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					Corporations
Professor Mitchell
Course Outline

   1. Nature & Purpose of the Corporation
         a. Perpetual Existence: corp. exists until dissolved
         b. Transferability: ownership interests are readily transferable
         c. Trustees of Dartmouth College v. Woodward (1819) (M6)
                 i. Held: NH leg. cannot amend DC charter by legislation, cannot impair the
                    obligation of contracts under the Constitution. Charter is a contract
                    between the corporation & the state.
                ii. Marshall:
                         1. Constitution protects private property, DC is private corp, tf ct
                             cannot interfere. Corporation is an artificial person, state may not
                             interfere w/corp’s right to own private property just like can’t do
                             it w/real people. Corp. is for the benefit of the corporation itself.
               iii. Story (concurring):
                         1. Corp. as artificial person. Look at where $$ came from. DC came
                             from private funding, t/f private corporation. When private corp.
                             is created, state cannot interfere. Legislature can amend corp.
                             charters, as long as the power to amend is reserved in the grant.
               iv. Consequences
                         1. Creates incentive for pp to create corps.
                         2. Corp. is an individual, possesses similar constitutional rights to
                             pp.
                         3. Now, every state has the reserved power to amend charters in
                             state incorporation statutes.
         d. Dodge v. Ford Motor Co. (1919) (M18)
                 i. Ford stops paying dividends & reinvests in corp. Basically, Ford is
                    attempting to ‚freeze out‛ the Dodge Bros. (min. SH’s) of his closely held
                    corp, as a result of Ford’s maneuverings, Dodge bros. may only be able to
                    sell to Ford, at a reduced price. Held: Stockholders can compel corp. to
                    pay special dividends, but F. is permitted to continue expansion (River
                    Rouge project), injunction is lifted.
                ii. Early application of the business judgment (BJ) rule.
                         1. In general, BOD has absolute discretion to allocate corp. $$, here
                             court interferes b/c SH are losing $$.
               iii. Corp. is carried out for the SH’s profit. Leads to goal of maximizing
                    profits, resulting in:
                         1. Pollution
                         2. Lower wages
                         3. Externalization of cost of maximizing profit
Corporations                                                                   Fall 2003


                 iv. Corp. is no longer ‚community of interests.‛ New view of corps. leaves
                      out unnamed constituents:
                          1. Workers, mngs, emp’ees
                          2. Other corps. w/financial interests.
                          3. Suppliers of the corp.
                          4. Customers
                          5. General public
                          6. Bank/creditors
          e. Smith v. Barlow (1953) (M21)
                   i. Corp. makes donation to Princeton. Held: Corp. may contribute to
                      charity as long as it has an indirect benefit to corp.
                  ii. Corp. power to donate goes beyond ‚express statutory provisions.‛
                          1. J. changes the law, disregards statute authorizing NJ to amend
                              charters, states ‚the genius of our CL has been its capacity for
                              growth and its adaptability to the needs of the times.‛
                 iii. Major political statement: Nation felt threatened by communism, J. has to
                      create laws to save our private institutions, make world safe for
                      democracy.
          f. Berkshire Hathaway model
                   i. Warren Buffet: ‚our form is corporate, our attitude is partnership‛
                  ii. Buffett allowed each shareholder to give $$ to their own chosen charity.
                 iii. Not a real partnership, but ‚feels like‛ a partnership. BH still has
                      centralized management so imp. to corporations. (and each share worth
                      $77k!)
          g. Steinway v. Steinway & Sons (1896) (M30)
                   i. P. claims BOD is acting ultra vires and wasteful (throwing $$ away).
                      Held: D’s are acting lawfully, court will not interfere w/corp. act if
                      logically related to purpose (benefit the shareholders). Here, corp. is
                      prospering, t/f no interference.
                  ii. Logical Relation test (p.32): Corp. power is expanding, corp. act is ok if
                      lawful & for the purpose of benefiting the shareholders, and is reasonably
                      related to that benefit.
                 iii. Progressive Era (1875-1900)
                          1. Moral uplifting of society
                          2. Industrialization has impacted the workers, growth in cities,
                              increased immigration.
                          3. Social gospel: wealthy are stewards of $$, must give back to
                              society
                          4. Moral tone of opinion reflects the social climate of the time.
                 iv. Implied Consent (alt. basis for decision)
                          1. P has ratified this expenditure, cannot bring suit now
   2. Intro to Fiduciary Duty & Underlying Values
          a. Non Stockholders



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                  i. Simons v. Cogan (Del. 1988) (M34)
                 ii. P. is convertible bondholder, sues Cogan for breach of fiduciary duty. C
                     merged 2 corps to get rid of public shareholders. Held: Directors do not
                     owe fiduciary duty to debenture holders. P is SOL.
                iii. Court is limiting corporate duty to shareholders only, duty will attach
                     here only once the stock is converted to shares.
                iv. Why no fiduciary duty? Ct provides no logical reason (but makes sense
                     on some level).
                 v. In what sense is stockholder ownership different from any other
                     relationship? SH take bigger risk-thus are more vulnerable to loss.
          b. Preferred Shareholders
                  i. Common Stock: basic stock, all rights & privs that stock has-every corp
                     must have at least one class of common stock
                 ii. Preferred Stock: Preference over common shares in dividends and/or in
                     receipt of assets if corp goes bankrupt. Certain rights apply to these SH’s-
                     specific rights articulated in charter. If conflict concerns preferences
                     stated in charter-involves PSH’s contractual rights & no fiduciary duty
                     attaches; if not, implied & equitable rights of PSH as shareholder involve
                     a fiduciary duty.
                iii. Jedwab v. MGM Grand Hotels, Inc. (Del. 1986)(M38)
                iv. Preferred SH brings class action suit against BOD. Merger in question wd
                     give cash instead of stock to preferred SH’s. P claims unfair
                     apportionment bc under deal, common SH’s get more $$ than preferred.
                     Held: Here, merger not in express K agreement, tf SH rights involved and
                     ct finds FD.
                 v. Rule: Contract rights are contractual/legal; shareholder rights are
                     equitable.
                vi. Problem: BOD’s interpret preferences in corp. charter, tf BOD’s interpret
                     whether there is FD. If case goes unlitigated (many do) then BOD’s get to
                     decide when there is a FD.
          c. Shareholder Valuism
                  i. Idea that duties are owed to corporation evolves into idea that SH’s are
                     sole beneficiaries of corporation.
                 ii. Idea becomes dominant in the 1980’s w/proliferation of hostile takeovers
                     (where SH’s can immediately capture the short-term value of corp).
                     Congress changed tax code in ’83-cannot pay execs more than $1 mill., tf
                     corps pay D’s in stock. Now, execs’ interests are aligned w/SHs’ interests-
                     bc D’s want more $$.
                iii. Rise in institutional investment-portfolio theory, diversification in order
                     to eliminate risk. Directors now have incentives to raise stock prices to
                     benefit SH’s in short term-but may be damaging to long term health of
                     the corporation.
                iv. M’s remedy?



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                         1. Change investment habits to focus on long-term profits, through
                             economic incentives, sliding scale capital gains tax, increase
                             attractiveness of long-term investments, and penalize pension &
                             401k holders for trading w/n the plans, make this taxable.
   3. Role of the Corporation in Public Life
         a. Ypsilanti v. GM (Mich. 1993)(M1, 46)
                  i. Town (P) gives D 12 yr. property tax abatement on corp’s $175 mill
                     investment for new car D planned to mfr in P town, D changes plans,
                     wants to make car in Tx. P sues claiming breach of K, PE, unjust
                     enrichment. Lower ct found D liable under PE claim, GM must produce
                     new car in P town. Held: Reversed. Just bc corp accepted tax
                     abatements, they have not promised anything (no promise, no deal). But
                     ct analyzes case in terms of contract doctrine, not from equitable
                     perspective. (maybe cd have implied a promise taking equitable
                     considerations into acct).
                 ii. Results: This opinion encourages towns to get K, encourages self-
                     protection when no help available from the law.
         b. Intersection of Corp Law & International Human Rights Law
                         1. Steinhardt: Transnational corp has remained immune from reg.
                             under intnt’l human rts laws-most treaties address gov’t conduct,
                             not conduct of multint’l corps. Unocal suggests that atty does
                             clients disservice by ignoring human rts in corp. law.
                         2. 4 regimes of corp responsibility:
                                 a. Market
                                          i. Corps compete by conforming w/ IHR’s laws
                                             (voluntarily). Market-based effort to attract
                                             consumers & investors.
                                 b. Domestic Regulation
                                          i. Suppressing corp. presence in certain countries
                                 c. Internt’l ‚Regulation‛
                                          i. Through orgs. such as OECD, Global Compact
                                             adopted by UN, HRC in Geneva.
                                         ii. Int’l financial institutions such as World Bank &
                                             IMF- corps must improve lives of constituents.
                                 d. Litigation/Liability
                                          i. Creates floor for market actors
                                         ii. ATCA (Alien Torts Claims Act): adopted by First
                                             Congress in 1789 to give aliens access to US courts.
                                                 1. Various US courts have ruled that corp may
                                                      be liable for HR violations by gov’t with
                                                      which they do business.




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                                             2. Corps want to legislate a corp carve out w/n
                                                  statute, don’t want us to be able to sue corps
                                                  for genocide, slavery, piracy, etc.
                                             3. Ex. Holocaust cases: Claims brought in US
                                                  against corps to recover looted assets for
                                                  slave labor in Nazi camps. (Some litigated,
                                                  some impeded by procedural reasons)
                                             4. Nike cases: Consumer sued for false
                                                  advertising claiming reliance on assertion
                                                  that Nike complied w/HR stds. CA SC’s
                                                  decision controls (bc SC said cert
                                                  improvidently granted) tf corp can be held
                                                  liable for lying to public.
                                             5. Criticism of liability regime:
                                                      a. No adequate notice to corps.
                                                      b. Forum non Conveniens (US not
                                                           appropriate forum to litigate)
                                                      c. Imposes liability on some corps w/o
                                                           bad intentions.
                                                      d. Some HR attys object- private
                                                           liability shifts to economic rights &
                                                           ignores political rights.
                      3. John Doe I v. Unocal Corporation (9th Cir. 2002)(M52)
                              a. P sued Myanmar (Burma) corp, claiming D corp. subjected
                                 villagers to forced labor, murder, rape, and torture. DC
                                 granted SJ to Unocal, P appealed. Held: reversed (only on
                                 claims for forced labor, murder & rape- not torture), (1) D
                                 violated law of nations; (2) P’s claims not barred by act of
                                 state doctrine.
                                      i. Concurring (Reinhardt): Unocal’s 3d party tort
                                         liability shd be decided under fed. common law
                                         tort principles, not international crim. law aiding &
                                         abetting std.
                                     ii. Stds that courts use for imposing liability:
                                             1. Benefits (from torts- apartheid cases)?; and
                                             2. Knowledge of abuse/HR violations; and
                                             3. Intent (K between corp & gov’t); and
                                             4. Control (corp equivalent to gov’t?).
                      4. Mitchell: Argument that enforcing HR’s is good for business is
                          flawed argument b/c takes business outside of the realm of justice.
          c. Comparative Corporate Governance
                i. United States
                      1. Market System



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                               a. Equity & debt market. Efficiency: capital moves to its
                                  highest valued use at the lowest possible cost- our system
                                  requires this kind of market.
                               b. Enlightenment liberalism: freedom of contract, our
                                  founding principles. Compels pp to accumulate for sake
                                  of accumulation.
                               c. Adam Smith (classical economist): Theory of Moral
                                  Sentiments & The Wealth of Nations. S. actually hated
                                  corps wanted gov’t reg.
                               d. Post Adam Smith (neo-classicists): Humans out for own
                                  self-interest & morally good to want to be rich. Attys
                                  attempt to merge descriptive science (econ) w/normative
                                  science (law), & give us idea that humans shd want to
                                  maximize wealth bc it is most efficient.
                               e. Law & Economics: Wealth maximization shd be the
                                  ultimate goal of the law. (assumes that wealth has intrinsic
                                  value).
                 ii. Comparative Corporate Models: relationship structures as opposed to our
                     market corporate structure.
                        1. Germany
                               a. Corps. used to better society- not just about SH, but about
                                  workers’ stable emp’t.
                               b. Difft ownership structure: interrelationships among
                                  German industry & German finance (most equity owned
                                  by banks) leads to oversight by pp w/more info.
                               c. Hostile takeovers are considered inappropriate- only 4
                                  hostile takeovers in this cent.
                               d. Germ. corps pay taxes, go to promote level of social
                                  welfare.
                        2. Japan
                               a. Corps provide stability in emp’t & stability in production
                               b. Corps principally owned by banks (like Germany).
                        3. France
                               a. Best & brightest French corps are emp’d by gov’t & run
                                  corps.
                               b. Corps retain close ties w/gov’t.
                        4. Russian Corps
                               a. Voucher systems
                               b. BB drafted American corp. law for Russia- Russian
                                  economy fell apart 1 yr late-we created disaster in
                                  emerging capitalist world.
   4. Duties of the BOD’s & Officers
         a. Authority of the Board



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                 i. Complete control over corp by BOD’s. Sep. of ownership from control in
                    American corp- alleged owners of corp. (SH’s) really don’t have any
                    meaningful property/control rights.
                ii. Board represents state-delegated power over corporation. Only control
                    state has over corps is its ability to regulate board through corp. law.
               iii. Why such complete control? Bc BOD’s do not have to consult SH’s for
                    every decision, corps are able to act quickly & efficiently.
               iv. Del. GCL §141: (M2, 2-5)
                        1. (a): Affairs of corp. managed by BOD, except as otherwise
                            provided in statute or in cert. of incorporation.
                        2. (b): BOD consists of 1 or more pp. No. of D’s fixed by (or
                            provided by) bylaws or certificate of incorporation. Maj. of D’s is
                            quorum unless cert or bylaws require more. Maj. vote if quorum
                            present is act of BOD unless cert of incorporation or bylaws
                            require more pp.
                v. Manice v. Powell (NY 1911)(M2, 6)
                        1. Relationship btwn D’s & SH’s are that of ‚trustee & cestui que
                            trust.‛ Corp owns property, but D’s possess & act as if they
                            owned corp.
                        2. BOD’s created from statutory laws of state legislature – original
                            powers created by state.
                        3. D’s get elected to BOD by SH vote. But institution of board is not
                            created by SH’s. BOD itself is conceptual abstraction.
               vi. Grimes v. Donald (Del. 1996)(M2, 7)
                        1. P. SH claims that D’s (CEO & BOD) breached fid. duty, failed to
                            exercise due care, and wasted corp’s funds. BOD entered into
                            emp’t K w/ CEO- K states CEO is resp. for gen. management of
                            corp’s affairs. CEO gets big $$ (severance) if BOD’s unrsbly
                            interfere w/his GF judgment.
                        2. Held: BJ rule applies to BOD’s actions- may enter into K’s w/CEO.
                            BOD still has ultimate power to run corp.
                        3. M’s reading: Formalistic corp. jurisprudence here. Ct says BOD
                            cannot formally delegate power, but they have effectively
                            delegated power here. Benefits of formalism? Certainty- BOD’s
                            can act w/o interference.
          b. Derivative Litigation
                 i. What is it?
                        1. Equitable device- brought by SH’s (rarely convertible bondholders
                            have standing to sue).
                        2. These suits have probs getting to the merits.
                        3. Procedure:
                                a. Pre-suit demand: P drafts SH letter to BOD. This req. is to
                                    avoid litigation. BOD must notify SH of rejection.



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                                b. SH may argue demand excused b/c futile (see Grimes Part
                                    III below).
                                          i. When is demand futile?
                                         ii. Aronson test: Must allege w/particularity that rsbl
                                             doubt exists that BOD is capable of making
                                             independent decision, when:
                                                 1. Maj. of BOD has material financial or
                                                     familial interest & incapable of acting
                                                     independently (bc of domination or control)
                                                 2. Underlying trans. is not product of valid
                                                     exercise of BJ.
                                c. SH may claim demand was wrongfully refused.
                                          i. Same as demand futile, must show rsbl doubt that
                                             BOD acted independently- but this claim is brought
                                             after demand is refused.
                                d. If demand requirements not met, right to sue is waived.
                                e. After demand rejected, SH then sues corp. to compel it to
                                    sue BOD.
                                f. Corp. sues under control of P SH.
                        4. Security for Expenses (see Baker, below): Some states req. SH’s to
                           post security for rsbl litigation expenses, including atty’s fees, for
                           all D’s.
                        5. Problem: takes pwr of BOD and gives it to SH.
                ii. Difference from Direct Litigation?
                        1. Direct: Injury to P as individual SH- need injury sep. & distinct
                           from other SH’s (but can have CA’s). Ex. P seeks contractual
                           rights.
                        2. Derivative: Injury to corp as entity. P here is really corp- no one
                           directly benefits except the atty’s.
               iii. Eisenberg v. Flying Tiger Line, Inc. (2d Cir. 1971)(M2, 11)
                        1. FT merges into FTL. FTL gets FT’s assets & liabilities, FT SH’s get
                           stock in FTC (FTL’s parent). P claims merger deprived min SH’s
                           of control over business.
                        2. Issue: Does P have to post security for costs (required in deriv.
                           litigation)?
                        3. Held: No, here suit is direct b/c about right to vote, losing right to
                           vote is harm to SH, not to corp.
                        4. ‚If the gravamen of complaint is injury to corp the suit is
                           derivative, but ‘if the injury is one to the P as a SH and to him
                           individually and not to the corp’ the suit is individual in nature
                           and may take the form of a representative class action.‛
               iv. Grimes v. Donald Part II (Del. 1996)(M2, 14)
                        1. Claims?



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                                a. Derivative: Due Care, Waste, Excessive Compensation (to
                                    CEO).
                                b. Direct: Abdication of D duty (see Part I). Direct b/c SH’s
                                    seek to invalidate emp’t K’s to CEO, corp gets no $$ as a
                                    result.
                v. Baker v. McFadden (NY 1950)(M2, 15)
                        1. P’s own 1% of stock in corp. NY stat. says P’s in deriv. litigation
                            must post security unless they represent at least 5% of corp’s
                            shares. Ct says it can amend order to post security if more SH’s
                            are joined –basically goes around statute to allow suit.
                        2. Why this legislation restricting deriv suits? NY WASPs hate the
                            Jew P’s attys.
               vi. Grimes v. Donald Part III (M2, 18)
                        1. P made presuit demand on BOD to cancel K’s. Then P claimed
                            demand was excused and sued for waste, excessive comp, & due
                            care. When P makes demand, right to claim excusal is waived,
                            thus P is SOL.
          c. Duty of Care
                 i. Sometimes classified as part of fid. duty, but not really part of FD. Why
                    not? BOD’s are not req’d to be careful bc of their position w/r/t SH’s
                    (whereas duty of loyalty arises b/c of trustee relationship). Just have to
                    use care in general w/r/t corporation.
                ii. Business Judgment Rule: As long as BOD acts in GF, court will not look
                    into their actions as long as D was fully informed & rationally believed
                    that his judgment was in the corp’s best interest. (NA to self-interested
                    transactions).
                        1. Justification? We need BOD’s to take risks. If rules were too
                            stringent, then no risks & no progress.
                        2. BOP? P always has BOP that BJ rule doesn’t apply (if no conflict
                            of interest- must be arms length transaction). To overcome BJ
                            rule, must prove BOD’s acted in BF or breached DOL.
               iii. Kamin v. American Express (NY 1976)(M2, 23)
                        1. Min. SH’s sue derivatively for waste & breach of DOC. BOD
                            bought corp for $29 mil worth 4 mil, SH’s want BOD to sell to get
                            tax break on loss.
                        2. Held: BOD’s are entitled to the protection of the business
                            judgment rule. BJ: Ct won’t interfere if BOD acts w/GF.
                        3. Duty of Care: Ct seems to say that need to show fraud, dishonesty,
                            or malfeasance to prove DOC violation.
                        4. Note: Economic Sociology (insert notes pp. 26-28).
                                a. Network theory
                                b. Structural Bias
                                c. Weak Ties



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                 iv. Joy v. North (2d Cir. 1982)(M28)
                          1. Ct justifies BJ rule. SH’s take on risk of bad business judgment.
                              Says SH’s can look out for themselves- but ct sets bottom beyond
                              which BOD’s behavior cannot fall. Why BJ rule- why do we let
                              BOD’s off the hook?
                                  a. Market Efficiency: encourage risk taking for max.
                                       efficiency. (EMH, see pp. 30-31)
                          2. Case encourages diversification of stock- if can’t afford it- shd
                              invest in mutual funds/pension plans.
                          3. Problem w/this? Managers of mutual funds pressure CEO to
                              increase profit. Concentration of capital in small amt of hands- no
                              close monitoring of investments as before.
                  v. Cede v. Technicolor, Inc. (Del. 1993)(M2, 31)
                          1. Lower ct required P to show duty, breach, cause & injury.
                          2. Flawed analysis: Ct collapses duty of care into fid. duty in
                              analysis. They state: BJ rule applies if BOD acts in GF. To
                              succeed, SH must rebut by showing breach of DOC, DOL, or duty
                              of GFFD. If BJ rebutted, BOD’s can still prevail by showing entire
                              fairness (fair dealing & fair price) of transaction.
                          3. Held: No cause & injury req’d. Finds BOD breached DOC by
                              gross negligence. Thus, transaction must be remanded &
                              reviewed for entire fairness.
                          4. Result: DOC requires only proof of duty & breach by P’s (no
                              causation or damages). M. says reasoning is flawed bc DOC is
                              about corrective justice (BOD’s compensate corp to make it
                              whole); whereas DOL (& fid. duty in general) is about distributive
                              justice (BOD’s acted unfairly-based on fairness/equity).
                                  a. May be distinction btwn deriv. & direct suits. If BOD acts
                                       ‚unfairly,‛ they harm SH in particular. But if they act
                                       ‚negligently‛ they harm the corp.
                          5. Fairness concept may be applicable to this case, only bc it is in the
                              merger situation, but in others (like Kamin v. Amex, for ex.) makes
                              no sense. In DOC claim –Q is simply whether BOD acted
                              carefully or not. Case leaves DOC doctrine messy.
          d. Duty of Good Faith: Generally see this when D’s are grossly negligent in following
             procedures. Failure to act is grossly negligent if D (1) fails to attend meetings; (2) fails
             to learn about the corp’s business; (3) fails to read financial reports.
                   i. Rare COA. Cts used to require that P prove a conscious breaking of the
                      law on part of corp, however, Disney implies that mere gross negligence
                      may lead to breach of duty of GF → based on Smith v. Van Gorkom.
                  ii. In Re the Walt Disney Co. (Del. 2003) (M2, 43)
                          1. Eisner (CEO) gets BOD to sign emp’t K for his boy Ovitz as Pres.
                              of Disney. BOD did not even review agreement bf signing. O.



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                           was not good Pres., wanted to leave w/no fault termination – to
                           get big $$ from agreement, he gets it but w/o BOD’s approval-
                           BOD did nothing.
                       2. Del §102(b)(7): Corp can provide personal liability waiver in cert
                           of incorporation for D’s breach of DOC but cannot limit BOD’s
                           pers. liability:
                               a. (i) for breach of DOL.
                               b. (ii) for bad faith, intentional misconduct, or knowing
                                    violation of law.
                               c. (iii) under Section 174 (improper dividends)
                               d. (iv) for any self-dealing transaction
                       3. COA? Bad faith (rare COA-need egregious behavior by BOD).
                           Ct. finds ‚reason to doubt whether board’s decisions were taken
                           honestly and in good faith.‛ But ordinarily, this case wd be
                           brought as a DOC case, here BF b/c of egregious nature of BOD’s
                           actions, but here ct. does not want D’s to claim immunity under
                           §102(b)(7)
               iii. Smith v. Van Gorkam (note case) (Del. 1985)(M2, 52)
                       1. TU (corp) had $$ problems- VG owned stock in corp. VG contacts
                           real estate developer, arranges a merger. Del ct. held TU corp
                           liable for breach of DOC for approving merger w/o sufficient
                           outside evidence of corp’s value. BOD relied solely on VG’s
                           (CEO) info. Factors in ct’s decision?
                               a. Inadequate length of approval meeting (3 hrs) & failure of
                                    BOD to read agreement bf approval.
                               b. BOD reliance on CEO Van Gorkam may have been
                                    inadequate (need reliance on expert’s report per Del.
                                    §141(e)). Here, VG’s info not a report.
                       2. Del. may have decided Van Gorkom this way bc during height of
                           80’s takeover frenzy & Del didn’t want fed. intervention. (Also
                           prolly the case w/Disney – after Enron, Worldcom, etc.). Corp.
                           America was relieved when Del. §102(b)(7) (see Disney, above)
                           was passed after this decision.
               iv. Francis v. United Jersey Bank (NJ 1981)(M2, 54)
                       1. P & B is a closely-held reinsurance broker. It receives premiums
                           from insurance corps and pays $$ to other insurance corps. P & B
                           did not maintain 2 sep. accts (assets & liabilities), but only one-
                           used other corp’s $$ as their own. Mom (director & SH) is in
                           charge of corp & her sons (SH’s) ran it. Fin. statements showed
                           huge loans to sons, over & above assets. P’s are trustees in
                           bankruptcy (not SH’s) who represent insurance corps who P & B
                           owes $$ to. P’s sue Mom’s estate.




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                               a. Why sue dead woman’s estate? Bc boys stand to inherit
                                    mom’s estate- P’s want to stop this.
                       2. Mom’s estate (D) not entitled to BJ rule. Why not? B/c no
                           business judgment at all, complete inaction on her part.
                       3. COA? Negligence for director nonfeasance.
                               a. Duty: Yes
                                         i. As director, mom had duty. Shd not have taken
                                            position (but hard to say no to husband who
                                            appted her b/c wanted her vote).
                               b. Breach: Yes
                                         i. What shd Mom have done to fulfill duty? Known
                                            business, attended meetings, & reviewed financial
                                            statements.
                               c. Causation
                                         i. Difficult to prove. P must show that ‚but for‛
                                            Mom’s nonfeasance, the corp wd not have gone
                                            bankrupt.
                                        ii. Ct uses common sense to find causation here. But
                                            ct may be wrong, may not have been so easy for
                                            Mom to stop sons from running corp into the
                                            ground.
                               d. Damages: Yes.
                       4. Ct’s neg. rule is more like strict liability. Role of directors in corp
                           is so significant that ct won’t accept excuses. Thus, new rule is:
                           D’s are liable) if pp are stealing from corp, regardless of the
                           situation.
                       5. Note: Ct ignores feminist angle- sons prob’ly did not let mom
                           interfere w/corp’s affairs.
                v. Senn v. NW Underwriters Inc. (Wash.)(M2, 66)
                       1. Why fid. duty here? not a SH suit. Trustee in bankruptcy may
                           sue b/c SH rights go to trustees in bankruptcy, tf creditors have
                           right to sue.
               vi. In re Caremark Int’l Deriv. Litigation (Del. CH 1996)(M2, 68)
                       1. CM is managed care corp.- provides healthcare for profit. Emp’er
                           pays flat fee, emp’ee pays nothing, encourages Dr’s to cut
                           expenses & see lots of pp. (paid per patient). CM got busted, had
                           to pay $250 mil. SH’s file deriv. suit for breach of DOC against
                           BOD. Parties settle – favorable to CM.
                       2. Issue: Was settlement fair? To analyze fairness of settlement, ct
                           looks at whether SH’s claim would be successful.
                       3. Held: BOD have duty to attempt in GF to assure corp info &
                           reporting system exists (in highly regulated industry such as here)




                                             12
Corporations                                                                      Fall 2003


                           – and finds BOD fulfilled their duty. Ct. appears to be setting a
                           higher std (beyond BJ rule) but in reality decision is a lie. Why?
                        4. BOD has to ensure that corp is still profitable. Set up payment
                           structure to give emp’ees incentives to violate law, structure is at
                           odds w/industry regs. M. says ct is allowing violations to
                           continue by allowing incentives to continue w/o requiring more
                           monitoring by BOD.
                        5. Ct states that crim. law covers this case- bc can deter or punish.
                           But crim law does not take care of SH’s.
                        6. Result: As long as BOD tells emp’ees to comply w/laws, BOD’s
                           not liable.
                        7. Note: This case contains excellent discussion of BOD’s monitoring
                           role. Though they don’t have same responsibilities as officers, still
                           have some duty to oversee officers. Departure from prior case law
                           (see Graham v. Allis-Chalmers).
              vii. McCall v. Scott (M2, 82)
                        1. D’s make motion to dismiss for failure to allege demand futility to
                           excuse failure to make presuit demand. Held: demand futile.
                           Court finds that D’s failure to act in response to senior executives’
                           actions created a rsbl doubt that D’s were disinterested &
                           shareholders alleged facts that show likelihood that D’s will be
                           liable for intentional or reckless breach of DOC.
          e. Duty of Loyalty
                 i. In General
                        1. CL: All SD transactions per se voidable.
                        2. Modern Rule for self-dealing transactions:
                               a. (1) Approval by fully-informed disinterested D’s.
                               b. (2) Approval by fully-informed disinterested SH’s.
                               c. (3) Intrinsic Fairness (Fair Price & Fair Dealing)
                               d. Note, if (1) & (2) are present, shifts the BOP to P to prove that
                                    the transaction was not fair. Important: just bc transaction was
                                    approved by fully informed disinterested D’s or SH’s does not
                                    mean it will be upheld if not fair- Cooke v. Oolie.
                ii. Meinhardt v. Salmon (NY 1928)(M2, 93)(Cardozo)
                        1. M & S had partnership. Gerry leases property to S & S enters
                           agreement w/o telling M. S did not want to share profitable
                           opportunity w/M, construction of GCT in 1911 greatly increased
                           the property value of the land in question.
                        2. Held: Duty of partners to eachother is one of the finest loyalty,
                           stricter than morals of marketplace. How can this be measured?
                               a. Hard to determine when duty is violated, but Cardozo
                                    wanted to set std in a way so can’t draw the line, so pp. wd
                                    be extraordinarily careful while in a fiduciary position.



                                               13
Corporations                                                                    Fall 2003


                                 b. M: C’s test is a pure application of Humian moral
                                    philosophy. C says, if yr gut tells you not to do something,
                                    if you wd be ashamed to be discovered in the act, then
                                    don’t do it→ decision is pure genius.
               iii. Bayer v. Beyran (1944)(M2, 99)
                        1. Held: Self-interested transactions will be voided if unfair. BOP on
                            D to show fairness.
               iv. Marciano v. Nakash (1987)(M2, 106) This case may have came out the way it
                    did because court allows N to save the corp from bankruptcy – no one else was
                    willing to make loan. Also, transaction was on same terms as a 3d party market
                    transaction.
                        1. CH corp. (Gasoline) is 50% owned by both M & N families who
                            are deadlocked. Corp owes $$ to Nakash. If N’s are allowed to
                            collect on debt, they will effect a takeover. N’s want to get
                            Gasoline’s TM’s & goodwill. M’s knew about loans to corp, but
                            not consulted beforehand.
                        2. Hard to dissolve corp in case of deadlock (as opposed to
                            partnerships which are easily dissolved). Bc of limited liability, ct
                            will not let corp go bankrupt, bc limited liability allows cts to
                            externalize its losses.
                        3. Del. GCL §144 applies in the case of a self-interested transaction.
                                 a. Material facts (re: self-interest) are known & maj. of
                                    disinterested D’s authorize transaction.
                                 b. Material facts (re: self-interest) are known & SH’s approve
                                    transaction.
                                 c. Trans. shown to be fair at the time it was authorized,
                                    ratified, or approved.
                        4. Holding: §144 is not exclusive, here, none of the 3 prongs apply
                            but transaction was fair t/f no breach of DOL. Court determines
                            that transaction was fair because it was on same terms as it would
                            be with a 3d party (substantively fair).
                        5. Note: FN 3 is very important. Court states that if there was
                            approval by SH’s or D’s then the BJ rule applies & judicial review
                            only if gift or waste issue. So, even if transaction may have been
                            unfair, BJ still applies if procedural rules are followed & D’s are
                            effectively immunized.
                                 a. Result: If D proves compliance with §144 then P cannot
                                    overcome the BJ rule, no chance to show unfairness.
                v. Cooke v. Oolie (1997)(M2, 113)
                        1. Direct class action & deriv. claims. P’s claim self-interested loans
                            & transactions that wasted TNN’s assets:
                        2. Legal claim: breach of DOL.
                        3. Analysis:



                                             14
Corporations                                                                           Fall 2003


                                   a. D’s have BOP to show they complied w/§144: D
                                      authorization or SH approval or ratification.
                                   b. If complied with, then BOP shifts to P to show the
                                      transaction was unfair (third prong).
                                   c. Note: FN 3 from Marciano above is overruled. Now, in DE,
                                      cannot follow §144’s procedures to approve an unfair
                                      transaction.
          f.   Fairness
                    i. In General
                           1. Fairness is a distributional concept, necessarily involves more
                               than one person.
                           2. Example: Sale of land from D to Corp. Experts on both sides
                               determine ‚fairness‛ of price. If one appraiser values purchase at
                               $1 mil & another values purchase at $15 mil then there is probably
                               a range of values that would be considered fair.
                           3. But, in arm’s length transaction, buyer will probably negotiate
                               harder than if it were buying from interested D, so if BOD’s buy
                               above $1 mil, prolly overvaluing the land & excess is pure profit
                               for the D seller.
                           4. Why lower standard? Perhaps to save transaction costs (easier to
                               deal w/directors). But results in SH mistrust of corp. & market
                               value. Will ultimately drive down price of stock.
                           5. M: old rule of absolute voidability for self-interested transactions
                               should be the law. Acting in a self-interested transaction is always
                               a breach of trust. Now, we ask if there has been an ‚unfair‛ breach of
                               trust. But doesn’t mesh with Meinhardt v. Salmon.
                   ii. Fair Price & Financial Valuation
                           1. Fundamental Valuation
                                   a. To determine what a willing buyer will pay on open
                                       market.
                                   b. Book Value
                                            i. uncertain
                                           ii. does not reflect true value of assets (does not account for
                                               increase or decrease over time)
                                          iii. does not reflect goodwill
                                          iv. always will be significantly lower than corp’s actual
                                               value
                                   c. Capitalizing Earnings
                                            i. look at profits: revenues minus expenses.
                                   d. Dividend Discount Model
                                            i. assumes that over time, all cash will be paid out as
                                               dividends
                                           ii. each year is discounted to present value



                                                  15
Corporations                                                                   Fall 2003


                        2. Modern Finance Theory
                                a. Capital Assets Pricing Model (CAPM)
                                b. Efficient Capital Markets Hypothesis (ECMH)
                                         i. Strong, medium, weak theory
                                c. Portfolio Theory
                                         i. If you put together portfolio, can diversify each
                                            corp’s individual risks. Left with only systematic
                                            risks:
                                        ii. Inherent Risk in Market: nothing to do
                                            w/individual corp & nothing we can do about it.
                                            Can’t be diversified away.
                                       iii. What a corp. will compensate for.
                                       iv. IB’s take each stock & develop a number (beta).
                                            Beta tells us extent to which stock moves when
                                            market moves. Higher beta, more risky the stock.
                                d. Final Notes on MFT
                                         i. Relies on efficient market theory.
                                        ii. Turns corp into beta, leads to more emphasis on
                                            beta, not on long-term success of corp.
          g. Corporate Opportunity add notes from 10.7
                 i. In General
                        1. A director or senior exec. may not take a business opportunity for
                           himself that belongs to the corporation.
                        2. see text 145, how is del law diff’t from ALI? What are the tests for
                           determining whether corp. opportunity has been taken?
                ii. Broz v. CIS (M2, 132)
                        1. No breach of DOL for corp. opportunity b/c Broz did not owe a
                           duty to CIS because PC had not yet aquired it, BOP on D to show
                           he did not usurp corp. opportunity.
               iii. Energy Resources Corp. Inc v. Porter (M2, 142)
                        1. P breached fid. duty to corp as director by not disclosing (even
                           lied outright). Thus, breach of DOL because took corp.
                           opportunity for himself.
          h. Compensation & Waste
                 i. In General
                        1. Waste
                                a. Historical Standard: Was there a rsbl relationship between
                                    the value of the benefit passing to corp & value of options
                                    granted?
                                b. Modern Standard: No consideration. Clearly difficult to
                                    show breach.
                                c. Remember: SH’s cannot ratify waste except by unanimous
                                    vote.



                                              16
Corporations                                                                       Fall 2003


                       2. Exec. compensation
                               a. Average CEO is rock star, earns 560 times average worker
                                   in corp. earns.
                               b. M. says should give CEO’s long term compensation to
                                   ensure that CEO helps corp’s long term health.
                ii. Lewis v. Vogelstein (M147)(1997)
                       1. Mattel’s BOD’s implement a compensation plan for themselves.
                           Two different compensation provisions granting stock options:
                               a. One Time Grant of Stock Options
                                         i. Exercise price: stock price at day given options.
                                            Options become valuable when stock price exceeds
                                            exercise price (then holders will exercise options).
                                        ii. Note: this form of compensation rewards performance by
                                            aligning D’s interests w/SH’s interests, D’s only make
                                            money if SH’s make money if stock increases. Creates
                                            obsession w/stock price.
                               b. Annual Options
                       2. BOD approves plan & presented to SH’s for ratification (not legally
                           required b/c §144 not applicable but may help protect from charge of self-
                           dealing). SH’s then bring suit for breach of DOL for nondisclosure
                           (D’s did not disclose the present value of options – HUGE $$) &
                           claim ratification is invalid.
                       3. What if ratification is invalid? BOD would have BOP to show
                           transaction was fair.
                       4. Held: BS pricing model (huh?) does not apply because not a
                           public corporation. No solid way to price options b/c closely held
                           corp and t/f disclosing price of stock may misinform SH’s.
                               a. M: do we buy this? No, because when BOD approved
                                   these options, they would have wanted to know how
                                   much their compensation package was worth – want to
                                   know their salary before approving. Thus, shd. have
                                   disclosed to SH’s what they learned. Also, BOD’s have a
                                   duty of care that requires rsbl investigation before
                                   approval . . . so would be breach of DOC if they had no
                                   idea about stock price.
               iii. Sanders v. Wang (Del. 1999)(M159):
                       1. SH’s & BOD’s have K regarding terms of KESOP (compensation
                           plan). BOD’s are 3 inside & 3 outside. D’s form a compensation
                           committee (outside D’s) who approve compensation plan. P’s sue
                           alleging waste.
                       2. Compensation Plan




                                               17
Corporations                                                                           Fall 2003


                                    a. D’s get 2 mil shares outright & 4 mil when stock has
                                        maintained target price for 30 days. Vesting provision also
                                        based on target price.
                                    b. Problems w/Plan
                                              i. Gives BOD’s incentive to artificially inflate stock
                                                 price. Bad for long term health of corporation.
                                                 Encourages lay offs & lying about corp.
                           3. Analysis
                                    a. Legal Claim: Waste. Requires SH to prove that corp got
                                        nothing in return for its $$.
                                    b. Ct analyzes this as a matter of contract interpretation.
                                        Why? Because if done under waste standard, court would
                                        have to find for D’s because it is an impossible standard to
                                        meet. Del. ct has to let P’s win because otherwise will look
                                        irresponsible during internet boom. Doesn’t want to force
                                        Congress to step in and legislate here.
                           4. Damages
                                    a. Disgorgement/Constructive trust: taking money away
                                        from D’s earned through self-interest. This takes $$ away
                                        from D’s own pockets, much more punitive in nature.
                                    b. Damages against corp.
          i.   Demand Refusal & Special Committees (Deriv. Litigation) this section goes
               w/derivative litigation section above.
                   i. Marx v. Akers (M2, 170)(NY, 1996)
                           1. Interested D’s compensate non-interested D’s & non-interested
                                D’s compensate interested D’s. P’s sue derivatively claiming
                                breach of DOL & waste. D’s claim no demand on board was
                                made. P’s claim demand is futile.
                           2. Demand Futility
                                    a. Del. Approach: Demand futile if:
                                              i. (1)Rsbl doubt that BOD’s are disinterested &
                                                 independent; AND
                                             ii. (2) Rsbl doubt that the challenged transaction was
                                                 otherwise the product of valid business judgment.
                                                 worries NY court because requires court to look into the
                                                 substance of the case at issue.
                                    b. Universal Demand (11 states):
                                              i. Must be SH demand in all cases.
                                    c. NY Court: NY BCL 626(c): must plead whether or not you have
                                        made a demand<demand required unless futile. Demand is
                                        futile if:
                                              i. Majority of D’s are interested; OR
                                             ii. D’s fail to rsbly inform themselves: OR



                                                  18
Corporations                                                                    Fall 2003


                                      iii. D’s failed to use BJ in approving transaction.
                              d. Comparison of NY & Del. approach?
                                        i. NY seems to be more board favorable than Del. test
                                           – but claim to have a higher std. for director
                                           responsibility. Abandons the rsbl doubt std but
                                           still have hard std for P to meet, but really not that
                                           diff’t from Del.
                ii. Auerbach v. Bennett (NY, 1979)(M2, 177)
                       1. Scandals about corporations bribing foreign officials & parties.
                          GTE does internal investigation & finds bribes. SH sues 4
                          directors in direct action & brings deriv. suit against the rest of D’s
                          & BOD forms special committee w/ disinterested D’s. Committee
                          decides not to sue corp.
                       2. Issues:
                              a. (1) Does BJ rule apply to committee actions made up of
                                  disinterested D’s?
                              b. (2) Board’s authority to appoint committee?
                       3. Held
                              a. (1) Yes, BJ rule applies.
                              b. (2) Yes, BJ rule applies & no analysis of DOL (independent
                                  board & therefore BJ applies) because procedures used OK
                                  (can’t look into substantive decisions) – but looking at
                                  procedures is akin to DOC analysis.
                              c. M: what court actually does here is inquire into whether
                                  DOC was breached first, then Special Committee gets BJ
                                  rule as long as no breach of DOC.
                       4. Main Point
                              a. Court is stressing that BOD’s have the ultimate right to
                                  control deriv. litigation trumps SH’s rights.
                              b. Deriv. litigation is special because it allows single SH to
                                  strip BOD of absolute authority. Therefore court gives nod
                                  to D’s by stating that BJ rule applies – though it doesn’t
                                  really apply it.
               iii. Zapata v. Maldonado (M2, 185)(Del. 1981)
                       1. Special Committee reviews demand and rejects it. Del. court
                          purports to apply BJ rule, but doesn’t really.
                       2. Del. GCL §141: Board has authority to delegate their power to
                          committee.
                       3. Test: 2 parts (M2, 191-92)
                              a. Did independent committee make a rsbl investigation.
                                  Look at procedures used. Auerbach test ends here.




                                             19
Corporations                                                                      Fall 2003


                                           i. This is just a symbolic step – show that BOD’s have
                                              absolute authority, deference to board as
                                              institution.
                                 b. Court substitutes itself for BOD and asks – did special
                                      committee make the right decision? discretionary step.
   5. Duties of Controlling Stockholders
         a. In General
                  i. Parent – Subsidiary Context: Is the parent getting benefit to the exclusion
                     of the minority SH’s of subsidiary.
         b. Sinclair Oil v. Levein (Del. 1971)(pg?)
                  i. Min. SH’s of Sinven sue BOD’s of Sinclair (parent corp) for breach of fid.
                     duty. Sinclair owns 97% of Sinven but 100% of Sinclair Int’l. K between
                     Sinclair Int’l & Sinven. Sinclair Int’l breaches K to Sinven because
                     Sinclair, owner of both, makes more $$ of Sinclair Int’l – because 100%
                     owned subsidiary.
                 ii. Issue: Does BJ rule or the intrinsic fairness test apply?
                iii. Problems:
                         1. BJ rule is supposed to protect BOD’s, here Sinclair argues for its
                             application to protect corporation.
                         2. No standing to sue derivatively – court does not address this &
                             treats all claims as direct actions. Dividend & contract actions are
                             direct but also partly deriv?
                iv. Analysis:
                         1. The decision of which rule to apply turns on whether the
                             transaction involves self-dealing. Here, self-dealing because the
                             parent (Sinclair) gets benefit to exclusion of the subsidiary
                             (Sinven). If self-dealing, then intrinsic fairness test applies.
                                 a. Note: if Sinven was dissolved and dividends were handed out,
                                      would not be self-dealing because all SH’s would get same $$.
         c. Anandarko Petroleum Corp. v. Panhandle Eastern Corp. (Del. 1988)(M2, 202)
                  i. Panhandle is parent.
                 ii. Anandarko is wholly owned subsidiary.
                iii. Stock spin – off: both corp’s become public.
                         1. BOD votes to issue A stock in PH dividend.
                         2. PH’s BOD issues an Information Statement for A. Common Stock.
                         3. PH restructures K’s w/A. to screw them. Maj. of D’s agree.
                         4. Millions of shares are traded between record date (owner of stock
                             on record date gets dividend) & actual distribution of dividend.
                iv. Trading
                         1. PH stock
                                 a. Regular Way: reflects combined value of 2 corps. Buyer
                                      pays artificially high price for stock.




                                                20
Corporations                                                                  Fall 2003


                               b. Ex-distribution: reflects value of PH only, but SH retains
                                    right to keep dividend because price is less.
                       2. A stock: when issued, reflects value of A as independent corp.
                               a. Result: PH SH’s will get screwed if they sell A stock.
                v. Held:
                       1. Parent PH has no FD to A SH’s.
                       2. Court does not want to impose a FD on PH on record date, as
                           opposed to date of issuance, because wd limit PH BOD’s business
                           opportunities & inconsistent w/FD’s to PH SH’s.
                       3. Court allows BOD’s to determine when FD attaches. T/f M. says
                           case came out wrong.
               vi. On Rehearing:
                       1. Should have argued that court allowed BOD’s to determine when
                           they have a FD to min SH’s by evidencing their intent not to
                           breach FD. M. says the conclusory nature of this opinion suggests
                           the court has no idea what is going on.
   6. Closely Held Corporations
         a. Basics (M3, 1-13)
                i. Agency: Fiduciary relationship in which one acts for another.
                       1. Actual
                               a. Express
                               b. Implied
                       2. Apparent: principal conveys rsbl belief that agent is acting as P’s
                           agent.
                       3. Inherent: authority based on position in corporation.
         b. Promoters, Preincorporation Agreements & Promoter Liability
                i. Coopers & Lybrand v. Fox (M2, 23)(1988)
                       1. Promoter is personally liable on a K for corporation not yet
                           formed. Even if corp is subsequently formed, promoter may be
                           liable for pre-incorporation K unless exception applies.
                       2. Waiver?
                               a. Promoter liability may be waived if contracting parties
                                    specify that they will look only to corp. for payment. Need
                                    clear & explicit waiver of promoter liability in K.
         c. Limited Liability & Exception for Veil Piercing
                i. In General
                       1. M: Why shouldn’t we have LL?
                               a. LL not necessary. PP would start businesses anyway
                                    without LL.
                               b. May not be economically or socially justifiable to have LL.
                               c. If no LL, wd encourage ‚silent partners‛ to take
                                    responsibility over their corp to prevent liability.




                                             21
Corporations                                                                 Fall 2003


                               d. Not necessary in public corps, because veil is never
                                  pierced, only veil piercing in CH corps.
                               e. LL creates moral hazard (costless) and therefore allows
                                  SH’s to be careless & reckless.
                      2. Why should we have LL?
                               a. LL externalizes costs of accidents/breached K’s on public.
                                  If no LL, then corp would take out insurance & SH’s wd
                                  bear costs of accidents.
                               b. Easterbrook & Fischel (M3, 42):
                                        i. Stocks wd not be fungible w/o LL.
                                       ii. LL removes the necessity of determining who the
                                           other SH’s are.
                                      iii. Fungibility facilitates an efficient market.
                               c. Class comments: LL may democratize the system, may
                                  allow everyone to trade even if no $$ to investigate other
                                  SH’s. But M says that LL helps rich get richer.
               ii. Veil Piercing
                      1. In General
                               a. Must prove that corporation was acting on behalf of the
                                  principal’s interest and not its own.
                      2. Walkovsky v. Carlton (M3, 30)(NY 1966)
                               a. P gets run over by D’s cab & gets screwed b/c of under
                                  capitalization. D owns 10 corps. P sues to pierce corp. veil
                                  to get to D SH’s $$.
                               b. Here, P should claim that corps were being operated as
                                  alter ego of D. Ask to pierce veil.
                                        i. Would lead to D personal liability but can’t touch
                                           assets of other corps?
                               c. Here, P claimed that corps were being run as single corp,
                                  and asked to reverse pierce.
                                        i. Would lead to P’s recovery of assets from all 10
                                           corps, but not from D personally?
                               d. NY Test for Veil Piercing
                                        i. Affirmative fraud or wrongdoing by SH
                                       ii. Failure to follow corporate formalities
                      3. Kinney v. Polan (1991)(pg?)
                               a. K leased building to Industrial, who subleased to Polan
                                  Co. Polan owned both Polan Co. & Industrial. K sued
                                  both corps for rent, then sued Polan personally.
                               b. Test for Veil Piercing
                                        i. Unity of Interest & Ownership
                                               1. No corp. formalities.
                                               2. Undercapitalization.



                                           22
Corporations                                                              Fall 2003


                              ii. Equitable Result
                                      1. Useless – VP is always about equitable
                                         results, that’s why we have COA.
                             iii. Assumption of Risk (look at who shd have
                                  assumed risk in transaction).
                                      1. Permissive prong
                                      2. May only apply to financial institution
                                         lenders (but here, M. says K should prolly
                                         have assumed the risk between the parties).
                                      3. But here, K cannot do due diligence because
                                         P did not keep any records at all.
                                      4. Thus, 3d prong puts burden on contracting
                                         party to protect itself. If no self-protection,
                                         no veil piercing. But K could have not entered
                                         transaction with P here if no info about ability to
                                         pay rent available.
                      c. Difference between tort & K claims?
                               i. Courts prefer to protect corp. form in K cases.
               4. Sea-Land Svcs., Inc. v. The Pepper Source (1991) decided by stupid
                  judge appointed by Bush
                      a. P entered into K w/PS who never paid up $86k owed. PS
                          corp goes out of business & can’t pay, P sues D, owner of
                          PS, & his 5 corps including one in which he owns only
                          50%.
                      b. Remedy sought: VP & reverse piercing. P wants to go
                          through PS to get to D, and then from D to get to assets of
                          other corps.
                               i. Alternative COA: sue D & other corps for
                                  enterprise liability. Why not used here?
                                      1. If you sue directly, have to deal w/other
                                         creditors in this bankruptcy situation. If
                                         reverse pierce then you become ‚judgment
                                         creditor‛ & get $$ first.
                      c. VP Test
                               i. Unity of Interest
                                      1. D paid for alimony, dog food, etc out of
                                         corp’s funds, used PS’s funds as his own.
                                      2. Shd have paid dividends, but would have
                                         had to pay tax, here D doesn’t have to pay
                                         tax on $$ he takes from corp.
                              ii. Adherence to Fiction of Separate Existence would
                                  Sanction Fraud or Promote Injustice
                                      1. Not discussed in Kinney.



                                     23
Corporations                                                                   Fall 2003


                                               2. Injustice is discussed at length here.
                                               3. Need a wrong beyond just creditor’s
                                                   inability to collect $$ owed.
                               d. Held: Reversed & remanded because P has not shown
                                   evidence of injustice. Court adheres to formalist test here.
                                       i. M: second part of test is stupid. Opinion shows
                                          such a strong desire to protect corp. form that J.
                                          ignores the obvious fact that abuse of the corp.
                                          form is unjust. LL is a privilege & shdn’t be
                                          abused.
                                               1. J. treats corp. as a car, can do what you
                                                   want unless you kill someone.
          d. Shareholder Voting Agreements & Voting Trusts
                 i. In General
                        1. Shareholder agreements are generally valid unless they restrict
                           BOD’s discretion.
                        2. How enforced?
                               a. Proxy: agreement can provide that each signer gives 3d
                                   person irrevocable proxy to voter signer’s stock. Courts
                                   did not like non-SH’s voting, t/f irrevocable proxy is only
                                   created by granting proxy coupled with an interest.
                               b. Specific Performance: if no irrevocable proxy, court can
                                   require stockholder to vote as the agreement provides by
                                   ordering specific performance of SH agreement. Not all
                                   courts will do this.
                ii. Ringling Bros. v. Ringling (Del. 1947)
                        1. 3 SH’s, 2 make agreement (Mrs. R & Mrs. H) to vote together,
                           agreement provides that if they can’t agree, then Mr. L will
                           arbitrate. Mrs. R & Mrs. H disagree, call in Mr. L who votes for
                           Mrs. H. Then Mrs. R sues to overturn agreement. Lower court
                           orders new election where Mrs. H must follow agreement, if no
                           agreement, Mr. L will vote.
                        2. Held: SH agreement is valid. But agreement did not create
                           irrevocable proxy and therefore Mr. L cannot vote. Thus, court
                           says that Mrs. H cannot vote. Results in stalemate between Mrs. R
                           & Mr. N.
               iii. Lehrman v. Cohen (Del. 1996)(M3, 81)
                        1. Corp creates class AL & AC stock. Each stock gets to elect 2 D’s
                           on 4 D board. Creates non-equity 3d class (AD) which can elect
                           5th D as tiebreaker. Class AD goes to corp’s gen. counsel,
                           Danzansky, who appoints himself as director.
                        2. Note: M would have set up same structure but not allowed atty to
                           be D. Danz. has ethical problem here.



                                             24
Corporations                                                                Fall 2003


                      3. Danz. steps down from D & appts independent D to ratify his K
                         for co-president.
                      4. AL class SH sue claiming stock arrangement illegal under Del.
                         §218 (voting trust stat). If arrangement is in fact a voting trust,
                         would be illegal – is it a voting trust?
                              a. §218: voting trust: does not define ‚voting trust‛
                                      i. 10 year limit.
                                     ii. Title of Stock must be transferred to trustee.
                                    iii. File at principle office of corp.
                              b. Abercrombie factors: voting rights are separated from
                                 other attributes of ownership.
                      5. Held: valid agreement. New class did not separate AC & AL
                         stock from other ownership aspects, new class just diminished
                         voting power. Court says this is diff’t from Ringling b/c there,
                         Loo’s vote took Mrs. H’s ability to vote away.
                      6. M: Court doesn’t really apply Abercrombie test. Looks at
                         substance & purpose of §218 (M3, 84). Voting trust statute is
                         supposed to prevent secret agreements & here no secret. Change
                         in law from Ringling.
                      7. New test for VT: Is the substance & purpose of AD stock
                         arrangement sufficiently close to substance & purpose of §218 to
                         warrant it’s being subject to VT statutory provisions?
               iv. Oceanic Exploration Co. v. Grynberg (Del. 1982)(M3, 88)
                      1. G makes voting trust agreement to appease creditors & then tries
                         to invalidate it. Is it a voting trust?
                      2. Lower court holds it is a voting trust & t/f invalid b/c not in
                         compliance with statute.
                      3. Held: not a voting trust and therefore agreement is valid. Court
                         decides this case on equitable grounds, clearly agreement is voting
                         trust though court says no. As a result, there is uncertainty in the
                         law, now, not clear whether agreement creates voting trust.
                v. Rosiny v. Schmidt (M3, 101)(1992)
                      1. SH’s in CH corp make buy-sell agreements that provide who can
                         buy & how price will be determined. Each subsequent agreement
                         bases price on book value or fair market value, the final
                         agreement is based on BV, substantially less than FMV. Then
                         when original SH’s die, P sues for specific performance of BS
                         agreement & lower court finds it unconscionable.
                      2. Held: Valid agreement, P’s get specific performance.
                      3. Analysis: case may have legally came out correctly but result is
                         unjust. In Oceanic (above), court changed law to be equitable, not
                         so here.




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Corporations                                                               Fall 2003


                             a. Justice is moral concept. Law attempts to be proxie for
                                justice. How wd I change law to make equitable result
                                here?
                      4. Dissent: maybe this is legal but we shouldn’t enforce agreement.
                         The point: treating legal doctrine as determinative of justice may
                         be problematic . . .
               vi. SH Control over Officers
                      1. McQuade v. Stoneham (M3, 52)(NY 1934)
                             a. NY Giants BB team, CH corp. 3 SH investors entered into
                                K, each promised to use their vote for each other as
                                officers. One of the SH’s (P) got voted out by other D’s &
                                sued for breach of K asking for SP.
                             b. Note: by voting P out, others can prevent P from getting
                                return on investment (no salary). As a result, P has stock
                                but no value & D can buy P’s stock cheap.
                             c. Held: Not enforceable. Can’t tell board how to vote, board
                                must be free to exercise BJ. Court wants to preserve the
                                BOD’s power & maintain status of corp. form.
                      2. Clark v. Dodge (M3, 59)(NY 1936)
                             a. P (25%) & D (75%) are sole owners of 2 Jersey corps.
                                Shareholder agreement: P would be D & GM as long as
                                faithful & efficient. D breaches & P sues for SP.
                             b. Note: Corp is incorporated in NJ & under internal affairs
                                doctrine, have to decide under NJ law, but NY wants to
                                change law, overrule McQuade.
                             c. New Test:
                                     i. Risk of harm to creditor’s, public, or non-
                                         consenting SH’s?
                                    ii. Was there more than negligible infringement on
                                         BOD’s freedom to act?
                             d. Result:
                                     i. D now has to offer P a fair price for his stock in
                                         order to buy him out. Change in court’s view of
                                         CH corp – now, seen as similar to private K,
                                         formalities are no longer so important.
                      3. Galler v. Galler (M3, 62)(Ill. 1964)
                             a. Two bros own drug corp equally. Enter into SH
                                agreement to protect fams & to assure equal control.
                                Agreement protects wives if husbands die (they agree to
                                pay yearly dividends). P (bro’s wife) sues D (kid of other
                                bro) to enforce agreement. Court applies Clark v. Dodge
                                test – injury to anyone? Min SH? Creditors? Public?




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Corporations                                                                   Fall 2003


                                b. Held: No injury, agreement is upheld despite its limitation
                                     of D’s power.
                                c. New view of CH corp:
                                         i. Treated as private property, can do anything you
                                             want with your corp.
          e. Controlling Shareholder Duties to Minority
                  i. Donahue v. Rodd Electrotype Co. of NE (M3, 116)(Mass. 1975)
                        1. Subsidiary corp buys out parent & becomes independent (2 SH’s:
                            R & Donahue (P)). R gives stock to kids & retires: corp buys back
                            his stock for $800/share, total of $36k. P wants corp to buy back
                            her stock too & corp offers lower price. P sues for breach of fid.
                            duty.
                        2. Held: All SH’s in CH corps owe FD. If corp offers to purchase
                            shares from one SH, has to offer same deal to everyone. Makes
                            sense? Depends. It benefits corp to buy old dude’s stock because
                            he is old & now his kids can run corp, but buying P’s min. shares
                            does nothing for corp.
                 ii. Wilkes v. Springside Nursing Home (M3, 125)(Mass 1976)
                        1. 4 SH’s form CH corp to run nursing home. P gets into argument
                            w/3 others and is voted out as officer & director & gets no $$. P
                            sues for breach of FD.
                        2. Held: Other D’s violated FD but not every act by maj. that
                            disadvantages min is breach of FD.
                        3. New Test: Majorities actions will be upheld if ‚legitimate business
                            purpose‛ is articulated & no less harmful alternative (difficult to
                            prove).
                iii. Sugarman v. Sugarman (M2, 132)(1986)
                        1. 3 bros form corp. One bro gives stock to son & grandkids, son
                            sells to other bro, leaving one bro (L) as majority SH and kids in
                            min. L pays salary to himself & pays dad pension, but no
                            dividends. Min SH’s sue L derivatively & directly claiming
                            excessive salary, self-dealing, & breach of FD for freeze-out
                            (direct).
                        2. Freeze out COA: breach of FD
                                a. Min. SH’s have to allege that D deliberately intended
                                     freeze out. Similar to intentional tort. So min. is SOL
                                     unless maj. SH does really bad shit.
          f. Parent Subsidary Problem
                  i. Weinberger v. UOP (M3, 155)(Del. 1983)
                        1. Sigal (S) bought controlling interest in UOP (just over 50%) to
                            diversify and set up BOD w/maj. of insiders (Crawford). S buys
                            out rest of stock by cash out merger (will eliminate min SH’s &
                            subsidiary UOP) which requires board approval.



                                             27
Corporations                                                                         Fall 2003


                        2. Feasibility study: done by S’s officers to determine fair price, but
                           use inside info to determine price from UOP D’s ($21-24).
                               a. Problems?
                                        i. S doesn’t disclose the results of this study to UOP.
                                       ii. No negotiation of price w/UOP’s BOD.
                        3. Merger is approved by BOD & min. of SH (analogy to §144) for
                           $24. But approval is made without full disclosure or negotiation and
                           therefore not entirely fair bc need fair dealing in addition to fair price.
                        4. In FN, ct says that trans. could be approved if subsidiary appted
                           an independent committee of outside D’s to deal at arm’s length
                           with parent. If comm. & parent negotiated as if at arm’s length,
                           then would be strong evidence of fairness.
                        5. Held: S violated FD to min. SH of subsidiary. Now, parent must
                           treat subsidiary at arm’s length or risk breach of FD.
                        6. Result: Case discourages partly owned subsidiaries because
                           requires high duty. Stops practice of 2 tiered tender offers.
               ii. Kemp v. Beatley (M3, 164)(NY 1984)
                        1. Min SH brings claim to dissolve corp under NY §1104(a) which
                           allows dissolution when maj’s conduct is illegal, fraudulent or
                           oppressive, requires at least 20% ownership. Maj. may defend if
                           buys out min. at court determined fair price.
                        2. Imp. points:
                               a. Most litigation is over def. of ‚oppressive‛ conduct –
                                   basically seen as breach of FD, where min’s rsbl
                                   expectations are not fulfilled.
                               b. NO DISSOLUTION PROBLEM IF BUY-SELL
                                   AGREEMENT!
              iii. AK Plastics (1980)(M3, 168)
                        1. Same as above but higher standard than ‚rsbl expectations‛ for
                           ‚oppressive‛ conduct. Here, seems as if court requires intentional
                           conduct to constitute oppressive.
                        2. Side note: M sues corp because her ex gets her $$ - should have
                           sued him for $$ he owes her.
   7. Fundamental Transactions (M4)
         a. Definitions
                i. Statutory Merger: amalgamation of 2 corps – one survives while the other
                    disappears.
               ii. Reverse or Forward Merger: whether B merges into A or A merges into B
                    depends on which corp has best tax benefits – depends on tax laws.
              iii. Stock Purchase/stock acquisition: Corp A exchanges shares for all
                    outstanding shares in corp B – and A gains control of B.
              iv. Asset Purchase/asset acquisition: Corp A exchanges shares for assets of
                    corp B. Corp B remains consisting of corp A’s stock & can be liable, corp



                                                 28
Corporations                                                                      Fall 2003


                     B will generally liquidate or go into another business. To sell all or
                     substantially all assets requires selling corp’s SH vote. Buying corp does
                     not vote.
                 v. Cash purchase of assets or stock: taxable transactions, most mergers are
                     done this way today. but no way of knowing what liabilities the aquired
                     corp has.
                vi. De facto merger: see Farris v. Glen Alden (PA, 1958): dissenting SH’s have
                     appraisal rights per statute even though transaction was cast as an asset
                     acquisition and did not technically fall under statute. Court said it must
                     look to the consequences of transaction & purposes of statute.
               vii. Triangular merger: Corp A (acquiring) forms wholly owned subsidiary
                     (acquisition sub) & puts cash or stock in & then merges corp B (acquired)
                     into subsidiary. Corp B SH’s get cash or shares of corp A (not
                     subsidiary). Thus, corp A escapes liability for B’s liabilities.
              viii. Reverse triangular merger: Corp A (acquiring) creates wholly owned
                     subsidiary and merges that into corp B (acquired). Corp B’s SH’s get
                     shares of subsidiary, and then immediately exchanged for cash or shares
                     of A. Thus, B becomes wholly owned subsidiary of A & B’s SH’s are gone
                     or SH’s in A. Allows corp to reach non-assignable gov’t K’s. Also, corp A
                     may get the benefit of B’s non-assignable tax benefits.
                ix. Cash out merger: Freeze outs. Maj. SH force min. to sell shares. Ex. corp
                     merges into subsidiary – maj. SH’s get stock in subsidiary & min. get cash
                     for shares. Used in parent-subsidiary situation.
                 x. Short form mergers: Parent owns large majority of shares of subsidiary –
                     permits to merge subsidiary into it without SH vote. Requires: P must
                     own specific % of subsidiary’s shares.
                xi. Tender offer: Buyer makes public announcement offering to buy stock in
                     corporation, bid is conditioned upon ability to acquire majority of stock.
                     Regulated by federal securities law (Williams Act). Faster than merger &
                     can be done without acquiring corp’s approval.
          b. Sale of Assets – asset sale may require SH approval but no appraisal rights.
                 i. Katz v. Bregman (M4)(Del. 1981)
                         1. PI sells 51% of assets. Statute requires vote & resolution of BOD
                             adopted by maj. of SH’s for sale of all or substantially all of corp’s
                             assets. Issue: does this sale fall under statute?
                         2. Test for sale of assets: Sale is
                                 a. Quantitatively vital to operation of corp & is
                                 b. Out of the ordinary & (has corp’s business historically been to
                                     do this sort of transaction?)
                                 c. Substantially affects existence & purpose of corp
                         3. Application?
                                 a. ***QV? Sale generates most of income, though only 51% of
                                     assets. Most important factor



                                               29
Corporations                                                                      Fall 2003


                                b. Out of the Ordinary? Yes, corp is in mfr’ing biz, not
                                    holding corp.
                                c. Existence & Purpose? Not existence, corp will always
                                    remain but ct says will affect purpose. M doesn’t buy-
                                    transition from steel drums to plastic drums is not a big
                                    change. Also, corp is already a diversified holding co.
                                    Very odd & useless prong ‘cause all certs of incorporation say
                                    only that purpose is to conduct business.
                       4. Result: Test is BS, ct finds for P b/c sale changes nature of SH’s
                            investment & thinks that P is being deprived of his profits.
                ii. Farris v. Glen Alden (M4)(PA ’58)
                       1. List (L) & GA merge→ 2 corps enter into agreement whereby GA
                            increases its shares from 2.5-7.5 mil. & L assigns assets to GA in
                            return for stock of ?. (Note: GA SH’s have to vote to amend
                            charter to increase authorized stock).
                                a. Result of transaction: new corp is List Alden (LA), form is
                                    GA’s but aquires L’s assets & liabilities.
                                b. Why is GA’s form kept by LA? GA has $14 mil tax loss
                                    carryforward – whole point of deal is tax shelter.
                       2. Held: De facto merger – court cuts through the form of merger to
                            the substance bc legal & economic result of transaction is same as
                            merger.
                       3. Test: Does corp lose its essential nature & alter the fundamental
                            relationship of SH’s among themselves? But no essential nature of
                            corp & shareholders have no relationship anyway, these are public corps.
                            Corp retains same corp form, no change in ‚nature.‛
                       4. Why this outcome?
                                a. Ct implies that deal is unfair bc GA SH’s book value drops
                                    but BV doesn’t matter. What matters is market value
                                    dilution & can’t tell, tf don’t know if deal is unfair.
                       5. Final thoughts?
                                a. Test is stupid & makes no sense. Deal is prolly good for GA
                                    SH’s anyway.
                                b. PA legislature ignores this case & says no de facto merger.
               iii. Harriton v. Arco Electronics (M4, 14) (Del. 1963)
                       1. Same trans. as Farris v. Glen Alden. Del. SC says no de facto
                            merger, this is a sale of assets covered by §271.
                       2. Equal Dignity Rule: Each statutory provision stands on its own,
                            they are all of equal dignity.
                       3. Comparison of PA & Del. approach?
                                a. PA’s approach favors SH’s in that a corp can’t
                                    predetermine the legal consequences of a transaction
                                    merely by structuring it a certain way but is unpredictable.



                                              30
Corporations                                                                    Fall 2003


                                   Requires BOD to offer fair price so if court gives appraisal
                                   rights, can be sure that no one will use them.
                                b. Del’s approach favors BOD’s: they get certainty &
                                   knowledge that the form of transaction will be respected.
          c. Mergers
                i. In General
                       1. In days of corp personality, merger was unheard of. Then needed
                          unanimous consent of SH’s to merge. Now, generally all you
                          need is: (1) BOD resolution; (2) SH vote of each corp (usually): (3)
                          file a cert of merger in state sec’s office.
                       2. Sometimes SH’s get appraisal rights, but in Del. SH’s in public
                          corp don’t get appraisal rights because theory is that you can get
                          fair price by selling on the market.
                               a. Why appraisal rights? Because in US jurisprudence can’t
                                   take another’s property without their permission
                                   (analgous to eminent domain where you get ‚just
                                   compensation‛ (fair price) for your land).
                               b. How is appraisal done? J. listens to financial experts from
                                   both sides & decides – absolute discretion unless clearly
                                   erroneous.
                               c. Note: Appraisal is merely compensation, NOT damages.
                                   And will almost never get recissory damages (never in
                                   Del.).
                       3. Merger & Sale of Assets Compared
                               a. Same actual result, in most cases on corp disappears.
                               b. Merger destroys corp. form & sale of assets does not,
                                   historically, sale of assets was permitted & mergers
                                   weren’t because corps were though of as persons that
                                   shouldn’t be destroyed.
                               c. Appraisal rights were given in merger context only
                                   because they were seen as a special, different from other
                                   transactions.
               ii. Weinberger v. UOP II (M4, 22)(Del. 1983)
                       1. Appraisal is generally the exclusive remedy & has very strict
                          procedural requirements.
                       2. Intrinsic Fairness required: in parent – subsidiary situation, need
                          entire fairness (because it is a self-interested transaction) →
                          requires fair dealing & fair price. Remember, BOP on corp. bc self-
                          interested transaction, unless approved by maj. of min. SH’s & full
                          disclosure, & arm’s length negotiation (committee of independent D’s).
                               a. Fair Dealing: fair negotiation & full disclosure
                               b. Fair Price: take all econ. considerations into acct- FMV.




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Corporations                                                                         Fall 2003


                       3. Here, court says that if no fair dealing, creates an exception to
                          exclusive appraisal remedy (but still get same amt. of $$ as a
                          result, on remand, court will merely conduct appraisal).
                       4. No business purpose test in Del.
               iii. Rabkin v. Hunt Chem. Corp. (M4, 27)(Del. 1985)
                       1. H. bought 63% of O’s stock through O’s controlling SH (T&N) at
                          $25/sh. conditioned on agreement that if H buys rest of stock
                          within a year, must buy for same price. So H merged w/O just
                          after 1 yr and paid only $20/sh. Min SH’s sued. Issue is whether
                          appraisal is exclusive remedy absent deception under Weinberger.
                       2. Note: P is not complaining that price is unfair (because it isn’t & that
                          claim would lose), but they want their K enforced so they can get $25/sh.
                          But K was a sham anyway, just to insulate O’s controlling SH’s, not like
                          H would buy the rest because why pay that price if you could wait a
                          while longer and get a better price? And the K was technically not
                          breached . . .
                       3. Held: ‚inequitable conduct will not be protected merely because it is
                          legal. . . At the very least the facts alleged import a form of overreaching,
                          and in the context of entire fairness they deserve more considered
                          analysis than can be accorded them on a motion to dismiss.‛
                       4. Even though unfair dealing does not give a separate remedy (SH
                          still get stock appraised), this case takes unfair dealing out of the
                          exclusive ‚intrinsic fairness‛ context and becomes an independent
                          wrong.
               iv. Glassman v. Unocal (M4, 40)(Del. 2001)
                       1. No fiduciary duty in short form merger context. Therefore min.
                          has to comply with appraisal procedures or gets nothing.
                v. Coggins v. New England Patriots Football Club, Inc (M4, 43)(Mass ’86)
                       1. S buys Pats, issues non-voting stock to public, gets kicked out by
                          friends and wants Pats back. S borrows $5 mil & personally
                          assumes the loan to buy stock (leveraged buyout). In order to pay
                          back his loan, he has to get rid of min. (public) SH’s in Old Pats so
                          that New Pats (his new corp) can assume his loan. Basically, S
                          effectuates a cash out merger to freeze out minority.
                       2. P owned Pats stock, he sues and asks for recission because he
                          wants his stock back – crazy mass football fan – and claims breach
                          of FD.
                       3. Test:
                               a. Is there a legitimate business purpose to the transaction?
                                         i. S claims that NFL doesn’t want public corps b/c
                                             doesn’t want corps to care only about stock price &
                                             that he is saving $$ by eliminating pub. SH’s bc he
                                             doesn’t have to comply with SEC regs.



                                               32
Corporations                                                                     Fall 2003


                                       ii. Court says no way, this merger does not benefit
                                            SH’s (cares more about benefit to SH’s than to
                                            corp).
                       4. Note: W. court says no reason for BP test, but if we apply W. test here
                          (fair dealing & fair price) then S would win, transaction was fair. When
                          would there be a BP for a freeze out? Perhaps if corp was a newspaper
                          and wanted to take controversial positions on issues.
                       5. Result: recissory damages bc merger was illegal without a legit
                          BP. Ct won’t actually give P his stock back because not possible.
                          Note: Can’t get recissory damages in Del. bc mergers are always
                          permissible.
          d. Hostile Takeovers these cases deal with validity of defensive measures
                i. What if there is a specific threat on the table?
                       1. Unocal Corp v. Mesa Petroleum Co. (M4, )(yr?)
                               a. M. owns 13% of stock but wants rest.
                               b. Front end loaded merger: 2 steps
                                        i. M. offers cash in front end at $54/sh. to gain
                                            majority.
                                       ii. Then merges U. into M. & back end gets securities
                                            (junk bonds) in exchange.
                               c. Prisoner’s dilemma for SH’s – too many & too widely
                                   dispersed to consult with eachother, therefore all want to
                                   accept ‚front end‛ of the offer. Note: Now, under Williams
                                   Act, all SH’s get same pro rata consideration.
                               d. U’s defense to takeover:
                                        i. 8 outside D’s (maj.) met with atty’s & fin. advisors
                                            & agreed to reject offer because said offer was
                                            inadequate.
                                       ii. Self-tender offer: $72/sh paid in debt securities
                                            (contracts). Debt instruments contain restrictive
                                            covenants, can’t assume more debt until debts are
                                            paid. M’s takeover is leveraged buyout and tf M
                                            will not be able to finance deal if corp can’t assume
                                            more debt. M has no power to void the contracts.
                                            Exchange offer by U. is not offered to M.
                                      iii. Clearly, U is never going to have to make the
                                            exchange offer – poison pill stops M. & M. sues to
                                            get injunction against exchange offer. M. claims
                                            breach of FD & self-dealing.
                               e. Analysis:
                                        i. Does BOD have power to resist tender offer?
                                                1. Court says power comes from Del. GCL §§
                                                    141 & 160. Has to use both so court can



                                               33
Corporations                                                                    Fall 2003


                                                  construct broad ability for BOD to resist
                                                  takeovers. BOD’s power to act comes from
                                                  fundamental duty & obligation to protect
                                                  the corp. enterprise. Completely goes against
                                                  Del. precedent in Harriton v. Arco (equal
                                                  dignity rule).
                                              2. Important: court looks at corp as an entity,
                                                  BOD’s are granted power to retain the corp
                                                  form. But also could be said that court is
                                                  interfering w/SH’s ability to sell stock – this
                                                  would interfere w/SH’s property rights, thus
                                                  court thinks of corp as a separate entity to be
                                                  protected.
                                      ii. Does BJ rule apply? BOD’s have the BOP to show (as a
                                          precondition to application of BJ rule):
                                              1. Did BOD rsbly believe that there was a
                                                  danger to corp policy & effectiveness?
                                              2. Were defensive measures rsbl in relation to
                                                  threat posed?
                                                      a. D’s can prove the above by showing GF
                                                           & rsbl investigation.
                                                      b. If yes to both, then court applies BJ
                                                           rule. If no, court will treat
                                                           transaction as a self-dealing one and
                                                           BOD’s must prove entire fairness
                                                           (dealings & price).
               ii. What if there is not a specific threat?
                     1. Moran v. Household Int’l (M4, 84)(Del. 1985)
                              a. M. adopts Preferred Share Repurchase Rights Plan.
                                  Triggered when (1) tender offer for 30% of stock or (2)
                                  actual acquisition of 20% of stock. In the event of a
                                  triggering event, corp will issue one right/share.
                                  Provisions are:
                                       i. Rights Agreement:
                                              1. Right to buy 1/100th of a share for $100.
                                              2. BOD retains the right to redeem the rights
                                                  for 50 cents (if there is a good offer)
                                              3. Rights become non-redeemable in the event
                                                  of an acquisition.
                                              4. If merger or consolidation occurs SH can
                                                  buy $200 of common stock of tender offeror
                                                  for $100.
                                      ii. Anti Destruction Provision



                                             34
Corporations                                                                     Fall 2003


                                               1. Can exchange convertible stock & bonds for
                                                   common stock.
               iii. What if there are two offers on the table?
                      1. Revlon v. MacAndrews & Forbes Holdings, Inc. (M4, 91)(Del.
                           1986)
                               a. PP wants to buy Revlon. Revlon doesn’t want takeover,
                                   eventually starts to negotiate with another corp,
                                   Forstmann & issues poison pill.
                               b. R’s defense tactics?
                                        i. Repurchase Plan: R. will buy back 10 mil. shares in
                                               1. Senior subordinated note of $47.50 principal
                                                   at 11.75 interest, due 1995, and 1/10th of
                                                   share of $9 of preferred stock at $100/share.
                                               2. Notes contain restrictive covenants: R can’t
                                                   incur additional debt.
                                       ii. Notes Purchase Rights Plan
                                               1. Each SH gets one NPRP. Can exchange
                                                   NPRP for one common share at $65 w/$12%
                                                   interest. Different from Moran plan, doesn’t
                                                   dilute, but adds more debt to Revlon. Necessary
                                                   bc PP’s new board could waive the repurchase
                                                   plan but this cannot be redeemed.
                               c. PP & Forstmann continue to outbid eachother. R makes
                                   agreement w/F. to buy corp provided that
                                        i. R agrees to waive Notes covenants.
                                       ii. R agrees to sell off some assets to help F (to lessen
                                           debt)
                                      iii. R agrees to $25 mil cancellation fee (covers F’s due
                                           diligence costs & lost opportunity).
                               d. F makes offer w/inside info for $57.25/sh, includes lock-up
                                   option & no-shop provision. PP sues.
                               e. Held: Defensive measures not cool – R is enjoined from F
                                   deal.
                                        i. Poison pill & rights plan were fine until BOD
                                           started to deal w/F.
                                       ii. Unocal is not applicable here bc only 1 offer on
                                           table in Unocal, here, 2 offers & R had already
                                           decided to sell.
                                      iii. Once BOD’s decide to sell, their only duty is to get
                                           the highest price for the shareholders.
               iv. Paramount v. Time (M4, 104)(Del. 1989)
                      1. P & Time SH’s sue Time for blocking P’s takeover offer. T’s BOD
                           wants to preserve ‚Time culture‛ and maintain their control over



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Corporations                                                             Fall 2003


                     Time. T decides to merge w/Warner (W) while Paramount (P)
                     wants in to take over Time. Issue: Are T’s defensive techniques
                     legal?
               2.    T & W: Stock for stock merger – T sets up wholly owned
                     subsidiary & W merges into that subsidiary. Resulting corp: 24
                     member BOD, journalism & entertainment. Now both corps are
                     on market once pp hear of this deal, so to prevent unwanted
                     takeovers, Time puts defenses into effect.
               3.    Defensive tactics:
                          a. Exchange agreement
                          b. Letter to banks
                          c. No shop clause
                          d. Sent out proxy material & set record date
               4.    Approval of SH’s of both corps required. W: Del. law says maj. of
                     SH’s have to vote. T: from NYSE rules, maj. of SH’s have to vote.
               5.    P makes tender offer for T at $175/sh. T is trading at $126/sh.
               6.    More defense:
                          a. T makes tender offer for W → now, P can’t afford to buy
                             TW merged & SH’s don’t have to vote on T’s purchase of
                             W.
               7.    SH’s argue:
                          a. Revlon: W SH’s will have 62% control of Time, tf merger
                             will lead to change in control (but really, T is surviving
                             corp). Ct says no.
               8.    Paramount argues:
                          a. Unocal: no rsbl threat & T’s defense precludes takeover (tf
                             not proportional). Note, no Revlon claim bc P is not SH of T,
                             just a prospective buyer.
               9.    Court’s Analysis:
                          a. Revlon: Selling T to P is a short term maximization of
                             profits & BOD may legitimately believe that market is
                             inefficient & tf sale to W will maximize SH profit in the
                             long run. Court says R not applicable bc T not for sale.
                          b. Unocal: BOD rsbly believed there was a threat & measures
                             adopted were rsbl. BOD wanted to prevent short term $$
                             at the expense of long term health of corp. Thus, ct
                             applies BJ rule.
               10.   M: retro opinion, takes us back to Dartmouth College. Why?
                     Because court recognizes BOD’s FD to the corp itself – to preserve
                     its long term health at the expense of short term quick $$ for SH’s.
                     Case most likely came out this way because the court recognized
                     T’s ‚journalistic integrity.‛ Unique corp w/unique service.




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