A business organization owned by a single individual, and is not cast in a special legal form of organization, such as corporation, that can be utilized only by filing an organic document with the state pursuant to an authorizing statute

“Fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” 3^rd Restatement (hasn’t been adopted yet).

person who by mutual assent acts on behalf of another and subject to the other’s control.

·         A consensual relationship but it doesn’t matter whether the parties think of themselves as or intend to be agent and principal.

§4: Restatement Second

General Agent – agent who is authorized to conduct a series of transactions involving continuity of service

·         Likely given more discretion by the principal, because of the continuity of service.

·         Example: School Caterer

agent who is authorized to conduct only a single transaction, or only a series of transactions not involving continuity of service

·         Example: Balloon man who comes to school once to make balloons.

·         self dealing transactions – agent on both sides

·         taking the deal from the P for themselves

·         P’s must monitor the A: costs can be high

Joint adventurers like co partners owe to one another while the enterprise continues the duty of the finest loyalty.

What was bad about S’s conduct?

o Court: the trouble about his conduct is that he excluded his co adventurer from any chance to compete from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency.

* Insurance 

* Diversification -- invest in other opps

* Who bears the risk

* what are the agency costs

* how to compensate risk bearer

* share of control + profits

Essential Elements of Business Firms

1. Duration -- begin/end

2. Profit - return?

3. Control -- who manages/controls?

4. Exit -- how do we get out?

5. Duties/Liabilities -- investor's responsibilities?

* Speak -- through voting

*Sue -- derivative suits vs directos,officers, and controlling SHs

*Leave -- sell their stock

* insurance

*diversification

*internal risk allocation

*risk externalization

To form a corporation:

1. File articles of corporation w/relevant state officials.

2. draft & adopt bylaws

3. Set out governing details of the corporation:

a. powers of directors & officers

b. election procedures

c. required notice periods for SH meetings

• as long as BOD's action follows procedure, deference will be accorded and litigation will not happen.
• Requirements:

1. Be informed
2. Serve a rational purpose
3. Are disinterested
4. Make decisions independently

* Corporate employees

• some are appointed
• have duty of loyalty
• run day to day biz
• report to directors

Three types of Corporate Securities

1. Debt
2. Equity -- Common
3. Equity -- Preferred

Common Stock

That the law of the state of incorporation govers the internal affairs of the corporation.  Corporate law is a product of state law --> SEE NY v. Del v. Cal.

Schnell and its standard

F: Unhappy SHs dissatisifed w/corp's performance. Corp changes SH meeting making it difficult to get to.

Ct: Mgmt is using corporate machinery and Del law to perpetuate itself in office and to that end for purpose of obstructing legitimate efforts of dissident SHs.

RULE: Inequitable action does not become permissible simply because it is legally possible.

Takeaway: equitable jurisdiction always looms.

* cts are well trained

* law is organic -- develops w/new trends in biz.

* fast [time is $$$]

* predictable decisions

BJR + illicit purpose.  If a BOD believes there are better offers then deference will be accorded to their expert judgment.

Here the issue was whether  BOD had compelling purpose to block tender offer from minority SH w/30% of authorized stock.  ct believes they did that they were not doing this for improper but rather for the best of the corp -- wait for better offer.

Equity governs.

Can state corporate statutes be amended?

What two things do Hedge Funds most rely on in pressuring managers for high returns for SHs?

1. Institutional Investors -- mutual funds / pension funds to vote for their proposals

2. Derivative suits to compel mgmt action

F: suit to enjoin reorganization of M which is 92% owned by M international. M is del corp and subsidiary of M int. M int is independent.

Wrinkle: Del law says forum where corp is incorp law governs.  M int is from Panama which allows for voting in subsidiary decisions. Del does not.

Takeaway re Del Law : Del cts will apply law of state of incorporation to the entire gamut of internal corporate affairs.

1. California -- applies pseudo corporation rule where corporation has headquarters & sales in CA but is incorporated elsewhere, CA will apply CA rules.

2. Delaware -- Fights to the death to ensure their law is followed -- even when applying the law from where corp is incorporated & that law conflicts w/Del law.

• What is vertical federalism?

- Let the kids do what they want to do but when you see market failure and break their necks, you give it a little fix and let the kids [states] learn again

o Even the M.O. for federal corporate law is to address the procedure – let the states address the susbstantive measures (think Eerie)

o The reality is that the Fed will intervene MUCH MORE when it perceives market failure.

* federal law preempts any state law as it pertains to interstate commerce.

A cumulative voting election elects the top vote-getters, just as with a simpleplurality election.

With cumulative voting, voters are permitted to not split their votes and instead concentrate them on a single candidate at full value.

Favors the minority shareholders

MITE Corp as to limitations on state law & internal affairs doctrine

Illinois tried to promulgate rule that compelle corps to issue notice to sec of state 20 days in advance of any bid to determine fairness

SCOTUS: states CANNOT regulate internal affairs of foreign or local corporations -- here state actor, sec of state, was called in to evaluate the business judg

1. Not violation of ICC -- even though more tender offers for companies may originate out-of-state, this allowance for meeting by minority SHs to discuss offers is beneficial to everyone and furthers the federal law in question -- no preemption.

state corporate law CANNOT be less restrictive than governing federal law as it would create conflict issues between state-fed.

Since law is not conflictive w/fed law, then state law should govern as to corporate doctrine w/in forum.

corporate law is best left to the states

if there is a fed law that speaks to the issue, & state doesnt have liberty to legislate in that area, preemption.

if there is no governing corporate law in place, then state may promulgate regulations so long as they comport w/ICC and DCC limitations

1. the liklihood of whether the rules will drive corporations away from the state.

2. maintain a good balance between SH and BOD rights

What are some questions asked when evaluating wha thte objective of the corporation is?

* maximize profits?

• corporate earnings
• market value of each Shs stake in the firm
• net present value
• return for SHs
• citizenship in society
• Corporate SOcial responsibility (Ford)
• 
  

Dodge bros are SHs and they want their dividend.

RULE: w/holding profits from SHs by reinvesting in company may be okay but not if the sole reason is to not distribute money to SHs but rather build healthier more profitable company in the longrun.  BJR.

Corporations are formed for the purpose of making $$$

Corp's duty to pay SHs supersedes any altruistic/philanthropic motivations.

Ford could have won had they defended their decision on grounds that this was temporary and better for long term profitability of organization

even though SHs passed the bylaws presumably,  if they conflict w/articles of incorporation, they dont govern.  

Corporations are FOR PROFIT!

F: majority Sh had caused corp to make annual donations. This is basically one big family. Minor SH wanted donations to not be diverted to D's charities anymore but instead her daughter's.

Donations in question <<5% of corps annual income.

SHs have no real role in how charities are chosen. Only takeway, if charity is well enough and BOD approves [procedurally sound -- EVEN IF BOD is CONTROLLED by OWNER]

F: Hammer donates $$$ to his own museum.  2 SHs file derivative suit.  One settles while the other sues other SH for limiting their relief.

Holding: Ct upholds the corporate decisions here as it was procedurally sound. independent directors, special committee all reviewed and approved the deal.

TAKEAWAY -- SHs really have no say in how charitable corporate donations are selected.

TALKING POINT -- all BODs & committee were nominated directly/indirectly by Hammer questioning their independence.

an association of two or more persons to carry on as co owners of a business for profit (pg. 143)

o Requires no filing with the state to form

a partnership formed by two or more persons and having one or more general partners and one or more limited partners

o Limited partner has no voice in the active management of the LP which is conducted by the general partner

Limited Liability Partnership (LLP)

Allow a person to limit liability to whatever they have invested though they remain personally liable for tortuous conduct for which they are responsible or under some statutes employees acting under their supervision

• Based upon principles of centralized management and limited liability for participants
• Corporation centralized in a board of directors 
• SH liability is limited to whatever amounts they have agreed to contribute to the corporation and does not extend to any debts or liabilities incurred by the corporation 
• SH cannot force the corporation to buy back their shares though they have broad rights to sell to other investors

Liability as to 

1. Corporation

2. GP

3. LP

1. most a SH can lose is generally limited to his investment in the corp -- lim liability is the default rule

2. parties can be held j+s liable for PP obligations

3. General partners face j+s liability where as LPs are limited up to their investment so long as they dont participate in mgmt -- e.g. advising GP on day to day trxs 

MGMT & Control

1. LP

2. LLC

1. If LP gets involved in mgmt or biz, they'll lose the protection of their limited liability.

2. LLCs can be member-mnged or mngr-mnged.  If member, each member has authority be agents for LLC.  If mngr, members are NOTT agents.

1. how does the form handle majority and minority interests.

2. how does the form affect the firm's ability to raise capital

3. what are the tax implications?

To qualify

o The corporation must be a domestic corporation or LLC with no more than 100 shareholders

o Shareholders must be individuals, estates or qualified trusts or tax exempt entities

o No shareholder can be a non resident alien

o Corporation can have only one class of stock

o All shareholders must consent to election of S treatment

1. Name of the corporation

2. # of authorized shares to issue

3. Name & Address of each incorporator

4. Name & Address of office and agent

1. Exculpation Clauses

2. Ultra Vires  --- purpose of the corp so as to limit corp's conduct.

Once the corporation comes into existence [art of corp filed], an organizational meeting must be held.

• election of directors
• adoption of bylaws
• appt of officers
• designation of a bank depository
• approval of the sale of stock to initial SHs

1. Operate locally -- incorporate locally as it reduces filing costs, reporting, & tax burdens.  May have more political sway as well.

2. National operation -- incorporate in Del.  It's more expensive but in long-run may be less costly because of reduced overal legal expenses.

Depends --

1. Entity Rule -- lawyer reps business and not individuals.

2. Aggregate Theory -- because biz involves fewer participants, indivs reasonably believe that lawyer is advising them meaning he has ethical obligations to both.

1. Doctrine of Defacto Corp -- promoters acted in good faith, unaware of lack of corporation, agents used corp form in trx w/3rd party

2. Corp by Estoppel -- Intention or Negligence induced party to his deteriment -- reliance on corp leaves opn liability.

imposes liabiltiy on those parties who know that the corp doesnt exist yet conduct biz as if the incorporation papers had been filed.

In FL this requires actual knowledge

• actual authority
• apparent authority
• inherent authority

BODs can either direclty monitor or delegate such authority

• they can be hands on [small businesses]
• delegation can be managerial [more favorable in larger corporations]

• Elect/Remove directors
• Approve fundamental trxs [mergers/acquisitions]
• amend bylaws/pass resolutions
• to some extent these can be -- precatory motions so as to warn the board to potential resolutions that the SHs may take
• informal communications w/BOD

• What are the roles of BOD?

• To exercise corporate powers
• to manage business and affairs
• to amend bylaws [if granted the power by SHs]

1. Actual

2. Apparent

Need a quorum to approve of every move made by the board.  Unless otherwise prescribed in the bylaws, greater than 50% is required.

F: Pres promised guy a pension & deal but didnt have actual authority.

Ct: says he had apparent authority.:

Analysis: analysis turns on whether conduct in question was extraordinary or ordinary.  If the conduct is ordinary, then there is apparent authority.  Since the K was reasonable and $$ minimal, it's ok.

F: Menard offers to purchase 30 acres from D. D's pres accepts in which he appears to have authority to P. D's pres used to regularly conduct such trxs until recently. BOD did not approve the offer however & refuses to complete the sale.

Difficult Holding to Understand: Corporate lawyer was involved w/both Pres and BOD.  Also, Corp put pres in position of trust & power such that misuse of that trust notwithstanding, maybe principal should bear the loss.

Common Types of Committees 

• Executive
• Audit
• Finance
• Nomination
• Compensation -- determine how much employees [e.g. including wall street types -- so much power in this committee]
• Special Litigation -- For derivative suits

1. Manifestation from P to A

2. Consent by A

3. W/A acting for the benefit of P and under P's control

R3d says agency is the fiduciary relationship arising out of this

depends on reasonable understaning of P's manifestations [expressed/implied], acquiescence, ratification

Apparent

Inherent

Undisclosed principal is liable notwithstanding an agreement between P & A that no P/A relationship existed.  Where P contracts with A, Retains complete control over A’s actions, can’t avoid liability w/regard to a 3^rd party by contractual terms between P&A. 

Key: He who controls another is principal; he who is controlled by another is agent of the other.

1. acts by P whether negligent or intentional, create the appearance of agency/authoriyt

2. T reasonably relies on that appearance.

3. T suffers harm in reliance upon that appearance.

Liability imposed on P even though A's action not based on actual authority

Limitations: what is customary for the enterprise

E.g. UNDISCLOSED Ps

(1) act usually accompanies or is incidental to  trxs that A is authorized to conduct

(2) T reasonably believes that A is authorized to act

When are Ps likely to be undisclosed?

• when A forgets to mention that they are repping P
• when P wants privacy [see: art auctions]
• when P knows T doesn't want to deal w/him
• when P fears strategic hold outs by T

Things relevant to the apparent authority + undisclosed agenty inquiry

1. was the trx extraordinary or ordinary in the course of A's performance?

2. was it reasonable for T to believe that A had authority to complete the trx?

Affects substantive change to law which is not what Restatements are supposed to do

R3d will harm innocent Ts currently protected under R2d

Not necessarily.  Says T may reasonably believe that the PP has acquiesced or consented to a partner's expansion of the nature of the business of the P if

T observes dealings or a pattern of conduct between the individual partners and the PP supportive of that belief.

1. Good Faith

2. Full Disclosure

In addition to actual, apparent, acquiescence, ratification, etc

R2d --  P is liable as to inherent agency power

R3d -- P is liable as to estoppel/expanded manifestation, or expanded apparent authority

1. derivative suit via SHs

2. class action suit against insiders and corp

"single dominant purpose" behind conduct under attack was in fact illicit -- e.g. postpone or move SH meeting to hault insurgent SH vote.

illicit purpose

(1) Schnell -- BOD has power but if it's inequitable to change meeting date & impede voting insurgency, cts will not allow it even if it might be lawful

(2) Stahl -- board has power -- and it's equitable to not set meeting date and thus impede insurgency/tender offer as long as it's in the interest of upholding SH powers and profitable for corp

If CA's statute were replicated in all states, no conflict would result.  Any conflict is speculative.  Any effect on IC is minimal and or incidental in relation to the purpose which that requirement is designed to achieve.

What about Wickard or is that federal as to state versus here it is the state as to federal argument.

* private property

* social instituion

Corporation is organized and carried on primarily for the profit of SH.  Discretion to attain that end does not extend to the end itself or to the reduction in profits.

• Protecting the investor
• protecting the value of the stock
• Risk of waste of corporate assets for undesirable purposes.
• but isnt non-profit maximizing goals = plutocracy in disguise?

• long term profit is much more healthy than short
• purely profit motivations can externalize risk on rest of society

1. conduct should be to enhance corporate profit & SH gain.

2. Even if profit isnt so enhanced, corp should still act w/in the law, take into account ethical obligations, may devote reasonable amount of resources to public welfare & philanthropy

Corporate Charities: 

(1) Are they legal?

Corporation Charitable Donations:

(2) Do they comport w/fiduciary duties?

Think Kahn v. Sullivan Armand Hammer museum case.  BOD was all in some way connected to Hammer whose museum received the donations.  Cites to Henderson.

Ct goes on to say that they might not have voted as the BOD did here but that's not relevant.  Akin to BJR deference because BOD and special committee both reviewed the matter in question & procedure was sound.

What of the fact that most members of here were not independent from Hammer & thus not necessarily disinterested?

Corporate Charities -- 

(3) SH role

Seems like SHs should be able to vote as to whom they will give their money away to but that isnt the case.  Henderson and Kahn v Sullivan.  BJR to BOD and Special Committees as these decisions border business decisions.

Contrast this w/Ford  and Craigslist

What is the role of corporate lawyers in CSR?

(CSR = Corp Social Responsibility)

[Stewart, Allen, and Painter opinions]

Justice Stewart: morals of marketplace

Chanc. Allen: Duty of Independence

Prof. Painter: Lawyer Interdependence

(1) economic realities of situation

(2) social and biz effects of coming out one way rather than another

(3) sharing of profits

• ordinary business decisions are decided by majority of partners
• matters in contravention of agreement should be decided by unanimous vote
• extraordinary matters interpreted to require unanimity too [dont want polarize PP]

1. is the majority vote really desirable especially for matters in ordinary course?
2. what do you do about any of this when you have 2 person PP?
3. what are ordinary business decisions of PP?

Each P will get equal share in profits + their share of contributions [after liabilities are satisfied] unless otherwise agreed.

Re Losses -- if not otherwise agreed [e.g. according to contributions], then losses follow profits [default = equal share].

RUPA and UPA agree.

(1) Unless the other party has knowledge of the fact that he has not authority to so act

Exceptions as to RUPA P-A Authority

UPA is not clear on this.  

RUPA, however, focuses on the act of a P for apparently carrying on in the ordinary course of the PPs biz or biz of the kind carried by the PP.  RUPA does not focus on PP's operation.

UPA -- J liability for Ks.  If other Ps are not joined, action may be dismissed.

RUPA -- PP can be sued as an entity [not the case in UPA].  P's liability is J+S but creditors must exhaust PP $$$ before going after P's personal $$$.

Meinhard v. Salmon is the classic interpretation of fiduciary duties in what business form(s)?

• completion of trxs done prior to dissolution
• selling assets
• paying debts
• settling accts among members
• terminate the biz

1. Term of PP ends
2. PP at will and a P withdrawals
3. All Ps decide to pull out
4. P is expelled pursuant to PP agreement

Automatic Dissolution

1. when it becomes unlawful to carry on biz
2. by death
3. by bankruptcy
4. by ct decree

dissolution itself does not discharge the existing liability of any P.

However, an agreement to the effect between himself, the continuing Ps and creditors can.

Yes -- so long as they are unaware of the dissolution.  

Best option to avoid post dissolution liability -- ADVERTISE DISSOLUTION in newspaper of general circulation.

Changes the name to dissassociation.

Dissociation is right UNLESS it fits into wrongful category.

1) Zeroed out income

2) Filing as a Chapter S (if you qualify)

• What happens after filing articles of incorporation?

Stage organizational meeting.

• Held by incorporators initial board
• actions:

- elect directors

- adopt bylaws

- appt officers

- adopt corporate seal

- designate bank acct

- sell stock

- approve SH agreement

* meeting minutes

* elect and remove directors

* approve fundamental trxs

* amend bylaws, pass resolutions

* exercise corporate powers

* manage biz and affairs

What are the corporate powers of

OFFICERS?

* described in bylaws and or appointed by BOD

* Authority in bylaws or precribed by BOD

• Inherent Authority
• Apparent authority
• Actual Authority -- Implied
• Actual Authority -- Expressed
• NOTE -- actual expressed authority can be ratified after the fact.

Menard as to Authority

Dage owned tract of land.  Sterling negotiated and signed a sales K to sell land to sophisticated buyer.  When M made offer, Sterling fwded it to the board which denied it.  When M made 2nd offer, Sterling accepted claiming authority.

Ct: while reps of P to T are central for defining apparent authority, concept of inherent authority differs as all that needs to be shown is that it exists.  If it does then P is bound.

Common stock 

and

Preferred Stock

High Return [* from earnings and at board's discretion]

and

High Risk [ growth potential and voting rights but lowest on totem pole]

generally dont exercise voting control.  it can have conversion rights however to common stock.  there is preference in payment of dividends and also often in corporate assets upon liquidation.

they are entitled to receive dividend payments before common shares.

Where they combine debt and equity in the capital structure.  

Outside debt == business

Inside Debt == Tax/Bankruptcy

Because of the added debt, the interest to be paid deducts from the income but because there is essentially less invested capital, if there is postive return, then you can stand to earn more.  

However, if there is negative return, you still must pay the interest on the loan.

Money In -- Validly issued, fully paid and non assessable.  E.g. the issue of equity securities -- authorized shares, unissued shares, outstanding shares, treasury shares, par value

money Out -- Legal Distributions

MBCA 6.21 -- before the corp issues shares, the BOD must determine that the consideration received or to be received for shares to be issued is adequate.

the determination by the BOD as to the adequacy of consideration is conclusive as to whether the shares are validly issued, fully paid, and nonassessable.

F: P claims SFD doesnt have enough surplus to refinance here leaving the company negative net value.

Because assets must equal Liabilities + SH Equity, any upward revalutation of assets increases SH equity.  Value assigned to assets on balance sheet is often less than assets' actual market value.  Here since the purchase of SHs after BOD accepted revaluation of company's assets under market multiple approach, it was procedurally sound.  Good faith assumed.

a rational BOD deliberative process seems to be the bright line.  if the procedure is fishy however, then more likely than not, a self-financing plan like this that will leave the corporation bankrupt will not fly.

Del -- dividends or repurchases may not "impair capital" -- must be paid out of  "surplus'" == assets minus liabilities minus capital

MBCA -- Distributions permissible only if assets exceed liabilities plus liquidation preferences of preferred stock (treated as debt) + corporation able to pay debts as come due

What is the classic standard as to dividend policy?

Conversely, what is the modern standard as to dividends?

Classic -- BJR

Modern -- oppression doctrine requires that BOD frustrate reasonable expectations of minority Shs.  CANNOT USE DIVIDEND POLICY TO COERCE MINORITY TO SELL ON THE CHEAP.

F: direcotrs of AMEX faced choice of liquidating a bad stock investment & take corporate tax deduction w/loss OR distributing stock to SHs as special divident [taxable to SHs]

CT: Although the choice was obvious [opt for corporate tax deductions], corp defended their decision that it would save net income figures for company.  BJR was applied because ct accepted that appearances (Non-$$$) could be more important than actual cash effects.

UNLESS GROSSLY NEGLIGENT, BODS CAN MAKE POOR DECISIONS.

• Ford [refusing to issue dividends so as to reinvest in the company in things that will NOT profit the company]
• Kamin v. Amex [dividends as decided by BOD that may destroy a company]
• Litle v. Waters [self dealing self finance]

periodic payments by the corporation to SHs in proprotion to their share ownership.  They are usually made in relation to past or current corporate earnings.

Usually given at the discretion of the board.

SHs in corps are NOT personally liable.  

This can be changed in by corporation however.  

SH may become liable by reasons of his own conduct/acts.

1. Piercing of the Corporate Veil
2. Fraudulent Conveyance
3. Equitable Subordination

• Pierce to get at parent's assets to satisfy subsidiary debt
• pierce to get at assets of other companies in the same enterprise
• pierce to get at assets of individual SH

• closely held corp
• insiders deceived creditors
• insiders failed to observe corp. formalities
• insiders commingled biz & personal assets
• inadequate biz capitalization
• D's active participation in the biz

D set up 10 small cab corporations w/each owning 2 cabs. D was controlling/dominant SH. D's corp injured P. Local law limits liability required $10k.

CT: says P should seek relief in legislature as that is what is limiting here. Remand to determine whether D acted in his INDIVIDUAL CAPACITY such that D could be liable if he'd siphoned off corp assets.

Parent-Subsidiary Piercing--

Radaszewski v. Telecom Corp 

When a subsidiary incurs liabiltiies, creditors look to the parent corp.  Cts require a showing that the parent dominated the subsidiary so that they acted as a SINGLE ECONOMIC ENTITY.

CT here refused to pierce even tho comp had minimal insurance w/bad insurance [that they owned]

RATIONALE: 

1. Parent must have complete control over subsidiary.
2. Parent uses that control commit fraud/wrong against T [e.g. under capitalization]
3. That fraud was proximate cause of the injury

Failure to maintain adequate financial cushion AKA insufficient legal capital.

Common Questions:

- Should this alone to justify piercing? NO -- NEED MORE

- Is insurance relevant? What about bad insurance?

D started a company, created quasi-corp, hired P, then later sold his corp.  P is suing for $$$/breach of K but P's corp no longer exists.

Ct: Here D, consultant, was liable for corp's obligations where consultant received bulk of corporate revenues and when corp sold its assets, 60% of purchase $ when to consultant here.

RULE: SHs who are (1) active in the biz and (2)act to disadvantage creditors are likelytoPCV 

Piercing as to real estate deals between 2 competent learned parties? Fucking Hard.

Theberge v. Darbro Inc

Two real estate parties entered into a deal but then, despite comingling & under capitalization, & promissory note that D will cover em. D then liquidates 2 properties to discharge loan to himself, & doesnt have any $ to pay P :(. no piercing.  What gives? Personal guarantees! 

No piercing even though SH actions described as shrewd & sharp biz tactics. ORAL PROMISES ARENT BINDING!

More PCV in TORT than K.

Overall, increased reluctance to PCV

Feds do so more than state.

Gardemal v. Westin Hotel Co.

AND

OTR Ass. v. IBC Corp. [Blimpie]

Westin Hotel Co. -- No Piercing!

F: Husband & Wife go to mex, talk to concierge, go to tranquil beach and die. Wife's pissed. Westin-Mex is Westin sub.

Ct: Alter Ego Analysis --

(1) not enough evidence re domination of sub [separate bank accts, formalities followed, separate staff/assets, insurance]

(2) no evidence of undercapitalization

Shopping mall leased space to Blimpied whose franchisee failed to pay rent. Kicked out.

PIERCE!

Corporate formalities are not complete defense to PCV.  Here subsidiary had no separate identity from parent.  (1) Closely Held, (2) Insider Deception, (3) Corp Formalities, (4) Commingling --same addy/letter head, (5) Undercapitalized

Review: Was there piercing? Why or Why Not?

1. Walkovsky
2. Radeszewski
3. C3 Computing
4. Darbro
5. Westin Hotel
6. IBC Services

As to corporate crime, what is the standard of liability for corporate execs gone bad?

-Strict Liability -- responsible corporate agent [subject to compliance program defense]

-wrongful failure to supervise -- knowledge of harm & acquiescence

What protective measures can SHs take to protect themselves?

• Voting -- fundamental trxs, elect/remove directors, initiate actions assuming bylaws have been amended
• Sue --- enforce fid duties, protect rights, appraisal
• sell -- liquidity or takeovers

• Meetings of SHs [annual, special, by consent]
• Voting at meetings
  • quorum [purpose], proxy [appt of agent], absolute v. simple majority, supervision of voting

• Choose directors
• Approve fundamental changes [usually after BOD initiation]
  • Ams to art of incorp, mergers/sale of assets, dissolution
• Initiate & approve bylaw changes, adopt resolutions

Nuances as to SH annual meetings

If not held w/in 13 mos period in del, SHs may have a right to petition a ct. 

Main purpose is director election.

Notice must be given but statement of purpose is not required.

who can vote at SHs meetings?

• SHs of record which is determined by who on record, at the record date, is on the books as holding that share
• Identifying used to be more complex but now it's easier w/tech

Cumaltive Voting -- Increased

Staggered BODs (terms differentiate as to years)

Del -- Action by written consent is easier under Del 228 [NOTE: although powerful to control SHs via written vote, many corps eliminate this right via charter]

RMBCA -- unanimous vote required of ALL SHs entitled to vote.

RMBCA -- other than election of BOD, all you need is more votes than your opponent.

DEL -- trx may be approvged w/affirmative vote of majority shares PRESENT or represented by proxy at the meeting & entitled to vote on the subject matter.

GLAIRING DIFFERENCE -- COUNTING ABSTENTIONS

simple -- majority of those voting

absolute -- majority of outstounding stock entitled to vote

If a SH dissents from a trx, he can demand that the corp pay him $ in fair market value of his shares as determined by a ct.

Note the ct has much discretion here per the state's appraisal statute.  Thus, appraisal statute shopping can happen from corporation.

Two parties negotiate, P and T, and P survives absorbing T's assets & liabilities.

MBCA -- T requires simple SH vote.  If T reps 20% of the SH voting power prior to trx, then P would also require simple majority of SH.

A triangular merger is a variant form of statutory merger. After negotiating the terms of the combination with T, P creates a subsidiary corporation (S) and transfers to S, in exchange for 100% of its stock, the consideration that T's shareholders are to receive. Then, S and T follow the steps necessary to effectuate a statutory merger: the boards of S and T adopt the plan of merger; the shareholder of S (P) and the shareholders of T vote to approve the merger; and T then is merged into S by operation of law. The only differences are that, rather than having S distribute its own shares to the shareholders of T, S distributes shares of P (or cash or other property) to the shareholders of T, and S (not P) becomes the owner of T's property and assumes T's liabilities. 

SH voting rights as to Statutory Merger, Triangular Merger and Sale of Assets

* MBCA

* RMBCA

*DGCL

P agrees to buy T assets for P shares.  P's BOD approves.  SHs of P have voting rights but no appraisal rights.

T's BOD must approve.  T's SHs have voting & appraisal rights.  Many times, SHs receive P shares.

Del -- majority of outstanding shares

RMBCA -- simple majority.  Again appraisl rights available but NOT in delaware.  Big difference as between SH v. Corp favoritism. 

P can seek to acquire control of T by offering to purchase T shares directly from T shareholders, either for P stock or for cash or other property. Through such a tender offer, P can acquire control of T without a vote of the T board of directors. 

no appraisal rights; T shareholders who disapprove of P's offer can refuse to tender their shares.

P can make the offer w/o any vote from their SHs unless there isnt sufficent shares to do so or the issuance would constitute a 20% dilutive share

F: Majority SH wanted BOD out & reinstate Auer. Want special meeting to vote to remove BOD for cause, replace, amend bylaws etc. Auer was already on the BOD. Pres refuses to call meeting.

Ct: tosses SHs a bone but then taketh it away.  Says since Shs have right to elect, they have inherent power to remove for cause. Because they can remove, they should be able to amend the bylaws so as to elect successors for those directors removed.

HOWEVER -- simple approval and disapproval will not empower SHs to effectuate change but they can still express their disapproval -- akin to warning current BOD

SH amending bylaws -- Ca Inc. v. AFSCME

SEC needs some help making decisions 

F: SEC wants Del to examine 2 issues of del law. SHs wish to amend bylaws.

Ct creates test to analyze when SHs can amend bylaws:

* Procedural? Yes -- even if it's substantive sounding like here to expend corporate funds, if it has both intent and the effect of regulating the process for electing BOD, it is proper SH action.

* if it is clearly substantive, then it is NOT proper subject for SH to amend

109 - SHs can adopt, amend or repeal bylaws even if they have to do w/corp biz/conduct

141 -- Biz & affairs of corp shall be managed by BOD.  

Levi -- if an amendment limits BOD power, BOD prevails.  Bylaws should define procedure by which substantive decisions are made by BOD.

TAKEAWAY -- If youre a SH, draft provisions to look procedurally

Include a fiduciary out provision that would protect against any arguments that BOD duties & powers are being encroached upon whereas otherwise the "procedural" amendment would govern.

Remember 141 (BOD has power) governs over 109 (SHs can amend bylaws that govern BOD).

F: 2 directors control 2 dif factions of SHs. Several step down but losing faction wants control still.

I1 -- Do SHs have power to fill newly created vacancies when directors step down? YES [see Auer]

I2 -- Do SHs have power to remove? YES -- for cause. wtf is cause?  Slippery slope as to what cause could be. What if BOD were complicit -- no way to know if cause exists.

I3 -- Do directors subject to removal receive notice+opp to be heard? YES

Look to DGCL 142 as a response to the question of cause

In FL, SHs can remove w/ or w/o cause UNLESS the ARTICLES provide for removal only for cause.

Most states, unlike FL, require case for removal UNLESS the charter says specifically to the contrary.

(1) calculated plan of harassment to the detriment of the corporation -- DELIBERATE OBSTRUCTION

NOT -- (1) desire to assume control; (2) lack of cooperation

DEL -- possible infinite regress

RMBCA -- SHs have option of drafting their bylaws to preclude subsequent board repeal

FL -- provides that BOD/incorporators shall adopt initial bylaws UNLESS that power is reserved to the SHs by art of incorporation

Fiduciary Constraints -- Interfere w/SH voting (Blasius) only when there is compelling justification.  "Shark Repellents" can also be adopted but BOD have heightened duties then as negotiators for SHs.

Limits on Power -- Amend bylaws as in AFSCME SHs can amend bylaws.  They can also adopt poison pills as in Quickturn but BOD must retain INDEPENDENT judgment.

F: Proxy contest between insurgent SH & incumbent BOD for control. P, 9% SH, wanted to liquidate hug sum, make one-time dividend payment, incur huge debt & put into risk company's long term health. P wants to increase from 7 to 15 BOD. BOD responds, increases size, puts their guys on thwarting any potential action by P.

I: Even if done in good faith, is this enough to justify such action? BOD decision to act in good faith is enough here.  Creates Blasius standard.

1. Is there a compelling justification to thwart insurgent SH?

- note: 9% shareholder is not majority and thus does not amount to "compelling justification"

2. Is there coercion? If so, this might amount to it.

3. Agents of SH [BOD] does not confer unfettered authority -- e.g. Platonic Masters

4. Pro SH but must be very specific.  If there remain other options aside from poison pill, then there might not be any compelling justification. 

Schnell requires judicial inquiry in to purpose -- what is the single dominant purpose.

Blasius goes a step further... even a good faith inference to stop an action that will kill the company is not enough.  There must be "compelling justification" that can amount to coercion to the extent that the corporation has not other options and must act this way.

F:  P, 7% SH, tries to buy D but is rejected. Then requests special SH meeting to elect new BOD, amend bylaws, begin proxy solicitation. Requests SH list. D finds a white night, expands BOD & institutes poison pill.

1. BOD's actions are DEFENSIVE response to corporate policy and effecitiveness --> issues of control.

2. (1) Whether there was reasonable grounds that a danger to corp policy existed?; (2) The defensive measure to said threat imposed is PROPORTIONAL

To invoke the Blasius compelling justification standard of review w/in application of Unocal, the defensive actions of BOD need to be taken for the primary purpose of interfering w/or impeding the effectiveness of the SH vote in a contested election

• BJR -- ordinary BOD conduct; deferential
  • Was the decision procedurally sound?
• Enhanced Review -- Blasius, Unocal, Liq Audio
  • Hostile takeovers, defensive measures
• Entire Fairness -- conflict/self-interest
  • MOST STRINGENT -- review of fairness + price.

F: D had agreed to be T in cash merger. Competing offer by founder proposed recapitalization. SH preferred latter offer. Right before vote, BOD postponed so as to persuade sufficient % of SH.

CT: BOD did NOT breach duties by postponing SH vote that was certain to defeat a merger for the specific purpose of gaining more time to convince SHs to approve it.

Refuses P's Blasius [was election of BOD not SH voting] arg and applies Unocal, BOD did not act w/primary purpose to THWART SH expression of their will.

Even so, ct says this would have survived Blasius but unclear how.

1. Did the BOD act w/proper motivation? Yes -- Continue
2. Were the BOD's actions reasonable in relation to their legitimate objective? Yes -- so long as they were motivated by a good faith concernt for the SH best interest

F: Mentor makes offer to acquire P. BOD decide offer sucks. P owns patent which keeps M out of market.  BOD passes poison pill that creates 6 mos rule to prohibit new directors from exercising powers after election thus violating their fiduciary duties.

RULE: BOD CANNOT limit fiduciary duties.  Poison pills, like here, deprive directors of the ability to carry out their statutorily imposed duties.

Quickturn goes ahead of Blasius -- Q declares some BOD actions as fundamentall inconsistent whereas the line in Blasiid was regarding "compelling purpose" to restrictive BOD actions that in that case purported to thwart insurgent SH action at elections.  Quickturn goes one step further by essentially creating a justiciable standard-->conduct that limits director capabilities to uphold fiduciary duties is clearly too far.

CA placed SH limits on ANY actions that arent procedural which complies w/Quickturn's "decision making authority for voting/sale decisions" as those govern substantive matters but as the process for those matters should be carried out.

Versata -- 5% pills are valid obviously because they arent a real threat.

Yucaipa -- 20% or even 30% pills are valid. More debatable.

Craigslist -- "culture-protecting" pills are invalid.  Once you go public you are for profit so deal w/it.

Poison pills in novel situations CAN still muster in DEL so long as the BOD has reasonably concluded that the pill will prevent an econmoic threat to the corp

Any SH that (1) states proper purpose can get corps ledger of SHs

Proper Purpose : reasonably related to such person's interest as a SH

If corp suspects improper purpose, burden is on the CORPORATION to prove as such.

which party, SH or Corp, has the buren to show proper purpose in:

(1) Ledger

(2) Books / Records

(1) Corporation has burden to show SH has improper purpose

(2) Burden is on SH to show that she has proper purpose fo rhte access request -- through credible evidence by a preponderance

F: Company makes agent orange. P doesnt like this & wants to change that. Buys 100 shares so he can vote annual SH meeting. Requests ledger from D to which D refused citing improper purpose.  

CT: Agrees that this is NOT  proper purpose.  

* Improper Purpose -- curiosity, speculation, vexation, desire to gain control of corp

*Proper Purpose -- SH w/actual investment interest + ultra vires.  

* ECONOMIC -- if it can make money for SH or corp, then it will be proper.

*POLITICAL -- most likely not proper forum [think Dodge, Craigslist and the constant SWM conflict]

F: P wants access to books/records. Burden's on him to show proper purpose w/credible evidence. 3 mos following merger, corp's accounting mistake shows up as $327million loss to corp.  P also did get his dividends payment

CT: P cant have access to books.  Just because SH doesnt bestow right. Absent showing of fraud or alter ego (think PCV), no reason to pierce the veil haha.

Catch 22 -- how do you obtain credible evidence of corporate wrongdoing if you cant get your hands on the docs in the first place? TESTIMONY + LOGIC says the ct

This is what the Saito court says needs to be established through credible evidence, fraud or subsidiary is mere alter ego of parent, and then a SH can get to the corporate books/records.

* meeting minutes of SHs, BOD, accting records, ledger, other books & records

*REQUIRES:

(1) good faith AND

(2) proper purpose as described w/ reasonable particularity & those records sought are directly connected to SH's purpose

Separation empowers board.  Shs permit board to be platonic guardian / law should minimize SH activism.

However, over time BOD will lose control to mgmt which is natural.  SHs are handsoff.

Give a basic overview of Dodd-Franks

It provides the SEC plenary access to proxies

• Mandates SH advisory votes re exec compensation votes – not voting on compensation per se but voting in an advisory capacity.  Gives BOD feel for how the SH feel.

Communications to security holders under circumstances reasonable calcuable to result in the procurement , withholding, or revocation of a proxy.

Post-1992, this has wained a bit -- not e.g. newspapers ads are fine.

• incumbents' expense are always by corporation til so long as the contest is over & expenses are reasonable
• Rosenfield : winning challengers CAN be reimbursed w/SH approval
• Losing insurgents have NO right to corporate $$$ [but can try and sue]

Long Island Light recall looked at whether a commercial aired publicly did centered around "reasonably calculated to influence the SH's vote" as the test.

look to 14a-7 + 14a-3 require SH to seek power to act as proxy AND not to speeches/public events provided that no form of proxy or definitive proxy statement has been made in communication w/said event.

when mgmt is making solicitations, it has the option to furnish SH list or mail requester's contending proxy material.

* sidesteps state law issues of proving purpose.

* does NOT preempt state law

* requesting SH has to pay for it

• Gives SHs the possibility of including SH proposals in mgmt proxy materials.
• Threshold requirements: eligibility, notice + attendance, timely, length of proposal
• must be in plain English

for the annual meeting, stated in last years proxy.

no less than 120 calendar days before the day of the of the company's proxy released to SHs in connection w/the previous year's annual meeting.

1. Improper under state law

2. Irrelevant

3. If the matter is SUBSTANTIVE such that it interferes w/BOD, then it's impossible. [see: AFSCME placing limitations on controlling BOD conduct but wait -- fiduciary out provision!]

Cons: dont be so quick to demonize BOD.  SHs have no experience & typically SHs vote w/BOD.  SH might also be motivated by non-$ factors which may or may not be good for corp.

Pros: creates more diverse corp also infuses new blood in BOD

Proper Proposal re SEC rule 14a-8(i) 

Iroquois

F: SH proposes new method by which to breed & slaughter geese.  Issue arises whether this decision encroaches on BOD as to ordinary biz or is it matter of public policy

CT: if this is ordinary biz, as a matter of BJR and DGCL 144, SHs must defer to BOD's sound judgment.  However, public policy it becomes murky SJW. 

Definitely empowers them and gives them an edge in an age of growing SH power & little to no legislative oversight.  

NOTE: these remarkably intelligent advisors are not being regulated at all.

On behalf of the corporation filed by SHs as a result of some member of the corporation's violation of direct duties.

Serves as a check on the corporation.  Any liability won by SHs will be paid to the corporation.

Issue turns solely on:

1. Who suffered the alleged harm [Corp -- Derivative OR suing SHs [direct]  AND

2. Who receives the benefit of any recovery or other remedy [the corporation (derivative) OR the SHs individually (direct)]

1. Sh makes a DEMAND to the BOD wherein BOD makes a decision that it's not beneficial to go ahead w/the proposed suit & dismiss it.  Thus it's futile which is why normally it's not filed & usually waived.

2. It is completely futile today.

BJR presumes that directors act in accordance w/their duties of care.  

Challenging party bears the burden of showing that the BJR presumption should not shield the judgment or action.

What are exceptions to the BJR? 

Also what case in particular?

Kamin v. AMEX -- no matter how bad a business decision, as long as the procedure is sound then the decision will be accorded deference.

BJR doesnt apply: Fraud, Illegality or Conflict of Interest, nonfeasance, lack of rational business purpose, gross negligence

What is the non-exhaustive list of ways by which a a director may retain BJR deference?

1. made a decision
2. engaged in reasonable decision making PROCESS
3. good faith
4. no illegality
5. no self-interest
6. rational decision -- coherent explanation

F:  SH derivative suit v. BOD for negligence & mismgmt for $$ & installation of lights to increase revenue & play night games.  Corp was operating at a loss (SWM).  But for lack of lights, Cubs would be in + argues P.

CT: to extinguish deference under BJR, SHs have to show fraud, illegality, or conflict of interest.  Like Kamin, if this cant be shown, no matter how bad a decision, BJR deference will be accorded.

FINAL EXAM QUESTION: What is the difference between: 

(1) A director shall discharge his duties in good faith v.

(2) in a manner he reasonably believes to be in teh best interest of the corporation

1. Attend mtgs/be informed

2. set corp policy/strategies

3. Monitor

4. Inquire/object when necessary

5. hire/fire/pay execs

6. manage business in crisis.

• Hindsight bias
• cts inappropriate forum
• undesirable deterrence
• avoidance of excessive risk-aversity
• avoidance of internal conflict and inefficient litigation costs
• voluntary acceptance by SH

F: frienly cash-out merger w/CEO who initiated, negotiated & promoted a merger agreement whose terms may have favored the acquirer. SHs file suit for lack of being informed.

CT: BOD failed to (1)inquire into VG's role, (2) review merger docs, (3) review fairness of price + unused investment tax credits, (4) accepted w/o inquiry CFO's opinion that price was fair, (5) didn't seek outside opinion to evaluate the price, (6) responded to offer in 2hr impromptu meeting w/o notice and more importantly NO EMERGENCY

RULE: BOD can be personally liable for not informing themselves adequately when they approve sale of the company in a negotiated merger. Blind reliance on uninformed CEOs will not elicit deference from the ct.

Didn't fly because there more than a few factors involved aside from the market value $38 and offer of $55.  The unused investment tax credits + an outside independent accounting opinion to determine in fact what the value was.  Or even read the damn reports in front of your face.

Succinctly, put:

1) What is the Van Gorkum standard? 

and

(2) What was wrong about BOD's behavior?

1) Gross Negligence

2) BOD relied on uninformed information in a hurried 2 hr meeting in the absence of an emergency.

In FL, directors can rely on information, opinions reports or statements etc from those corp people they can REASONABLY BELIEVE to be RELIABLE and COMPETENT in the matters presented.

In VG, you had a long time company employee who was extremely intimate as to the company's value & had in the past made decisions that benefited the company's long term health.  No signs to believe otherwise + $55 > $38 so all factors on their face would lead to this coming out the opposite way.

1. Proximate cause + BJR

2. Exculpation clauses

3. Indemnification

4. D&O insurance

Enacting 102(b)(7) -- a liability shield that allows corporations to adopt provisions in their articles limiting the monetary liability of directors who act in good faith but nevertheless in breach of their duties

NOTE: this charter is NOT self-executing

DGCL 102(b)(7) -- must be put in articles of inc -- 

Allows for a director to not be personally liable to the corporation or SHs for violation of fiduciary duties where there is no lack of GOOD FAITH or no intentional MISCONDUCT or KNOWING VIOLATION

Also the violation in question can't derive any IMPROPER PERSONAL BENEFITS

PROS -- mitigates liability for those decisions that in hindsight weren't sound.  it also shifts the causation burden to the Ds that there wasn't a better deal avaialble.

It also forces SHs to be very weary of promulgating such a provision even if at the time all indications that BOD is upholding their fiduciary duties.

DGCL 145 -- includes $$ for settlement, damages, expenses only in permissive suits.  Indemnification is mandatory where director has prevailed.

Corps can also incorporate bylaws to create more potential indemnification for BOD.

D&O Insurance.  

(1) Reimburses the corporation for its lawful expenses in connection w/indemnifying directors and officers.

(2) Covers claims against corporate capacity thus reducing their exposure when the corporation is unable or unwilling to indemnify

Dishonesty, fraudulent conduct, criminal conduct

Sometimes even mere allegations of such conduct are enough to exclude coverage.  Burden of Proof accordingly isn't too high.

F: Creditors coming after D's estate after she died. She & her two sons managed the biz, were sole SHs, etc. Sons took out SH loans that drove the biz into the ground.  D's estate claims she didnt understand the biz.  Is this enough?

CT: No! Directors have duties:

(1) acquire at least a rudimentary understanding of the biz corporation; (2) lack of knowledge is invalid defense; (3) director has affirmative obligation to object & if the corp doesnt correct their behavior, to resign

F: 4 directors accused bid rigging. SHs allege the BOD should have been aware by monitoring the corp.

RULE: BJR shields directors who had failed to detect antitrust violations (criminal bid rigging) by mid level execs.

Unless the BOD knew or suspected the conduct, there was no duty to install a monitoring system.

Holding: BOD may have a duty to install corporate monitoring & reporting systems to detect illegal behaivor.

FRAMEWORK:

(1) that the directors knew OR (2) should have known that violations of law were occurring

AND IN EITHER EVENT

(3) the directors took no steps in good faith effort to prevent that situation AND (4) that such failure did not proximately result in losses alleged.

1. Allis-Chalmers defines  a red flag as misconduct that BOD knew or should have known about.

2. Caremark doesnt delve into the merits as to what might be a red flag.

• outside auditors fail to discover or report accounting fraud
• outside auditors nonaudit serves undermine their independence (Arthur Andersen w/Enron)
• BODs fail to watch auditors
• Execs oblivious to truth of company filings, fail to supervise
• Companies fail to report riskiness of true financial position
• corporate cultures encourage irresponsibiltiy

• Creates PCAOB
  • Audit firms must register w/Board
  • PCAOB sets new audit rules
• SEC authorized to go after parties not complying w/the rules

SEC requires lawyers to "report up the ladder" -- be whistle blowers.  Inform securities layers, to CLO or CEO, even up to the BOD but not to the SEC.

SEC will enforce nonfeasance for malpractice

Those retaliate are liable for criminal charges & can amount to private actions for liability.  Audit committees can and will be set up.  

NOTE: for fraud, SOL is much longer allowing for parties to file suit more often

F: SHs filied derivative seeking personal liability for their failure to implement a monitoring system as required by fed law.  Were there a monitoring system, red flags re the ponzi scheme would have emerged.

CT: although D's monitoring system was deficient, BOD did not deliberately fail to oversee.

RULE: That the system failed was NOT enough to establish a sustained or systemic failure of BOD to exercise oversight.

said that failing to act in good faith is a violation of loyalth rather than a new indepenent fiduciary duty -- thus a bad outcome from a decision is NOT equal to bad faith.

THERE IS NO TRIAD OF FIDUCIARY DUTIES -- good faith is part of care.

F: SHs file derivative suit alleging that BOD should have been more weary of investing in subprime mortgage market because of the news as losses could arise to $55bil.

Ct: Applies Caremark considering this business risk v. legal oversight compliance.  Ct says only when BOD fails to monitor risk that is "systemic" red flag like failure to acquire reasonable info & reporting.

What does Citigroup contribute to our analysis of whether BODs must be monitoring their corps?

Why cant red flags arise from public knowledge  (aka NY Times articles)?

there is a difference between overseeing financial risk v. overseeing legal compliance -- BOD duties versus SH ones.

If red flags came from public knowledge, it would be disastrous as to the floodgates of Del corp law.  The knowledge should be imputed to BOD but not the foundation of derivative suit.  The knowledge need be more intimate.

1. Does it present potential harm to the co?

2. How much time does the BOD have to react?

3. What is the source of red flag? (e.g. public might not be enough)

4. What is the frequency of the red flag?

5. How available is relevant information to directors?

F: Eisner hires buddy w/o properly informing BOD. Fires guy later w/o compensation package amounting to $140mil for cause but doesnt amount to cause.  E never obtained consent from BOD or SH for hire nor disclosed prior negotiations or discussion.

CT: in order to prevail, SHs need not prove best practices as that's a matter of BJR.  SHs need to show "deliberate indifference and inaction in the face of a duty to act"

E.g. (1) subjective bad faith, (2) intentional dereliction of duty, conscious disregard for one's responsibilities.

Gross negligence w/o more is NOT bad faith.

P must prove either:

(a) BOD utterly failed to implement any reporting or information system or controls to monitor biz OR

(b) w/system in place, BOD consciously failed to monitor or oversee its operation s thus disabling themselves from being informed of risks

Requires showing BOD had knowledge

(1) Procedural -- e.g. full disclosure, disinterested informed vote, interests/benefits drawn by violating director known, how the deal was struck etc

(2) Substantive -- is it w/in valid price range & does it take into account the complete value of the corporation?

F: trx approved by BOD who were majority SHs in both corps involved.  Even tho this fulfills statutory voting burden, may violate duty of loyalty.

CT: says BOD has duty to each and every SH.  BOD cannot profit at expense of corp.  Even if the deal made money for the corporation here, it needed to be subjected to the procedural and substantive hurdles.

Query: could this have been alright had the Ds fully disclosed and received a majority vote from disinterested BOD and or SHs assuming the $$$ was substantively fair?

ENTIRE FAIRNESS --fairness of price + fairness of process

Is it objectively fair + appropriate for the corporation at the time of the trx?

1. FAIR DEALING -- when the trx was timed, how it was initiated, structured, negotiated, disclosed to the directors, how the approvals of BOD & SH were obtained
2. FAIR PRICE -- relates to the economic & financial considerations of the proposed merger-->assets, market value, earnings, future prospects, etc

• self dealing trxs arent void on their face.
• disclosure of mat. facts to BOD + majority of disinterested directors OR  mat. facts to SH + SH approval in good faith
• at time of trx, deal is fair

* Non disclosure [more importantly of material facts]

* an unfair trx [as determined by the ct of course]

Fliegler -- merely removes the "interested director" cloud when its terms are met... nothing in the statute removes the trx from judicial review

Marciano -- approval by fully informed disinterested directors under 144 permits invocation of BJR & limits judicial review re issues of gift/waste placing burden of proof on attacking party.

F: corp needs $$. puts together financing plan. one of the directors uses his company to finance it. Majority SH challenges for lack of material disclosure even though BOD voted.

CT: Del 144 provides safe harbor for interested trxs like this if the "material facts" re director's relationship re this trx are disclosed OR known to the BOD AND the BOD in good faith authorizes the trx w/requisite vote # disinterested directors.

DGCL does create a safe harbor for those trxs that involve interested directors so long as approval by the BOD is by fully-informed as to the MATERIAL FACTS AND the BOD in GOOD FAITH authorizes the trx by the required majority vote.

After such a vote, the ct reviews the trx under a BJR standard.

BJR as to prove the decision amounted to waste or a corporate gift -- not pursuant to SWM

waste = gross negligence

1. majority of BOD interested?
2. " affected by another director's/SH interest
3. " is dominated by interested dir/SH
4. interested director manipulates decision making process by failing to disclose MATERIAL INFORMATION to otherwise disinterested board

F: derivative suit alleging insiders knew earnings would fall so they sold their shares. Corp formed an SLC who concluded that the suit should be dismissed.

CT: SLCs must show (1) members are independent; (2) good faith; (3) reasonable bases for their recommendations. 

SLC was NOT independent here.

• members attend the meetings
• full disclosure
• fully informed
• members are capable of making independent decisions despite respective relationships

Director school + insitutional SHs create for a concentration of power amongst few hands.

If there had been more transparency and disclosure to the ct, the assessment of the trx may have been permitted.

NOTE: Levi thinks people get into academia for reputation and not $$ which plays into the cts decision here.

1. No coercion
2. Informed
3. Majority of disinterested or Unanimous

F: SHs challenging BOD compensation plan approved by SHs arguing lack of information because stock value wasnt in proxy solicitation material.  Self dealing because it was recommended brought by BOD.

CH Allen: Effect of informed SH ratification is (1) Complete Defense; (2) Shifts burden to PI to show waste; (3) " to show unfairness; (4) no effect

* Do not take corporate opps

* Duty to not use corporate assets for personal purposes

*Duty to not compete w/the corporation

1. Expectancy

2. Line of Business

3. Ability to Finance

if the corporation has an existing expectancy in a biz opp, the manager must seek corporate consent before taking the opportunity.

can cover opps of special or unique importance othe corporation for which there is a presumed expectancy

Cts compare the new biz w/the corporation's existing operations.  the corp need not have an existing interest of a special interest for the opportunity, or the mangaer need no learn of the opps in his corp capacity.

IF THE NEW PROJECT IS FUNCTIONALLY RELATED TO THE CORPORATION'S EXISTING OR ANTICIPATE BIZ, THE MANAGER MUST OBTAIN CORPROATE CONSENT.