Term
| Procedural & Substantive parts of the Business Judgment Rule |
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Definition
| The procedural aspect of the BJR is the presumption that corporate fiduciaries, when making corporate decision, do so in good faith, with due care and without conflicting loyalties. If this presumption is not rebutted, the substantive aspect of the BJR applies. Under this element, the courts will not review the decision unless it is one that no reasonable fiduciary could have made. The burden is on the plaintiff to rebut the presumption and to show the unreasonableness of the fiduciary’s decision. |
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Term
| Entire/Intrinsic Fairness Test |
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Definition
| In the event the procedural element of the BJR is rebutted, the fiduciary no longer gets the benefit of the substantive element. Instead, the burden is on the fiduciary to show the decision made was entirely fair to the corporation when made. This means full disclosure of material facts, the procedures used were fair, and, any price involved, was fair. If the EFT applies, the fiduciary can shift the burden back to the plaintiff to show unfairness, by disclosing all material facts and obtaining approval of a majority of the disinterested directors or the shareholders ("sanitizing" the transaction). |
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Term
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Definition
A corporate opportunity is one that a corporation has the right to pursue. A problem arises when a fiduciary also wishes to pursue the same opportunity. To determine whether something is a corporate opportunity, we first asked how the opportunity
came to the fiduciary. If it came in his/her corporate capacity, the opportunity is deemed corporate. If it came in the fiduciary’s private capacity, the court applies a multi-pronged balancing test to determine whether the opportunity is corporate: 1. Is the co capable of taking this on (financially & practically) 2. Is it within the line of business w/ the company (do they have experience & expertise in) 3. Does the co have an interest/ expectancy in the opportunity (is this PARTICULAR opportunity one the company had an interest in-- an option k, an expectancy (we've been talking about how we've been looking for this type of opportunity)) 4. If the fiduciary took it, would it harm the corp? If on balance suggests that it would, then it’s a corp opp-- must be disclosed to the board & the board must have an opportunity to pursue it |
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Term
| Do Majority SH in a CHC owe minority SH any fiduciary duties? |
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Definition
| Majority SH in a CHC owe minority SH a strict duty of the utmost good faith & loyalty. Donahue/Wilkes Test for CHC: Balancing Test: Where SH claim breach of SH duty by the majority. The maj has the burden of showing: A legitimate biz purpose for the action took that resulted in the harm. If they can’t show this minority wins & upmost GF & loyalty prevails. If maj. can show biz purpose minority has burden to show there was an alternative way that would've accomplished the stated biz purpose but not resulted in the harm. If minority can’t show this maj wins. (Balances the maj’s right of selfish ownership against their fiduciary obligations to minority) |
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Term
| If majority SH in a CHC breach their fiduciary duties to the minority SH, what test applies? |
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Definition
Donahue/Wilkes Test for CHC: Balancing Test: Where SH claim breach of SH duty by the majority. The maj has the burden of showing: A legitimate biz purpose for the action took that resulted in the harm. If they can’t show this minority wins & upmost GF & loyalty prevails. If maj. can show biz purpose minority has burden to show there was an alternative way that would've accomplished the stated biz purpose but not resulted in the harm. If minority can’t show this maj wins. (Balances the maj’s right of selfish ownership against their fiduciary obligations to minority)
eg: |
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Term
| Discuss whether directors, in performing their functions as directors, are agents of their corporation. |
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Definition
Directors, as directors, are not agents of corporations. An agent is one who agrees to act on behalf of and under the control of another. Individually directors have no authority. As a
board, they act for the corporation but not under its control. In fact, they set the path for the corporations and have control of its actions. |
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Term
| Describe under what circumstances a shareholders agreement in a closely held corporation may bind its directors on issues such as employment contracts, salaries, and dividend policy |
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Definition
Traditionally, shareholders agreements could not bind the board. As the concept of closely held corporations evolved the distinctions blurred between shareholders and directors in
these entities and courts recognized the partnership like attributes of CLCs. From a starting point prohibiting shareholder agreements binding boards the law grew to allow all shareholders to agree to bind directors on issues such as employment, salary, and dividend policy so long as the
corporation, its creditors, and the public were not harmed by the provisions. This further evolved to allow less than all shareholders to agree on those issues so long as no minority shareholder objected and there was no harm to the corp., its creditors or the public. Today, statutes in many states recognize the significant overlap between shareholders in CLCs and the boards. These statutes have created the possibility of more flexible, partnership-like regimes. |
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Term
| Explain and distinguish the majority and minority standard applied to special litigation committees’ decisions in connection with demand excused derivative litigation. |
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Definition
Upon a motion, the majority position (Auerbach) is that the court will evaluate whether the committee is truly independent from the allegedly wrong-doing board and, if so, whether its investigative procedures were reasonable. If the court finds for the committee on these issues, it will give business judgment deference to the committee and dismiss the suit. In the minority states (Zapata), the courts applies the same test but
even if they find for the committee, they reserve the right to substitute their own judgment for the committee’s on whether the suit should continue. This is because these courts believe there is a risk of structural bias in all boards which is exacerbated by the fact that it is the allegedly wrongdoing
board that has appointed the special committee. |
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Term
| Discuss the following proposition: In PTC, CEO’s are typically more powerful than boards of directors. |
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Definition
Technically, the board sets the policy of the corporation and makes, at least initially, all of its important decisions. It hires and sets salaries for the top executives, including the CEO.
Practically, however, the board is made up of primarily outside directors who do not spend a great deal of time with the corporation. Boards typically meet between 10 and 12 times per year for about 3 hours per meeting. Board members might spend 50 to 75 hours per year involved in corporate business. Given the complexity of such businesses and the number of decisions that have to be made, this is not a great deal of time. Moreover, outside directors typically do not have sources of corporate information other than through management. These “structural holes” allow management, led by the CEO to control the information flow and to characterize information. Finally, CEOs are typically the most visible member of the corporation and are in a position to control the loyalty of management and shareholders. |
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Term
| Explain and contrast the process by which a board of directors can prevent or bring to a close a shareholder derivative suit in demand required and demand excused situation. |
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Definition
In the typical derivative claim, the complaining shareholder must make a demand upon the board to bring suit. By making the demand, the shareholder concedes that the board does not
suffer from decisional defects and is capable of making a decision on whether to bring the suit. If, as is usually the case, the board rejects the demand, the shareholder may only proceed by showing that the rejection itself was wrongful, that the board, while capable of making a bjr decision, did not do so in this particular matter. The shareholder must show that the rejection was tainted by lack of care or lack of loyalty and may not then claim that demand was excused.
In demand excused cases, the board is not capable of making a bjr decision. The shareholder may proceed to file suit without a demand. In such cases, the board might appoint a special committee of independent directors who were not tainted to determine whether the suit should continue. Such committees usually decide that the case should be dismissed. Upon a
motion the court must decide whether the special committee members were truly independent and whether their investigative procedures were reasonable (Auerbach). In a minority of jurisdictions, the court may go on to impose its own judgment as to the benefits of the suit despite the validity of
the committee (Zapata). |
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Term
| What is a 'golden parachute' and what are the advantages of it? |
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Definition
Golden parachute: provides management w/ a significant severance package, typically to protect management from loss of job due to hostile takeover.
Advantages to SH: GP is an inducement for talented execs to join the company, may mitigate management’s conflict in the face of an offer by hostile acquirer that would cost managers their jobs. Managers are more likely to accept a fair offer if they know they will receive the lucrative package if they are fired. Thus, SHs are more likely to get the benefit of a fair premium in a takeover . |
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Term
| What is a 'shark repellent'? |
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Definition
| Provision in articles of inc that require a certain % of SHs (supermajority) to approve a merger – triggered by someone acquiring a certain % of shares |
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Term
| What are the two types of poison pills, their restrictions, and how they deter an acquirer? |
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Definition
Poison Pill: SH rights plan triggered upon certain conditions
Two Types of poison pills: Flip in: the holder of the right, the ability to buy shares in the target corp at a heavily discounted price. Flip over: allows the holder of the rights, to buy discounted shares in the acquiring corporation.
How do these rights deter an acquirer? If you can buy shares at a discounted price, what does that do to SH who can’t take advantage of the rights? Dilutes their interest. Scares acquirers away. - Moran: flip over provision is based on an idea that when an acquirer actually takes over the target in a merger, the acquirer is responsible for all target's obligations. Since the targets shares don’t exist anymore, the anti destruct provision allows those shares to exercise their rights in the acquirers shares. The effect of that is that it dilutes substantially the value of the acquirer's shareholders. |
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Term
| What is the significance of the fact that a corp is deemed to be a person by the law |
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Definition
| 1. It has its own liability so the ppl who create it are shielded from what it does (limited liability) --This is the most significant attribute of a corp. 2. BC it is an artificial person; the law deems it never to die. So it has perpetual duration. If it’s not dissolved or have an end date in its charter, it exists forever and independently of the ppl who created it (who will die). 3. Significant difference from a tax perspective. It has its own tax obligation. It is a taxable entity. BC of this, the income it makes is subjected to tax. If there is more money that’s left over & given to SHs, then its taxed again. Double taxation. Increases the tax rate on the total amount of taxable income a corporation has earned. That’s a disadvantage. |
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Term
| What are the two types of corporations and how are they defined? |
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Definition
| Publicly traded corp: Defined by having a ready market for the shares. Publically traded on the stock exchange. Closely held Corp: Corp for which there is no ready market for shares. Held by a small amount of SHs who typically know each other & participate directly in biz. |
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Term
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Definition
| Has some type of preference over common stock, either when dividends are paid out or in liquidation. Less risky than common stock. Preferred SH are “senior” to common shares as to dividends and liquidation rights, but “junior” to the claims of debt holders and creditors. Generally, they don’t have voting rights, but can be granted in some circumstances/ under statute for fundamental transactions (i.e. mergers, amendments to the articles of incorporation that eliminate or dilute preferred stock’s seniority). |
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Term
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Definition
| Represent the corp’s residual ownership interests- that is, what is left of the income stream after all other financial claims by creditors, employees, bondholders, & preferred SH have been satisfied. Risky. Common SH are last in line. Dividends on common shares aren’t guaranteed. If corp is dissolved, common SH have liquidation rights only to the remaining assets- after ‘senior’ claims are satisfied. Common SH are referred to as the ‘owners of the corporation’ & make up for their precarious ‘junior’ position through things like: voting rights (voice), liquidity rights (exit), and the right to enforce fiduciary duties (loyalty). Some describe these attributes of ownership as the right to vote, sell, or sue |
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Term
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Definition
| Allow SH to acquire shares when corp issues new ones to protect their proportional interest- if a SH owns 30/1000 outstanding shares & a corp proposes to issue 200 more, a preemptive right would entitle the SH to acquire 60 shares, preserving their 30%. |
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Term
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Definition
| Give SH an option to force the corp to repurchase their shares- exercisable at the discretion of the option holder or only at certain events/periods. The redemption price can be specified in the articles or set by the board if not in the articles. |
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Term
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Definition
| Give SH an option to convert their shares into another security of the corp. The option can only be made exercisable in certain events/during certain periods. |
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Term
| Liquidation Rights On Dissolution |
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Definition
| pro rata distributions in cash or in kind based on corp assets upon dissolution. Senior shares receive payment before junior |
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Term
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Definition
| Pro rata payments by corp to equity SH based on earnings, in discretion of board, can be cash/prop/stock. |
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Term
| Debt financing comes in three typical forms: |
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Definition
Promissory notes: individual borrowing from a bank or a SH & you give a promise to pay in the form of a note.
Bonds: corporate borrowing. Typically, public borrowing. Corp issues bonds, & people buy the bonds (lending money to the corp). Those are due to be repaid at some point in the future. Creditors who have bonds (or notes) have priority over SHs. First in time is first in right. Earliest lender has priority over all subsequent lenders. Bonds are typically secured debt- property that is pledged. So secured debt gives it priority [over debentures].
Debentures: just like bonds but unsecured. Usually issued to the public. Debenture holders have no fiduciary rights; only contractual rights. Reason: debenture holders do not have equitable interest in corp. A debenture is not an equity interest. W/o a property interest they are only protected by the K (indenture) b/c they are merely creditors. Even with the convertibility factor, until they actually convert there is no FD owed to them. |
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Term
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Definition
Consensual contractual relationship by two ppl (one could be a corp entity) by which the agent act for the benefit for the principal, under the principals control. Principal liable for agent's activities.
There are two questions when thinking about agency: 1. Did the agent have authority? 2.Was the agent acting w/in the scope of that authority? |
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Term
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Definition
| Can be either: Express authority: The principal actually gives the agent authority (“Go to the store and buy me 10 barrels of paint”) OR Implied authority: When a reasonable person in the position of the agent would reasonably assume themselves to have authority (Eg: “Paint the wall.” – you’d assume you have authority to buy the paint.) |
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Term
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Definition
| Agent did not have authority, but whomever they were dealing with reasonably believed, based on the actions of the purported principal, that the purported agent had the authority. Have to: 1. Know that there is an agency relationship, & 2. Have some knowledge about the principal’s actions. Focus is on the principal because they are the one who stands to benefit. NOTE: Often arises when one gives authority to an agent & informs a 3rd party, then revokes the authority w/o informing 3rd party |
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Term
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Definition
| Unlike actual & apparent authority, inherent authority does not depend on interactions btwn a principal & 3rd party but inheres in a position. The purported agent has all the authority that an agent in that position would normally have in the mind of a reasonable 3rd party, despite whether they have actually been given any power. Implied that they have the power from their position. (Watteau). |
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Term
| Test to determine was the agent acting within the scope of employment? |
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Definition
1. Conduct is of the general kind the employee is employed to perform. 2. Conduct occurs substantially within hours of employment 3. Conduct occurs substantially within spatial boundaries of employment 4. Conduct must be motivated, at least in part, by the purpose of serving the employer’s interest.
Note: Scope is a question of fact for the jury (unless no reasonable jury could find he was acting within scope of employment). (Clover) |
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Term
| The basis for piercing the corporate veil |
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Definition
| SH has somehow disregarded the formalities of the separate existence of the corporation. |
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Term
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Definition
| Horizontal piercing: (aka enterprise theory): An enterprise consists of multiple businesses & assets are pooled together to satisfy the obligations of one of the businesses/when there is a disregard for the formalities that separate the individual corps. Cannot hold owner personally liable, but can reach assets of the other corps disregard for corporate formalities btwn several sibling corps. HP allows you to reach funds of the other corps. |
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Term
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Definition
Vertical Piercing: to get to an insider(s). Have to show that specific insider used the corp for personal use.
Polan 2 Pronged-Test: 1. Are the corp & the SH so connected that they have no separate identity (question of fact whether the corp. is her alter ego --> consider: Commingling of funds’ & assets; use of corp's funds/assets to non-corporate uses; Failure to maintain the corporate formalities like no meetings/records, Identical equitable ownership in 2 entities; same staff; use of a corp as a mere shell, etc.)
2. Is piercing the veil necessary to prevent injustice? (look at fraud, deception, unfairness, public interest, unjust enrichment). Injustice almost always shown by showing a disregard of formality of a corporation. Injustice not satisfied just because they cannot pay the debt owed (Sea Land).
3. (not mandatory) Could the wronged party have done something to protect itself? Eg: demand personal guarantor to k. |
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Term
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Definition
| Reverse Piercing: A method for disregarding the corporate entity to treat corporate assets as personal assets of the SHs. When the veil is vertically pierced, but the resolution isn’t satisfactory, then the veil can also be pierced btwn that SH & his other corps (as long as disregard btwn them can be shown). Then P can recover from the SH & his other co’s as a CREDITOR. |
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Term
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Definition
| when a co doesn’t have enough capital in the corpo to meet its ordinary obligations. If it occurs at the beginning of a corp can be a reason to pierce. bc you’re trying to protect your assets but not really run the co (or else it would be properly capitalized). Might include not buying insurance to cover expected risk. If it’s just a bad biz decision, there wouldn’t be a piercing due to undercapitalization |
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Term
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Definition
| a baseline duty that directors & officers act in a responsible fashion. Fiduciary must use the degree of care that a reasonable person would in that situation under the same circumstances. |
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Term
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Definition
| Requires that in any conflict btwn the interests of a fiduciary & the interests of the corporation, the corporation must come first. The mere fact that there is a conflict is not a breach. 3 standard forms of breach of loyalty claims: 1. Self-dealing 2. Interlocking directors 3. Corporate opportunity doctrine. |
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Term
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Definition
| A corporate opportunity is one that a corp has the right to pursue. A problem arises when a fiduciary also wishes to pursue the same opportunity. If taken violation of duty of loyalty. Corporate Opportunity Analysis: 1. If it comes to a fiduciary in his corporate capacity, it is a corporate opportunity & must be disclosed & delivered to the corp. 2. If it comes to an individual in individual capacity, it may still be a corporate opp but you must then move to the next level of the test…1. Is the co capable of taking this on (financially & practically) 2. Is it within the line of business w/ the company (do they have experience & expertise in) 3. Does the co have an interest/ expectancy in the opportunity (is this PARTICULAR opportunity one the company had an interest in-- an option k, an expectancy (we've been talking about how we've been looking for this type of opportunity)) 4. If the fiduciary took it, would it harm the corp? If on balance suggests that it would, then it’s a corp opp-- must be disclosed to the board & the board must have an opportunity to pursue it. Broz v CIS: no duty to disclose bc doesn’t meet any of the factors to be considered a corp opp. If a corp is unable to take an opportunity, can a director take it? ERCO v. Porter: A refusal to deal-- the fiduciary cannot on his own deal w it- must be a disclosure & the corp must get opportunity to work something out. Its only if it cannot be worked out that it can go to the fiduciary. |
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Term
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Definition
| When there has been a harm to SH directly. If the corp declares a dividend & gives to all SH but YOU, you can sue in a direct sue. Doesn’t require a demand or bond (unlike derivative). |
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Term
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Definition
An action by the corp, but which the board of the corp refuses to bring. The harm is to the corp & only derivatively to the SH. The harm must directly affect the corp & thus only trickles down to the SH. Derivative suit allows SH to bring the suit in the name of the corp to vindicate a corporate right.
PROCESS:
You can do one of two things first:
1. Make a demand on the board. Usually board will reject a demand. If they are willing to accept the demand, the board will take over the suit (b/c it’s a corporate claim). If you're making a demand you're conceding the board is capable of making a decision of pursuing the case (capable of independence, due care & GF). If board rejects the demand, the BJR applies to that rejection, unless that judgment was wrongful. If you find a defect ("suit wrongful"), the suit can proceed. EG Wrongful: all the directors were drunk when they made the decision to reject suit (no due care thus rejection was wrongful).
OR 2. Don’t make a demand but claim the demand is futile… That there's lack of GF, lack of due care, or conflict of interest- in which you're claiming the board is unable of making an informed decision of whether to sue. General grounds for excusing demand: majority of board has a material financial interest in the corp, majority of board is incapable of acting independently, board dominated by wrongdoers, or the underlying transaction in question is not the product of a valid business judgment.
If demand is excused because it would have been futile: Board may delegate the litigation decision to a special litigation committee. The committee has the power to make only one decision: should this litigation go forward? Rarely says yes. If committee decides that the suit should be dismissed, then that decision is protected by the BJR.
Two ways in which the decision of the SLC is reviewed by the CT: Majority approach: Basic business judgment. Auerbach: Committee will be tested for its independence & its methodology. If its independent (duty of loyalty) and uses a reasonable methodology (duty of care) to come up with its conclusions, then the BJR protects the board’s decision to dismiss the suit. OR Minority Approach (Zapata) Go through the same business judgment inquiry regarding duty of care & duty of loyalty. But, even if those are satisfied, due the possibility of structural bias, the court reserves the right to examine the matter & impose its own judgment as to whether the case should continue. Zapata: Reserves the right of the CT to determine its own biz judgment. CT figures out if its independent, & if methodology was wrong.. But then it’s not an automatic dismissal, the ct still must examine if there was structural bias that affected the outcome. So adds a step in giving control to the court to determine. |
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Term
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Definition
| A doc by which a SH grants to an agent the right to vote the SH’s stock at a SH meeting. Doc is known as a proxy or form of proxy. Proxy (two types): (1) A person who is acting on behalf of a SH in terms of the SH vote. The principal controls how the proxy will vote. Proxy is given by a SH, as a principal, to an agent, normally with instructions as to how the agent is to vote the shares. (2) A document/ form in writing & signed by the SH. |
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Term
| Formula to help SH determine how many shares they need to elect a certain number of directors: |
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Definition
X = (S x N)
------------- + 1
D + 1
X= The number of shares needed to elect a certain number of directors
S = The total number of shares to be voted at the meeting
N = the number of directors you want to be elected
D = number of directors up for election
Eg: if you have 500 shares voting, 10 directors up for election, & u want to elect 3 directors: (500x 3) / (10+1) = 136.6. So u need 137 shares to make certain u can elect 3 directors. |
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Term
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Definition
| A device that allows SH to allocate their votes for directors differently than in the standard model. Allows you to cumulate your votes (60 votes, 3 elections = 180 votes). Instead of doing the votes evenly, the minority can divide up the votes however they want. Can give all votes to one person. |
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Term
| Voting Trust & uses for them |
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Definition
VOTING TRUST: A statutory device by which a SH may transfer the legal title (& w/ it, voting rights) of his shares to trustee who holds the shares in trust for SH/beneficiaries. All states have a voting trust statute. Typically lasts for 10 years, can be renewed. Must be in writing. SH have a beneficial interest in the shares but not a legal interest. Typically, they have a right to dividends.
USES: 1. Estate Planning: A donor, often a parent, making a gift of stock to a minor while retaining voting control of the shares. 2. A creditor demanding voting control of the event of a default on the creditor’s loan 3. Used by controlling SH in CHC who want to incentivize employees by giving then share of company w/o giving up voting control. |
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Term
| In CHC shareholders, who are also directors, can make an agreement that bind BOD if: |
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Definition
| When SHs of a CHC who are also directors make an agmt that binds the BOD, it is valid if 1. there is no harm (to the minority, the creditors, or the public) 2. no complaints from minority SH not party to the agreement – even if not all SHs are parties (operates as though the binding SH take on FD to other SHs). (Galler) |
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Term
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Definition
| In a SH agreement, a mechanism for pooling votes/deciding how to vote. Only binds SH. when SH agree to vote for each other for the board or for other issues; valid even if includes penalty provision for breaching (Ramos); but, can only bind SH directors if: 1- no harm to corp, creditors, or public, and 2- no complaints from minority SH not party to the agreement- even if not all the SH are parties to the agreement. (Galler) |
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Term
| Shareholder Duties in CHC |
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Definition
Majority SH in a CHC owe minority SH a strict duty of the utmost good faith & loyalty.
Donahue/Wilkes Test for CHC: Balancing Test: Where SH claim breach of SH duty by the majority. The maj has the burden of showing: A legitimate biz purpose for the action took that resulted in the harm. If they can’t show this minority wins & upmost GF & loyalty prevails. If maj. can show biz purpose minority has burden to show there was an alternative way that would've accomplished the stated biz purpose but not resulted in the harm. If minority can’t show this maj wins. (Balances the maj’s right of selfish ownership against their fiduciary obligations to minority).
BUT ONLY Applies only when the majority affects the minority through corporate actions (i.e. corp is a party in the transaction); does not apply when majority affects minority individually (Wilkes: involved corporate policy even if the corp itself wasn’t involved); SH do NOT owe FD to one another, as individuals, even in CHCs (Rosiny: those transactions were SH-to-SH). |
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Term
| Oppression of minority SH |
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Definition
Oppression occurs when: TEST: 1. have the objectively reasonable expectations of a minority SH been oppressed? (They had expectation which was reasonable (& formed the basis of them working/becoming minority SH for the corp)), & 2. were these expectations known or should have been known by the majority? IF YES-- OPPRESSION. [Kemp & Beatley].
Courts may dissolve a CHC upon the petition of holders of certain % of shares in CHC when majority engages in conduct that is illegal, fraudulent or oppressive. But no absolute right to dissolution. Inquiry re: whether to dissolve b/c of oppression: 1. Is liquidation the only feasible means for SHs to obtain a fair return? 2. Is liquidation reasonably necessary to protect the rights/interests of substantial number of SHs? |
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Term
| Remedies for oppression of minority SH |
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Definition
| 1. Buy-out as described in articles of incorporation or bylaws. 2. Appraisal; examination of assets & liabilities to determine what the corporation is worth, to determine per share price, available only upon (1) merger, (2) sale of substantially all corporate assets, in which SH objected. 3. Petition for Involuntary Dissolution 4. Purchase of stocks as equitable remedy (like in Donahue) Allowed only where one group of SHs derive a special benefit not available to all. |
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Term
| Deadlock as a basis for dissolution |
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Definition
Deadlock exists when there are equal factions & they are at a stalemate on corp management or cannot elect a BOD. Courts may order dissolution if the SHs of a corporation are in a deadlock.
TEST whether to dissolve b/c of deadlock: [Radom; Wollman]: 1. Are competing interests of SHs so discordant that efficient management is impossible or so discordant that the corp. is unable to attain purpose of existence (consider does the nature of the biz require them to work together, are they successful rn) 2. Would dissolution be beneficial to SHs & not injurious to the public? |
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Term
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Definition
Generally, SHs in PTCs do NOT owe each other or the corp FD. But, we impose special duties (GF & loyalty) on controlling/majority SHs, bc have power to select the board/approve fundamental changes, can act to detriment of minority. Typical cases this arises: self dealing, corp opp, dominance on board
EG: If a controlling SH uses his position to dominate BOD, has the same fiduciary duties as a BOD member. [TransAmerica]. If controlling SH merely exercises control by electing the board & then leaves them to independent best judgment, no duties attach. If controlling SH influences or dominates the board’s decision-making, then the SH is acting like a director & consequently has director’s FDs.
How it works: [Zahn]: 1. Min.SH must show Maj.SH dominated board & its decision making. 2. If show domination → Maj.SH must prove GF & inherent fairness of the transaction from the viewpoint of the corp & those interested therein |
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Term
| 5 essential characteristics of a stock |
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Definition
(don’t need all 5): 1. Right to receive dividends. 2. Negotiability. 3. Ability to be pledged 4. Voting rights 5. The ability to appreciate in value.
If the factors suggest it is a stock, must be registered |
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Term
| Investment Contracts & Howey test |
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Definition
| Investment K: a financial instrument not otherwise listed under the ’33 Act is an investment k when it meets Howey 3-part test. 1. Investment of money. 2. In a common enterprise. May exist when there is pooling of funds from several investors (horizontal commonality) or there is an ongoing relationship in the enterprise btwn an investor & the promotor (vertical commonality) 3. With profits to be derived solely from the efforts of others. If you have some control (day-to-day operations hiring/firing) profits aren’t derived solely by work of others. Ct’s have held the “solely” language to mean that the efforts of others must be ‘undeniably significant ones.’ Beyond that CT’s look at the Williamson factors. |
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Term
| General Partnerships can be investment contracts if they satisfy the Williamson test. |
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Definition
| Williamson test for whether general partnership interests can be marked as securities (investment K): [If you have one of the following, you satisfy the 3rd Howey factor]: 1. Agreement leaves so little power in the hands of the partner This factor is in regards to the legal powers afforded by the investor by the formal docs w/o regard to the practical impossibility of the investors invoking them. 2. Even if the investor has legal authority, is he so inexperienced or unknowledgeable in biz affairs that he cannot intelligently exercise that power? Just a general business sophistication not necessary sophisticated in this biz. If no evidence remand to determine whether the P have raised a genuine issue of fact as to whether their lack of expertise prevented them from exercising meaningful control over their investment. 3. Even if he is experienced & knowledgeable in general, is the investor so dependent on some unique ability of the manager that the manager cannot be replaced. If any of these factors is applicable, the 3rd prong of the basic test is met. |
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Term
| Types of Underwriter's Obligation |
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Definition
| Underwriters sell the offering & will commit to either one of 2 obligations: 1. Firm commitment- underwriter buys up the entire offering & sells UP for profit. Takes the risk of market not absorbing it. Or 2. Best efforts to sell commitment- corp takes the risk of the company not being fully absorbed. 3. (not common) Stand by model- best efforts, but commitment to buy the rest at discount. |
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Term
| EXEMPT FROM SEC REGISTRATION: |
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Definition
| B/C of the time, expense & liability associated w/ registering, issuers often prefer to take advantage of one of the exemptions. Exempt Securities: enumerated securities that are exempt from the reg process: 1. Govt securities 2. Banks & other financial institutions 3. Nonprofits who may issue debt. Exempt Transactions: securities which would normally be required to be registered but the transaction in which their issued allows for an exemption. 1. Intrastate offering: offering is all made & sold in one state. 2. Sales not involving a public offering-- "a private placement" (opposed to a public offering) [not defined but like crowdfunding]. “Regulation D” is a SEC regulation governing private placement exemptions. Reg D allows usually smaller companies to raise capital through the sale of equity or debt securities w/o having to register their securities with the SEC. |
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Term
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Definition
Duty to Abstain or Disclose – Insiders in possession of material
corp info must disclose it or abstain from trading until it is disclosed. Disclosure has to be EFFECTIVELY communicated (get to the public & public a chance to digest & react on it.)
Materiality: Whether a reasonable investor would find the info important in making a decision to buy/sell stock. When the info is an event, balance the likelihood of event taking place w/ the magnitude it did take place. The inside info has to be extraordinary in nature. And has to be info intended for corporate use, not personal use. |
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Term
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Definition
Misappropriation: An outsider violates 10b-5 if he has a fiduciary relationship with the source of the information and uses confidential information that is property to which the corp. has exclusive use (not for private use).
3 bases where it is implicated: 1. You’re a fiduciary of the source 2. You have a contract w/ the source 3. There is a policy or procedure of the source (Carpenter). The source of the info stands in for the company in whose securities you’re trading: Your FD is to them bc the duty necessary to impose liability |
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Term
| 2 elements for derivative liability |
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Definition
| Derivative liability (Dirks): 1. The tipper must breach its duty [of loyalty] to the corp & benefit from it 2. The tippee must know or have reason to know of the breach. BENEFIT: money, reputational benefits, quid pro quo, giving a gift to friend/ relative. Newman: suggests you need to know of the benefit going to the tipper. For a criminal action, gov’t must prove actual knowledge of the benefit. Salman makes clear that the benefit does not have to be immediate pecuniary gain. |
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Term
| SH are allowed to propose inclusions into management proxy solicitations. Not opposing them but you want them to address something they’re not. So you propose to have management include (in its proxy solicitation) your proposal. Rules that govern when corp has to include: |
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Definition
| Series of rules in 14a (8) that govern when they have to include. Mgmt must include unless: 1. Info violates state/fed law 2. Violates proxy rules 3. Involves special interest of SH 4. Co has no authority to implement 5. Involves mgmt functions 6. Relates to an election. |
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Term
| When there is a dissident's position (SH want to send their own proxy), regulations give the company a choice: |
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Definition
| 1. give the dissident's the SH list OR 2. say we're not giving you the list but send us your material & we will send it out to SH (but you' still have to pay). Usually latter bc they don’t want you to have direct contact w/ SHs. |
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Term
| There can be liability for omissions/ misstatements in proxy solicitations: §14(a) of 1934 Act regulates false/misleading proxy statements: You have to disclose all material info. Whats this mean & how do you prove violation? |
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Definition
materal: info that reasonable investor might have considered important in determining how to vote. Goal: promote free exercise of the voting rights of SHs by ensuring that proxies would be solicited w/ explanation to the SH of the real nature of the questions for which vote is sought.
A statement of belief by a BOD can be a material misstatement if: 1. The speaker doesn’t believe what he said he believes (provable by corporate records, correspondence, etc.) 2. The underlying fact is untrue.
To prove 10b-5 violation, there has to be a connection between the fraudulent action (misleading or omitted info.) and the impact on the market/the reliance by shareholders.
Causation Test [Mills]: 1) There was a material omission/ misstatement & (2) Solicitation was essential to the outcome (votes needed to approve). DONT have to show actual reliance on misstatement. Basic case is when the soliciting party needs maj. of votes/quorum, & doesn’t have it. Note: could be situation where proxy was an “essential link” even if the soliciting party had enough votes. If for some reason the controlling block wouldn’t move forward w/o a stronger maj. OR IN appraisal |
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Term
| Three basic accounting statements |
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Definition
| Balance sheet lists all asset, liability & equity accounts of a business. Shows financial condition as of a particular date. Assets – Liabilities = SH Equity. Income Statement: financial statement showing company’s income (revenues, expenses) for the accounting period (over period of time). Depreciation treated as an expense. Statement of Cash Flows: shows companies inflows & outflows of cash during period; the difference between cash inflows & outflows gives a measure of an entity’s ability to pay its debts as they come due. Lists all sources & uses of cash. 3 Parts: (1) Cash flows from operations (2) Cash flows from investments (3) cash flows from financing. This statement is VERY important to creditors/lenders. |
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Term
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Definition
| Judicial doctrine that gives SHs in functionally equivalent asset sale same protections available to those in statutory mergers. When a corp. combines w/ another & loses its essential nature & alters fundamental relationship of SHs among themselves & corp & upsets SH expectations in the corp., the transaction is a de facto merger & dissenting SHs are given voting & appraisal rights |
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Term
| Appraisal Rights & Process |
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Definition
Appraisal rights are available to SH who dissent from corporate action involving certain fundamental changes, as defined by state statute, in the corp. If such SH follow the appropriate procedures, they are entitled to receive the appraised value of their shares as determined, in the last resort, by the CT.
PROCESS In Delaware: When there is an appraisal event that's announced by corp dissenting SH have to notify corp they are dissenting. When the vote takes places for the transaction, the dissenting SH has to vote NO or abstain. If they vote yes, they waive their rights. If the transaction goes through, the SH have to notify the company they are exercising their appraisal rights. Certain statutory amount of time they have to bring suit to get appraisal of their share. Evidence that can be admitted to CT to determine fair price is ANYTHING. Judge is fact finder to determine fair price If price is higher than what was in transaction, you (only the dissenting SH) get higher price. If the CT finds fair value is a lower price, you get a lower price. |
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Term
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Definition
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Term
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Definition
In tender offers- no duties so long there is full disclosure & no coercion -- no appraisal rights. Tender offer is when some acquirer (could be outsider or controlling SH) who wants to gain control (sometimes 100%) of a corp but doesn’t want to do it through the board of that target, can bypass that board by going directly to the SH. You do this by a public tender offer.
Less protection offered in TO context bcs: (1) Individual SHs retain right to reject offer (2) Target corp not taking corporate action in TO, just individual choices |
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Term
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Definition
If a corp owns 90% of the shares of another corp & they want to merge; all they need is a resolution passed by the board of the parent corp. File an ownership resolution and a merger resolution. The minority shareholder in the subsidiary have no say, no notice before hand, no vote for the minority subsidiary board, no vote for the subsidiary minority shareholders, all done by the board of the parent.
REMEDY: Appraisal is the exclusive remedy in short-form mergers (Glassman). Bc there is no dealing btwn parent & subsidiary -- entire fairness doesn’t apply. The only question is fair price & that fair price is determined by appraisal. |
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Term
| Majority & minority tests for a merger when it gets rid of minority SH. |
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Definition
| Entire Fairness Test (DE & Maj. Rule)– When a fiduciary stands on both sides of a merger, he bears the burden of showing that the merger was entirely fair (fair price & fair dealing). Maj. eliminated Business Purpose req., think entire fairness captures it. (Weinberger). If biz reason- fair. If its only to cash out minority= not fair. Business Purpose Test (minority rule) – When a controlling SH eliminates the minority interest, he bears the burden of proving that it was undertaken for a legitimate business purpose. STEPS: 1. Was there a business purpose? If YES, look at entire fairness test. If NO (as in Coggins), it fails. |
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Term
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Definition
| When price of a stock get really high, company can split stock EG: you have 2 $50 shares, rather than 1 $100 share; to make it more affordable to retail investors (more liquid). |
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Term
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Definition
| Artificial dollar value specified in articles of incorp, no relation to market value; floor price that assured SHs parity (so insiders couldn’t buy for self at a lower price). E.g. Company issues 1000 shares w/ par value of at least $100; every investor had to pay at least $100 |
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Term
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Definition
| stock value too low, want to join together to get higher number; exchanges have min. prices to be listed |
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Term
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Definition
| Normally, where price is at issue in a merger, appraisal should be the remedy (Weinberger). But if there’s a breach of duty involved, courts can choose any remedy available. |
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Term
| Unocal/Unitrin Enhanced Scrutiny steps to determine whether defense mechanism in hostile takeover is VALID |
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Definition
Enhanced scrutiny only applies in hostile takeover situations.
Steps: 1. Confirm threat to corporate policy & practice [GF & reasonable investigation]. 2. After you determine if defenses are NOT draconian [not preclusive or coersive] then you 3. proceed to range of reasonableness. |
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Term
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Definition
When it becomes clear that a hostile takeover takeover is going to either break up the corporation (all SH gone) OR result in a change of control (no maj. before now a controlling block) then
its no longer in the fiduciary purview of the board to fight off the defenses. Must remove the defenses & not favor any bidder. Must maximize the offer. Become an auctioneer to get the best value.
Best value reasonably available = use Unocal test. Substitute perception of threat the question of whether the board reasonably perceived the best value. How do we know? GF & reasonable investigation. If they are w/in a range of reasonableness = deference to the board for what the highest value reasonably available was. Still enhanced scrutiny but CT gives great deference. Combines Revlon's maximization & the Unocal reasonably perceived the best value. |
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Term
| Directors Duty to Stay Informed (to satisfy their duty of care) |
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Definition
Directors duty: 1. stay informed about corp’s activities, have a rudimentary understanding of the biz of the corp, monitor affairs/policies—attend board meetings, review financial statements, 2. object to illegal acts 3. resign 4. if they don’t stop, seek advice of counsel 4. Threaten to sue 5. sue
For breach of care for failure to monitor must show: 1. Directors knew, or should have known, that violations were occurring. 2. Directors took no GF steps to prevent or remedy situation. 3. The failure of directors proximately resulted in complained losses. |
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Term
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Definition
| Director, acting in SH capacity, is entitled to act in own self-interest, even at the expense of other SHs, as long as it: (a) does not thwart declared corp. policy and (b) the purpose was not to harm other SHs. Zidell: Stock is sold to Emery & leaves Emery with control of the company to Arnold's disadvantage. Arnold says they took a corporate opportunity. CT says it’s not a corporate opp b/c the corp had never talked about purchasing its own stock or making sure they were even. Arnold argues he violated FD duty. HELD: FD only applies in relation to corporate activity. CT says no harm to the corp by allowing Emory to buy. No loss to the corp. doesn’t care who SHs are. |
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Term
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Definition
| DUTY: In TO, not entire fairness; just demonstrate SHs had true choice to accept (no coercion). Siliconix: In a TO, the board does not have to demonstrate entire fairness, only has a duty to make sure that the SHs have the choice to accept or not accept; Cts will only intervene to protect SHs’ right to make free choice – i.e. upon showing of fraud, coercion, or non-disclosure |
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Term
| Parent/Subsidiary long-form Merger Test in Delaware |
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Definition
| Since in a parent/subsidiary you are on both sides of the transaction --> Inherent fairness applies. In merger contexts that means fair dealing & fair price. If there are implications about fiduciary duties breach (issues that don’t go to the value of the stock) the remedy can be something other than an appraisal (comes from Weinberger reinforced in Rabkin). |
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Term
| Short form merger in Parent/Subsidiary & duty |
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Definition
If the board of the parent is at least 90%(typical but varies by state) share ownership and APPROVES the merger, that’s all that’s required. File an ownership resolution and a merger resolution. The minority shareholder in the subsidiary have no say, no notice before hand, no vote for the minority subsidiary board, no vote for the subsidiary minority shareholders, all done by the board of the parent.
DUTY: fair price ( judged by appraisal). (since no dealing dont have to decide fair dealing). |
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Term
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Definition
| no duties so long there is full disclosure and no coercion |
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Term
| Parent/Subsidiary long-form Merger test in Mass |
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Definition
| 1. Was there a business purpose? If YES, look at entire fairness test (fair dealing & fair price) If NO (as in Coggins), it fails. |
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Term
| Test for omissions/misstatements in proxy solicitations |
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Definition
Test: (Mills):
1. Was the solicitation an essential link in achieving the result?Basic case is when the soliciting party needs majority of
votes, and doesn’t have it. There probably could be a situation where the proxy was an “essential link” even if the soliciting
party had enough votes. If for some reason the controlling bloc
wouldn’t move forward without a stronger majority (Virginia Bancshares). One member of the court (Stevens) believes that any material omission/misstatement in a proxy statement should be actionable, because if you solicit, then you had a reason to do so.
2. If so, was there a material omission? |
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Term
| In a long form merger, the board of the target has an obligation to... |
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Definition
i. Carefully review
ii. Evaluate
iii. Recommend |
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Term
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Definition
corp sets up a shell subsidiary into which the disappearing company mergers (a forward triangular merger) or which mergers into the disappearing co ( a reverse triangle merger). The latter typically down for tax reasons, when its necessary for the target co to maintain its corporate existence (in order to maintain tax loss carry forwards, for eg)
Triangular Merger
i. A creates Asub → Asub + B = Asub
ii. Reverse triangle: Asub + B = B |
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Term
| Attorney advice for acquirer trying to avoid a poison pill |
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Definition
If there is a poison pill at 30%, you buy 29.9 of the shares and then go through a proxy fight. So if the shareholders of the target like your offer, they're going to vote you in and you redeem the pill before its triggered.
Or, DON’T MERGE. That's what triggers the poison pill. Just hold your shares.
○ Pill triggered- rights get distributed |
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Term
| Why have the enhanced scrutiny test for the omnipresent specter of conflict? |
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Definition
Unocal, when the court talks about the "omnipresent specter of conflict" -- no actual conflict the conflict they are talking about is the potential conflict. So the court comes up with an intermediate level of scrutiny.
○ Not entire fairness w/ its lack of deference (& there isnt a conflict of interest yet, just an omnipresent specter of it).
○ Not complete deference w/ business judgment
○ No longer presumption the board has acted with good faith and in due care. The board has the obligation to prove they acted in good faith or reasonably perceived a threat after an investigation.
§ If the board proves these things, that’s the substantive part of the biz judgment rule, it shifts the burden. And then the business judgment rule kicks in. |
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Term
| When a BOD interposes a defenses to a takeover that has not yet manifested the use of the defense is judged by what test? |
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Definition
| Moran: When a BOD interposes a defenses to a takeover that has not yet manifested the use of the defense is purely judged by the BJR. There is no enhanced scrutiny because there is no threat. Enhanced scrutiny is based on the omni present spector of the threat that board's will be taking actions to preserve their positions. When there is no such threat, no spector thus no need to enhance scrutiny. Defenses actions are permissible & only judged by BJR, which is very deferential. |
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