SHORT CORPORATIONS OUTLINE

  1. Nature and Purpose of Corporation – Public or Private?
  2. Approaches:
  3. Charter/Artificial Entity
  4. DartmouthCollege – nothing w/o grant from the state –
  5. private contract that makes it public entity -
  6. Contract
  7. TODAY’S FORM
  8. Natural/Real/Individual
  9. Separation of Ownership from Control -
  10. RUN FOR THE PROFIT OF SHAREHOLDERS
  11. Private property with fiduciary duties to shareholders
  12. Ford
  13. The ct will interfere with dividends only when there appears to be misappropriation.
  14. Smith v. Barlow
  15. Corporation can give charitable donations if it benefits the company.
  16. Steinway
  17. Exception to the rule of corporation as private property w/ duty only to shareholder
  18. OK AS LONG AS W/IN CONFINES OF CHARTER
  19. Shareholders v. Bondholders

Stock / Bond / Preferred
Control (of directors-vote) / + / - / Limited
Income (fixed) / - / + / Not fixed
Place in bankruptcy
Assets - Liability = Equity / Last / + / Middle
Risk / + / - (none) / Not much
  1. Simons
  2. Just because there was option to convert does not mean there is fiduciary duty
  3. Jedwab
  4. Preferred stock is looked at as contract and equity – so there may be fiduciary duty – BUT SELF PROTECTION IS KEY
  5. Shareholder valuism – most important factor for directors – maximize $!
  6. American Model
  7. Shareholders
  8. Bd of Directors
  9. Officers
  1. Corporation in public life – depends on vision for corp – how far will you let them go…
  2. Poletown
  3. Public purpose allowed for private eminent domain transfer.
  4. Ypsilanti
  5. Corporation had no social obligation unless there is express contract.
  6. Unocal
  7. Corporations will be looked at w/ others as one entity when there is wrongdoing in pursuit of profit.
  8. Progressive Corporate Law
  9. Let more interests come in – give directors incentives to consider beyond initial $.
  1. Duties of Directors and Officers
  2. Authority of the Bd – What can directors do?
  3. Separation of ownership from control
  4. Manice v. Powell
  5. Director is a trustee of shareholder property (use it for their best interests) with absolute power by statute
  6. Grimes v. Donald (I)
  7. Directors use power at their discretion – but can’t formally GIVE IT AWAY.
  8. Litigation –
  9. Derivative – enforce duties to corporation via suit brought by stockholders
  10. MOST ARE DERIVATIVE – corp was hurt, not individuals
  11. Ellima
  12. Security
  13. Baker – can vacate security if over 5% of stockholders join.
  14. Direct
  15. Eisenberg v. Flying Tiger
  16. Broaden realm of direct suits
  17. What belongs to shareholders: voting, unpaid dividends
  18. Grimes v. Donald (II)
  19. Asking for declaratory judgment or injunction is better way for direct
  20. Demand
  21. Make demand on the bd or prove it would be futile – not one then other!
  22. Grimes

DOC (tort principles)
BJR - - - - good faith - - care ------
(damages) / DOL (fiduciary principles)
------best interests of corp(despite conflict)
Fairness Fair deal fair price (not damages)
  1. DUTY OF CARE
  2. BJR
  3. Presumption that directors act in good faith, due care and in best interests of corp.
  4. Burden on Π to rebut presumption and then show damages
  5. Tort – reasonable person  good faith  gross negligence
  6. Eroded Doctrine -
  7. Kamin
  8. BJR and gross negligence mean even if directors are stupid, there is no liability as long as there is good faith and care.
  9. Van Gorkom
  10. Failure to inform self fully = gross negligence
  11. Joy
  12. BJR exists so that corp directors can take action/risk.
  13. Protect Yourself!
  14. Cede
  15. NOT NORMAL – in merger Δ was able to show fairness after Π rebutted BJR presumption.
  16. So DOC = fairness
  17. Bringing back DUTY
  18. Disney
  19. There is a limit to BJR – §102(b)(7) exemption won’t help
  20. Acts of omission (no honesty and good faith) are not protected by BJR
  21. What Should Directors Do?
  22. Francis
  23. Negligence in failure to act/monitor – No BJR
  24. With power and responsibility comes accountability
  25. Ask questions, object, resign, seek advice, prevent
  26. Caremark
  27. Action of a monitoring system is enough to invoke BJR
  28. DUTY OF LOYALTY
  29. Fiduciary relationship (TRUST) – power over the property of another
  30. Act for benefits of shareholders before your own
  31. Show Fairness
  32. §144
  33. procedural
  34. substantive
  35. Self dealing
  36. Meinhard
  37. Cardozo – Protect interests of shareholder before your own
  38. BROAD DISCLOSURE
  39. Bayer
  40. SHIFT FROM TRUST to FAIRNESS
  41. Consider your interests as long as end result is balanced.
  42. DE Corp Law §144 – PROCEDURAL FAIRNESS
  43. Factors:
  44. Disinterested shareholders approval

OR

  1. Disinterested board approval

OR

  1. Entire fairness determined by third party (judge)
  2. Substantial Fairness
  1. Marciano– Dominant Test
  2. Substantial fairness determined by judge because of deadlock
  3. ONLY WASTE CAN BE SHOWN
  4. high standard – destructive to DOL
  5. Cooke v. Oolie
  6. Compliance w/ §144 does not mean automatic BJR
  7. SHAREHOLDERS REBUT BJR w/ LACK of FAIRNESS
  1. Fair price valuism
  1. Corporate Opportunity – rarely gets to a question of fairness
  2. DUTY TO DISCLOSE – then directors decide whether the corp. will take advantage
  3. Energy Resources
  4. Cardozo Test
  5. If you have a duty to the corporation you have duty to disclose.
  6. Broz
  7. Disclose – if they can’t/won’t take it then you can
  8. If you are a member of more than one bd – choose one.
  9. Ebay
  10. Automatic disclosure avoids conflict of interest with the corporation
  11. TEST: For directors to decide
  12. Financial ability to take advantage, expectancy, relation to interest
  13. Compensation and Waste – wide discretion and extremely high standard to prove waste
  14. Lewis v. Vogelstein
  15. Once procedural fairness is met (§144) can only show waste (extremely high)
  16. Ct used DOL – but could be a DOC analysis – Duty to disclose
  17. Sanders v. Wang
  18. Formalistic – contract was breached by directors w/ stock split so there is equitable relief for stockholders.
  1. Closely Held Corporations
  2. Forms
  3. Sole proprietorship
  4. Partnership
  5. Limited Partnership
  6. CORPORATION
  7. Limited Liability
  8. Central Officers
  9. Transferability of Interest
  10. Continuous Existence
  11. Process of Incorporating
  12. File with state
  13. Incorporator – promoter
  14. Coopers
  15. Promoters are personally liable for contract they make absent an express agreement removing liability.
  16. Defective Corporation
  17. Defacto – good faith mistake
  18. Estoppel – everyone treats it as a corp
  19. Cranson v. IBM
  20. Once creditors recognized corporate identity they are estopped from disregarding it.
  21. Piercing the Veil – disregard the corporate entity (liability)
  22. Theories:
  23. Alter-ego
  24. Co-mingling of personal funds, treat as equal to personal entity.
  25. Enterprise
  26. All corporations treated as one (co-mingle corp. funds)
  27. Agency
  28. Corp exists as agent to do whatever shareholder wants (hard to show)
  29. TEST – (1) Theory; (2) Injustice; (3) Did you self protect (optional)
  30. Walkovsky
  31. Cab co – there is an extremely high standard – prove what you plead to pierce.
  32. Kinney
  33. Self protect – it is a permissive prong, but it will help the ct to side with you
  34. Reverse Piercing:
  35. Sea-land
  36. Creditors of corp will get shareholder shares – but if corp is going bankrupt - shareholder becomes creditor of other corp/personal $.
  37. Minority Shareholders –
  38. Agreements: contracts between individual shareholders to increase their control
  39. Ringling Bros.
  40. Can’t make an agreement that separates economic interest from voting.
  41. Lehrman
  42. Shift test – Flexibility – did the statute prevent the situation, did you disclose?
  43. Oceanic
  44. Flexible – Allow shareholders in CHC to adopt the best methos from them – which are different from PHC.
  45. Rosiny
  46. Doctrinally correct but unjust results– More risky/likely in CHC.
  47. Ability to Bind Directors – not strict management for CHC - shareholder’s property.
  48. McQuade
  49. Directors have control and agreement that limits their power is void
  50. Clark
  51. Change from form to what people want – Not corporate entity but contract w/ unanimous consent.
  52. Galler
  53. CHC may come up with agreements that are best for them – and they will be enforced as long as they do not harm creditors
  54. MOVING TEST – Contracts are allowed when there is unanimous consent
  55. Looking at the desires of the party rather than formal rules of PHC.
  56. Enforce as long as don’t harm.
  57. Fiduciary Duties BETWEEN SHAREHOLDERS – lines are blurred in CHC.
  58. Donahue
  59. Furthest reach of obligation = partners (Cardozo)
  60. Wilkes
  61. Modified BJR – Balance – majority can be selfish to extent min can’t show alternative.
  62. Shift from trust to fairness dilute fiduciary duty
  63. Smith v. Atlantic Properties
  64. Balancing - Every agreement should have a buy/sell agreement – ct doesn’t want to decide.
  65. Sugarman
  66. Prove INTENT to freeze out (not fiduciary but intentional tort).
  67. Ingle v. Glamore Sales
  68. Dissent – when a contract is derived from the nature of the relationship it is more than just a contract.
  69. Remedies for Oppression – Self-protect - don’t forget buy back provisions!
  70. Dissolution – extreme solution – usually does not happen (buy back instead)
  71. Alaska Plastics
  72. Low price, fraud, self-dealing = oppression
  73. Matter of Kemp
  74. Oppression – blocking reasonable expectations of return.
  75. Controlling Shareholders in Public Corp - Parent Company
  76. Self-dealing – Majority benefits to the exclusion/detriment of others.
  77. CONTROL DEBATE – you elect directors so you have fiduciary duties?
  78. Sinclair – dealings with 97% owned subsidiary were self dealing
  79. Absent self-dealing –
  80. BJR will apply to controlling shareholder  show waste
  81. Self-dealing –
  82. If there is benefit to the detriment/exclusion of minority there is no BJR  Intrinsic fairness test applied.
  83. Andarko
  84. No Sinclair duties when there is no minority – expectancy does not = duty.
  85. Zahn
  86. Controlling shareholders should act as disinterested directors bc directors have to have the ability to make decisions outside of controlling shareholder rule.
  87. Perlman – NEVER FOLLOWED
  88. Do not sell to someone who will loot the corporation.
  89. Weinberger
  90. Parent must negotiate at arms length and give fair price/complete disclosure.
  91. Even though you have control – there will be duties when you act in bad faith
  92. Fundamental Transactions
  93. Merger, acquisition, involuntary dissolution – require a vote
  94. Katz
  95. Ask how much it will impact corp – VOTE when it is substantially all assets.
  96. Merger laws – fairness and appraisal rights
  97. Farris
  98. Make sure you are fair to the shareholders and given them appraisal rights
  99. PA Law – if it looks like a merger it will be treated as one.
  100. DE Law – treat the agreement as whatever the directors desire.
  101. Hariton
  102. DE directors can prevent appraisal rights by calling the merger a sale of asset.
  103. REMEDY –when someone disagrees with the merger –
  104. WEINBERGER – only appraisal is needed absent deception.
  105. Rabkin
  106. Contractual remedies – more $ over time than appraisal
  107. Inequitable conduct will not be protected merely bc it is legal
  108. Hycor (MA)
  109. Instituting DE block method and legitimate business purpose test.
  110. Coggins (MA)
  111. Broadening legitimate business purpose test and allowing damages.
  112. Fiduciary duties – are you attempting to hurt the minority?
  113. Duties of Directors
  114. Ace
  115. Directors cannot abdicate their duties – must make their own decisions and take into account the fiduciary obligation of what is best for shareholders.
  116. Short-Form Merger
  117. No need for a vote to merge sub w/parent when it is over 90% owned by parent.
  118. Siliconix
  119. Only remedy once there is a short form merger is appraisal.
  120. Factors the ct should have considered: disclosure or coercion violation
  121. Glassman
  122. Appraisal is exclusive remedy – there is no entire fairness standard for SForm.
  123. Tender Offers
  124. Takeover attempt via stockholders –
  125. Directors do not have the gate keeping power that they do in mergers.
  126. Directors want their job/maintain corporation
  127. Shareholders want their investment
  128. Unocal
  129. Defensive measures test:
  130. Reasonable belief in threat
  131. Reasonable reaction to threat
  132. Moran
  133. Poison pill – givers rights to shareholders that can be triggered by an event (takeover) but also cancelled by the directors.
  134. Goal – negotiate with the board.
  135. Threat – when there is a threat shift from BJR to Unocal analysis of defense.
  136. Revlon
  137. Unocal applies until the co. is considered “up for sale”
  138. Maximize value for shareholders once the co. is for sale.
  139. Time
  140. To shareholders:
  141. You will only get a vote when your interest changes.
  142. Directors:
  143. Can consider more than just $ (like nature of business) & meet Unocal.
  144. QVC
  145. Back to Revlon duties – maximize value obligation in sale of control (break-up is not actually needed).
  146. Once we allot the bd to take defensive measures we are basically limiting the market for control.
  147. Unitrin
  148. Once there is a reasonable threat to corporate power directors can engage in defensive tactics as long as they are not draconian.