Business Org outline The relationships in corporate law are governed by case law, agency law, common law,

and statutory law. The Statutory Law governs the corporations and its entities and the members of the company are governed by contracts. When dealing with the relationships, look at the contracts first, then statues and case law which interprets the statutes. Who are the parties involved: (A) Owners or investors provide the capital for the business; (B) Managers run the day to day operations of the company and sometimes are the owners and investors: (C) Employees are responsible for the day to day affairs of the company; and (D) The company itself as it is separate form and distinct from the people who own them.

Corporations: Formation & Parties

A. Sole Proprietor ship Has no separate legal existence from its owners, aka D.B.A. There is no formality to form the business Each owner has unlimited liability (100%) Owner is completely responsible for everything. If the company does not have it, then they could come after the house and other things that do not belong to the company. The tax treatment is pass through tax - no taxes filed at the business level and happen when payment is issued to owner. The management is direct management as each owner plays a role of the management and have the right to manage the mangenes have the ability to bind the Company or other proprietors The Owner finances as there is no one to invest Exit strategy (how to end or get out of the business) is hard as well B. Partnerships Owners are the partners Mangers are the same people. Partnership agreement is not needed to be in writing for a General partnership. 1. General - two or more people to conduct a business for profit, partnership is separate from the owners and Partners finance the company Taxes are pass through - each general partner is taxed even though the partnership is viewed as a separated legal entity. The partners are general partners and the liability is unlimited and joint and several. Management is direct management and each general partner is entitled to manage the partnership and can bind the partnerships and each other, unless an agreement states otherwise. But, then can also bind the partnership and each other to 3rd parties by apparent authority. Exit strategy is difficult 2. Limited - separate legal identity. Have to file a certificate of formation that has all the information and is formed on the date it is filed with the secretary of state. May or may not have a partnership agreement, thus, the code section comes into play. Made up of one or more general partnerships or/and one or more limited partner. The general partner has unlimited liability and others have Limited liability so long as they do not participate in the partnership (a passive partner).
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Business Org outline General partners are the managers and make the decisions. They can also bind the partnerships and the other limited partners. Liability is limited to investment in company and partners share in the profits in accordance with their interest. Do not have agency authority and have no apparent authority. A third party has to know they are dealing with a LP. LP can have a fiduciary duty in some cases. A majority partner has a duty to protect all minority parties and he cannot harm the other partners by benefiting just himself. The General partner has the duty of care, loyalty, and good faith under agency/principal doctrine and the under the rules of corporate policy as well. Exit strategy is generally difficult Taxes are pass through. 3. Limited Liability partnership - formed primarily for law firms or accounting firms. Essentially a general partnership that has limited liability status for certain circumstances. Each partner is 100% liable and has the opportunity to manage and bind. Still responsible for the debt and obligations. But it differs when it comes to vicarious liability (torts) Any partner that was not responsible for the criminal act or did not supervise the person who acted is not personally liable and only liable for their interest in the partnership. Partners are protected by a partial shield against malpractice for other partners, unless they partake in the wrong or supervised the malpractice. Exit strategy is limited. Taxes are pass through. C. Corporations Owners are the shareholders Officers and directors are the managers Employees of the company can be all who work for the company. The bylaws are the agreement. 1. C-Corp -Taxed under subsection C of the internal revenue code. Has separate legal existence from those who own it. Corporations are like a person and can have sub-subsidiaries, parents and affiliates. The owners, or shareholders, have limited liability. The only thing the owners can lose is their investment Has double taxation. When a Corp earns money, it gets taxed at the corporate tax rate. Once it has the money, it can retain it as retained income or it can give it out as dividends to shareholders. As a dividend, it is taxed again at the individual income rate of the shareholders. A centralized management (a few representatives who represent the Corp.), ie. Board of Directors (BOD) Starts out as a c-corp. unless it opts for something else. Get finance through the sale of shares.
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Business Org outline 2. S-Corp - have to elect to be it and is taxed under chapter S of internal revenue code. Has to be a small company with less than 35 share holders A pass through tax entity. No taxes at corporate level. Shareholder taxed on money even if the company does not distribute as a dividend. There are certain things in the S section that will apply. Offer limited liability to the extent of the investment. Some flexibility of how the company is managed. A shareholder has a limited right in management. Limited to a certain amount of investors. 3. Professional Corporation (PC) - Reserved for professionals such as lawyers, doctors & dentists. 4. Limited Liability Corporation - A relatively new business form. A separate and distinct entity, must file certificate of formation with the SOS Limited liability to all members, even if they participate in the management and can have a centralized management. Managed member LLC - have a representative who can, but does not need to be a member of the LLC. This manager controls the affairs of the LLC. Only the manager can bind the LLC. The agreement is called the operating agreement and does not get filed. The operating agreement still effective if not signed. Free to contract in any way to conduct business with each of the members. Each member is liable 100% for their own negligence and can be vicarious liable for the actions of the other partners within the scope of the Corp. (criminal acts are outside the scope of the agreement) Flexibility on ownership status Choice of Pass through or double taxation. There are no separate tax provision and when formed, it could be a disregarded entity or to be taxed as corporation.

Principal & Agency principles

A. Elements of agency The duties of Care, Loyalty, and Good Faith apply and all the above are principal and agent relationships. Agency can be apparent within the Corp. between the parties involved. Employees are agents of the corp. and owe duties to the corp., but not the shareholders. The principal is liable for the actions of the agent and any torts committed within the scope of the agency. 1. Must be implied/expressed consent by both parties Both parties must consent to the agency relationship even if they don't know that is what they are doing. Corse of dealings can imply consent. 2. Must be some degree of control given to the agent by the principal The agent has to respond to some minimum directions of the principal. The principal is liable for actions of the agent done within the scope of the relationship. Gay Jensen Farms v. Cargill: A fiduciary agency relationship merely requires a manifestation of consent by one person to another that the other shall act on his
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Business Org outline behalf and subject to his control, and consent by the other so to act, regardless of whether a contract was formed or the intent of the parties was to be bound by the legal obligations of that relationship. Cargill argued that they never consented to the agency relationship, and each of their actions could fall under a debtor-creditor or a buyer-seller relationship. Alternatively, Cargill argues that they are at best an undisclosed principal because they settled with the agent and no third parties entered directly into a contract with them. The court agrees that many of the factors, when taken individually, could fall into another category of a relationship. But the factors need be taken as a whole. 3. Agent must act on behalf of the principal and not for the benefit of. The agent has to be doing something that the principal has asked her to do something that is on the principals behalf. Duties principal owes to agent Pay compensation when its agreed and when its reasonably expected. This is an objective standard. Reimburse expenses incurred by the agent from the performance the principal has asked the agent to do. Indemnify agent for any losses the agent suffers from performing the act the principal has asked to do Act with due care for the agent, fairly and loyalty Deal with agent fairly in good faith Duties agent owes to principal The duty to account for money received and spent on behalf of the principal and also expenses. Duty of Care: Full disclosure & no self dealing. The duty of full disclosure, have to tell the principal anything the agent learns that would affect the principals interest within the scope of the agency. Cannot do anything that would negatively affect the principal, unless it is whistle blower of a criminal act. The agent has the keep the principals confidences Meinhard v. Salmon: Partners in a venture have a fiduciary duty to each other. So, when an opportunity arises that can benefit both partners, but one partner takes advantage of it without informing the other, the fiduciary duty is deemed to have been breached. The opportunity belonged to the partnership, not to the individual partners, so one partner is considered to have stolen the opportunity from the partnership. Members of a partnership owed duty of loyalty to each other and so must disclose opportunities that arise in order for both to have an equal chance to take advantage of it. Duty of Loyalty and Duty of Good Faith. May depend on the position that is held. May be a higher duty of loyalty for someone who is a president or partner and not so high for an employee. Obey/follow directions Types of authority that can bind the principal officer to Board, Board to Corp., partner to partner, etc.. 1. Actual-principal manifests consent to allow agent to act on his behalf and agent can bind a principle to all non-tort actions arising out of the scope of the agency. the Principal will be responsible for the acts of the agent and cannot sue the agent for indemnification

Business Org outline Actual authority a) Expressed: The expressed authority given to the agent by the principal to carry out some kind of act. By laws, articles of incorporation, partnership agreement, statute, contract, verbal instruction, nodding. b) Implied- based off or actual authority and it is authority to do what is reasonably necessary, usual, proper to perform agents duty 2. Apparent-perceived by a third party and gives agent the power to bind the principal by virtue of their position, action, or/and course of dealing. Only binds the principal as it relates to third parties because the position gives an impression of apparent authority. The third party would have to reasonably believe that the agent would have the authority to carry out the act for the principal. The principal must follow through with the bargain. However, if the Agent did not have implied or expressed authority to make the bargain, then the principal go sue the agent to indemnification of what was lost. 3. Ratification-principal ratifies the agents act after the fact, even if the act was not authorized Vicarious liability & Duty-Principal is vicariously liable for the tort actions of the agent as long as the tort is committed within the scope of the agency. Butler vs. McDonalds: The more control, the more likely the principal will be held to the liability of its agents. 1. Duty of care-same as negligence a. Agent must be acting w/in the scope of his authority b. Principal had some control over agents act 2. Duty of loyalty a)Benefit the principal b)No self dealing Partnership agreements: Uniform Partnership Act of 1997

Corporate law principle

A. Formation of corporation 1. Incorporators-person that usually handles admin aspects of getting it formed Filing the Articles of Incorporation that creates Corp. must be filed with SOS. Can be anybody of legal age & does not have to have relationship to Corp. after its formed No liability as long as they strictly only attend to administrative (ministerial) duties 2. Promoter-may also be incorporators & tends to pre-incorporation activities Purchasing equipment, leases, finding investors No fiduciary relationship yet because the Corp. hasnt been formed, but is seen to be an agent of the Corporation after it is formed. Promoters only owe fiduciary duty to other co-promoters because they are look at as general partners because they have an agreement to form a business for profit. What personal liability does promoter have for pre-incorporation activities? The liability will depend on how the PRO entered into the agreement and what knowledge the PRO had at the time the agreement is executed
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Business Org outline When does the corp liability attach to these pre-incorp activities? What liability does corp have to the shareholders for fraudulent conduct of the promoter? a. Promoters liability when he enters into a contract with 3rd party for the corporation. i. Enter into a contract in the promoters own name only without reference to corp. because the Corp. has not been formed. Promoter is always personally and direct liable for the contract Even if the corp. assigns that contract to the corp. from the promoter, promoter is still personally liable along with the corp. unless expressly released by the corp. through a novation ii. Enter into a contract in the name of the corp. but 3rd party doesnt know that the corp. is not in existence yet Promoter still personally liable on a theory that he is NOT acting as an agent of corp. because the principal hasnt been formed yet. iv. Enter into a contract in promoters own name but acting as a representative of the corp. with full disclosure to the third party that there is NO corp. yet Promoter is still liable unless the 3rd party releases him or the Corp accepts the contract and releases him via a novation. b. Third parties and Promoter Liability - Court will look at intent of the parties and circumstances the contract was made. This is when the promoter enters into a contract as a agent of the corp. with the full disclosure to the 3rd party that there is NO corp. yet. 1) Court will view the contract as an offer to the corp. to be formed, which is revocable by corp. or the 3rd party. It only becomes contract if the corp. accepts the offer by 3rd party It is revocable by either party, the corp. or the 3rd party Promoter is still liable for the contract if the corp. doesnt accept the contract. However, the promoter might be able to avoid liability if the intent of the 3rd party or corp. would allow the promoter to not have liability. 2) Other courts look at it as irrevocable offer or an option. 3rd party cannot rescind the offer but corp. has option to accept/reject the offer If the corp. doesnt accept the contract, the promoter will be liable to the 3rd party. However, the promoter might be able to avoid liability if the intent of the 3rd party or corp. would allow the promoter to not have liability. 3) Other courts look at it as a contract between the promoter & 3rd party If corp. accepts the contract, the promoter is released from liability. Shown by the intent of the parties that upon the Corp being come to life, the Pro will be released from liability. If corp. doesnt accept the K, the promoter is still on the hook c. Ways corp. may relieve promoters liability when he is not an agent of the corp. 1. Acceptance/ratification of liability - Ratification means the Corp. accepts or ratifies the contract and makes it its own after it has been entered into Only corp. that were in existence at time of contract can be ratified Can expressly be part of the contract by saying that the corp. will adopt and ratify all actions of the promoter and releases and indemnify all claims. The corporation implied the acceptant by taking the benefits of the contract.
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Business Org outline Also if they start manufacturing the items under the contract. In some cases, by the contract not specifically being rejected, the corp. does accept it by acquiesce 2. Adoption happens after the corp. is formed. corp. wasnt in existence at the time of contract corp. adopts the terms of the contract, expressed(we agree to adopt all liabilities) or implied from circumstances(corp. benefits from K) B. Defective corp. Statute in the Uniform Limited Partnership Act 306 1. De facto corp.-there was good faith attempt to form the corp. but for some reason, there was some type of defect in the statutory requirement Recognized in entire world except the State of Ga. a)There must be a law in which you could have complied to incorporate b)D must prove good faith attempt to incorporate under that law c)D must show that he used the corp. status to start business 2. De jure corp.-you followed the law & formed the corp. pursuant to statutory requirement Recognized in the entire world & the State of GA. Not a defective corp. 3. Corp by estoppels-other 3rd parties dealt with you as if you were a corp. to avoid personal liability. This happens when the AIC do not get filed. Both parties believe there is a corp. Other party is estopped by asserting that there was no corp b/c acts were carried out as if it existed. The shareholders only enjoy limited liability to the Third party Contract, all other parties they are liable to. C. Corp finance Debt = The corp. get money to continue business: loans (must be paid back), bonds (obligation of some issuer that is generally is some kind of gov't agency that issues bonds. The bonds are sold to bond holders, the investors), debentures (a bond that is unsecured by anyone. Done on the good faith and credit). Equity = The owners put money into the corp as investments (Investors put in the money to help run the business and have no right what so ever to be paid back for their investment), common stock, preferred stock Look at this when the Corp. decides to dissolve. 1. Order of payment when corporation becomes insolvent (Forms of equity of corp) (1) Debt If you are creditor, then creditors have priority first over the investors. They must be paid as it is legal obligation. (2) Preferred stock Authorized by articles of incorp It must state what preference what preferred shares have

Business Org outline Preference a) Cumulative dividend right-dividends are cumulative if the company pays a dividend and it is not paid in any given year, it accumulates and rolls over to the next year. Does not guarantee that the money will be issued within a year, but it will roll over it is paid. b)Non-cumulative $ for whatever year only.corp. can skip dividend some years c) Voting preference - generally only commons stock has a right to vote and elect directors of a Corp. d)Liquidation preference-when debt gets paid out, u get a certain amount e)Redemption right-redeem shares at a fixed price f)Conversion right-convert shares to common stock (3) Common stock Basic fundamental unit in which corp. shares are divided Every corp. must have at least 1 class of shares that receives all of its income in the assets of the corp. after all obligations are satisfied Generally has all the voting rights to elect the directors, to remove the directors, etc. Does not have to be authorized by articles of incorp. Gets paid last and no requirement to be paid dividends and only if there is net income or assets. 2. Issuing of Shares Consideration for common/preferred shares: Cash, Existing business, Equipment/inventory, Labor (sweat equity) A. Common shares: Authorized and issued Authorized is the number of shares the Corp is authorized to issue. Has nothing to do with the value of the company When then are bought back are called treasury shares. These are considered authorized and issued. These shares no longer affect the ownership rights. The person still has 300 shares and owns 100% of the corp. Authorized, issued and outstanding Outstanding - Shares that the company actually issues. Theses outstanding shares are what determine the value of the company. It gives the owners voting power. 1000 Authorized, 300 outstanding, and there were 3 people, then each owns a third. Authorized and issued - Not outstanding - 1000 shares authority, issued and outstanding 400 shares. Of the 400 shares, the corp bought back 100 shares. When then are bought back are called treasury shares. These are considered authorized and issued. These shares no longer affect the ownership rights. The person still has 300 shares and owns 100% of the corp. Example: Authorized 1000, then there are 400 shares outstanding. Leaves 600 shares to authorize. Then Corp wants to authorize the rest of the shares to the same people, to 3 people equally, but to one, then do not give an equal share. His interest is now diluted. His ownership is less than the original 25% of the company.
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Business Org outline Can protect yourself if you have preempted rights form this scenario. These are in the AIC or the shareholder agreement B. Valuation of shares If corp doesnt receive what the value of the shares through consideration, what happens? Par value-minimum value that a corp can sell its shares w/o becoming watered stock Can sell for any amount or consideration If corp issues shares for less than its par value, then u have WATERED STOCK C. Dividends The current return on the shareholder investment and at the discretion of the BOD. They do not have to be paid even when there is net profits Paid out of the net income of the corp. If there is a profit, then the person will get a dividend if the BOD decides to. Distribution is what is given after the company is dissolved. The extent to pay dividends is affected by the amount of loans that are higher than the profits, then company cannot pay dividends because they are deemed illegal dividends. When there is no net income and dividend is paid or when there is net income, but the payment of the dividends would make the corp. undercapitalized. Insolvent means that they are unable to pay debt as they come due. The money left over is the profit. If not money is left over, then no dividend is issued.

Undercapitalization & Corp.s liability - Piercing the corp. veil when corp. is
undercapitalized A. Piercing the corp. veil Mechanism that creditors rely to hold the shareholders liable for corp. debt when its insolvent The reasons why corp. is undercapitalized is because shareholders have too much corp. asset & hiding behind corp. to deny payment to creditors. There are two general tests the courts will use to determine to pierce the veil Instrumentality test - the shareholder exercise excessive control over the corporation to which he is managing or affects the direction of the corp. The Corp. is not separate from the shareholder because of the control. Alter ego test - whether there is such unity of ownership and interest that the separate existence of the corp. cannot be established. Identify test- corp. does not have an identity test where the corp. does not have a separate address, phone number, logo, etc. 1. Factors court will look at in deciding whether to pierce the corp. veil The Shareholder should be liable for corp. debt b/c it was undercapitalized or shareholder had too much control. (The may choose to be obliged to the debt by contract). Must satisfy more than 1 of these (If undercapitalization, then do not need another one) a. Shareholder failed to maintain adequate record or failed to have corp. formality Not have regular board meetings, no separate address, not comply with all the required records of a corp., and not when there are any board members. Usually the small mom and pops do this, but need another factor to accomplish the PCV

Business Org outline b. Whether they commingled funds or used corp. as instrumentality/alter ego of shareholder Did shareholder use corp. accounts as if it was a personal account? Must use accounts in a way to tell that a separate entity is involved. c. Whether the corp. was sufficiently capitalized to begin with (undercapitalization) i. Whether they gave stocks to someone without getting cash consideration & getting sweat equity in return ii. Whether the capitalization of corp. is small in relationship to the risk of the business Capitalization is measured at the time of corp. formation or when it goes into new venture/activity d. Whether one corp./shareholders treats the assets of another corp./shareholders as its own. Usually with a corp. and subsidiary. A subsidiary is when corp. A owns a large amount of stock of corp. B. 2. Reverse piercing When shareholders try to pierce their own corp. veil. The shareholders try to piece their own corporate veil to show that there is a corp. existence and did all the things wrong so that the corp. existence and the shareholders wanted the money. Corp real prop being foreclosed on, if corp., can close, if individual, not. The shareholders pierce the veil to show that corp. never existed to keep the property. They are also resp. for the debt as well as assets. 3. Equitable subordination If shareholders are also creditors, their claims are subordinated to other creditors who are non-shareholders. The shareholders loan money to the Corp. and should not be paid back as debtors, but as shareholders. Shareholder/creditor get paid last in bankruptcy along with common stockholders Courts look at same elements as piercing corp veil to decide on the subordination issue B. Ultra Vires. When corp. acted beyond its purpose(conduct) or power(method) The management powers must promote the business and the issue comes up when the shareholders tell the Corp. not to do some kind of business because the corp has been only doing one particular thing forever. giving too much charitable donation may be beyond its power because its irrelevant to promoting your business MBCA-Corp has the power to conduct all lawful business currently, u can only bring suit against corp. for acting beyond its powers b/c corp. is formed for any legal purpose Common law on corp. giving charitable donations Corp management cannot disburse any corp. funds for philanthropic or public cause unless it benefits corp. MBCA Corp may make donations for public welfare, charitable/scientific/educational purpose if it furthers the corp.s business and is good for the shareholders

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Business Org outline Corp can give bonus/pension to past officers if it was stated in the AIC that they have the power to do so Corporate Waste. When the cop. gives big corporate bonus to the BOD to the point that it is extravagant and puts the corp. at a disadvantage. Retirement packages

III. Corp management

A. Board of directors & officers role in corp. 1. Board of directors Under MBCA, corp. power are exercised under the authority of the board of directors Directors have the power to manage the corp. only as a group and are an agent of the Corp. when they act together. 1 director cant bind the corp. Once elected, the BOD becomes fiduciaries to the corp. & its shareholders. They act in the best interest of the Corp., even to the disapproval of the shareholders. Generally, board action is taken at meeting of Board of Directors under MBCA Cannot delegate management duties (decisions), but they can delegate ministerial duties (administrative). When meeting is called, majority vote of the directors can bind the corp. as long as quorum is present at the meeting. Quorum-min # of directors that must be present at the meeting before any vote on an action can be taken Majority of its directors & their vote will bind the corp. (MBCA) Quorum must be present before each vote is taken Actions can be voted without a meeting if there is written consent by the entire quorum Bust a Quorum MBCA 8.24(d) A director who is at the meeting of the Quorum will have assented to the action taken unless: Objects at the beginning of the meeting (or at arrival) to holding business OR his dissent or abstention is entered into the minutes of the meeting OR delivers written notice of his dissent or abstention. 2. Officers True agents of corp. & general principles of agency applies to officers 3 ways an agent can bind the corp. a) Expressed/actual authority-corp. expressly states that officer has particular power in the by laws b) Implied authority-corp. implicitly gives an agent certain expressed authority by virtue of the corp. conduct or the persons position. The officer can do all acts necessary to accomplish the expressed authority. True officer or honorary title? Assumption that a certain position can do certain things

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Business Org outline c) Apparent authority- office or Corp. manifests to 3rd parties that the person has certain authority to act. Could be by title (president can sign contract) or by course of dealing. As a sale manager, he can bind the corp. as his position as a sales manager as long as it is within the scope of his work. If the reliance is reasonable, then the corp. is bound by the officers actions and must indemnify him Only law firm partners can sign service of process. A receptionist accepts service of process by mistake and if corp. doesnt act to correct the wrong, then receptionist has apparent authority to receive service of process B. Fiduciary duties of directors 1. Duty of care Negligence standard when managing the Corp. Director must be informed about Corp activity Perform general monitoring (attend meetings, financial affairs, keep themselves informed) Whether they violated duty of care, its measured by BUSINESS JUDGMENT RULE If director made decision on well-informed info, in good faith as a reasonable person would do, his decision will not be second guessed & BUSINESS JUDGMENT RULE applies as long as he exercised his duty of care in the process of coming to that decision a. Business judgment rule- )Only a defense for duty of care.) If the director relies on reasonable information and did some due diligence, the fact that his decision was bad, will not matter. This is a judicial review standard and the court will not second guess business decision by director(MBCA 8.3) Only protects mistakes in your decision for mergers, acquisitions, etc. Only a defense for violation of your duty of care Doesnt apply for negligence in the process used, decision that had no business purpose, self dealing, corp waste, nonfeasance, ultra vires i. Malfeasance - accused of doing something that violates duty of care ii. Nonfeasance - director failed to do something when they should have acted Usually occurs when directors are honorary & just follow with the program The shareholder must prove that the breaching of the fiduciary duty was that the director was reasonably informed at the time he made the decision and the documents he had. Director can rely on 3rd parties as long as reliance is not unwarranted. 2. Duty of good faith Exercise duty in good faith with care that a reasonable person in like position would do under similar circumstances Interwoven into duty of care & duty of loyalty Reasonable person standard is measured differently for insider(higher) & outsider(lower) & person with particular skills (directors with law degree compared with reasonable lawyer) 3. Duty of loyalty Requires that directors and officers act in the best interest of the corp. Disinterested directors and the interested directors: Interested directors have an interest in the outcome and duty of loyalty. Disinterested directors will be judged by the duty of care and the business judgment rule. Whether or not director has conflict of interest or self dealing or fraud is the main issue and there must be a breach due to the conflict of interest or the self dealing or fraud. When D/O takes a benefit that should otherwise go to corp.
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Business Org outline A director contracts unfairly with his own corp. and receives a benefit that is not shared with the other shareholders of the corp. Officer or director sells personal property to the corp. or buys property from the corp. Officer/Director contracts with another corp. where he has an interest in the other Corp. Parent corp. contracts with its subsidiary corp. because the parent corp. has share of subsidiary company. Interlocking directors and officers: Two corp. contract with each other and have similar directors and officers in both sides. Globe v. Utica: If there is an interlocking director in a transaction, he must disclose all the information for the board to make a decision. Court uses INTRINSIC ENTIRE FAIRNESS RULE, & fairness of the ultimate decision of the transaction The court will look into the fairness of the approval process of how the decision was made and will look at if the substance of the decision was fair. Must find the conflict and be sure of it before starting the analysis. Common law approach-need both full disclosure & approval Statutory approach-as long as the process was fair to the corp., no need for full disclosure or shareholder approval 1) Was the decision/approval process fair to the corp./shareholders? a)Full disclosure of all pertinent facts and what the conflict of interest is. b)Approved by disinterested directors/shareholders (who do not have the conflict and there must be a quorum) If the shareholders are required to vote, the shareholders have to know as well. Mergers, sales of substantially all assets, tender offers, etc. Disinterested votes count and no interested votes count. Burden on to show that there was no full disclosure and was not approved by disinterested D/O. 2) Was the substance of the decision fair to the corp./shareholders? a) What was the value of what was received compared to the market value? b) What was the need for the property? c) Could the corp. finance the transaction? Burden on to prove the value, need and finance. a. States have approval statutes or Conflict of interest statute. 8.61(b) - Approval by majority of disinterested directors after full disclosure, the director is fine Or after full disclosure to the shareholders Or as long as it was fair to the corp., it will be ok as measured by the market value. If the director complies with the statute, the burden in on the director to show the disclosure. If the director complies with the statue as of disclosure and there is a vote by both the disinterested directors and interested shareholders, the director has met his burden of proof. If the transaction was claimed to not be fair, The plaintiff must show that the transaction is not fair to the corp. Majority approach.
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Business Org outline If the director comply with approval process, the court will limit it inquiry as to whether the process used complied with the business judgment rule. C. Doctrine of Corp opportunity 1. Duty of fiduciary to act with undivided loyalty to the corp. 2. Demand utmost good faith in his relations with the corp. that he represents 3. Corp officer/director is under a fiduciary obligation not to divert corp. business opportunity for his own personal gain Court analysis 1. Is it, in fact, a corp. opportunity and the court uses three tests a)Interest/expectancy test-focuses on circumstances Whether the corp. opportunity was needed Whether the corp. was expecting an opportunity. Did the Corp have an interest in the opportunity first and had previous negotiations. b) Line of business test-whether the opportunity was similar to that of the corp. The activity is one that the corp. already engages in and was in line with its business. Based on the facts Guft v.Loft: Loft could have purchased Pepsi for the corp., but Guft took the opportunity to take the formula for his self. c) Fairness test-looks at totality of circumstances.NOT NEEDED FOR THE EXAM -Whether or not its fair to the corp. if director takes the opportunity instead and should the corp. be protected. 2. Does the corp. want it or have the means to take it? -Both must be yes in order for director to have violated his duty of loyalty a)Whether the corp. wanted the opportunity or not If corp. negotiation fell thru because they didnt want it, then director was free to take it b)Whether the corp. had financial ability to take the opportunity D. Duty not to compete Officer/director has a duty not to compete with the corp or steal corp opportunity or solicit to their client or business E. Executive compensation Corp can pay any compensation that corp wishes to pay When compensation is more than for service, where it amounts to corp waste thru bonuses/gifts/consulting fees Corp cannot give its assets away b/c it interferes with shareholders profits

III. Corporate democracy A. Shareholders rights Shareholders are passive in nature & have no authority to run/manage corp although they are owners of the corp. Shareholders can force certain actions can sue corp 1. Power to amend/repeal by laws or adopt emergency by laws in the event of an emergency
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Business Org outline 2. 7.02Power to call a special meeting if 10% of the shareholder requests it. 3. 7.03 Power to request meeting through the courts. 4. 7.04 Power to vote on actions by unanimous consent in lieu of meeting 5. 7.20 Power to inspect corp. books/records and the power to have a list of all shareholders. 6. 7.21 have the power to vote and each share is one vote on each matter 7. 7.22 Power to vote by proxy 8. 7.28 Power to elect directors by plurality or cumulative vote 9. 7.30/7.31/7.32 Power to create voting trust/shareholders agreement 10. 7.40 48. Power to initiate derivative suits 11. 8.08/8.10 Power to remove directors/fill board vacancies, however no power to remove an officer 12. 10.03 Power to amend articles of incorporation & bylaws 13. 11.04 Power to approve merger, 12.02 sale of substantial assets, 13.02 appraisal rights They can sue directly for violation of these rights Exercised through their principle right to vote B. Voting Generally done through majority of quorum and for any shareholder action to valid there must be a plurality vote at the Quorum. Quorum-majority of all shares outstanding (not shareholders) & entitled to vote. The bylaws will state what a majority is and if not in by laws, then it will be the majority of shares. Generally, shares are entitle to 1 vote for each matters to be voted on and there must be at least one class of voting stock present (common stock) When shareholders quorum is met, its deemed to be met for the entire meeting even if some leave during the meeting unlike quorum of directors Once a quorum is met, its always met throughout the meeting 1. Straight voting scheme 1 vote per share, minority are at disadvantage 100 shares=100 votes per matter. If have 100 share outstanding. Three matters are going to be voted on. One vote for each share on every matter. Then get 100 votes for each matter, or a total of 300 votes. If A has 60 and B has 40. Then A will win every time and B would always lose 2. Cumulative voting scheme-shareholders can cumulate all their votes & vote however they want 300 shares=300 shares per matter or split it up Requirement for cumulative voting Articles must provide for this voting & is not automatic Must give notice of intent to vote cumulatively prior to meeting Allows some representation on Board of Directors WILL NOT TEST ON THE FORMULAS! 3. Other voting rights of shareholders Weighted voting: One class has more voting power than the other Class Voting: Each class has different voting rights

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Business Org outline Contingent Voting: Class is given a right to vote on certain matters only. Contingent on the matter C. When and How Shareholders Vote. 1. Annual meeting general meeting once a year for the purpose of electing directors or other general matters No prior notice is required for what to be voted on but notice must be given 10 days before the meeting and no more than 60 before. When the controlling shareholder put the members of the BOD together, look for a conflict of interest problem. 2. Special meeting Given notice to shareholders when some big decision needs to be voted on and notice must be given 10 days before the meeting. Can be called by the board of directors, OR shareholders who have more than 10% of the shares. For Shareholders, a purpose has to be stated and that purpose has to be voted on Only thing can be voted on is what is stated on the notice (ie. merger) Anything that is not annual meeting is a special meeting (ie. court ordered meeting) 3. Written Consent: Shareholders can vote in lieu of a meeting with a written consent vote must be unanimous by a majority of the quorum 3. MBCA 7.28 default ruleunless otherwise is stated, directors are elected by a plurality (a majority of the quorum votes in favor of the transaction) of the votes cast by shareholders and shareholder do not have the right to cumulate their votes for BOD. 4. Record owners purchased shares & registered with the corp. and have all the rights The shareholder that gets the notice is the shareholder that gets the vote. Corp is only required to deal with record owners Shares entitled vote are shares that are registered with the corp. on a record date (arbitrary date) Record date-must be a record owner on the date the corp. has set If no record date, the date the notice is sent out for a meeting is the record date 5. Beneficial owners purchased shares from record owners but havent registered with the corp 6. Shareholders inspection rights Shareholders has a right to inspect books/records & obtain shareholders list As long as they have a purpose, they can inspect and have the burden to show the purpose. To be able to communicate with other shareholders to challenge management or enter into proxy fight 7.Proxy contest Proxy-person who is authorized by the record shareholder to vote record holder shares at any meeting. The authority given by the record shareholder is called the appointment form and the grant is called the appointment.
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Business Org outline Creates an agency relationship, therefore all agency rules apply to proxy Agent owes fiduciary duties to the principle(record shareholder) to vote how the record shareholder wants to vote Under MBCA, proxy is only valid for 11 months Revocable at any time if coupled with interest by expressly or by implication. If a later proxy is given, the earlier on is revoked. If the shareholder shows up with the intent to vote, then the proxy would be revoked. Proxies that are coupled with interest are irrevocable ie. Proxy given in exchange for a loan(their shares), property given to corp. Proxies that are not coupled with interest are revocable ie. Paying fee for proxy service which is incidental to some other benefit Anyone can solicit proxy appointments from shareholders including management, other shareholders, or outside 3rd parties Management usually solicits proxy Proxy fights-managers & other shareholders solicit proxy and usually happens in a merger. As long as the contest involves a conflict over policy and not merely a personal power contest, the Corp. may pay for managements reasonable expenses in educating the stockholders as to the correctness of the managements view. If the managers are successful, then they will be reimbursed if the shareholders approve it. Rosenfeild

IV. Closely held Corporations Owners want to keep shares close very few shareholders usually limited to friends/family What defines a closely held corp.? a)whether there is an active market for the shares Even if you wanted to sell your shares, there is no one who is willing to buy it. Restrictions on transfers of shares by Corp. right of first refusal, when a holder can sell their shares, may be subject to buy and sell agreement. Right of first refusal - another person has the right to buy the shares first if there is a bona fide offer at the amount of that offer Right of first offer - If the person offers, and a person does not buy it, then the next person has to buy the shares at the same price or more. b)whether there is an exit strategy If you cant sell shares without other shareholder approval Buy/sell agreement, right of first refusal, restrictions. Majority shareholders hold a fiduciary duty (Faith, loyalty) to minority shareholders and cannot make self dealing deals. If the Corp. repurchases shares from one stockholder, it must offer to repurchase from other holders on the same basis. Minority shareholders have the right to dissolve the company in certain situations. This usually happens when there is a deadlock in voting, management, etc. They can force the dissolution as it is the only way to get out the company. A. S Corp.-considered closely held corp. Generally, shareholders are also officers/directors More close to partnership than corp.
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Business Org outline may owe a duty to everybody in the corp. Shareholders agreements and trust agreements 1. MBCA two or more shareholders can eliminate all forms of corp. formalities (eliminate the BOD or restrict its power) if there is a valid shareholders agreement Shareholders have a right to vote at all times Must be signed by all shareholders Normally happens in closely held corporation but applies to all corp Can show up as provisions in by laws or as separate written documents signed by all shareholders It can last indefinitely. There must be some mechanism that employs when shareholders fail to agree on a matter ie. if matters cannot be agreed, the majority wins there must be some resolution to failed agreements It can also say that a 3rd party will be given the tie braking vote (1 non-economic) share Actions of shareholder is generally binding on the shareholders by contract law but not on other parties such as creditors Apparent authority Can get specific performance of the vote 2. Voting trust 7.30 Small group of shareholders agreeing to vote their shares a certain way What constitutes a shareholders voting trust? 1. There must be a complete separation of voting rights from other rights of ownership of shares 2. Trustee has the ability to vote the way they choose and can be 3rd party The trustee has absolute discretion to vote the shares as he or she sees fit. If the beneficial owner can direct the trustee in any way in dealing with votes, it is not a complete separation. The trustee has a fiduciary duty and a duty of care to do his due diligence to make sure he hold the beneficiary in his best interest. 3. Must be in writing & recorded at the corp. The endorse certificate is sent to the Corp. to be recorded on the books and the trustee is the record owner. Record owner has voting right and a beneficial owner has the right to receive the profits of the stock. 4. Limited in duration-MBCA limits it to 10 yrs 3. Proper purpose doctrine Shareholders agreement or voting trust cannot be founded on fraud or illegality To exclude minority shareholders = improper To maintain control = proper 4. Classified Stock or weighted voting Classified stock the Corp. sets up two or more classes of stock, and then gives the classes differing voting powers or financial rights.
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B.

Business Org outline A minority share holder may be given voting rights equal to those of the majority even though he does not have equal financial rights. Two equal shareholders may give a third person (even on who has no real ownership interest, a vote to break a time between them. C. Fiduciary duties owed by controlling shareholders in closely held corp. MBCA-at least a 10% shareholder/ De jure control - own at least 51% De facto control - own less than 51% but your percentage allows you to have control. This is the controlling interest. The Controlling shareholder may have on 25%, but that is the most of anyone else who owns shares (all others own 24% or less). 1. Same fiduciary duty like partners in a partnership A parent Corp. that sets a Subsidiary dividend policy does not constitute self-dealing Self dealing does occurs when the parent, by virtue of its domination of the entire BOD of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary. The burden is then on the Parent to show affirmatively that the transaction was fair to the subsidiary. 2. Good faith & loyalty if the Corp. has an unusual business opportunity that is not completely taking advantage of (ability to raise prices, obtain interest free loans, or otherwise prosper), this opportunity may not be appropriated by the controlling shareholder in the form of a premium for the sale of control. A majority shareholder, particularly when they also are the president and chairman of the board, who sells his shares to a third party who then obtains a controlling interest, owes the minority shareholder their share of the premium paid by the third party for the controlling interest. 3. Equal opportunity & access = fair dealing Intrinsic fairness test. 1) Controlling shareholder owes a fiduciary duty to minority shareholders as in partnerships whose dealings with the Corp. must prove that good faith of the transaction and its inherent fairness from the viewpoint of the Corp. and those interested therein. There must be disclosure to the minority shareholders before any action can be taken to benefit the majority shareholders and the majority must control the Corp. in a fair, just and equitable manner. The benefit must be to all shareholders proportionately. 2) Was there self dealing? Yes - controlling shareholder must prove that it was done in detriment to minority No - business judgment rule applies D. Shareholders restricting the preview of the BOD in a closely held Corp Stockholders may not, by agreeing among themselves, place limitations on the power of directors to manage the business of the Corp. by the selection of agents at defined salaries and the board must be left free to exercise its own business judgment.

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Business Org outline However, an agreement that restricts the discretion of the BOD will be valid if all the shareholders signed the agreement and there was no sign that anyone would be injured by the contract AND the impairment of the boards powers is negligible. MODERN VIEW: A shareholder agreement that substantially curtails the discretion of the BOD will nonetheless be upheld if it does not injure any minority shareholder does not injure creditors or the public AND does not violate any express statutory provision

IV. Federal securities law

1933: Applies to the first or initial sale of a company's securities. Unless it meets an exemption under the securities act, the company must prepare a registration statement and it must be filed with the SEC. It has to have full disclosure of the risks and benefits. It also must have a perspective which is smaller version of the registration and goes to any potential shareholders. Prohibits any material misstatement or omission of a material fact, either oral or written, regarding the purchase or sale of those securities. 1934 Prevent fraud of selling and purchasing securities. Prohibits any material misstatement or omission of a material fact, either oral or written, regarding the purchase or sale of those securities in any area and any person and any security. A. 10(b)5 securities fraud claim Covers securities fraud and insider trading. Securities fraud is when the is a complaining shareholder and the security does not need to a publicly traded security. It can be involved with any security. There was some king of misrepresentation or an omission by the (also applies to 14(a) proxy) 1. Facts must be material Material fact-if there exists substantial likelihood that reasonable shareholder would consider the information important in deciding to purchase/sell security. Statement has to be a martial fact or to omit to state a material fact necessary. An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to sell or purchase their securities. A plaintiff must show a substantial likelihood that, under all the circumstances, the omitted fact, if known, would have assumed actual significance in the deliberations of the reasonable shareholder There must be substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Merger negotiations-court looks at case by cases, no bright line rule. Misleading statements during merger discussions will be material under Rule 10b-5 if the misstatements would have changed the view of the total information by a reasonable investor.
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Business Org outline 2. You have to have standing-in connection with element You must be a person who actually purchased/sold shares, not hold onto the shares. You must purchase/sell based on misstated fact/omission not to sell their shares because the corp. or its insiders made an unduly optimistic representation or failed to disclose negative material. You must have a right to purchase/sell your shares. The P are members of an indentified be group that have a contractual right to purchase and sale. ie. option purchase to buy/sell 3. Scienter (state of mine) - Mere negligence is not enough perpetrator had knowing conduct or an intent to omit/misstate: deceive, manipulate, defraud Knowing falsehood - clearly misstates a material fact knowing that the statement is false, and with the intent that the listener rely on the misstatement Absence of belief - if the representation is made without any belief as to whether it is true or not, False statement of knowledge - if stated that he knew a fact to be true, when in fact the knows that he does not really know whether the fact is true or not. Recklessness - A person makes a misstatement with total disregard whether it is true or false has acted recklessly. The has ignored a danger that is so obvious that any reasonable man would have known it, he has acted recklessly. 4. Deception misstated info/omission must have purpose to deceive or manipulate As long as there was no omission or misstatement in the information given by to , there was no fraud and no breach of duties. If shareholder approval is needed and they were not given full disclosure of the transaction, there may have been a deception If shareholder approval is not needed, there still may be a deception if the disinterested directors were not given full disclosure and had full disclosure been made, the disinterested directors might have rejected the offer. Use a device or scheme to freeze out shareholders. if the is a member of a minority class whose votes were not necessary for the proposed transaction to go through, the may not recover no matter how material or how intentional the deception in the proxy statement was, because the deception did not cause the transaction to go through. 5. Loss causation P must establish some sort of link between Ds misstatement/omission & Ps loss If the can prove that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction. P must prove that but for Ds acts, P would not have suffered a loss & that misstatement/omission was a substantial factor in producing Ps loss 6. Reliance causation-P entered into transaction as a result of the Ds misstatement/omission a)Reliance on misstatement P must prove that he heard/saw the misstatement & that it played a significant part in his decision for the transaction Not necessary that P actually relied, he could have relied on someone who relied on it Reliance must be reasonable
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Business Org outline ie. broker reads article, then broker advises , then rely on broker b)Reliance on omission courts generally assume reliance if a reasonable investor would have considered the info important if the fact have been disclose c)Reliance on projection Must be cautionary language & projection must have been made in good faith Safe Harbor Rule protects corp from liability & burden is on D to prove that the projection was prepared with a reasonable basis & was disclosed in good faith d)Fraud on the market theory Only applies to publically traded shares if fraud affects the market price, reliance is presumed Just b/c you put precautionary language, doesnt mean you are protected from the theory B. Insider trading - Primarily involves whether there is a duty to disclose certain info or not 1. Common law Applied to classic insiders, directors/officers since they are fiduciaries of the corp. When a promisee asks a direct question of a promisor, it could amount to bad faith if the promisor withholds information that could change the promisees position. Duty does not extend to private dealings with stockholders. A purchaser of stock on the market does not owe a fiduciary duty to a seller to disclose the information that the purchaser may know, even when the purchaser is in a position that provides insider information. Directors/officers may take advantage of inside info when trading in open market Exceptions: actual fraud/misrep, face to face transaction with shareholders with material non-public info 2. Rule 10b5-provides exceptions to the common law rule Applies to any person when you deal with insider trading & you owe some fiduciary to the P that was breached. Fiduciary relationship creates the duty to speak and if the fail to speak, then violate the duty. Inside information is a corporate asset, and that an insider profits by trading upon that information has violated his fiduciary duty to the corporation and must turn over to the corp. any profits he has made. Available in face to face & open market transactions. No person can omit a material fact in connection with the purchase and sell of any security. Must prove all elements from previous section #1~#6 Info must be non-public at the time Once info is public, you are free to trade It becomes public when its disclosed in a manner that ensures availability to the investing public, widely disseminated & reasonable time to act on it Look at: timing of disclosure, where is it published, how is it published, timing of your trading Failure to disclose must violate one of the fiduciary duties Duty of loyalty-P must prove that officer violated duty of loyalty by self-dealing
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Business Org outline 3. Constructive insider One who, because of their relationship with corp., is afforded access to nonpublic info. There has to be a relationship of trust and confidence. ie. attorney, accountant, investment banker, financial consultant Employees of constructive insiders as people who owe a duty to the source 4. Misappropriator person commits fraud when he misappropriates confidential info & violates his duty to the source by some sort of agency relationship. Confidentially agreement does not necessarily create the trust of a special relationship. ie. employee of constructive insider 5. Tippee/Tipper arises when insider, classic or constructive, passes info to another person knowing that the other person would trade on the info For tippee to be liable, its necessary to determine whether the insider breached a fiduciary duty. A person is a tipee only if he receives information given to him in breach of the insiders fiduciary responsibility, he knows that, or should know that, the breach occurred, and the insider/tipper has received some benefit from the breach. Only liable to the extent that the person trades on the information. Whether the insider received a benefit as a result of the disclosure of the tip directly/indirectly Benefit can be broadly defined & does not have to be monetary (ie. closer friendship, family benefit) A tippee will not be liable if he acquired the information by totally by chance or if he ferrets out the information from his own due diligence. Tipper is liable whether or not tippee actually trades on that information - hard to prove Tippee is liable only if he trades on the info The tipper must receive some kind of benefit from disclosing the information. The benefit can be either direct or indirect and can be either pecuniary or reputation. Still have to violate a fiduciary duty. Absent some personal gain, there is no breach of a duty. There can be an intent to benefit the tipee The duty can be there when there is a gift given of the confidential information Spouses dont generally owe duty to each other unless there is an oral/written/implied agreement that they will keep such info confidential (wife knowing not to disclose what hubby says about his work) C. Device or Scheme the way the transaction was done. The sells his shares because of a device of scheme employed on him to induce him the sell. There can be no device or scheme if the follows the statute that was in place for the transaction. D. 16b of SEC-strict liability statute a) You are officer/director, or 10% shareholder. O & D are determined by their job responsibilities, not their title. b) Shares are publicly traded c) You sold/purchased shares w/in 6 months of each other. Dont need to have actually traded on inside information, it is strict liability. The must be a stockholder the first sold/purchase and at the second sold/purchase.
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Business Org outline Insider trading analysis If not 16b, then it is 10b5. Look for whose stock did the trade to determine if he was an insider or if he was an outsider. 1. Is the person an insider or an outsider? a)Insider 1)Officers, directors, 10% shareholders Not merely title but must have a duty of an officer/director A)16b - strict liability only applies to shares on the national securities exchange. 1. Purchase & sale/sale & purchase within 6 month of each other that corresponds to each other 2. Shares must be traded on a national exchange 3. If all above are met, there is a violation If not, follow 10b5 analysis B)10b5 - if strict liability does not apply 1. Is the info material and non-public? if no material information or if it was public, stop analysis & find no violation Was the stock related to the company that the insider works for. 2. Other elements -Intent/knowing conduct -Deception -Loss causation -Reliance -In connection with 3. If all above are met, there is a violation 2) People who have a special relationship where they are afforded access to corp. info Lawyers, accountants, financial advisors, follow 10b5 analysis b)Outsider 1)Misappropriator - someone who steals the info Did you violate duty to the source of the information? if yes, follow 10b5 analysis. Did the person who the misappropiator got the information from, did he have a duty to the corp. whos stock was traded on. Whenever a person agrees to maintain information in confidence (by agreement) The person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person is communicating the material nonpublic information expects that the recipient will maintain its confidentiality. The disclose or abstain rule and its application to trust and confidence. Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling. however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence existed with expect to the information, by establishing that he or she neither know nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential, because of the parties history, pattern, or
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Business Org outline practice of sharing and maintain confidences and because there was no agreement or understanding to maintain the confidentiality of the information. Tiper Liable for simply giving the information He also got some kind of benefit for the information 2)Tipee Did the original tip come from an insider? 1. Did the insider benefit from the disclosure of the info? broad definition of benefit 2. If the insider benefitted, regardless whether the tippee traded = 10b5 violation 3. Tipee is liable only if he trades & satisfies 10b5 elements Tipee defense: a)I planned it all along & did not act on the tip b)So many people knew it before me that its practically public info c)Traded after it was publicly announced

V. Merger & acquisition

1. Merger a)Horizontal merger-merger between 2 corp. that are in same line of business (ford-Mercedes) b)Vertical merger-merger between 2 corp. that have businesses that are somehow connected in some way (manufacturer-supplier) c)Conglomerate combination-merger between 2 corp that involve totally different type of businesses 2. Purchasing all assets Acquisition of assets: If the selling of an asset that was vital to the survival of the corp. and the selling of the asset was not in the ordinary course business and if the loss of the asset substantially affects the business or its purpose, then it is beyond the powers of the BOD alone and the shareholders have to approve the sell. 3. Tender offer corp. makes offer to shareholders of another corp. to purchase their shares to gain control of corp. A) Statutory/straight merger-statute tells you what you need to do to merge Most basic type of merger Develops a plan of merger that tell what will happen and what consideration will be given. Bd of Directors of both corp. (A&B) have to approve the plan of merger Bs liability becomes As liability (loans, debt, etc) Bs disappears completely Shareholders whose shares will be affected also have to approve the plan of merger (to the extent that they receive cash for their shares, or shares of new corp., or some other consideration are entitled to appraisal rights. Also look for duties that may be owed by the BOD to the shareholders. Duty of care vs Duty of Loyalty. a)Shareholders of B gets shares of A b)cash(freeze out or cash out) c)combination (of cash and shares)
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Business Org outline Shareholders have appraisal rights to allow court to decide what their shares are worth A B merges into A (survivor) (disappears)

B) Consolidation-A & B creates another corp., C and merges into that corporation. Look for a conflict and if a fiduciary duty was violated. Also look for full disclosure about the structure of the new corp., the value of the consideration. A&B C (disappears) (new corp formed) C assumes all obligation of A & B The BOD and shareholders of A & B have to approve the merger. A & B shareholders receive consideration from C a)Shares in C b)Cash(freeze out) c)Combination (of cash and shares) Shareholders whose shares will be affected must approve the plan of merger Shareholders have appraisal rights to seek appraisal of your shares even if the merger is approved Generally, you do a consolidation when both corp have significant identifies IBM + Microsoft = IBM Microsoft C) Straight triangular merger-A wants B but A doesnt want to assume some of Bs obligations A (Parent corp. A), creates subsidiary & owns 100% A sub B (subsidiary) (disappears) The BOD of A sub. and shareholders of B Corp. have to approve the merger. However, the shareholders of A do not need to approve the merger. A sub is created by A and the officers is the only shareholders. A is only liable for the investment into A sub. a)B shareholders can get shares in A Parent b)B shareholders can get shares in A sub. c)B shareholders can get cash d) can get a combination of all above. A shareholders dont get to vote on the merger b/c the merger is between subsidiary and B Bs liability doesnt follow to A b/c A sub. is only shareholders to A Assets of A is protected from Bs liabilities B shareholders have dissenters rights Usually when there is two separate businesses. D) Reverse triangular merger-A parent creates sub, A sub. shares are converted into Bs shares A (parent corp), creates subsidiary A sub B
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Business Org outline (subsidiary) (survives) (disappears) -If B had a lot of assets or rights (publishing rights, etc), B needs to survive in order to retain certain rights Shareholders and BOD of A sub and B have to vote. a)B can get shares in A b)B can get cash c) shareholders that do not vote may have appraisal rights. A sub shares converted to B shares and A Par. owns 100% of B. A sub ceases to exist and B shareholders get A shares, cash or combo of two.

E) Short form merger or Purchase of assets Statutory merger that allows any parent corp. who owns 90% or more shares of any sub to merge the two without any consent or approval from shareholders. The statute guides the merger. Still need approval of the BOD. This is used in appraisal rights as well. A (parent) A s1 or (sub 1) A s1 (sub 1) A s2 (sub 2)

(survives)

A (consideration) (assets)

B (disappears or survives)

-Bd must approve asset sale -Since shares are not effected in A, only B shareholders have a right to vote -Must constitute all or substantially all Quantitative-90% of assets amount to least of its assets Qualitative-10% of assets amount to most of its assets Analysis 1. Ordinary course of business test-doesnt require shareholder approval if its ordinary course of business a)Quantitative test-how much of its assets make up the corp b)Qualitative test- can the corp still survive without its assets. Was it out of the ordinary course of business and does it affect the character of the business. 2. Sale of all or substantially all-requires shareholder approval if you are selling less than 25%, it will not qualify as all of substantially all under Fed Statute

VI. Appraisals A. Appraisal statute adopted by every state to give dissenting shareholders a right to demand payment of the fair value of their shares Justification for appraisal remedy Allow corporations to combine with another and alter existing rights among shareholders w/o fear of serious constitutional challenge
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Business Org outline Provide safety valve to remedy dissenters unhappiness without interrupting the acquisition Monitor self-dealing by the board of directors Address conflict of interest problem on the part of the majority shareholder Intrinsic Fairness Test The transaction must be basically or intrinsically fair to the minority stockholders by showing that the price for the stock was fair, the use of fair procedures under which the Corp. BOD decided to approve the transaction, and adequate disclosure to the minority shareholders concerning the transaction. Also it would be a good idea for the BOD to appoint a special committee of disinterested directors to negotiate the transaction. Protect minority shareholders & afford them a way out in case of fundamental changes 1. MBCA 13.20 Notice must be given as to whether the shareholders do or do not have appraisal rights before the meeting and vote. 2. MBCA 13.21 If shareholder vote is required for fundamental change, shareholder must: 1. Give written notice of their intent to dissent prior to the vote 2. Refrain from voting in favor of the plan 3. Dissenting shareholder must follow procedure, see 13.21 thru 13.30 4. Make a written demand for payment of the fair value of their shares The notice of appraisal will let the shareholders what the corp thinks is the FMV of the shares. A shareholder not satisfied will ask for more such. If the corp does not pay the amount in 60 days, the shareholder can get the court to determine how much the shares are. B. Appraisal rights purely statutory rights by each state to allow stockholders a right to have their shares appraised Unless the statute provides that you have appraisal/dissenters rights in a particular type of transaction, you cant assert those rights must follow specific procedures such as timing, notice of intent to dissent, voting restrictions, type of transaction Del - appraisal rights only for merger but not sale of assets GA - follows MBCA 13.02 merger where corp is a party to the merger if your shares are unaffected after merger, u have no appraisal rights share exchange, merger of subsidiary, disposition of assets Some states - only have appraisal rights & no right to stop the transaction Some states - may have right to enjoin, stop transaction Some states - provides a way out for dissenting shareholders & allows them to become creditors 1. Challenging fairness of merger Do you have appraisal rights? Was the transaction fair? a) Did the board violate the duty of care?
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Business Org outline Business judgment rule applies only to duty of care ie. what method was used If board is on one side of transaction, business judgment may apply b/c they owe no duty of loyalty to the other corp.s stockholders b) Did the board violate the duty of loyalty? Approval process & the substance of the transaction is fair. ie. conflict of interest, self dealing, on both sides of transaction The burden in on to show that it was fair by the following listed. 1)Fairness of process a. There must be full disclosure of all conflict of interest & of the transaction to all shareholders b. Majority of Disinterested directors or shareholders must approve c. A majority of the minority of the shareholders approved the transaction. 2)Fairness of the substance has to show this. -Was the price fair? Value of what was received v. price on the open market

VII. Takeover/tender offer When there is one corp. trying to merge or takeover another corp, if they agree, then it is a nonhostile. If do not agree, then it is hostile and then the corp. goes after the shareholders by making tender offers for their stock. Once the bidding corp. gets control, the corp. puts its own Board in place. When the new board is placed, look for fiduciary duties and conflict of interest. There must be a violation of the conflict of interest with the fiduciary duties with the shareholders and look at the shareholder duties to other shareholders. If the target does nothing, then that is also non-hostile. If the target uses defensive measures, then it is a hostile. Look for the use of the poison pill, such as shareholders get option to buy shares in new corp. They also do lockouts by taking on liabilities and getting rid of assets. When the board does do these defensive tactics, have to look for conflict by the board to protect themselves and not protect the shareholders. The defensive tactics might cause the bidder to go away and the shareholders lose. Also look for a management buyout where the BOD goes to the SH to get the shares. Target -The bidder makes an offer directly to the shareholders to buy their shares. Bidder - the one who make an offer Shareholders - The ones who have influence over the target. Tender offer - The bidder offers to buy the shares at a premium over their value to get enough shares to get a control. Non-hostile takeover - when the target does not do anything to discourage the Defensive tactics - Things that the traget does to make itself less appealing Poison Pill - A shareholders rights agreement. The Target goes to shareholders and give the shareholders the right to buy stock in another corp. The bidder absorbs any obligations of the target. Lockup - Grants the right or option for a third party to purchase a substantial asset of the Target.
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Business Org outline White knight - A friendly person comes in and makes a courter tender offer. He is also considered a bidder and this can cause a bidding war. Hostile takeover - The management of the target does not want the merger to happen and will put in place defensive tactics. Breach - When the bidder takes it offer back. This is because there is a breach of loyalty and the BOD put the defensive devices in place to protect themselves and not the shareholders. The BOD could defend themselves by showing that what they did was part of the business judgment rule.

1. Non-hostile-u have approval of management for takeover 2. Hostile-management does not approve of takeover & recommends to shareholder not to agree to takeover a)Proxy fight-bidder solicits target shareholders to vote for their pick of directors b)Tender offer-bidder offers to purchase shares from shareholders Bidder will usually offer a huge premium over market price Does not require target companys board of directors to approve Directors will implement defensive tactic that will prevent takeover A. Bidder usually want 100% control satisfied with 51% to vote in their own directors they will try to acquire the rest of the shares 2 Step freeze out merger 1) Bidder tenders for enough shares to gain control over the corp (51%) a)Bidder announces that it plans to purchase 51% contingent upon getting 51% at premium price b)Bidder announces that it will only pay below market price for rest of the shares if they are successful at purchasing 51% to encourage shareholders to sell at premium price This forces shareholders to tender their shares early 2) Bidder will use its control to merge & pay all remaining shareholders with cash (49%) B. Target tries to prevent bidder from taking control 1) Stagger boards only certain # are allowed to be voted in a single year to prevent bidder from majority board control in a single year delays an immediate takeover Sometimes they amend articles of corp to place stagger board method into effect 2) Create 2 classes of stock a)Public stock-limited voting right bidder cant take control of voting b)Management stock-all voting rights management has control over voting 3) Grants an option to sell of significant portion of the corporation
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Business Org outline If tender offer is announced, target corp will agree to sell its assets to a 3rd party corporation this makes the corp look less attractive to bidder & will force bidder to try to convince the board of target company to sell to bidder rd 4) 3 party corporation(white knight) will make a counter offer to shareholders 5)Shareholder rights plan (aka poison pill) some triggering event(announcement of tender offer by the bidder) are granted certain rights to obtain securities at a substantial discount a)Flip in plan-getting securities in the target at discount (before merger) Will allow shareholders to purchase more shares of target that is redeemable at a higher price by the target b)Flip over plan-getting securities in the bidder at discount (after merger) If bidder purchases certain shares of target, target shareholders can purchase shares in bidder at a substantial discount that is not redeemable so that the bidder has to take on this liability after the merger c) For shareholders who want to tender their shares, they can allege violation of duty of care or loyalty by its board of directors for not acting in the best interest of its shareholders i) Duty of care-liable for neglecting their duties for misjudgment Burden of proof on P to show that D violated his duty of care Directors decisions protected by Business Judgment Rule ii) Duty of loyalty-applies when there is conflict of interest or self dealing Burden of proof on D to show that the entire transaction was fair There was full disclosure, vote by disinterested shareholder, substance was fair to the shareholder P argument Conflict of interest arises b/c directors are more worried about keeping their job D argument Defensive tactics are for the best interest of the corp & should apply Business Judgment Rule d) Tender offer is subject to certain disclosure & timing requirement by Fed Securities Law (Williams Act of 1968) whose securities are registered under Securities Act 13(d)-requires any person who acquires more than 5% of any stocks in total, including the shares you already have, to file a Schedule 13d w/ the SEC w/in 10 days Identity of purchaser, where the money came from, purpose for purchase, plans for target corp, any other arrangements with another person regarding target company shares 14(d)-requires any person who makes tender offer for more than 5% of stock to file a statement like 13d with SEC with all of its advertisement/invitation for tenders that SEC may require Bidder must disclose their information and its terms of the offer Shareholder has a right to withdraw tender offer while it still remains open Bidder has a right to accept on a pro rata basis (% from every shareholder) with equal terms for all shareholders until they reach their 51%
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Business Org outline Bidder must file its offering doc with SEC & hand deliver a copy to the target and competing bidders Target must send disclosures about recommendation, file a Schedule with SEC, & send the Schedule to the bidder 14(e)-prohibits material misstatement/omission, fraudulent, deceptive, manipulative acts in connection with tender offer Applies for all tenders, no matter how much percentage, including mini tender offers Applies to registered & unregistered Tender offer must be open for at least 20 business days If tender offer is not subject to 14(d), bidder is not required to send its offer to the target Target company must disclose their position to shareholders regarding the tender offer Protects investors who didnt receive certain info or misrepresented info Protects investors who tenders and from target company by preventing them from tendering with defensive tactics b/c it brings down price of tender offer

VIII. Derivative suits/indemnification A. Direct law suit when 1 or more shareholder sues the corp, alleging corp denied the shareholder some contractual right owed to the shareholder by the virtue of the shareholder being a shareholder Found in by laws, statute, caselaw form the rights that a shareholder has in a corp When these rights are denied, shareholder has a direct law suit claim 1.Rights as shareholders that can be enforced directly 1. Right to vote 2. Dividend 3. Right to prevent corp waste 4. Right to inspect corp books/records B. Derivative suit alleged harm must be to the corp & corp has the claim but doesnt pursue the claim shareholder can sue on behalf of the corp & any money recovered goes back into corp treasury Harm is perpetrated by those in control (director/officer) Violation of fiduciary duty of care or loyalty Mismanagement, violation of corp obligation, waste of corp funds 1. Requirements shareholder must meet for a derivative suit i. Contemporaneous & continuous ownership of their shares at the time of wrongdoing P must own the shares at the time of the wrong about which the shareholder is complaining P must remain a shareholder until the suit is resolved Merger or selling shares terminates the lawsuit b/c of standing problem If merger happens to freeze out the shareholders to eliminate the derivative suit, shareholder can have remedy with direct law suit Exception:
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Business Org outline a)Continuing wrong If wrongdoing is continuous such that it continues extends into your period of ownership, you can still bring derivative suit as long as they are still doing the wrong while you hold your share b)Double derivative actions Owner of shares of parent corp & wrong is done in a subsidiary, you can still maintain derivative action on behalf of the sub where u werent a shareholder c)Operation of law transfers You receive shares from someone else (inheritance, divorce, split of asset) by operation of law Person who owned it at some point had a right for derivative suit at the time gets transferred to you d)Undisclosed wrongs: not official but suggested by some cases If the wrong has been concealed at the time you had your shares, then you would have a claim once the wrong has been discovered ii. Facts alleged must be verified in a verified complaint Shareholder must verify or test in good faith that they have a valid and true complaint Must be personal knowledge iii. Shareholder must post some sort of bond If you lose or withdraw your claim, you have to pay the corp for having to litigate through bond iv. Demand rule- most important a) Shareholder must make a demand on the corp to address/remedy the wrong, including filing the lawsuit. The demand must not be futile meaning it is not worth the trouble because the BOD is going to deny that the BOD did anything wrong Once the demand has been made, what type of due diligence did BOD do to pursue the demand and investigate the claim before they made the decision not to sue. If they show due diligence, then BOD would be protected by the business judgment rule. Where shareholder does not give demand, the shareholder has the burden to show that the demand was futile. The premise of a shareholder claim of futility of demand is that a majority of the BOD either has a financial interest in the challenged transaction or lacks independence or otherwise failed to exercise due care Have to show that there is some kind of conflict of interest and the COI would have caused the demand to be tainted. The only relevant question is whether the directors acted in an informed manner and with due care, in good faith belief that their action was in the best interest of the corp. When lack of independence is charged, a plaintiff must show that the BOD is either dominated by an officer or director who is the proponent of the challenged transaction or that the Board is so under his influence that is discretion is sterilized.

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Business Org outline The effect of a demand is to place control of the derivative litigation in the hands of the BOD. Refusal of demand subjects the boards decision to judicial review according to the traditional BJR. SUMMARY: 1)Corp may reject the demand 2)Corp may accept the demand & handle it from there 3)Demand may be excused b/c of structural bias with directors/management/officers b) Court may decide whether to require demand or not depending on case by case basis C. Indemnification Most companies have D&O insurance (Directors & Officers) insurance for indemnifying them for cost of litigation expenses if they win the lawsuit Corp may or may not indemnify officer/directors if they lose the lawsuit usually found in indemnification provision of the by laws or state statutes 1. What was the wrong? 2. How culpable were they? 3. Good faith harms

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