Enterpries Org Outline

AGENCY
DETERMINING AGENCY
Creditor Liability for Acts of Debtor
PRINCIPAL LIABILITY
TO
PARTY
RD
5
IN
CONTRACT
Actual Authority
Apparent Authority
Express Apparent Authority
Implied Apparent Authority
Inherent Agency Power (catch all)
Ratification
Estoppel
AGENTS
10
LIABILITY TO
LIABILITY
OF
PRINCIPAL
RD
PARTIES
TO
RD
IN
CONTRACT
PARTIES
IN
TORT
10
11
Actual Agency
11
Servant vs. Independent Contractor
11
Service station cases
12
Franchises
13
Apparent Agency
14
FIDUCIARY OBLIGATIONS
OF
AGENTS
15
Use Principals assert during agency relationship
15
Stealing Principals business
16
After termination of Agency
16
PARTNERSHIP
18
DETERMINING
18
THE EXISTENCE OF A PARTNERSHIP
Formation
19
Partners vs. Lenders
20
Partnership by Estoppel
20
OF
PARTNERS
21
Taking an Opportunity
21
Grabbing and Leaving
23
Expulsion
24
PARTNERSHIP PROPERTY
25
Sales of property/ Transfers of rights
26
RIGHTS
26
OF
PARTNERS
IN
MANAGEMENT
Voting
27
PARTNERSHIP DISSOLUTION
29
Judicial Dissolution
29
Consequences of Dissolution
31
Wrongful Dissolution Continuation Option
32
Sharing losses
33
Buyout Agreements
34
LIMITED PARTNERSHIPS
35
LIMITED LIABILITY PARTNERSHIP
36
CORPORATIONS
37
KEY FEATURES
OF
CORPORATIONS
38
THE INCORPORATION PROCESS
39
LIABILITY
40
PIERCING
THE
CORPORATE VEIL (PCV)
41
Alter-Ego Liability
41
Enterprise Liability
43
CHALLENGING BUSINESS ACTS
44
Ultra Vires Acts
44
Business judgment rule
45
Waste of Corporate Assets
47
Derivative Actions
47
Procedural Requirements
48
Policy Rationale
48
Demand requirement
49
Special Litigation Committees
51
53
OF
DIRECTORS, MANAGERS, & OFFICERS
Duty of Care
53
Interaction of Duty of Care and Business Judgment Rule
55
Duty of Loyalty
56
Corporate Opportunity Doctrine
57
Obligation of Good Faith
58
Executive compensation
58
Director oversight
58
DEFENSE
OF
OF
DOMINANT SHAREHOLDERS
RATIFICATION
59
60
Board Ratification
60
Shareholder Ratification
61
INDEMNIFICATION, INSURANCE, ADVANCING FUNDS
63
Rules for Indemnification (DE)
63
These rules can be altered by the corporation
64
Advancement of funds
65
Rules for Insurance
65
CONTROL
65
IN
LARGE CORPORATIONS
PROXY FIGHTS
65
Proxy Voting
66
Private Right of Action if false or misleading
67
Control contests
69
Reimbursement of Expenses
70
SHAREHOLDER PROPOSALS
71
Proxy access proposals
72
Grounds for exclusion 14a-8
73
Failure to meet procedural requirements(s)
73
Failure to satisfy substantive requirement(s) a/k/a Question 9
73
Board refuses to act
75
Bylaw Amendments
75
SHAREHOLDER INSPECTION RIGHTS
76
Inspection of Book and Records per DGCL 220
76
What is a Proper Purpose?
77
SHAREHOLDER VOTING
78
Stock can only have voting rights
78
Delaware Default Rules for Voting
79
Possible Modifications
80
CONTROL
81
IN
CLOSELY HELD CORPORATIONS
SHAREHOLDER AGREEMENTS
OF
82
SHAREHOLDERS
Remedy for breach
84
88
MASS.: NO
RIGHT TO CONTINUED EMPLOYMENT UNLESS REASONABLY EXPECT CONTINUED

EMPLOYMENT
88
Involuntary Dissolution / Forced Buy-outs
89
RESTRICTIONS
92
ON
TRANSFERRING CONTROLLING BLOC
Duties of Shareholders Selling Control Bloc
92
Exceptions That Require Sharing the Premium
93
Right of First Refusal and Take Along Provisions
93
LIMITED LIABILITY COMPANIES
95
FORMATION
95
PIERCING
THE
LLC VEIL
FIDUCIARY DUTIES
IN
97
LLCS
98
CORPORATE OPPORTUNITIES
98
DISASSOCIATION & DISSOLUTION
99
DISSOCIATION
99
WITHOUT
DISSOLUTION
DISSOLUTION
CONSEQUENCES
99
OF
DISSOLUTION
100
CORPORATE DEBT
101
DEBTORS SALE
102
OF
SUBSTANTIALLY ALL ASSETS
INCUR ADDITIONAL DEBT
103
DETAILED INDEX
105
AGENCY
Determining Agency
Agency is contractual: can be explicit or implicit

No need for compensation or formal agreement
Legal Definition (Rst 1)
Agency is a fiduciary relationship that results from the manifestation of consent by the
Principal to Agent that Agent shall act on Principals behalf and subject to Principals control
And, Agents consent to so act, either by words OR implied by conduct
Judged from objective reasonable person standard
Not what the parties actually thought, but what reasonable person would think given facts
Parties characterization is not always followed
Policy rationale
Law and economics: Owner of car is arguably the person best able to insure against these
kinds of losses, because principal owner may be the cheapest cost avoider.
Gorton v. Doty
- Teacher volunteered car to the coach to take the students to the football game. The
teacher and the coach were sued because on the way to the game there was an auto
accident. Was the coach an agent of the teacher?
o On her behalf because she wanted kids to go to game and could have driven.
o Subject to her control because she said only coach could drive
o Agents (coach) consent implied from fact he drove
- Prima Facie Assumption w/car lender driver cases: There is a prima facie presumption
that driver is agent of the owner.
o Note: Court says that the agent/principal relationship does not necessarily have to
involve some matter of business, but only that where one undertakes to transact some
business or manage some affair for another by authority and on account of the latter,
the relationship of principal and agent arises. P. 2. Also not crucial that there be a
contract, the agent promise to act in a certain way, or that compensation is involved.
o Policy rationale problem: Underlying the decision is that she did in fact have
insurance.
o The best advice may be to make sure that she has insurance, because it is very hard to
rebut the presumption
Perhaps the courts use agency law to create incentives for car owners to insure against these
kinds of accidents because she is owner of car and she can insure for instances when she and
other people drive the car.
Internalize the costs of doing business

Become liable if exercise de facto control over debtor
Creditor becomes a principal at that point at which it assumes de facto control over the
conduct of the debtor, regardless of the formal terms of the contract. Rst 14O
5
Gay Jenson Farms Co v. Cargill Inc. (1981) p.7

- Farmers sold grain to Warren (Grain Elevator) who sold almost all of its grain to Cargill
(Grain Dealer). Ps want to collect from Grain Dealer?
o Borrowing relationship:
Grain dealer keeps loaning funds to Grain elevator.
Dealer has the right of first refusal on the grain
Significant veto control over decisions and operations of business (debt, stock,
div)
o Defense: They are merely in a buyer/supplier or creditor/borrower relationship
- Apply the definition (Rest. 1)
o A manifestation of consent by Cargill that Warren act on Grain Dealers behalf by
procuring the grain for Grain Dealer as part of its ordinary operations
o Subject to Grain Dealers control by interfering in Warrens operations
o And Agent consents to so act, is implicit with agents actions
- Court says nine factors shows control
o Grain Dealers constant recommendations to Grain Elevator via telephone
o Right of first refusal on grain
90% of grain supplied to them. Doesnt always create agency (lack of
independence)
o Couldnt do significant financial outlays: (mort. Dividends, purchase stock).
o Right of entry onto Warrens premise to carry on periodic checks and audits.
o Correspondence and criticism about salaries and finances
o Cargills determination that Warren needed strong paternal guidance
o Drafts written under Grain Dealers name (suggests less independence)
o Financing of all of Warrens purchases of grain and operating expenses
o Cargills power to discontinue financing of Warrens operations
Principal Liability to 3rd Party in Contract

Authority is the starting point for analysis
Restatement 144: a Principal is subject to liability upon contracts made by an agent acting
within his authority
Actual Authority: express or implied
Apparent Authority: express or implied
Inherent Authority/Power: catch all category Rest. 161 and 195 / Watteau
Estoppel: Rst 8 changed position / Hoddeson
Ratification: Rst 82 / Botticello
Actual Authority
Express or implied to agent because incidental/reasonably necessary

Rst 7: Agents power to affect Principals legal relations by acts in accord with Principals
consent to Agent
Requires a manifestation of consent from the principal to the agent to do an act
- Express or Implied Consent (Restatement 26)

- Objective Reasonable Person Standard (Restatement 33:)
Express Actual Authority
P expressly manifests consent to A by spoken or written words (Restatement 7)
Implied Actual Authority

Its based on the agents understanding of his authority. Must be determined whether agen
Implied by context (e.g., custom, prior practice, course of dealing)
Incidental or usually accompany it reasonably necessary ((Restatement 35)
Mill Street Church v. Hogan
- Did Bill (the agent) have the authority to hire his brother Sam? Yes, had done so before
and church allowed & necessary to complete job.
- Dont need but would also be apparent authority and ratification (church paid wages)
Apparent Authority
Manifested explicitly or implied to third party because of position

Rst 8: Agents power to affect Ps legal relations by acts in accord with Principals
manifestations to Third Party
Requirements
Requires a Manifestation by Principal or an authorized agent to Third party, reasonably

interpreted by Third Party
- Objective Reasonable Person Standard. Rst 27
Policy rationale
Put burden on the principal instead of third parties
Cheapest cost Avoider?
- Cheaper and more effect for the P to inform the world that A has no authority than to
require each T who deals with A individually to inquire?
Control your employees rationale? Possible incentive to adopt effective internal controls
and clear hierarchy of authority? (e.g., Lind)
Principal/Authorized Agent expressly tells 3rd Party that the Agent has authority.
Special case: Principal is aware that there is a manifestation from someone claiming to be an
agent to the 3rd party
- If the P is aware of it, and keeps silent then P has made the manifestation to third party.
P cant become liable solely b/c someone says they are his agent (need his manifestation).

Implied to TP from position of Agent, reasonably, (e.g., manager) that agent has authority.
- Note: There must be some holding out
Three-Seventy Leasing v. Ampex Corp (1976)
- 370 wanted to lease computers from Ampex. 370 told Ampex that they wanted to deal
exclusively with Kays. Kays presented a sales agreement that 370 signed, but blank spot
7
for Ampexs signature. Ampex sent around internal memo confirming sale and Kays sent
370 a letter confirming delivery dates.
- Did Kays have apparent authority? Yes
o Kays was salesman and its customary for them to be able to enter into sales Ks
o Company knew 370 wanted to deal with Kays
o Ampex didnt notify that Kays had limited authority and Kays didnt tell 370
- Original K wasnt really a K because not signed by Ampex (just an offer to sell)
o But, court finds that letter confirming delivery was a promise to ship
Dont go here first because merely an equitable principal

- Catch all category that captures cases that doesnt fall into the other categories, but just
seems fair to hold P liable.
Very fuzzy standard, courts reluctant to apply it.
Distinction from Apparent authority
Does not have a reasonableness requirement, but courts may bring it in by implying such a
requirement. In some jurisdictions they merged this into the apparent authority doctrine.
Because Principal is undisclosed, there can be no implied apparent authority (because its not
traceable back to the principals manifestations).
- When the Principal is disclosed, apparent authority by position should generally yield the
same outcome as inherent agency power.
Restatement treatment
Rst 8A: Power of an agent [not based on] authority, apparent authority or estoppel, but
[only on] the agency relation and exists for protection of persons harmed by or dealing
with . . . agent.
Third party has not received any manifestation from the Principal,
- Third party might not even know the principal exists.
E.g. Acts of Manager appearing to be Owner
Rst 195: Undisclosed Principal is bound (even if she instructed A not to act so) if:
- Transaction is USUAL in such business;
- And, on the PRINCIPALS ACCOUNT
Rationale
Fairness: Necessary, otherwise Ps would hide behind agents and setup sham transactions
Cheapest cost avoider, Its cheaper for Principal to monitor his employees than to require
every third party that comes into contract to inquire/determine with the Agent is there a
principal.
Power v. Authority
Power: ability of Agent to change Principals legal situation by doing or not doing a given
act. (Rest 6).
- A may bind P even when A lacks any form of authority
Watteau v. Fenwick (1892)

Humble sold the Victoria Hotel to defendants, a firm of brewers, but remained as manager.
The beer license was taken out in Humbles name and his name was on the door. Humble
had no authority to buy any supplies except bottled ales and waters. However, Humble
bought (but did not pay for) cigars from plaintiff
Actual Authority?
- He was expressly told he did not have actual authority He could not have reasonably
believed he had such authority so no implied actual authority.
Actual Apparent Authority?
- No, the Principal never communicated to the Third Party, that he was an agent for
principal.
Implied Apparent Authority?
- No, because there was no holding out by the Principal that the Agent exists. Plaintiff
didnt even know that the principals existed.
Inherent Power
- [T]he principal is liable for all the acts which are within the authority usually confided
to an agent of that character, despite limitations on that authority (p.27)
- It does sound like apparent authority, in that he was hired as a manager so third parties
would look at him as having authority to do this type of activity. But, the TP didnt know
that the principal existed.
Ratification
Ratification: Affirmance by person of prior Act purportedly made on his behalf but without
authority thereby giving the Act effect as if originally authorized by him.
Affirmation: My agent didnt have right but now that she did.Im happy and agree to be
bound
Rules
May be express or implied from circumstances

Original act must have purportedly been made on Ps behalf
- So, merely accepting benefits if not on Ps behalf is insufficient - Botticello
And, P must know or have reason to know all material facts of the specific transaction
Receipt of benefits is not alone sufficient unless other elements already present
Until ratification occurs, unilateral right so TP can avoid the K but P cannot
Botticello v. Stefanovicz (1979)
H/W owned farm as TIC. H entered into K to lease with option to buy. s refused to honor
option K. Argue wasnt binding because W wasnt in the K and didnt ratify it.
Held: She wasnt bound.
- Marriage alone isnt enough
- She knew tenant paid rent & improved the property but H had authority to lease his
undivided half and thats consistent.
She received benefit, but before that can be a ratification, the other requisites must be
present.
- Here, H didnt purport to enter the K on her behalf so the proceeds alone dont make her
a party.
9
Problems
Problem 1: W is a writer, H enters into K for her next book to publisher. Publisher sends
check to W who spends it.
- Publisher wins. She accepted benefits and appears to have been a party to the K.
Problem 2: Same, but she argues she thought was royalty from previous book.
- Depends, she has to know, or should have known, material factsso if shes persuasive.
Problem 4: P is investor who opened account at brokerage and told him to invest only in
bonds. He bought high-risk stock, she realized after next monthly statement but decided to
wait and see. The stock went down dramatically. She closed account and demanded he pay
the losses.
- Did she ratify it? Yes, she knew and decided to accept the benefits (by prolonging). She
got all of the details in her statement.
Problem 5: P owns a mansion. A enters sales K for mansion with T without authorization.
Mansion burns down. Then P ratifies. T says too late.
- Not effectivewont be effective where will harm the rights of the third party.
- Its unilateralif T changed his mind before burned down, he can avoid but P is bound.
Estoppel
Equitable doctrine to protect third parties
Rst 8B: A person who is not otherwise liable . . . is nevertheless subject to liability to persons
who have changed their positions because of their belief that the transaction was entered
into by or for him, if:
- He intentionally or carelessly caused such belief
- Or, Knowing of such belief and that others might change their positions because of it, he
did not take reasonable steps to notify them of the facts.
Rules
Hoddeson v. Koos Bros (1957)
She goes into the store and finds furniture she likes and she goes to someone she thinks is the
manager and he says give me the money and well ship it to you. Later, they claim it was an
imposter in the store and they have no record.
Not apparent authority because hes not held out by store that he was an employee
- Could make argument that it was implied apparent authority if they saw him and did
nothing.
Court remands for her to prove estoppel grounds
- She changed position
- Acts or omissions of principal leading to her belief
o Did they take steps to make sure customer was protected from imposters?
- That her reliance was reasonable
Agents liability to 3rd Parties in Contract
Partially disclosed: Rst 4(2): Know A is or may be acting for P but dont know Ps identity
- If partially disclosed, Agent is party to K himself
10
Disclosed Principal
Generally no liability for agent (A merely a representative of P)

- Unless clear intent all parties be bound
- Or, Agent made K but without authority
Rationale: The third parties are aware they are not contracting directly with the agent so
principal liability makes senses.
Partially disclosed (know P exists but no who) or undisclosed principal
Agent treated as though a party to the contract

- To avoid, Agent must disclose acting as Agent and identity of P.
Rationale: Partially disclosed principals: W/o knowing the identity of principal 3rd party is
relying on the trustworthy of the agent. And in the case of undisclosed they have no idea.
BUT Default Rules can be circumvented by agreements.
Liability of Principal to 3rd Parties in Tort

General rule
Principal liable for servants torts w/scope employment

Vicarious Liability Centerpiece
- Principal is liable for the servants torts provided theyre in the scope of employment
Rest s 219(1) with some additional exceptions 219(2)
Analysis
Tort by alleged agent

Is there an agency relationship?
- Servant or contractor?
For servants, liable within scope of employment or has authority from master
- General nature, time/authorized, etc.
- Bushey v. U.S.
o Drunken sailor opens valves on dry dock scuttling ship. Contract had required dry
dock to let sailors go to ship.
o Purpose: Opening valves wasnt intended to benefit employer (US)
o But, it was a foreseeable risk so they hold employer liable
For contractor, only if:
- Retain control over aspect of work in which tort occurs
- Principal engages an incompetent contractor (cheapest cost avoider)
- Activity contracted for is a nuisance per se
o Inherently dangerous activity that creates a peculiar risk of harm to others unless
special precautions taken
o Distinguish ultra hazardous where strictly liable
Actual Agency
Generally, principal not liable for torts committed by independent contractors

Key is, do they control the means (time/place) or just the results?
Courts split on whether must control the instrumentality (Vandemark)
11
Look to:
- Who controls day-to-day operations
- Who bears financial risk or exercises financial control
Factors
Pivotal Issue is the Degree of Control of P over As work

P and A are in different occupations?
Type of occupation normally done by specialist without supervision
- More likely to be indep contractor. E.g. plumbers
Degree of skill required?
- When skill is required, more likely to be indep contractor
Length of employment
- Shorter period tends to be indep contractor, shorter more discrete.
- Longer duration looks more like employment relation
P is a business entity of which As work is a regular part of business
- Tends to show employee-employer relationship
Parties intent
- Not dispositive by itself.
Is pay by time or by job?
- Paid by job is discrete task, by time looks more like employer, employee relationship
Weird hybrid cases because of structure of industry

- They do business under oil company name, sell oil companys products, and oil company
want to ensure quality/customer service.
Policy
Fairness: They should be made whole.

Efficiency: Because gas company are in control, they are the cheapest cost avoider: By
imposing liability, we force them to internalize the social costs of doing business.
- But, some of these were most easily avoided by local owners
Appearance of responsibility
Humble Oil & Refining Co v. Martin
Held: Owner was just like a commission employee. Humble had all of the control
- Humble had lots of risk in bad times and unlimited upside in good
o Humble bore risk of non-sale of products because it retained title
o Humble paid large portion of operating costs
o Rents were adjusted based upon sales so in bad times, could have negative rents
- Strict financial control by Humble
- Little or no business discretion by station owner
- Unilateral right to terminate lease at will
- Humble controlled hours of operation
- Required owner to do basically anything Humble wanted
12
Hoover v. Sun Oil Co
Held: Not an agent

For agent relationship
- Sun owned station, equipment, most tools, and all advertising displays
- Lease could be terminated by either party with 30 days notice
- Wore Sunoco uniforms, Sunoco placed over owners name
- Attended training at Sunoco
- Weekly inspections
Against or neutral
- Owner could sell competitors products
- Rental partially determined by sales but with min/max rate
- Under no obligation to follow advice from regional rep
- Owner assumed all risk of profit/loss
- Owner determined own hours
Franchises
Defined (R. Rosenberg)
A system for the selective distribution of goods and/or services under a brand name through
outlets owned by independent businessmen, called franchisees
Franchisee gets the profit and bears risk of loss, pays fee to franchiser
The contract regulates franchisees activities.
- Franchisee fee is often based on local revenues
- Extensive contract (regulatory rules) that govern with rules: question is if this creates so
much control that theyre liable for the torts of the franchisee
Compare FTC Definition
A commercial relationship with the following three elements:

- The franchise distributes goods . . . or services identified by the franchisers trademark or
other commercial symbol.
- The franchiser exerts or has authority to exert significant control over franchisees
method of operation
- To operate, franchisee is required to make a payment to franchiser.
Advantages of Franchisee Agreements
Franchisee
- Ready made things: training, advice how to run business,
- Advertising
- Relative autonomy over day to day operation of business
Franchisor
- Bare less financial risk as they would if operated within the firm (need less capital)
- Greater diversification if they can operate across markets.
Customers
- Standardization: can rely on constant quality of service and product
Risk
- Liable if exert too much control
13
Murphy v. Holiday Inn
Plaintiff is staying at a hotel that is a Holiday Inn, although Betsy-Len Corporation may
have a sign saying they are just a franchisee. Hotel guest slips and falls injuring herself.
The factors outlined look like standard franchise relationship: these are to maintain
consistency in quality and maintain goodwill
- But do NOT give control over day to day operations: daily maintenance of premise,
current business expenditures, fix customer rates, or demand a share of the profits, hire
employees, etc.
- Disclaimer clause: Licensee in the use of the name . . shall identify Licensee as being
the owner and operator and the parties hereto are completely separate
entities(although we know this not dispositive)
Outcome: Not sufficient control to create master servant relationship: System not adequate.
Why not bring it under apparent agency instead of master servant?
- Some court may say there is sufficient factual basis to have apparent agency
Vandemark v. McDonalds
Employee of McDonalds franchise was injured when the restaurant was robbed. The
employee sued McDonalds, claiming the franchisee was an agent of the franchisor.
Court makes a narrow construction and looks at the particular area of where the harm was
done, and did McDonalds have a say in that particular area of business.
- Since McDonalds exercised no control over security of operations, not liable even
though had control over other elements.
This is the more modern approach, look to the specific instrumentality causing the harm.
Apparent Agency
ONLY APPLIES IN TORT
Even if not actual agent, or franchisor doesnt maintain sufficient control, can still be liable
under apparent agency theory.
A non-master principal can be liable as a master if she created reasonable appearance of
being master:
- We cannot assume that customer will understand that Franchisor is not the Master.
Elements
An apparent agency exists if:

- Representation of principal
o By action or inaction: Usually present because using franchisors trademarks, etc.
o TP must reasonably believe that the franchisee is the franchisors agent or dealing
with franchisor
o Proper notice can defeat this element if prominent enough
- Reasonable reliance on representation by TP
o Critical: This is where most of the action is
o Proper notice of independent ownership can defeat this element
- A change of position or damage to TP
14
Restatement
Rst 267: One who represents that another is his servant or other agent and thereby causes
a third person justifiably to rely upon the care or skill of such apparent agent is subject to
liability to the third person for harm caused by the lack of care or skill of the one appearing
to be a servant or other agent as if he were such.
Miller v. McDonalds
Person bites on thing in food and sues McDonalds.
Actual Agency relationship:
- There is no finding of an ACTUAL agency relationship, but the court says there could
be and then moves on to discuss whether or not apparent agency exists.
- Control test: would try to show McDonalds had control over hours, method of food
preparation, wages, moderating employees behavior
Apparent Agency:
- As far as a layperson is concerned you think youre dealing with McDonalds, although
corporate headquarters doesnt have sufficient control over that store.
- Analyzed under elements:
o 1. Purported Principal held out the other party as its agent
Signs and symbols of ownership: McDonald signs, uniforms and NOTHING
prominently to the contrary saying McDonald was not the owner.
Problem with sign indicating independent: if too prominent customers may be less
inclined to go there
o 2. 3rd party Justifiably relied on such holding out
McDonalds was trying to argue that she needed to prove that she new specifically
McDonald owned restaurant, and not in general that McDonald name brought her
there.
o 3. Harm is obvious
Fiduciary Obligations of Agents

Duty of Care
Rst 379: Duty to use standard care, std skill in the occupation and locale, and any special
skill you possess.
Reasonable care standard (like in torts)
Duty of Loyalty
Rst 387: Duty to act solely for benefit of principal in ALL transactions connected with the
agency
Agent is entitled to reasonable compensation but no other profits unless Principal knowingly
consents

Test: Sole cause vs. opportunity
Were the Ps assets the sole cause of the profit vs. merely gives an opportunity of profit PG
82.
- If Sole Cause: Disgorgement of Profit
- If merely opportunity: No disgorgement of Profit
15
Under Reading can Krier keep profits from his property casebook?
- Michigan is by no means sole cause of his creation: use of Michigans resources do not
predominate. Could argue he is just using the time and not acting in competition with
Michigan.
- Policy: We dont want so restrictive with the rules so that they will not develop their own
human capital
Disgorgement of profits.
Must disgorge profits if use Ps assets to obtain benefit

Rst 404: An agent who, in violation of duty to his principal, uses for his own purposes or
those of third person assets of the Ps business is subject to liability to the P for the value of
the use.
- If the use predominates in producing a profit he is subject to liability, at the principals
election, for such profit
Exception: Using time only and not in competition with principal
No disgorgement if use time only and not acting in competition

Rst 404: he is not, however, liable for profits made by him merely by the use of time
which he has contracted to devote to the P unless he violates his duty not to act adversely or
in competition to P.
- E.g. Trading securities at work during business hours of work
Reading v. Regem p.80
Evil doers used Military person to help smugglers get stuff through Cairo, because of his
uniform and position could avoid inspection and then received money.
- It was the position that gave him the ability to engage in that activity.
- Whatever value (profit) he derived goes to the Principal.
What if someone had never been in the army and bought the uniform?
- No, because there was never an agency relationship. Maybe criminal but no breach of
fiduciary duty.
Gulf war hero? Earns Medal of Honor and becomes public hero. One night goes to popular
restaurant in his uniform and reporters came and took his photo and the manger have him
$1,000 in cash when leaving. He then went several more timesgetting $10,000 in cash
total?
- No, because not getting money from the uniform (per se) but because of actions during
war.

Rash v. JVIC
Rash hired to start and manage division of industrial maintenance business. Rash started his
own scaffolding business but didnt tell JVIC. He then awarded contacts to his own business.
Eventually, JVIC started its own scaffolding business.
Held, breach of his fiduciary duties
Relevant rules:
- Duty to account for profits arising out of employment
- Duty not to act adversely to or compete with P, without Ps consent in matters relating to
subject matter of the agency
16
- Duty to disclose material info related to the Ps business; duty to disclose any potential
conflicts of interest
o This is a general duty to disclose what the principal should rightly know about things
affecting his interests.
Problem: If JVIC had never formed scaffolding business, would the result change?
- No, hed still be acting adversely because he was still awarding to himself.

Competition
Rst 396(a): Unless otherwise agreed, after the termination of the agency, the agent may
compete with the principal
Use of confidential information
Rst 396(b): has a duty t not to use or to disclose, in competition with the principal or to his
injury: trade secrets, written lists of names, or other similar confidential matters given to him
only for the principal's use or acquired by the agent in violation of duty.
- He may use general information concerning the method of business of the principal
and the names of the customers retained in his memory, if not acquired in violation of
his duty as agent;
Accounting for profits if misuse confidential information
Rst 396(c): has a duty to account for the profits, whether or not in competition with the
principal
Cleaning Service: Town & Country v. Newberry
Some employees left and took the cleaning list when they left. Successfully solicited former
customers.
Problem here isnt the cleaning method, its the list of customers which took a long time to
accumulate. These werent people that could be looked up in the phonebook. They
contacted hundreds of housewives to find ones that wanted cleaners.
So if they made $50,000 in profits for taking the customer lists: must give back profits, but
only to extent that the new customers are from old customer list.
Ok if the names and numbers in memory and not actual lists
- BUT if deliberatively tried to remember it, not okay.
Problem: Hairdresser leaves salon
Hairdresser leavers Salon. Can she take the customer lists gather carefully by salon owner?
- She can casually mention shes leaving, and they can say let me know where were going
and want to come with you. And thats okay.
Implicit Wages
- Professor thinks that you can actually reduce the profits you give back by the implicit
wages you would pay yourself but didnt.
Remedies under fiduciary breach vs. contract claim
No need prove actual damages in a fiduciary suit:

- Contract claim:
o Remedy: Must prove ACTUAL damages
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o No moral condemnation
- Breach of fiduciary duty:
o Remedy: Disgorgement (immediately gets back without proving loss of profits, less
evidentiary burden
o More, moral condemnation
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Partnership
Statutory body of law
o UPA (Uniform Partnership Act) (1914) {most states}
o RUPA (1997) {California}
UPA: Most rules are default rules that can be contracted around.
o Default rules: share profits equally and management equally
o BUT Power to bind partnership in contract cannot be waived.
o All partners are deemed agents of other partners.
This leads to fiduciary responsibilities.
What is a Partnership?
DEFINED A partnership is an association of two or more persons to carry on as co-owners

a business for profit. UPA 6(1) (PG32 Supplement)
General vs Limited
In general partnerships, all partners equal

In limited, have 1 or more limited partners
- General partners = manage and have unlimited liability
- Limited partner = No liability for partnership debts beyond investment in partnership
o Cannot partake in managementhave to be passive.
In LLP, all partners have limited liability
Partners Liability (UPA 15)
Joint liability for contract obligations of the partnership

Joint and several liability for all other obligations of the partnership (e.g., tort)
- Particularly true for torts, (were assuming general partnership, not limited)
- Liability NOT limited to capital investment in firm, can go after personal assets
Determining the existence of a partnership

Rules for determining existence of a partnership (UPA 7)
(1) Persons who are not partners as to each other are not partners as to third persons, except
as provided in 16.
(2) Joint tenancy or part ownership does not of itself establish a partnership.
(3) Sharing of gross returns does not of itself establish a partnership.
(4) Receipt by a person of a share of the profits of a business is prima facie evidence that he
is a partner in the business, but NO such INFERENCE shall be drawn if (see below)
Summary of Factors Relevant to Partnership Existence
(Taken from UPA 7): Right to share profits, but not if:
- A debt
- Wages to employee or rent to landlord
- Annuity to a widow or rep of deceased partner
- Interest on loan
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- Consideration for the sale of good-will/property of a business

Obligation to share loss
Joint ownership and control
Joint liability for partnership debts
Conduct toward third parties
Right to capital contribution upon dissolution
Formation
No formalities necessary to form a partnership
But, must comply with requirements of K lawso oral agreements acceptable unless statute
of frauds applies.
The parties must agree to be partners
Look at parties intent (p. 93)

UPA 6(1): There must be an association of two or more parties to act as co-owners of a
business
See also UPA s. 18(g)
A written agreement is evidential but not conclusive
UPA doesnt address; developed via case law

Facts showing intent may overcome the written contract (p. 94)
Fenwick v. Unemployment Comp. Commn p.91
Salon (Fenwick owner) enters agreement with receptionist where she gets % of profits
instead of wage. Call themselves partners in agreement. He does not want her to be an
employee, because he wouldnt get the unemployment tax exemption.
Issue: Is she an Employee vs. partner?
- All indications appear on a daily basis this is an employee
- Sharing profits alone, w/o sharing liabilities/mgmt right = not enough.
Suggests not partners
- Liability: Only Fenwick liable per their agreement
- Management Rights: All control and management w/ Fenwick.
- Initial Investment: She made NO investments into partnership.
o Could argue, that she invested her human capital. It is possible for one person to put
in capital and the other person to put in labor. So this alone is not dispositive
- Control Total lack of joint control over businesss day to day affairs (even though both
could terminate only Fenwick managed)
- Third Parties: Didnt hold themselves out as partners.
Strongest argument for partnerships existence?
o They are sharing profits (receipt of shared profits is evidence of partners as a
business, fact she gets 20% and he gets 80% of profits).
o But this looks more like a wage under UPA 7(4)(B)
Q3: How could you as a lawyer draft an agreement that appears to give control but leaves
Fenwick in control and is consistent with UPA 18(e)?
- He could agree he is the managing partner. Look at law firms.
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- Perhaps agree he had 80% of the vote and she has 20%, so practically he calls all shots.
Q4: How can Fenwicks lawyer make sure he gets his property back after dissolution,
assuming pship to beg. w.?
- 18(a): each partner will get their contributions back but agreement can also explicitly
provide for this.
- He could also simply RENT his property to the partnership, so always the owner.

Degree of Profit sharing/veto right okay if interest on loan & no day-to-day control
Martin v. Peyton p. 96
Investment partnership in financial trouble. It needs an infusion of cash. Three parties give
it marketable securities it could use as collateral for bankrupt.
- But in exchange these parties got veto over some of the speculative investments and
dividends of securities and had some investment rights, and inspection rights.
o They have NO DAY TO DAY decision power, and NO RIGHT TO BIND them in
contract.
- They have an option to buy 50% equity stake in the firm if they desire to do so,
o BUT not uncommon for creditors to have this option to take an equity stake in the
firm, as incentive for them to issue a loan in bad states.
Is Peyton (Freeman and Perkins) a lender(s) or partner(s)? See UPA 15 Lenders
- If creditors, they get paid first. If partners, other creditors go first. If partners, also
jointly and severally liable for torts/breaches and jointly for all other debts.
Why do these not make them de-facto partners?
- Profit share Entitled to receive 40% of profits up to $500,000 and floor of $100,000
o UPA 7(4)(d) Lets you rebut the presumption if it is interest on a loan even if it is
profit sharing. This is merely repayment on the loan of 40% of profits so a degree of
profit sharing is okay.
- They can force members of the firm to resign
o Okay, b/c Court saw it just as another protective mechanism for worried creditors
- Veto right why not?
o Directly related to what the firm got in trouble in the first place was speculative
investments on foreign securities.
Contrast with Cargo, when Cargo oversaw Warren was seen to be the principal in an agency
relationship.
- Professor: DAY to DAY control of the business is lacking, but rather their veto rights
here were limited to speculative investments and dividends
o Otherwise daily running of business left to partners.
o No pervasive control.
Rules
UPA 16(1):
- Representation to third party;
- Consent by alleged partner;
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- Reliance by third party; and

- Third party extends credit to the partnership on the faith of the representation
Hypo
What if H told Banks CEO that P was a partner, and based on Ps reputation, Bank lent
money?
- We would have to know if P consented to the representation.
Young v. Jones p.101
Plaintiffs put money in bank that loaned to another bank based on financial statement
prepared by Price Waterhouse-Bahamas. They attempt to sue Price Waterhouse-US alleging
they are partners.
- Brochures just said Price Waterhouse and said offices around the world.
If partners, the US partnership would be J&S liable for Bahamas screw up.
Court says not partners
- No showing that they relied on the brochure
- No evidence they lent money based upon representation
- Further, no act or statement of US partner indicating partnership with Bahamas
partnership.
Fiduciary Obligations of Partners

Default rule
UPA 21: Every partner must account to partnership for any benefit, and hold as trustee any
profits derived by him without consent from any transaction connected with partnership or
use by him of partnership property
RUPA 404
- Duty of Loyalty
o Must account to partnership, including the appropriation of a partnership opportunity
- Duty of Care
o Limited to refraining from engaging in grossly negligent or reckless conduct,
intentional misconduct, or a knowing violation of the law
- (e): Doesnt violate duty simply because partners conduct furthers his own interest
Limitations on modifying
Cannot restrict rights of third parties, e.g., cant limit their obligations to third parties
Cannot eliminate the duty of loyalty/care by contract
RUPA 103(b)
- (3) Duty of Loyalty
o Cannot eliminate Duty of Loyalty but ay identify specific activities that dont count
o All, or number specified, of partners may authorize or ratify otherwise violation after
full disclosure
- (4) Duty of Care
o Cannot unreasonably reduce the Duty of Care
Relevance of Partner Status
All have fiduciary obligations its just a matter of degree

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Managing fiduciaries generally held to stricter standards because have more information
- Control creates opportunity for abuse
- In the modern understanding, Meinhard may have been considered a limited partner
Rule
Opportunities are partnership property and cannot be taken without first disclosing to the
partnership and giving them an equal opportunity to compete. UPA 21; RUPA 404(b)(1)
Meinhard v. Salmon p. 105
Salmon formed a partnership with Meinhard to manage the Hotel Bristol. As 20 yr. lease on
building was expiring, Salmon negotiated to take the reversion (new lease) and develop a
new building. Meinhard sues.
- Parties had agreed Salmon managing partner and Meinhard who contribute capital.
Salmon get 60% of profits for 5 years, other partner get 40% and after that split evenly.
- Gary was trying to lease the land, and not necessarily Salmon or Meinhard, so he
approached Salmon and they came to the agreement.
o Meinhard was not given an opportunity to engage in the new lease.
Is this a violation of fiduciary obligation for partners?
- Held: breach of duty of the finest loyalty to coadventurer
- Sole Cause vs. Opportunity:
o Could try to argue this was merely an opportunity and not the sole cause
o BUT from the facts, they would not have come into contact if it were not for him
managing the partnership.
- Duty to Disclose
o He needed to at least inform the other of the opportunity.
o Cardozo suggests must have to do more, but not realistic: the thought of self was to
be renouncede.g. he should have invited Meinhard to join in
Under RUPA 404(e): Not a violation merely because done for partners benefit. (This gets
rid of Cardozos argument that must give up all sense of self.) But same result because:
- Under (b)(1), opportunity belonged to partnership
- Under (b)(2), acting adversely to partnership
- Under (b)(3), competing with the partnership
What if Salmon had seen Gerrys ad in the newspaper instead? Any obligation to notify
Meinhard?
- Connection with the partnership here is much more remote
o Mitigates argument violated the fiduciary obligation.
- Agreement: Would be relevant if there was something in the agreement for this situation.
- Equal Opportunity: Now could also say both parties had equal opportunity to learn of
this opportunity.
Sandvick v. LaCrosse
4 guys bought oil lease to sell. Lease paid for from business JV account and held in
partnerships name. Later, two bought top lease that came into effect when old lease expired.
Other 2 sued on basis of violation of fiduciary obligations.
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CoA concludes this is a Joint Venture (similar to partnership but more limited in scope and
duration)
- Meinhard could be seen as a Joint Venture under modern understanding
Conflict because once renewed, the two that will keep owning have a conflict with current
partners that want to sell the lease before it expires. (They are acting adversely to others.)
Hypos
Mark and Norma are lawyers and they practiced as partners for a few years. One day
someone comes and asks Mark to represent a wrongful death case, particularly because he
heard how good Mark was. Can Mark take the client for himself and break the partnership?
Client came based on reputation, but knowing it came to the partnership law office.
- Bare facts: Violate the fiduciary duty if he took the opportunity as his own.
o He must tell her of the opportunity. I expect this amount of money, and Im planning
on leaving and taking this client with me.
o Then shed turn to the partnership agreement: they would try to split the value of that
representation. Disclosure would force the parties to negotiate over the client
o If Mark had decided before she came in
Look to see what the agreement is, if it could be dissolved by any partner at will
of any partner at any time or if it was for a fixed number of years.
o If you decide to take an opportunity there is a common law duty to disclose.
Trading on the information for own benefit considered property of the firm, and
once theyve traded on the information they have duty to disclose
Suppose Peter approaches him in the sports club but knows hes a partner with Norma
- Norma: shed argue that still came because of the partnership
- She has equal right because it came to the partnership.
Suppose Peter approaches him in the sports club knowing he is a lawyer but does NOT know
he is a partner.
- Tough. If done strict like Meinhard would have a duty to disclose
- BUT arguably could take it and setup on his own, because it didnt approach him at the
firm or knowing he was a partner.
In Real Life Look at the pships agreement
- Planning structure the partnership agreement to anticipate such issues
- Compensation Eat what you killed (if tend to be more productive) as opposed to lock-step
- Removal Requirement

Rules for Analysis
Partners duty of loyalty (UPA 21, Meinhard, Singer)

- Duty of Loyalty (basically duty to faithfully serve principal) (Rst 387)
o Duty to act solely for benefit of principal in ALL transactions connected with the
agency
Agency rules RE using customer lists
- Agents duty not to use lists of customers and other confidential info in competition with
former principal Rest 2d Age. 396(b), Town and Country
o 396(b): Agent is entitled to use general information and any names of customers
retained in his memory (from efficiency point of view not good idea not to let them
24
take their skills with them, and not fair; so there are limitations on what they can do
after relationship terminates.)
- Agents liability to principal for personal use of principals assets for profit if such use is
predominant cause of such profits (Rest Ag. 404)
o But no duty not to compete after termination of agency relationship (Rest Ag.
396(a))
Permissible v. Impermissible Conduct
- Clearly okay: Locate office space, negotiate merger with another firm, contact clients
before leaving firm (after announcing departure), keep plans to leave confidential
(Meinhard), negotiate with fellow partners, remind clients of right to have counsel of own
choice, take desk files (personal notes/created yourself reviewing legal doctrines)
- Grey Area
o Contact clients before announcing departure
o Negotiate with associates
- Red Area NO
o Take client files: client files = Partnership property
o Deny plans when asked directly
UPA 20: Duty to render true and full information of all things affecting
partnership.
o Not inform clients of right to have counsel of own choice (i.e., stay with the firm).
Meehan v. Shaughnessy p.117
Partners leave law firm and take some associates and clients.
- People: Invited 3rd partner to join and 3 associates secretly
- Clients: Put together lists of clients theyd want to take.
o Created the list before they actually gave notice of leaving.
o Prepared letter, gave notice leaving to partners, then sent the letters out considerably
before identifying who they were planning on taking.
Agreement explicitly contemplated removal of clients: Departing partners could take pending
cases that came to the firm through their personal effort or connection, if paid a fair charge.
- 3 months notice requirement but law firm waived it.
Court finds breached fiduciary duties to the partnership by
- Unfairly acquiring consent from clients (no choice presented to clients)
o Wrong: Instead of saying were leaving and wed like you to go with us.
o Okay: Explicitly let them know have choice to stay with the firm.
- Maintaining secrecy about which clients they were taking / trying to take
o Violated UPA 20 (Duty to render information)
o Did not inform their old partners who they were contacting for a long time
o Denied they were leaving when asked
- Did not give their partners a meaningful opportunity to compete because of their failure
to disclose
But, it was ok for them to get an architect, sign a lease, etc.
Nor did talking about handling cases unfairly breach their duties because no evidence they
did so.
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Expulsion
Expelling a partner is not itself a violation of the other partners fiduciary duties
Freedom of Contract is respected: guillotine clause fine if in agreement
Lawlis v. Kightlinger & Gray p.125
Lawlis was a partner in law firm and became an alcoholic. Mgmt committee created
treatment plan that said no second chance but they gave him one anyhow. Then he proposed
his units of participation be increased and they expelled him by a 7-1 vote. Lawliss sued,
claiming expulsion was unlawful.
Breach of partnership agreement (Breach of Contract)
- When they told him they were going to hold a vote to expel him they took his files, this
was defacto expulsion
o Held: Not expulsion because they still paid him
Breach of fiduciary duty opportunism
- Executive committee had the right to expel them within the terms of contract (guillotine
clause)
- Because that was their agreement in K, court not holding them to the highest possible
fiduciary duties
o Good faith does not trump the terms of agreement.
W/o provision in K, what would he need to show for Breach of Fiduciary Duty?
- Not acting in good faith
o E.g. His productivity was greater than what was being paid for
Takeaway: Freedom to K extends to limiting fiduciary duties
- If silent default UPA/RUPA rules apply.
- Strict fiduciary duties can be waive-able
Partnership Property
UPA 25: A partner is co-owner with partners of partnership property

- Such that, every partner has right to possess for partnership purposes but no right to
possess for any other reason without others consent
- Right in property not assignable unless all partners assign their rights
- Cannot be attached by creditors unless a claim on the partnership
o But, court can charge the partners interest and appoint a receiver to receive profits
28
- Does not pass to heirs, etc.
What is partnership property?
CL & RUPA 203: Property acquired by partnership is partnership property and not property
of partners individually
204: Partnership property if:
- Acquired in name of partnership
- One or more partners and indicates in instrument acting in capacity as partner and
partnership name appears in transfer document
- Presumed if purchased with partnership assets, regardless of name or capacity
- (d) Otherwise, presumed separate property even if used for partnership purposes
o If not acquired in name of partner with indication acting in capacity as partner
26
Partnership capital
Can contribute capital, special experience, etc.

Capital account keeps a running total of equity ownership
- Allocation of profits increases capital account (as does capital contributions)
- Allocation of losses decreases capital account (as do draws, distributions)
Indemnification for personal payments
UPA 18(b): Partnership must indemnify every partner for any payments/personal liabilities
reasonably incurred by him in ordinary course of business or for preservation of business or
property
Legal claims are partnership property
Legal claims are property so if you sell interest, you also sell known/unknown legal claims
- Unless fraudulent concealed by other partners
Putnam v. Shoaf p. 132
- Sold 50% ownership interest to partners who assumed all liabilities. Later, discover
bookkeeper embezzled over the years. wanted to recover her 50% of judgment against
bookkeeper.
- Held: Not entitled because the partnership owned the inchoate claim (a chose in
action ) and Mrs. Putnam gave up her interest in the partnership.
- Principal: Partnership property (including legal claims) belongs to partnership, not the
individual partners
o Shes no longer a partner so no claim to partnership property.
o Exception: If fraud and the other partners knew and tricked her different outcome
UPA 24: Partner has rights to (1) specific partnership property, (2) his interest in the
partnership, and (3) his right to participate in management
Sales of interest/property require consent of all partners
Cannot sell membership without consent UPA 18(g)

Cannot sell part of partnership assets because only the partnership can sell. UPA 25
Removal of property contributed to partnership

Hypothetical: Partner wants to remove some of the equipment he contributed to the Salon
partnership. Can he?
- Doesnt matter that he contributed them, once contributed them he needs to seek the
others consent, or he can dissolve partnership in which case the rules for dissolving
partnership kick in
Assigning rights
Can assign rights to profits but not to specific property or management (unless consent by all
others) UPA 27
- Can sell cashflow but if sold management rights the buyer would defacto be a partner
Assigning interest in partnership does not result in dissolution. RUPA 503(a)(2)
- But note: Under RUPA 601(4), partners can expel member who transfers substantially
all of their interest
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Rights of Partners in Management

Rights
Right to full information about partnership affairs UPA 19, 20; RUPA 403
Right to be involved in management. UPA 18(e); RUPA 401(f)
Right to bind partnership to 3rd parties. UPA 18(b); RUPA 401(c)
Right to veto certain decisions. UPA 9(3)
- Assign property in trust for creditors
- Dispose of good-will
- Any other act that would make it impossible to carry on partnership
- Confess a judgment
- Submit a claim or liability to arbitration or reference
- Make any other person a partner (consent of all reqd). UPA 18(g); RUPA 401(i)
- Any act in contravention of any agreement between the partners. UPA 18(h)
Partners authority to bind partnership
Act within usual way of business binds partnership (unless no auth & TP aware)
- UPA 9(1): Every partner is an agent of the partnership and the act of every partner
apparently carrying on in the usual way of business binds the partnership, unless
o Lacks the authority
o And, 3rd party is aware
Otherwise, need authorization from other partners to bind
Nabisco v. Stroud
- Two partners run grocery store. One partner tells Nabisco will no longer be liable for
more bread. Other partner buys more, then partnership dissolves.
- Here, both partners had authority to order. The only way to remove his authority is if
they unanimously agreed. They didnt, so he could order more bread and bind the
partnership.
o One partner cannot unilaterally remove power from another partner.
- If he had ordered shoes instead of bread, partnership not bound because not the usual way
of business.
o 9(2): Act not apparently for carrying on business of the partnership in the usual way
does not bind the partnership unless authorized by other partners. (Unless Walmart
that sells both groceries and shoes)
- To effectuate, would have to dissolve partnership and notify suppliers to escape liability.
- Problem here is, they are stuck in a deadlock. Always avoid even numbers! Or provide
for a tiebreaker.
Voting
Majority vs Unanimous
In ordinary course of business = Majority

o 18(h): Any difference arising as to ordinary matters connect with the partnership
business may be decided by a majority of the partners.
Contradicting partnership agreement = Unanimous (unless agreement says otherwise, Sidley)
o E.g. Admitting a partner, or partners voting to increase their draw
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o 18(h): No act in contravention of any agreement between the partners may be done
rightfully without the consent of all partners
Allocation of votes
By default voting done by partners not by capital accounting. 18(h)

- But note: partnership agreement could say go by capital contributions
Deadlock situations
Need a majority to change ordinary course of business, so if Status Quo remains in effect if
deadlock situation.
- Note: Always design structure so this doesnt happen!
Summers v. Dooley p.142
- Summers and Dooley had equal stakes in trash collection partnership. Summers decided
that they needed a third man, but Dooley disagreed. Summers hired a third man
anyways, paid him himself and then tried to make the partnership reimburse him for it.
- Court says hiring someone else is NOT for benefit of the partnership. The default
position was that they did NOT hire anyone else.
- Default Rule: 18(h) Any differences arising as to ordinary matters connect with the
partnership may be decided by a majority of the partners; but no act in contravention of
any agreement between the partners may be done rightfully without the consent of all the
partners.
o This requires a majority vote, and Summers doesnt control a majority (UPA 18(h))
o It is manifestly unjust to permit recovery of an expense which was incurred
individually and not for the benefit of the partnership
- Who sought to change the status quo
o In previous case, status quo was transacting with Nabisco: in order to flip from norm
of buying to not buying he had to get a majority vote.
o In this case the status quo was that if they would hire help they would pay out of their
own pockets, and now trying to make partnership pay.
Without agreement of majority (in this case both) they cant change ordinary
business
- What if hired help was not paid at all and seeking claim against partnership?
o Then from perspective of employee he could make the case for apparent authority.
Problem ABC are partners in a grocery store. Charles has hired son. Can A and B fire son?
- If firing Don is an ordinary business decision that partners usually make collectively then
A and B can out vote C and fire
o Question is, is this part of the ordinary business? Then majority of partner vote.
o But of course if the partnership agreement said that only C can hire help then this
would control
Partnership Agreements can significantly deviate from default
Partnership agreement can specify different rules for voting (even getting rid of unanimity
requirement)
Sidley & Austin v. Day p.144
- After the merger of Sidley with Libman firm, Mr. Day was forced to share his
chairmanship of the DC office with a Liebman partner, so he quit. During merger, they
had promised no partner would be worse off.
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- Freedom of K.
o The partnership agreement said all the decisions would be made by the executive
committee, so he cant say later that excluding him is fiduciary breech because he
accepted those terms.
o Exceptions: amending partnership agreement, merger, etc., however is his vote was
not pivotal.
o If there was not the fact that a majority vote was all that was needed he may have had
a better argument (by default all partners would be needed to vote for it.) Even if
they had disclosed it, it vote would not make a different.
- Derogating from Default by Contract
o Sidley illustrates the extent to which courts allow partnership agreements to derogate
from statute:
Use of executive committee to make most firm policy decisions
Unequal voting and management rights
Use of majority approval for matters requiring unanimity per statute (e.g., merger,
admission of new partners, amendment of the partnership agreement.)
- Why give executive committee such power:
o When a firm grows very large, decision making becomes more complex, and you can
have collective actions problems, and deadlocks so by delegating it to a smaller
subset of partners you can mitigate the problems.
o These partners may have expertise that junior partners wouldnt have.
o They tend to be the people that make important clients happy.
Partnership Dissolution
Timeline
Dissolution The Winding up Period Final Termination

- Dissolution is the change in the [legal] relation of the partners caused by any partner
ceasing to be associated in the carrying on of the firms business. UPA 29
o Dissolution is not the same as going out of business
- Winding up: The process of shutting down post-dissolution (see, e.g., UPA 30, 27).
When can a partner dissolve the partnership?
Every partner has the power, but not necessarily the legal right to dissolve the partnership.
Rightful causes of dissolution. UPA 31
- By termination of a definite term or particular undertaking specified in K
- By the express will of any partner when no definite term or particular undertaking
- Express will of all partners when term (before or after expiration)
- Expulsion of any partner in accordance with agreement
- Any event makes unlawful to continue business or partnership
- Death of any partner
- Bankruptcy of partner
- Court Decree (Judicial dissolution)
May seek this if it gets not very nice and want judicial help dividing assets.
Or, not clear at will partnership and dont want to risk being held in breach
30
Grounds for judicial dissolution
UPA 32: On application by or for partner, court shall decree dissolution where a partner is:
- Declared a lunatic
- Becomes in any other way incapable of performing
- Guilty of conduct tending to prejudice carrying on of business
- Willful or continual breach of partnership agreement
o Or, otherwise conducts self in matters relating to partnership that not reasonably
practicable to carry on the business with him
E.g. deadlock. Owen
- Can only be carried on at a loss
o Unless bad partners fault and bad partner is seeking dissolution. Collins
- Other circumstances render dissolution equitable
Benefit of judicial dissolution
Court has wide discretion to create an equitable conclusion

- E.g. going beyond the K in the interest of fairness Owen
Prevents being accused of wrongfully terminating partnership, Even if appears to be at
will not always clear not implied term
What is the legal effect of the order for dissolution? What is the likely practical effect?
- Legal Effect:
o Break off the assets and sell them piecemeal
o But before the court does that the parties could come together and bargain.
- Practical Effect: Buy each other out: Either partner could buy the other partner out.
o It is kind of a deal-making measure.
Owen v. Cohen p.150

At Will Partnership is profitable but not getting along. One partner wants to have
gambling and the other doesnt. One partner doesnt want to do the non-managerial work
either. Deadlock on many important issues. Owen made a loan of $6,900 to the firm, which
they had agreed would be paid out of profits. Owen seeks judicial dissolution.
- D: that it is not reasonably practicable to carry on the business in partnership with him
- F: Other circumstances render a dissolution equitable.
Court has wide discretion to create an equitable conclusion:
- Since the one partner was the source of the hostility he should not be entitled to the
benefit of the original agreement and goes beyond contract in the interest of fairness:
awarding him back the loan, even though it said that it would only be paid out of profits.
Why does Owen sue for dissolution rather than simply declare dissolution?
- B/c relations are so bad; it may be very difficult to get money back.
- He might have been accused of wrongfully dissolving the partnership
o If he wrongfully dissolved, the other guy could keep carrying on the business
Collins v. Lewis p.153
50-50 partnership in cafeteria business. Collins is contributing money and Lewis is the
manager/businessman. Definite 30 year term. Startup costs greater than expected.
Collins seeks judicial dissolution because dissolving would clearly violate the agreement and
he would be subject to negative consequences. 38(2)
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Collins is trying to say the firm is unprofitable and the firm disagrees with that.
- Court refuses dissolution because itd be profitable if hed only give it more money.
o Basically saying he is the cause of the unprofitability of the firm. Costs can be
underestimated and he assumed that liability without limitations.
o Lewiss responsibility is to pay the agreed $30K a year, and he did so when you factor
in that he paid expenses that Collins wrongfully refused to pay.
Page v. Page p.158
Brothers partner in linen supply company. Both partners put in money to start. In past
businesses, they had repaid these loans with profits. Business was unprofitable but becoming
profitable. One brother alleges other wants dissolution in bad faith so he can take over the
business.
Lower court says for a term because to be paid out of profits and when such an agreement is
made, the partnership is for a term reasonably required to repay the loan.
- However, CoA reverses and finds At Will because you have to show explicitly intended
thisnot just hoped that loan would be paid back out of profits.
- Therefore, brother has power to dissolve but if found to have breached his fiduciary
duties and appropriate the new partnership, the dissolution would be wrongful.
In Lawlis, the court said it was good faith so long as they paid the excluded partner what he
was owed. Is this consistent?
- There court seemed to say he was paid FMV. If he hadnt, court would have likely found
a good faith violation.
If brother wanted to take over and run with new partner, what should he do?
- The facts dont support judicial dissolution.
- They cant agree on the value, so get an appraisal and try to bargain with brother.
What if he wants to liquidate and pickup the best clients?
- He can dissolve because at will partnership.
- But client list belongs to partnershiphe cant just takeitd be analogous to trade
secrets under agency principals.
o Hed have to get his brothers consent and negotiate payment to him.
Actions after dissolution
After dissolution, the partnership must be wound up, absent agreement among the partners to
carry on the business
Assuming that the business will not be continued, the winding up process generally
contemplates that the firms assets will be distributed to the partners.
- Authority of partners to act on behalf of partnership terminated except in connection with
winding up of partnership business. UPA 33; RUPA 804
Can continue by the acquisition of assets/business by some partners and continuation
Can continue per explicit provision in partnership agreement that the firm continues w/o
existing partner.
- Technically a new partnership
- Old creditors automatically become creditors of new partnership
- Departing partner:
o Entitled to accounting
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o Interest from date of dissolution in event of unreasonable failure to pay

o Remains liable on all firm obligation unless released by creditors. UPA 36
- New partners liable on old debt, but limited to partnership propertynot personally
liable beyond that.
Can continue following wrongful dissolution by non-breaching partners
Rules for distribution
UPA 40: When settling between partners, assets distributed (in order) to:
- Creditors other than partners
- Partners other than capital and profit (e.g. loans)
- Partner capital
- Profits
Choice between continuing business vs. liquidating is crucial
Asymmetric information problem

- Partners have more information about the value of the partnership than a third party
purchaser.
- Lemon car problem: buyers discount across the board.
- Firm sold piece meal is likely to be discounted.
Firm may be worth more as a going concern rather than be broken up.
Intangible characteristics: Goodwill that customers have toward it, partners expertise, etc.
Acquisition of assets/business by some partners is fine
Its fine after court orders dissolution for remaining partners to buyout other partner at a bid.
Prentiss v. Sheffel p.163
- Business can continue with a subset of partners. 3 member partnership and a shopping
center. 3 partners, Sheffel and Iger own 85% of the firm and another party isnt doing
well. Firm making losses and each required to contribute their part of their losses, and
the other partner didnt pay.
- Trial court finds: partnership was dissolved b/c they froze other partner out (b/c he is
no longer participating in the decision-making of the firm. It doesnt have a moralistic or
wrong tone.) Court orders dissolution.
- There is an auction and the two partners that want to carry on bid and win. Court says this
is fine.
o Structurally other partner wasnt precluded from participating. He benefited from the
fact they made the bid because otherwise the sale price would have been lower.

Early dissolution of a term partnership is a wrongful dissolution
Subjects the wrongful dissolver to damages for breach of the partnership agreement UPA
38(2)(a)(II)
Prevents her from participating in the winding up process. UPA 37
Remaining partners have absolute right to continue the business
UPA 38(2)(b): Partners not wrongfully causing dissolution have right to carry on
partnership for remainder of original term even if no agreement covering
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- May continue to use partnership property for this purpose

Wrongfully dissolving partners entitlement if continued
UPA 38: If the business is continued, the wrongfully dissolving partner is entitled to:
- The fair value of his or her share in the partnership, minus any damages caused by his or
her breach of the agreement and minus her share of the business goodwill; in cash or
secured by a bond
o Goodwill: Extent to which company is worth more than its net assets
- Wrongful partner released from any outstanding liabilities
Compare RUPA 701
- Wrongfully dissolving partner entitled to her share of assets value (the greater of
liquidation value or going concern value) minus damages
- Does NOT exclude goodwill from calculation of such partners interest
Pav Saver v. Vassco Corp p.164
P-ship for permanent term to manufacture paving machines using PSCs patents and Vassos
financing. P-ship agreement has liquidated damages clause should the p-ship terminate and
provides that the P-ships license to use PSCs trademarks and patents would go away upon
expiration. PSC wrongfully dissolves. Vasso wants to continue as permitted by UPA 38(2)
(b)
Liquidated Damages Clause
- Liquidated damages = 4 times gross royalties received by PSC in 1973, payable in 10
equal annual installments
o PV = $384,000 according to trial court
o Business valuation = $300,000 and PSCs interest = $165,000 (excludes goodwill b/c
wrongfully dissolved partnership)
Clause 3: IP to be returned to PAV-SAVER when the p-ship ends
- But court finds that Vasso couldnt carry on without the IP and the statute provides that
right, so the provision requiring the return of their IP is ineffective and Vasoo can keep
manufacturing with the trademark/patent.
- Further, no value assigned for IP because that is goodwill and the wrongful party doesnt
get value for this.
o Note: IP no longer considered goodwill. Accounting rules require reporting them
individually on the balance sheet.
o Also under RUPA 701, the wrongful partner does get goodwill so would have been
credited for value of patents.
Dissent: The UPA provides that parties can depart by agreement, and here the IP return
requirement is their agreement that neither party could continue the p-ship if it was
wrongfully dissolved.
Default rules vs Contract (which prevails)
- Regarding trademarks and patents
o Court says, its nearly impossible to continue the business without the trademarks, so
the court found to give them the right to continue the partnership, they had to ignore
the contracts.
o In order to continue with the business the contract should be ignored
- Regarding liquidated damages
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o Contract prevails on the liquidated damages, follow what was followed for in the
contracts.
Sharing losses
Default rule = losses follow allocation of profits
UPA 18(a). But, can be modified by agreement

40(d): "partners shall contribute . . .the amount necessary to satisfy the liabilities"
Exception (UPA only): Service partnerships
In service partnerships (where agreement says one partner contributes only labor), the
laboring partner does not share in losses by default.
- Explicitly rejected in RUPA 401 (comment)
Kovacik v. Reed (p. 179)
Capital contribution: Kovacik $10,000; Reed $0, labor. Profits: equally divided; no salaries.
10 months later--Kovacik dissolves on grounds partnership is losing money. They were silent
on matter of how to share losses and took no salary.
- Loss = $8,680 Remaining assets = $1,320
Court creates exception to default rule (share losses) because Reed only contributed services
to the partnership.
- Kovacik Rule: When one party contributes only labor no sharing of net losses by
default
o Rejected in RUPA 401
- Where one party contributes money and the other contributes services, in the event of a
loss each would lose his own capitalthe one his money and the other his labor.in
such a situation the parties have, by their agreement to share equally in profits,
agreed that the value of their contributionsthe money on one hand and the labor
on the otherwere likewise equal; it would follow that upon the loss . . . of both
money and labor, the parties have shared equally in the losses (p. 180)
What concerns might the capital-only partner have about the Kovacik rule?
- The service only partner would have NO downside on losses: so service only partner
would perhaps want to take on WAY more risk.
o Money partner is not running the business, the service partner is.
o Service Partner: Incentive to take on substantial excessively risky ventures, or
perhaps not work hard enough to save business if runs into trouble.
- If they know this going into venture: try to contractually impose greater risk sharing of
losses, and appropriate incentives for collective profit maximization for entire firm.
Buyout Agreements
Malpractice not to recommend
Lawyer who fails to recommend a buyout agreement for clients forming a partnership (or
LLC or close corporation) is committing malpractice
- Liquidity is a special problem in small businesses (because not traded publically)
Key negotiating points
Trigger Events
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- Death, disability, retirement, breach of partnership agreement, etc.

Obligation versus option to buy
- Liquidity important
o Who has obligation to buy departing partners: the firm? need outside investors?
Price
- Agreement
- Appraisal (Market Value, but theyll disagree about it, so how its done important)
- Book value (whats recorded in firms books)
- Formula (e.g., 3 times average earnings over last 3 years)
Method of payment
- Cash, installments, (time value of money) interest
Protection against debts of partnership
Procedure for offering either to buy or sell
- First mover sets price to buy or sell, first mover forces others to set price
Parties can contract buyout formula that is more/less than FMV
Business can be worth more than book value due to goodwill, etc.
G&S Investments v. Belman (p. 183)
Real estate partnership (Century Park) to run apartment complex. Buyout clause said it would
be trigged with death of a partner. Nordale died and G&S decided to apply the buyout clause
instead of seeking judicial dissolution per 38(2)(b)
This is a limited partnership, but the general partnership statute applies because Nordale was
a general partner.
- The Uniform Limited Partnership Act (ULPA) did not speak to the specific issue
presented. UPA 6 provides that it governs limited partnerships as well
Buyout formula in contract: Buyout price = Nordales capital account plus average of prior 3
years earnings
Nordales estate challenge the buyout clause: capital account is ambiguous
- Market vs. book value of capital account? Market Value > Book Value
o Book value: Historic Cost
o Mkt value: Fluctuates.
- Court: Capital Account refers to how treated in the partnership books, which under
GAAP is cost basis
o Absent fraud or duress, courts will enforce Buyout clauses even if for more/less than
FMV of business at time of death.
Limited Partnerships
General partnership liability
J&S for torts, breach of fiduciary duties. UPA 15

Jointly for all other debts/obligations of partnership
Corporate Liability Compared MBCA 6.22(b): a shareholder of a corporation is not
personally liable for the acts or debts of the corp except become personally liable by
reason of his owns acts or conduct.
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Formation
A partnership formed by two or more persons and having one or more general partners and
one or more limited partners
Requires filing documents required by statute, usually with the secretary of state.
Structure
Both persons and other business entities can serve as partners.

General Partner: runs the business, manages day to day affairs
- But note that general partner can be a corporation, e.g., private equity fund
o Shareholders behind that corporation are protected as in Pav-Saver.
Limited Partner: passive investor; may not partake in management
Liability in Limited Partnerships
General Partner = Full personal Liability

Limited Partner = No liability, unless take on the kind of control a general partner has.
If exercise too much control, limited partner will be treated like general partner
Holzman rule: A limited partner shall not become liable as a general partner UNLESS in
addition to the exercise of his rights and powers as a limited partner, he takes part in the
control of the business p197.
RULPA does it differently and extends liability only to extent TP reasonably believed GP:
- RULPA 303(a): Only limited partners who participate in control can be held liable
AND
- They can be held liable only to those who reasonable believe that they are general
partners
RULPA 303(b) Examples of conduct not deemed to constitute participation in control (safe
harbors):
- Just consulting and giving general advice
Holzman v. De Escamilla p.179
Farming business. 2 limited partners were supposed to be just investors and Escamilla was
supposed to be the general partner. 2 LPs had a lot of say as far as what crops were
planted and could veto the general partner. (In order to spend money had to get 2 of the 3
partners to sign off on it.)
Consequence: They became liable for partnership debts as if they were general partners
- Agency: Cargill & Warren: Creditor assumed liability as principal b/c creditor assumed
too much control and therefore became principal under agency law.
- Partnership: Can be liable as partner if takes too much control.
o With control comes potential liability
Would two LPs be liable to the creditor under RULPA in previous case?
- Question: Did the creditors believe / have reason to believe they were general as opposed
to limited partners.
o Third party creditor seeing them write out checks might give you reason to believe
general partners.
Writing checks could be consistent with passive investor
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o Limited partners replacing others. In actual case probably not enough to show
o Could argue that the creditors only hear consultation and advice but if they had
heard them calling the shots.
- What if general partner had said, Those guys are limited partners, but they think they
can give me orders and I dont have a choice to do what they say.
o Then creditors have NO reasonable basis to believe they are general partners.
o BUT perhaps go by control anyways, and ignore statute.
Limited Liability Partnership

True general partnership . . . but with limited liability
RULPA 306(c): An obligation of a partnership . . . is solely an obligation of the
partnership .. A partner is not personally liable solely by reason of being a partner.
State variations: Contract vs Tort
Many states restrict the liability limitation to tort actions. Contract Liability remains
unlimited.
Rules are state based, weve just been looking at general expressions of default rules: must
look at rules in your particular state
Formation
Formed by filing a statement of qualification with secretary of state

- Convert a general partnership to LLP by filing
- Conversion does NOT cause a dissolution; See RUPA 201(b)
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Corporations
The Universe of Corporations
Public (publically held)

- Characterized by a public secondary market where shares are listed for traded e.g., NYSE
Close (closely held)
- Characterized by absence of a secondary market for its stock
o May not be able to sell your shares without others consent
- Often relatively small # of shareholders who actively participate in management
- May display many partnerships characteristics
Limited Liability Partnership (LLP)
- General Partnership with limited liability; filing required
Limited Liability Company (LLC)
- Hybrid; flexible (but less so in some states); can be taxed a partnership (check the box)
Limited Partnership
- Limited liability for LPs if they do not participate in control; taxed as partnership; can use
corporation as general partner so no individual is personally liable.
S Corporation
- A corporation that elects to be taxed similarly to partnership (single tax, pass-through of
losses); limits on number and types of shareholders and capital structure.
Partnership / Corp comparison chart

Formation
Limited Liability
Free Transferability
Continuity
Centralized-Management
Cost
Default Rules
Client Perception
Flexibility
Tax
Partnership
Informal; UPA
No, but can bargain for it; use LLP;
buy insurance
No, but can agree to allow;
continuity agreement
At willunless agree on continuity;
Need an agreement
No. Each partner an agent; but can
use executive committee and limit
authority by agreement and notice.
Zero, but should hire lawyer
Extensive
Hard to understand; need to use
entity concepts; low prestige
Great
Single; losses can be used by
partners
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Corporation
Formalities required; Articles of incorp;
By-laws; Board of Directors; officers;
minutes; elections; filings.
Yes, but creditors may seek guarantees
Yes, but can restrict if appropriate; need
agreement
Indefinite, but can limit; need exit
agreement
Yes, but may want to modify to prevent
freeze-out.
Need lawyer; filing fees, etc.
More extensive
Easier to understand, but misleading; high
prestige
Not quite so great and awkward in some
instances
Double on distributed earnings; losses
only useable by corporation.
Key Features of Corporations

Legal personality
The corporation is an entity with separate legal existence from its owners
- Possesses (some) constitutional rights (e.g., corporation cant be forbidden from doing
business in a state, has some free speech rights)
- Separate taxpayer
Limited Liability
See e.g. MBCA 6.22(b)

- A shareholder of a corporation is not personally liable for the acts or debts of the
corporation except that he may become personally liable by reason of his own acts or
conduct. E.g. Piercing the Corp Veil (PCV)
Separation of Ownership and control
Exception: sometimes very large shareholders may exert significant influence

DGCL (Delaware Corporate law) 141(a) (Default Rule)
- The business and affairs . . . shall be managed by or under the direction of a board of
directors, except as may be otherwise provided in this chapter, or in its [cert of incorp]
Shareholders do elect the directors on an annual basis
Rule of thumb
- Boards ACT
- Shareholders REACT (at most)
Shareholders entitled to vote on: (default rules, could put something else in the charter)
- Election of directors DGCL 211
- Any amendments to the articles of incorporation (i.e. corporate charter found document)
and, generally speaking by-laws (DGCL 242, 109)
- Fundamental transactions (e.g., mergers DGCL 251) or selling major assets, or
acquisitions.
o Done to prevent abuse by self-dealing.
o Corporate officers might do empire building that doesnt make sense for owners.
- Odds and ends, such as approval of independent auditors in states adopting Model
Business Corporation Act (MBCA)
Liquidity
Mainly applies to public corps

Secondary trading markets (primary market is the IPO that happens once)
- E.g. NYSE and NASDAQ
Flexible capital structure
The permanent and long term contingent financial claims on the corporations assets and
future earnings issued pursuant to formal contractual instruments call securities
Many ways to package such claims e.g., stocks and bonds or bank loans.
Contingent Financial Claims: Debt v. Equity
Bonds and other debts securities typically consist of two distinct rights
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- 1. Entitled to receive a stream of payments in the form of interest over a period of years
- 2. At the end of the bonds prescribed term (i.e., at maturity) entitled to the return of the
principal
- Creditors: NOT owners
o They go before the stockholders in collecting but lack control rights
Equity securities (i.e., stock or shares)
- Represents the units into which the proprietary interests in the corporation are divided
- Residual claimants: equal right to participate in distribution of the firms earnings.
o In the event of liquidation, to share equally in the firms assets remaining after all
prior claims have been satisfied
- A limited right to participate in the corporate decision-making by electing directors and
voting on major corporate decisions.
Shareholders have two rights
Cash flow right (right to receive dividends, if not paying now get when it liquidates)
Control right (right to vote)
Can have these split: could own 30% of the equity but 80% of the vote
The Incorporation Process
Paul v. Virginia US 1869: A state may not exclude a foreign (another state; alien is another
country) corporation engaged in interstate commerce.
Delawares Preeminence
No Minimum capital requirements

- Vs. in Sudan need 500,000 to start one.
Need only one incorporator (a corporation may be the incorporator)
Favorable franchise tax in comparison to other states
Favorable tax rules for companies doing business outside of Delaware
- No corporation income tax
- No sales tax, personal property tax, or intangible property tax on corporations
- No taxation upon shares of stock held by non-residents
- No inheritance tax upon non-resident holders
Corporation can keep all of its books and records outside of Delaware and can have a
principal place of business/address outside of Delaware
Highly competent judiciary in company law and extensive case law.
In practice, most lawyers use an incorporation service to handle paperwork

- Service will also act as necessary registered agent
1. Draft Articles of Incorporation
- Mandatory terms: DGCL 102(a)
o E.g., naming the corporation, address of registered office, nature of business (i.e. any
lawful act or activity so as not to pigeon hole you and have to amend the articles),
number of authorized shares, preferences and rights for different classes of shares
o If imposing liability on shareholders or limiting director liability, need to be in
articles.
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- Optional terms DGCL 102(b)

o E.g., Delaware corporate code: default is majority voting, but they can mandate
supermajority for certain issues if they want.
o Limitations on duration of corporate existence
2. Incorporator files Articles with Secretary of State
3. Upon receipt of Articles and fees, youre incorporated pursuant to DGCL 106
Post-Incorporation Activities
Hold organizational meeting (DGCL 108)

- If necessary name directors (hold office until first annual meeting of shareholders)
- Adopt Bylaws (DGCL 107, 109); corporate governance document
- Appoint officers
Issue stock (DGCL 151)
Some contracts formed pre-incorporation (see, e.g., Southern-Gulf Co No 9 Inc. v. Camcraft,
Inc.)
Liability
Promoters and the Corporate Entity
corporation not formed when K entered into, but corporation still held to K.
Southern Gulf Marine Co. p.202 (Pre-incorporation contract) (Rod: didnt read this)
- Plaintiff Corporation had not been formed before contracts were entered into with it.
Defendant tried to get out of the contract with the corporate plaintiff. Defendants
true motive was that assets had appreciated.
- Both Defendant and Plaintiffs will be held to the contract
- What if corporation was never formed?
o They could still sue the promoter of the corporation under the understanding that hed
bring his best efforts to bring the corporation into existence.
- If Representing Ship Builder what terms to take into consideration corporation had not
been formed
o Explicit insurance that promoter would actually complete corporation and absent that,
that hed be individually liable.
Limited Liability of owners (except for PCV)
DGCL 102(b)(6): The stockholders of a corporation shall not be personally liable for the
payment of the corporations debts except that they may be liable for reason of their own
conduct or acts
- 1. Shall not be personally liable for losses greater than the amount invested in the firm
- 2. The corporations debts are a corollary of the corporations status as a separate legal
person
- 3. Except that they may be liable for reason of their own conduct or acts
o Encompasses piercing the corporate veil PCV
o Data shows courts more likely to pierce the corporate veil in contract, but it is quite
rare to do so.
Limited Liability Praises and Problems
Praises
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- Leads to more capitalization, people willing to invest.

- No need for shareholders to monitor the firm, etc.
Problems
- Externalities
o Might allow entrepreneurs to avoid some of the social cost of their activities b/c they
wont ultimately be held liable
Piercing the Corporate Veil (PCV)

Alter-Ego Liability
Recovery is against the shareholder of the corporation

Look at control at time the K/act was done. In re Silicon
Sea-Land test (individual as shareholder)
Unity of ownership and interest so that separate personalities of the corporation and
shareholder no longer exist. Sea-Land
- Failure to maintain records or observe corporate formalities
- Commingling personal and corporate assets
- Undercapitalization
- One corporation treating assets of another as its own
Not to do so would promote fraud or injustice
- Generally not looked to in tort cases
Subsidiaries (only when corporate shareholder)
Note: Just because parent liable for subsidiary as alter ego, does not mean that every other
subsidiary liable for actions of subsidiary. Sheffield
- There is no respondeat superior between subsidiaries.
When a corporation is so controlled as to be the alter ego or mere instrumentality of its
stockholder, the corporate form may be disregarded in the interest of justice
- Consistent with Sea-Land except no requirement of fraud in Delaware (maybe
subsumed into interests of fairness).
o Particularly in tort cases
o But, 2nd prong may be required in other jurisdictions
- For parent to be liable for subsidiary, totality of circumstances must show substantial
domination.
o Common officers/directors
o Consolidated financial statements/tax returns
o Parent finances subsidiary
o Parent incorporated subsidiary
o Parent pays salaries
o Only business comes from Parent
o Parent uses subsidiarys property as its own
o Daily operations not kept separate
Parent corporation vs. Individual distinction
If it is an individual shareholder: require Sea-Land: unjust, unfair etc.

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But for corporations, court drops the 2nd prong because it is a parent corporation owning a
subsidiary of any percentage
- In Delaware, you may need 2nd prong in other jurisdictions.
Justification: In case of individual you are going after their individual assets whereas owners
of the parent corporation are shielded.
Justification: Tort vs. Contract distinction
Is there a sound reason to treat them differently when deciding whether to PCV?
Contract Creditor: Easier to negotiate things up front, check firms creditworthiness.
Tort Interaction: You cant foresee it so dont require showing of fraud/injustice.
Note: Can insulate from PCV by having Limited Pship with Corp General partner
Limited Partnership Mr. X and Y are Limited Partners. Corporation is General partner.
- Mr. X and Mr. Y are directors and controlling shareholders and make all the decisions
(day to day control) for the corporate general partner.
- They run the day-to-day affairs, but if they have respected ALL corporate formalities
(holding minutes, no mingling funds, etc.) then the court will respect the distinction and
will not be held liable.
Frigidaire Sales Corporation vs. Union Properties Inc. p.211: When the shareholders of a
corporation, who are also the corporations officers and directors, conscientiously keep the
affairs of the corporation separate from their personal affairs, and no fraud or manifest
injustice is perpetrated upon third persons who deal with the corporation, the corporations
separate entity should be respected.
If X and Y were not limited partners, just officers and directors, Alter ego theory could try to
hold them liable.
- Control and Unity of interest with corporate general partner
If just limited partners: can be held liable because they controlled day to day affairs of the
partnership. (Standard control issue)
Sea-Land Services Inc. v. Pepper Source p.194

Contract claim. P is arguing all the corporations are alter-egos of D and one another. P won
summary judgment in lower court and D appealing here.
Why reversal of summary judgment of SL?
- Plaintiffs argument is if the veil was not pierced P couldnt collect on judgment.
- Court: If that were sufficient, then the test would collapse, because in any case it is unfair
if P doesnt win.
- There must be: unjust enrichment on the part of the D if the P were not compensated. So
an allegation that the D deliberatively used corporate structure to escape its creditors.
o Level of fraud burden of proof is lower: but need some element of fraudt intent.
Why is the failure to comply with corporate formalities relevant?
- With contract creditors they can inquire about a firms credit worthiness, much easier for
3rd party to investigate their credit worthiness with the books and records.
o Indicates a potential disregard for creditors interests: If you play fast and loose with
formalities, maybe we expect that you played fast and loose with your bills too
o We want to encourage a world where creditors can investigate buyers
creditworthiness
1st prong met
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- He didnt even have a personal bank account, always used corporate.

- Did not hold meetings.
- He doesnt even remember corporations creating bylaws.
- Ran all corporations out of single office using same phone line, expense accounts etc.
2nd prong met on remand
- Able to show that D was engaged in tax fraud, using personal funds for benefit, and
promised shipping bill would be paid while at the same time stripping corporations of
assets.
In re Silicon Gel Breast Implants Products Liability Litigation p. 204
Parent Bristol wholly owns its subsidiary MEC, a corporation. Breast implant lawsuit wants
to go after the parent. Piercing the corporate veil, arguing the controlling shareholder should
be held liable for injuries caused by wholly owned subsidiary.
***See test above
Corporate Formalities (goes to the first prong)
- Negotiated the purchase of two corporations in Medical Engineerings name
- Bristol-Myers made the major (and even some of the minor) financial decisions regarding
Medical Engineering
- Bristol-Myers set employment policies and wage scales for Medical Engineering
Advice
- Hold meetings, make sure majority of the board of directors are different, allow
subsidiary to determine its own wage rates, and major financial decisions, etc.
- BUT delicate balance Parent as the sole owner has an interest that it is run well, but if
it exerts too much control could be held liable.
Timing:
- Look at control at the time the harm was done
Any indicia of fraud?
- No fraud here, no dividedness de-capitalizing
- Insured them for 2 billion.
- Generally tried to maintain its financial health
- But, Bristol Myers stripped MEC of its assets
Why does the court reject summary judgment for Defendant BM?
- In Delaware at least, not necessary to show fraud if the subsidiary is alter ego.
o First prong is enough in a parent subsidiary situation
o And they may be nicer in torts as opposed to contracts. May mater
- Even if fraud was required, they vouched for products with their name in brochure but
didnt permit subsidiary to retain sufficient assets to pay for injuries (triable issue)
Seeking to hold all the corporations liable for the acts of the other, under the theory that
theyre all alter egos of the other, so they do not separately exist.
Agency is the basis of Enterprise Liability, not fraud.
Evidence needed
Such a unity of interest between the two (or more) entities that their separate existence has de
facto ceased
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- Funds mingled across corporations

- Decisions were made jointly,
- Failed to follow corporate formalities: didnt maintain separate minutes
Treating the two entities as separate would sanction fraud or promote injustice
- Without this, courts wont look beyond the formalities of corporate structure
Walkovszky v. Carlton p.207
Taxicab driver injures person. 10 separate corporations each owning 2 cabs controlled
mainly (more than a majority stake owned) by one shareholder (controlling shareholder).
Each cab only had the minimum required amount of insurance of $10,000 per cab (20,000
per corporation, and the medallions are judgment proof.)
Complaint: having the cabs organized across 10 corporations constitutes a fraud, because of
structure.
- Therefore he should be able to sue all corporations (enterprise liability) and to the
shareholder (to pierce the corporate veil) and hold owner personally liable.
- Needed to: make particularized statements that the Ds and business were actually doing
business in their individual capacities, shuttling their personal funds in and out of the
corporation
Enterprise Liability Theory:
- Allows claimant to proceed against assets of other corporations that are involved in
the business operated as a single entity, unit and enterprise and all are named as
defendants
- Plaintiffs argument: Multiple corporate structure was a fraud on the public Courts
response:
o Agency is the basis for enterprise liability not fraud
- Enterprise liability is horizontal while PCV is vertical!
Challenging Business Acts

Ultra Vires Acts
Purposes of Corporations
A business is organized and carried on primarily for the profit of stockholders.

Specific corporate purpose defined in Articles, but they are all written broadly now
- MBCA 3.01: any lawful business unless a more limited purpose is set forth in the
articles of incorporation
Definition
Acts beyond the power of the corporation to perform

- E.g. Illegal acts, acts lacking a business purpose
Consequences
Possible Consequences DGCL 124

- Action by attorney general to dissolve corporation
- Action by or on behalf of corporation against the shareholders who ordered the action
- Action by a shareholder to enjoin the action
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Charitable Donations
Ok if reasonable amount in relation to company value, not pet charities, some benefit to corp.
- If charity is recognized, generally have not held it to be Ultra Vires
- Not recognized charities, greater taste of problems or issues of self dealing
A.P. Smith Mfg. Co v. Barlow PG 282
- Decided via board resolution to give $1,500 to Princeton University. Some of the
shareholders challenged the gift (as ultra vires) and AP Smith sued for declaratory
judgment. A law was enacted after corporation was formed in New Jersey explicitly
permitting such giving.
- Charitable Giving history: Early common law, corporations could just seek profits
o Today: Pretty much every states corporate law permits corporate giving.
- Limitations on holding: Charitable Donation must be a reasonable amount in relation to
value of company (e.g., not $18 million if FMV $20 million)
o Corporations prohibited giving to more than 10% of a corporations stock per NJ
statute
o Contributions could not be given to pet charities: charities related to officers.
o Must be able to argue there is some benefit to the corporation, however remote
- Disclosing to the board and getting its approval should sanitize the gift
But, businesses arent run to serve as charities themselves
Dodge v. Ford Motor Co. p.270

- Ford was hugely successful and paid regular dividends of 60% of the 2M investment.
Awash in Cash. Henry ford dominated; owned 58% of the stock. Ford eliminated the
special dividend and announced expansion plans. The Dodge brothers (10% owners) sue.
- Court: Ford must issue the special dividend
o Business judgment rule: Courts will generally give great deference but courts will
intervene if it shows an abuse of discretion as would constitute a fraud or breach of
good faith (or illegality or self dealing).
o But here, Ford stupidly testified he had a non-business purpose for keeping the
money: he thought the company was making too many profits
He wanted to lower profit by employing more people and lowering prices. But it
is not within the power of the board to conduct the businesss affairs primarily to
benefit others
This testimony is what drove the entire outcome of this case!
- But, Ford Motor Company can continue the expansion.
This is a decision for the board and the complaint alleges no fraud, etc.

Rebuttable presumption acting in interest of corporation
Absent a showing that a business decision was fraud, a breach of good faith, illegal, or selfdealing as would constitute an abuse of discretion the court will not substitute its judgment.
- Good faith: Business person of ordinary sound judgment would see rational basis for the
decisions: Irrationality is the outer limit Essentially a gross negligence standard
- Once you approach decisions that no businessperson of sound judgment would make,
then pushing against the outer limit of business judgment rule.
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Rebuttable presumption that judgment of directors was formed in good faith and was
designed to promote the best interests of the corporation they serve.
- Once overcome BJR, then you have to prove your case (fraud, etc)
Rationality is the outer limit
Decision wont be upheld if cannot be attributed to any rational business purpose.

- E.g. irrational disposal of assets = corporate waste.
Shlensky v. Wrigley p.275
Cubs consistently lost money. Shareholders sue directors (which include Wrigley as a 80%
controlling shareholder and president/officer) for violation of a fiduciary Duty of Care.
- He claimed he thought baseball was a daytime sport, and concerned about the
surrounding neighborhood. Plaintiff is alleging these are nonprofit motives.
Court says this could be construed as a reasonable business decision.
- BJR: In the absence of a showing of fraud, illegality or self-dealing by the directors, their
business decision is final and not subject to review by the courts.
o Once the court decides the BJR rule applies, it abstains and doesnt delve further.
- Rebuttable presumption that judgment of directors was formed in good faith and was
designed to promote the best interests of the corporation they serve.
o If rebuts, still has to show prima facie case. E.g. negligence.
Wall Street Rule Notion if youre not happy with the way the corporation is being run, you
may want to exit
What strategy would you adopt toward crazy shareholder/officer as a hostile witness?
- Try to get him to state explicitly it is more of a personal decision rather than a business or
profit decision
Chart showing BJR application and fiduciary duties
- Note: There can be parallel claims in one suit

Two ways of thinking about the business judgment Rule
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Abstention Doctrine
- Court will not review directors decision, just their process
- Preconditions: No Fraud (duty of loyalty) No Illegality; No Self Dealing (duty of
loyalty); Decisions not egregious
As a standard of Liability
- No Liability for negligence
- Instead liability based on: Fraud, Illegal conduct, Self-dealing, Egregious conduct, Gross
Negligence?
- Business Judgment rulePost-Van Gorkom
o A standard of liability Directors may be held liable for gross negligence in failing to
make an informed decision (but since then pulled back)
o A rule of abstention: Courts will not review substance of directors decision
(substance), only the decision making process. Was decision informed? (Not was it
badly informed)
Very hard to prove
Standard
Waste (fraud) if an exchange that is so one sided that no business person of ordinary, sound
judgment could conclude that the corporation has received adequate consideration.
Irrationality is the outer limit
Occurs in rare case where directors irrationally squander or give away assets. In re Walt
Disney
Thus, irrationality serves as the outer limit of the BJR test. Brehm v. Eisner p.391
If required to pay under K, look at whether K obligation itself constituted waste
The payment of a contractually obligated amount cannot constitute waste unless the
contractual obligation is itself wasteful. In re Walt Disney p.390.
E.g. In re Walt Disney, employment K required payment of severance. So look at whether
wasteful ex ante (there whether incentivized him to leave early)
Cannot be ratified
Even if ratified by a majority of disinterested shareholders or directors, can still prove gift
or waste to void transaction.
Derivative Actions
Direct v. Derivative Suits
Direct = Brought by the shareholder in his own name.

- Cause of action belong to the shareholder in his individual capacity
- Arises from an injury directly to the shareholder
o E.g., breach of a contractual duty owed the shareholder (dissolution of voting rights).
Eisenberg v. Flying Tiger
- Recovery goes to the shareholder
Derivative = Brought by a shareholder on corporations behalf.
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- Cause of action belongs to the corporation as an entity, not the shareholder

o Arises out of an injury done to the corporation as an entity
o Shareholders injury is derivative of the injury to the corporation
- Recovery goes to corporation, then shareholder recovers indirectly
o Exception: In a closely held corporation court may distribute it directly as ordering it
back to evildoers not a good idea.
We got a good example of when this would be fucking weird. Find it
- Suit in equity
o Suits alleging harm to the corporation must technically be filed by the corporation,
because the shareholders at law do not have standing
o This is why this is a suit in equity to tell corporation to sue the third party, so
technically the corporation is a defendant.
Delaware approach to determining direct vs. derivative
- Two prongs
o Who suffered harm?
o Who would receive recovery?
Examples
Direct
Derivative
Loss of voting rights
Embezzlement by employee
Failure to pay dividend
Failure to get shdr vote for sale of
guaranteed by charter
substantially all assets
Excessive salaries
Insider trading
Failure to pay dividend
Duty of Care / Good Faith
Should recovery go to individual or corporation?
ALI Principals: individual recovery should be ordered when it is equitable in the

circumstances and adequate provision has been made for the creditors of the corporation.
- For example, the plaintiff shareholders owned approximately 63% of the corporations
stock. Having determined defendants potential liability to be just under $2,126,280.91,
the trial court awarded the plaintiffs 63% thereof$1,339,769.62plus interest and
costs (pro rata distribution)
Close corporation exception followed in many jurisdictions
Other cases in which courts have allowed individual recovery in a derivative suit:
- Corporation in liquidation
- Former shareholders who discovered concealed wrongdoing after the fact
Contemporaneous ownership of the shares (see, e.g., Fed. R. Civ. P. 23.1)

- Must have been owner since cause of action arose and continuously through trial and
appeal (if any)
Verification of complaint (see, e.g., Fed. R. Civ. P. 23.1)
- Plaintiff reads the allegations and attests that she, in good faith, believes they are true
Security for expenses
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- Plaintiff with small ownership stake may have to pay defendants costs if she loses or
abandons the suit; secured with a bond (Cohen)
Demand requirement
- The stockholders right to bring the action does not ripenuntil he has made a demand
on the corporation which has been met with a refusal by the corporation to assert its
causes of action.
Policy Rationale
Structural issues
If all board of directors involved in the wrong doing, theyre not going to sue themselves.
Derivative suits allow shareholders to hold directors accountable
- Supreme court called it a remedy born of stockholder helplessness (Cohen)
Potential abuses Strike suits
Small shareholder may sue to recover from corporation for the nuisance value of the suit.
- Small shareholder has less at stake, so their likelihood of getting a settlement that is
greater than the value of investment is high; large shareholder bears more cost of suit
- Nuisance suits brought for settlement value.
o Corporation settles just to get rid of them.
Checking abuses Security statutes
Some states reduce incentive for strike suits by requiring owning less than a % or $ value to
post bond for corporations legal fees.
Demand requirement
Role of the Demand Requirement
A way to separate cases where the board should be allowed to control suit from those in
which shareholders should be allowed to do so.
As a result, people prefer direct over derivative claims
Competing Policy Concerns
Derivative suits a mechanism of managerial accountability, but potential for bias b/c cannot
expect directors to sue themselves.
But, cause of action belongs to corporation, like all assets, litigation should be under control
of Board of directors
- And shareholder interests may diverge (e.g., strike suits) so BoD should have some say in
the process.
Advantages
May actually forestall litigation b/c work out issues before go to court
May filter out frivolous
Results
- Demand accepted
o Corp would control suit
- Demand refused
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o If good process, then decision protected by BJR.

o But may have been wrongfully refused Grimes
Demand wrongfully refused if:
Can allege facts with particularity creating reasonable doubt to rebut BJ presumption
o Reason to doubt board independence or due care.
Note: Difficult situation because havent had discovery yet.
- Demand excused as futile
o Allege with particularity that majority of board engaged in self-interested transaction,
Universal Demand Requirement
Some States always require a demand before shareholders to file derivative suit
Delawares Demand Requirement
Basic idea is that the P must approach the board and demand that it sue the wrongdoers.
- If demand is required, failure to make demand results in dismissal (and maybe prejudice).
Excusal of Demand Requirement (file suit directly without approaching board)
- When it would be futile: e.g., the board is self-dealing and would not sue itself.
o P must allege particularized facts creating a reasonable doubt that the board is capable
of making a good faith decision on suit.
o 1. Majority of board has material financial or familial interest;
o 2. Majority of the board lacks independence (domination and control by wrongdoers)
Not enough that majority of the board are named as defendants if simply
conclusory
o 3. Or, transaction not product of valid exercise of the BJ
This is very hard to overcome, probably want to prove 1 or 2 so can bypass the
BJR standard
- Discovery not permitted, must use the tools at hand
o 220: access to records and books to company with corporate purpose.
o Public information
- If demand is excused, what is the consequence?
o The stockholder will under most circumstances will control the litigation, but the
board could reassert its control by forming a special litigation committee
But then fail to have the favorable BJR standard
What happens if make demand but the board refuses to institute the action?
- The BJR applies to the boards decision to dismiss and is likely to lose,
- Have to argue that the demand was wrongfully refused.
Legal Effect of making Demand
Once youve made a demand on one claim, youve conceded the board is independent as to
all other claims.
Danger: If they make demand, then the decision to dismiss the lawsuit is a matter of
business judgment rule and then theyll lose because business judgment presumption is
nearly impossible to overcomeespecially since P is not entitled to discovery in the pre-suit.
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Cohen v. Beneficial Industrial Loan p.214
Diversity proceeding in federal district court in New Jersey. Corporation incorporated in

Delaware. New Jersey has a security for expenses statute but neither Delaware code nor
FRCP 23.1 requires security for expenses.
- NJ provides that a shareholder who brings a derivative suit and who owns less than 5%
of the stock or stock worth $50,000 is liable for the corporations reasonable expenses if
suit fails
- Corporation can ask court to require such a plaintiff to post a bond to secure such
expenses before suit goes forward
Under Erie Railroad v. Tomkins, Federal law governs procedural issues and State law
governs substantive issues.
- NJ security for expenses statute is substantive because it creates a new liability
Plaintiff alleged breaches of fiduciary duty: theft, waste, and mismanagement
- Delaware Corporate law applied to decide whether defendants breached duty
o Law of state of incorporation applies to substantive corporate law issues
- But NJ law applies as to the security statute.
Grimes v. Donald p.223

Shareholder brought suit, alleging a breach of fiduciary duty by the board because they
abdicated its authority, failed to exercise due care, and committed waste. Board entered
employment agreement that said CEO would be constructively terminated if the board or a
substantial shareholder unreasonably interfered in his good-faith judgment.
- demanded board abrogate the agreements but they refused.
While the other claims are derivative, the abdication claim is direct as he was only seeking a
declaration that the agreements were invalid.
Abdication claim: severe financial penalties for interfering with CEO will inhibit and deter
the board from exercising its duties.
- Held, not sufficiently plead because the agreement didnt formally preclude the board
from interfering.
o Business judgments are not abdication simply because the limit the boards freedom
in future actions.
Derivate claims
- Must make formal demand on board or allege with particularity why justified for not
making demand. Grounds:
o Reasonable doubt that the board is capable of making independent decisions to assert
the claim.
Majority of the board has a material financial or familial interest.
Majority incapable of acting independently for some other reason such as
domination or control.
Underlying transaction is not the product of a valid exercise of business.
o Shareholder can only use the tools at hand to discover the information to plead
these.
Such as inspection rights
- If demand is made and rejected, the board gets BJR protection unless the shareholder
can allege facts with particularity creating a reasonable doubt the board is entitled to the
protection.
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o Reason to doubt the board acted independently or with due care in responding to the
demand.
- Here, he made a demand that was refused and then later argued demand was excused.
o Held, once you make demand, you can no longer argue demand is excused.
He only alleged couldnt have investigated because they refused the demand
which is insufficient to overcome the BJR.
Timeline
Shareholder sues w/o demand b/c futile. Board then constructs a special committee to handle
litigation that is independent and has no conflict of interest.
Board Account Remedy, born of stockholder helplessness, was long the chief regulator of
corporate management and has afforded no small incentive to avoid at least grosser forms of
betrayal Cohen.
Board Authority [T]he derivative action impinges on the managerial freedom of directors.
Policy
Grimes
Balancing Act: Dismiss strike suits; preserve board authority Vs. Preserve derivative suits
effectiveness as intra corporate means of policing board of directors
Needed: a filter to weed out cases in which the board is disabled by conflicts of interest from
acting an independent decision in good faith. SLC plays the role of a filter.
Court may evaluate SLCs independence and procedures
Auberbach v. Bennett
- Independent investigation revealed some employees had paid bribes and some individual
directors have been personally involved. Board delegated authority to investigate and
determine response to 3-member committee composed of members that werent on the
board at the time (disinterested).
o Determined not in best interest of corporation to pursue claims and told GC not to
take over derivative actions.
- Court holds that BJR applies because nothing suggests the SLC members were not
disinterested. Nothing prevents the court from determining the SLCs independence
o Just because they serve on board with directors does not destroy their
independence.
o Business judgments because SLC chose procedures to investigate and then made
substantive judgment based upon the results.
- The court may, however, look into the adequacy and appropriateness of the committees
investigative procedures. Courts have lots of experience with this.
o But they may not use this as a pretext to trespass on business judgment.
o If proof offered investigation was half-hearted and really a sham, would not be
protected by BJR because would raise questions of good faith or conceivably fraud.
Standard for reviewing SLC recommendations
Two step inquiry per Zapata

Step 1: SLC committee must prove it is independent and in good faith
- Note: Burden has shifted to SLC
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o Inquiry into independence

Independence inquiry of directors: [W]hether a director is, for any substantial
reason, incapable of making a decision with only the best interests of the
corporation in mind. Oracle
But, the relationship must be of a bias-producing nature. Mere personal friendship
or outside business relationships, alone, are insufficient to create reasonable
doubt. Beam p.262
o Inquire into good faith (basis supporting committees recommendations; procedural
due care)
How deliberated, bring outside experts, costs to company, cost of litigation,
distraction.
Step 2: (optional) court may apply its own business judgment as to whether the case is to be
dismissed and review the substance of decision.
o Even if board followed the correct procedure, may evaluate them.
o Intended to thwart instances where meet step 1 but result does not satisfy spirit.
o Requires balance of many factors: public relations, commercial impact, employee
relations, distraction bring to directors subject to lawsuit, ethical considerations, effect
on companys bottom line, effect on company, effect on share price;
Also law and public policy: sense that certain types of claims should be litigated
because the law is not clear in this area so they want it: role of this case as
creating a precedent
o Function of this? Allow meritorious suits to proceed and account for structural bias.
Zapata Corp v. Maldonado PG 261

Derivative lawsuit over excessive compensation. P did not make demand and demand was
excused as futile. Appears there is reasonable doubt about boards indep, so must find:
- 1. Is it okay for the board to create special litigation committee
o Yes under 141(c) Board is authorized to delegate authority to subcommittee of board.
o They put people on committee who were not members when questioned
compensation was paid.
- 2. SLC recommends that the suit should not go forward.
o Consider effect on company reputation; effect on efficiency effect on main job, costs
of litigation vs. benefits of litigation.
Power of SLC to dismiss a suit already begun
- Under a normal situation, boards decision would be subject to BJR.
- But here, under a different intermediate standard because demand was excused.
Fiduciary Obligations of Directors, Managers, & Officers

De Facto Officer
Can be considered an officer even if for some legal reason lack actual legal title to that office
if: In re Walt Disney p.381
- Actually assume possession of office
- Under the claim and color of an election or appointment
- And, is actually discharging the duties of that office
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Duty of Care
Key is, did you follow the correct process?

- Basically, a do not be negligent rule.
Very rare to impose liability on directors!
Directors duties
MBCA 8.30(a): Each member of the board of directors when discharging duties of a
director, shall act:
- (1) in good faith, and
- (2) in a manner the director reasonably believes to be in the best interests of the
corporation
(b): Board members shall discharge their duties with the care that a person in a like position
would reasonably believe appropriate under similar circumstances.
Essentially all about the process
If the proper process hasnt been followed, then the duty of good faith has been breached.
Board can appoint committee to provide process
DGCL permits BoD to appoint committees and to delegate to them a broad range of
responsibilities.
- So long as the committee has made itself aware of the material terms.
Uninformed Decision
Board has duty to inform itself of all material information reasonably available to them
- Failure to do so amounts to gross negligence.
The Boards failure to inform itself is not fixed by shareholder approval, as their vote is
also uninformed due to the Boards failure.
Note: under new DGCL 144(e): Board can rely on officers or experts oral opinions so long
as they exercised care in hiring them.
Smith v. Van Gorkom p.314
- Leasing company (mainly railroad cars) generated lots of tax credits and had lots of cash,
natural target for a LBO. Trans Union chairman Van Gorkmom decides to sell company
through an LBO, and negotiates with financier (which benefits him personally b/c shares
were under-valued and he wanted to retire soon). He pretty much suggests the price to
acquirer w/o any support for value, other than he thought it would be feasible for a LBO
at this price. Transunion becomes a wholly owned subsidiary of Pritzker and gets
$55/share.
- In DE, both BoD and shareholders (both acquirer and target) must vote to approve.
o Trans Union Board approved but they looked at no real evidence
Only Chairmans 20 min. oral presentation.
Amendments executed and delivered without Boards having read them.
o Shareholders voted 70% in favor 7% opposed
- Duty of care analysis: Plaintiff must prove that BoD failed to inform itself of all
material information reasonably available to them
o Yes they violated their duty because the board was making an uninformed decision
and the BJR rule doesnt protect that.
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o The board knew Pritzker was willing to pay a $17 premium over the prevailing
market price and thats an indication the market price is inaccurate.
o A publically traded stock price is solely a measure of the value of a minority
position and, thus, market price represents only the value of a single share.
He may be willing to pay more because of what the control it represents means.
o While directors have right to rely upon reports from officers, reliance here was
unreasonable because only uninformed oral statements.
Under new DGCL 141(e), can rely on just opinions if take care when hiring
officer.
- For mergers: Duty to act in an informed and deliberate manner in determining whether
to approve an agreement of merger before submitting the proposal to the stockholders
o Irrelevant Shareholders approved it as they had insufficient information.
o A director may not abdicate that duty by leaving to the shareholders alone the
decision to approve or disapprove the agreement.
- Market Test Defense: 90 day test period would put company up for auction
o Failed, as defense b/c not adequate market test.
Could not solicit bids nor provide proprietary information to bidders
Pritzkers lockup option may have been a deal killer.
If informed decision and followed process BJR Protection
Brehm v. Eisner: Claim for Waste (Executive Compensation) Followed process (relied on
expert) Board Gets Off
- When P alleges waste and due care violations in connection with executive compensation
court will not review substantive merits only process due care.
DGCL 141(e) A member of the board of directors . . . shall, in performance of such
members duties, be fully protected in relying in good faith upon
- The records of the corp, and
- Info, opinions, reports, or statements presented to the corp by any of the corps officers
or employees, or by any other person as to matters the members reasonably believes are
w/in such other persons professional or expert competence and who has been selected
w/reasonable care
Kamin v. American Express p.310
- Derivative lawsuit. Suit brought by the shareholders against board who allegedly decided
to distribute stock to shareholders directly (in-kind) thereby failing to take advantage of
tax loss.
o They argued theyd have to report a loss in earnings and would cause stock price to
fall.
- Conflict of Interest: Plaintiff argued they made decision based on their self interest b/c
some had incentive stock options, but a majority of the board didnt so not a problem.
- Process looks okay, duty of care is about process and not judgment, they met and
discussed it.
o They met at request and specifically considered s objection. They may have made
a bad choice but it was their choice. So long as the process is ok, the court wont
review.
Failure to act or make a decision = no BJR
Duty to be informed and act so lose BJR protection

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- Francis v. United Jersey Bank: Widow was an inactive director and allowed officers
(sons) to mismanage company
o Rare case: She had never even attended meetings or reviewed statements.
Duty to be informed & act: Obligation of basic knowledge and supervision.
- Stay abreast of financial affairs (even if dont audit books)
- Do not rely on subordinates when know that they are misbehaving
then still has to prove violated duty of care, which caused damages
- Duty of care: must prove negligence and her behavior was the proximate cause of the
loss.
o Ordinary businessperson would not have behaved that way. completely in-attentive
to business.
- Because presumption doesnt apply so it collapses into a negligence case.
Illegal decision or action = no BJR
Explicit decision to break law not protected by BJR

- Trucking company and board of directors deciding to violate weight limit if fine is only
$200 and chance of getting caught is 20%.
Causation needed: If there was no net loss b/c of decision then shareholders cant recover.

BJR is essentially a standard of review
In a duty of care case: the allegation is the directors of officers have violated the duty of care
to the corporation.
- Very rare to impose liability on Directors.
Business judgment rule is basically the standard of review, in reviewing their decision.
- If theyve deliberated (somewhat) and gone through the process, then in most cases youll
never prevail on the claim.
Business judgment rule insulates directors from negligence liability liability only for fraud,
self dealing, illegality, intentional misconduct and possibly gross negligence as in Van
Gorkom, but exceedingly rare.
- Van Gorkom sent shockwaves so many states passed statutes insulating directors from
personal liabilities for violations of DoC (but not DoL!)
o Excludes officers
Duty of Loyalty
DoL arises when directors interest on both side of the transactions
Duty of loyalty comes up when a director or officer or controlling shareholder or a business

in which she has an interest is on other side of transaction with the corporation.
- Late 19 century: such contract voidable by any shareholder regardless of fairness or
ratification ex post
- 20th century courts increasingly okay, especially when ratified by board/shareholders.
Example: Direct vs Indirect
Example
- Direct Directors other company makes handmade puppets and sells handmade
puppets to company.
58
o Issue: Is she charging a price higher than she would in an arms length transaction
- Indirect Disney director is an officer of Comcast.
o There is a contract between Comcast and Disney and she has fiduciary obligations to
both.
Once conflict shown, directors burden to prove good faith and inherent fairness
Strict scrutiny by court

Structural bias thesis: Sometimes, like Bayer, court treats all Directors as conflicted because
they work very closely and so the conflicted director may exert undue influence (all insiders
and he dominates the board)
Possible defenses
Board Approval
- Material facts disclosed or known
- Board authorizes in good faith
- By affirmative vote of majority of disinterested directors
Approval of Majority of Shareholders
- They approve it
- And, conflict disclosed
Bayer v. Beran p.336
Directors wife is awarded a radio singer contract. Concern is shes getting a K that she
otherwise wouldnt, corp. not getting best deal, shes getting paid too much.
- Duty of Care: BJR protects Advertising on radio decision itself. Not corp. waste bc
salary not absurdly high.
- Duty of Loyalty issue: Conflict of Interest, therefore NO BJR protection for decision
to hire his wife.
Directors win, transaction was inherently fair & benefited corp.
- Her services really worth value and they got what they paid for
Okay no formal board action, small decision, they were a working directorate and all knew
what was going on, not a huge decision like a merger.
A subset of the general Duty of Loyalty: Fiduciaries (officers, directors, controlling

shareholders) may not take CO for themselves
When a CO exists
Broz v. PriCellar: A Corporate opportunity exists where:

- 1. The corporation is financially able to take the opportunity
o If the other party is unwilling to work with company no matter what not able
- 2. The opportunity is in the corporations line of business
o LOB if fundamental knowledge, practical experience, and ability to pursue
- 3. The corporation has an interest (contractual right) or expectancy in the opportunity
o Expectation also not met if corp actually not interested
- And, 4. Embracing the opportunity would create a conflict of interest between directors
self interest and the corporation.
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- 5. Relevant in which capacity the opportunity came?

o Relevant but not dispositive: if came under capacity w/corporation higher burden of
proof for D.
Do you need to satisfy all above elements?
- Some courts suggest need to satisfy all elements while others say they must be balanced
- For test, dont need all of the elements
Board or Shareholder approval not required but creates safe harbor
Under DE law, formally presenting the opportunity to the board is NOT required to prove
you didnt wrongful taking of a corporate opportunity, but creates a safe harbor that
shields the transaction from ex post judicial review
Corporation cannot have CO if illegal for them to perform act
If spinning had been illegal in Ebay as it is now, no interest or expectancy in illegal action so
firm would not prevail under this claim.
Even if not a CO, Agency law may require profit disgorgement
Rest Agency 388: [A]gent who makes profit in connection . . . under a duty to give such
profit to the principal.
Directors/officers are agents of the corporation.
So, in transactions on behalf/associated with/connected with principal any profits should be
disgorged BACK to the corporation.
Ebay Shareholders Litigation PG 389
Basically IPO bank offered some of the IPO shares to the officers/directors and then after 1
week they often flip them. This is corporate opportunity case: could argue corporation
should have gotten opportunity to make these investments.
Corporation is financially able to take the opportunity
Opportunity is in the corporations line of business
- Considerable amount actually was invested into marketable securities.
o If had been much smaller part of overall business then perhaps not problem.
No contract interest, but expectation b/c investing was significant part of their return
Embracing the opportunity created a conflict of interest: Created an incentive to stay with
Goldman Sachs because of the kickbacks not because best bank in town
Also consider capacity (i.e., how opportunity came.) Strengthens corporate opportunity
taking because came in the corporate capacity
Implicit in both duty of care and duty of loyalty.
Not a separate cause of action

Stone v. Ritter
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- Makes clear that Duty of Good Faith is really a subsidiary element of DoL
o Lack of good faith means directors not acting in best interest of corp IVO DoL
Includes actual intent & conscious disregard for duties
Encompasses both actual intent to do harm (subjective) and a conscious disregard for ones
duties. In re Walt Disney.
- Does not apply to gross negligence without malevolent intent.
Duty to be Informed & Act
Obligation of basic knowledge and supervision. Stay abreast of financial affairs (even if
dont audit books)
Do not rely on subordinates when know that they are misbehaving
Object to misconduct and, if necessary, resign.
In some cases duty may be greater: bring in counsel; report to authorities
Note: BJR doesnt apply for failure to act unless business decision not to act
Will not evaluate reasonableness of advisor fees
Too many variables and courts are not rate regulators. Jones v. Harris Associates p.392
In re Walt Disney Co. Derivative Litigation p.376
Disney hired O to be new President. Contract for 5 years provided for severance if fired
without cause. They fired him and he collected $130M.
Held, decision of compensation committee entitled to BJR because exercised DoC and not in
bad faith.
- Bad faith includes
o Subjective bad faith (actual intent to do harm).
o And, intentional dereliction of duty (conscious disregard for ones responsibilities)
o But, gross negligence is not bad faith
Director oversight
Standard
Directors failed utterly to implement any reporting or information system or controls

Or, having implemented such a system, consciouslt failed to monitor or oversee its operations
thus disabling themselves from being informed of risks or problems requiring their attention.
But, must show that directors knew they were not discharging their fiduciary obligations.
- Otherwise not conscious disregard sufficient to rise to the level of bad faith.
In re Caremark
Directors not liable for losses due to ignorance or criminal conduct if:
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- Attempt in good faith to assure a corporate information and reporting system that is
adequate
- Which the board concludes is adequate
[O]nly a sustained or systematic failure of the board to exercise oversightsuch as an utter
failure to attempt to assure a reasonable information and reporting system existswill
establish the lack of good faith that is a necessary condition to liability.
Elements of Law Compliance Program
Would include: Policy manual, training of employees, compliance audits, sanctions for
violation, provisions for self-reporting of violations to regulators, appropriate disciplinary
measures.
If board adopted minimal compliance program, ok?
- Yes, BJR would apply because decision was made.
o So long as acted in good faith and followed rational process
o May decide not to have, theyre expensive.
Fiduciary Obligations of Dominant Shareholders

Controlling shareholders owe other shareholders fiduciary duties
Shareholders acting as shareholders owe one another no fiduciary duties

- Directors: hired to look after shareholders.
- Shareholders: just buy to make profits
But, controlling shareholders owe fiduciary duties to the minority
- They have a degree of control that others dont have, which means they can actually
control the board, so some of boards fiduciary duties fall on controlling shareholder.
- Shareholder may have incentive to oppress minority shareholders, so deal with that with
fiduciary obligations.
Controlling shareholder can own <50%
Can own 100%, Can also own less, such as 50.01%, Or minority control of subsidiary
If parent is self-dealing, defendant has burden to show intrinsic fairness
Self-dealing in this context parent receives something form the subsidiary to the exclusion
of and detriment to the minority stockholders of the subsidiary
Other conflict of interest between parent and subsidiary/minority shareholders
Sinclair Oil v. Levien p.357
- Derivative action in which minority shareholder of subsidiary bringing action on behalf
of organization. Everyone on board of directors of Sinven have been nominated by
parent who owns 97%
- Contest Sinvens large dividends
o Court determined no self dealing because minority shareholders received their
proportionate share, advantage fell equally on all shareholders.
o P could argue improper motives amounting to corporate waste, but waste is a very
hard thing to prevail, it would have to be extremely disproportionate.
- Prevented from expanding (parent expanded in other companies but denied opportunity
to them: usurped corporate opportunity)
o Opportunity to expand came to Parent company separately.
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- Violated: Breach of contract between parent and subsidiary that injured subsidiary, and
subsidiary didnt enforce
o Intrinsic Fairness rule applies because self-dealing
BOP on D to show transaction was intrinsically fair to Subsidiary.
o Parent receiving something to exclusion of minority so apply inherent fairness test.
D Fail to prove fairness so P prevails.
Defense of Ratification
Ratification of conflicted interest transactions
A conflicted interest transaction may be ratified by votes of directors or shareholders, after

full disclosure of all material facts related to the transaction and the conflict of interest.
Effect of ratification
Burden of proofThat raises the question as to the effect of ratification.

- In general, ratificationby the board or by shareholdersshifts the burden of proof to
the plaintiff.
So, for DoL cases, this would shift the burden from the Board back to .
Standard of review.
- States statutes and court decisions are all over the board
- And, it also depends upon whether the interested transaction has been ratified by the
board or by the shareholders.
Delawares approach
144(a):
- No contract or transaction between a corporation and 1 or more of its directors or
officers ... shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the board or committee which
authorizes the contract or transaction, or solely because any such directors or officers
votes are counted for such purpose, if:
o (a)(1) approved by a majority of the disinterested directors or
o (a)(2) approved by a majority of the shareholders
Note: Courts read disinterested requirement into this route
- But, 144(a) does not preclude judicial review as there may be other reasons for voiding
(e.g., waste or gift)
Board Ratification
Board ratification shifts the BoP to
Applicable standard of review
Depending on the jurisdiction, the standard of review is either:

- Fairness
o Even though the disinterested directors have ratified the transaction, some courts still
apply an entire fairness review.
Plaintiff must prove that the transaction is unfair to the corporation
- Or, Business Judgment Review
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In others, board ratification transforms the conflict of interest transaction into an

ordinary board decision and the applicable standard of review is the business
judgment rule.
Ratification cleanses the initial conflict
Will be very difficult to prevail unless can show gift or waste
o Waste is much harder to prove than unfairness.
Quorum rules
(Default rule) DGCL 141(b): A majority of the total number of directors shall constitute a
quorum.
144(b):Common or interested directors may be counted in determining the presence of a
quorum
- Majority of those present suffices them to authorize a transaction
144(a)(1): the board or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though the disinterested
directors be less than a quorum
Not corporate opportunity claims
Corporate Opportunity rules evolved separately so just follow the Broz test.
Duty of Care claims
Informed vote of majority extinguishes DoC claims against Board. Van Gorkom
Probably still a gift or waste standard of review.
DoL with interested director = BJR
Fully informed vote shifts burden of proof to plaintiff to prove waste

Standard of review = BJR. E.g., to show waste.
DoL with controlling shareholders = fairness
Fully informed vote shifts burden of proof to plaintiff to show unfairness

Standard of Review = Fairness. Wheelabrator
- Worry that minority shareholders may approve a transaction favored by the majority
shareholder merely out of fear of retaliation (e.g. a freeze-out)
Essentially the same standard as if this was a conflicted transaction without approval, bur
burden shifts to to prove unfair (versus parent proving fair).
If all material facts are not disclosed or no majority = fairness
s burden to show fairness of transaction

144(a)(3) would be relevant when:
- Transaction approved without requisite majority of disinterested directors or shareholders
o Procedural defect
- Defective disclosure Statute requires disclosure of all material facts (Benihana)
When can transaction still be upheld: e.g., procedural defects and failure to disclose
information?
- It holds that if the transaction is fair then it still may be upheld b/c fair to corporation
- D. bears the burden of proof, no burden shifting to P.
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Fliegler v. Lawrence p.367
President of corp acquired related properties and gave company option to purchase. Board
exercised option and shareholders ratified.
- If majority of shareholders approve, shifts burden to to show that terms amount to gift
or waste.
- Does the mere fact the board approved purchase mean BJR?
o No, fact the board approved doesnt change it because conflict of interest. 144 cant
fix it because we dont have disinterested directors
- Does shareholder ratification satisfy 144?
o Since the directors, who are interested, control the majority shareholders = no shifting
to BJR.
o Court reads disinterested requirement into statute.
- Therefore have to apply the intrinsic fairness test
o They were able to prove transaction was fair to corporation.
In re Wheelabrator p.370
Action from WTI shareholders brining a derivative suit. There is a merger between Waste
Inc. and WTI. There were shared directors between the two companies. Non-waste directors
unanimously approved the deal separately. At time of decision Waste owned 22% of WTI.
WTI went through all necessary steps. Acquired companys shareholders approval without
counting interested shareholders
Effect of Approval by Shareholders per 144(a)(2)
- Duty of care claims
o BJR kicks in by fully informed vote by shareholders (Van Gorkom)
o Now would have to show WASTE, not just unfairness.
- Duty of Loyalty claims against interested directors
o Fully informed vote shifts burden of proof to P to show waste: BJR
- Duty of loyalty claims against controlling shareholder
o There is still a fairness standard, but burden shifts to the P.
Hypoos
- Contract with third Party maybe connected with board of director so potential conflict of
interest. Closely held corp with 3 directors. Flintstone gets a contract to act in movie.
- Board approves contract with third party, contracted with Oliver stone by vote 2-1.
o If you view the two contracts as separate
BJR seems to apply. Mouse looses unless can show waste
o If you view the contracts as inter-related
Could argue not BJR: saying only 1 to 1 bc Flintstones contract is
inseparable/inter-related from stones so there is a duty of loyalty/conflict of
interest and so hes interested
- Contract involving director, so conflict of interest
o BJR does not apply. We now have contract between corporation and one of directors
144(a) requires majority of disinterested, but here its 1 to 1
Flintstone: bears burden of proof that the contract is fair to the corporation.
- Corporate Purpose Challenged
o Flintstone objects to wacky left wing views. Remaining two dont care
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This is not question about conflict of interest, but corporate purpose.

As long as proper corporate purpose (not sacrificing profits to make money) then
2-1 is sufficient (remember the Ford case). No violation of fiduciary duty by
having controversial thing in film.
- Mouse was absent on vote of Flintstone contract, and approved by vote 2-0. Two
objections
o Invalid for lack of a quorum?
Quorum because majority of total number of directors (we count interested)
o Has the K been authorized?
Majority of those present suffices them to authorize a transaction
But, not immune from duty of loyalty, challenge just because it is authorized.
o Dont have a majority vote under 144, b/c majority of disinterested directors
would be 2 of 2 and only have 1 of them voting in favor.
o Therefore, no board ratification, so Fairness standard with burden of proof lying
on D Flintstone.
Indemnification, Insurance, Advancing Funds

At CL, directors not entitled to indemnification
At common law, corporate employees were entitled to indemnification for expenses incurred
on the job, including certain legal liabilities, but directors were not.

Opt (Direct): May indemnify D/O for expenses, judgments, fines in civil/criminal if good faith
145(a) authorizes the corporation to indemnify the director or officer (& ees) for expenses
plus judgments fines, and amounts paid in settlement of both civil and criminal proceedings
- Covers BOTH officers and directors.
- Covers both expenses (e.g., attorney fees) and damages (e.g., Ps award)
Opt (Derivative): May indemnify D/O for expenses (incl atty fees) if good faith or with court order
if found liable
145(b) authorizes indemnification of officers, directors (and employees) for expenses,

including attorneys fees
If the director or officer was held liable to corporation indemnification of expenses requires
court approval (court of chancery).
- Only expenses are covered, not judgments, fines or settlements.
- No recovery for damages
Good faith = manner reasonably believed in, or not opposed to, best interests of company
So not if embezzlement, etc.
Reqd (both): Must indemnify D/O if successful on the merits or otherwise
Required: Under 145(c), the corporation MUST indemnify a director or officer who has
been successful on the merits or otherwise in a direct or derivative suit
Note: Court will not ask why successful. Just not personally paying any monetary
damages for a claim will be considered a success, even if company settles and thats why he
didnt pay.
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If unsuccessful, indemnification optional unless prohibited by statute
For unsuccessful directors and officers, indemnification is permissive, so long as it is not

precluded by statute.
Waltuch v. Conticommodity Services
Corporation required to indemnify officers, directors and other employees for expenses they
necessarily incurred in an action for which they are parties (with an exception for any matters
they were judged to be negligent or liable for misconduct).
Two sets of litigation:
- 1. Private litigation for fraud (Firm settled for $35M. He spent $1.2M defending private
litigation and was eventually dismissed after the company settled.
o With respect to private litigation, the court says he must be indemnified
145(c) requires firms to indemnify officers who are successful
o D counters that he escaped paying only because it paid the claimants $35M
Court will not ask why D was successful
o He did not pay any monetary damages out of pocket so we will consider it success.
145(c) is a bright line rule: we do not look at how are why
It only requires they escape liability, not that they were morally exonerated
- 2. Enforcement action by government. (He paid a fine of $100k and agreed to 6th month
ban on trading.) He spent $1M defending the government litigation.
o He admitted guilt/paid fine so 145(c) doesnt apply.
o Court agrees that indemnification per Article 9 for the government litigation is
inconsistent with the scope of the corporations power to indemnify as delineated in
145(a)
o Their agreement covers this, but 145(f) doesnt allow them to enter agreements
requiring indemnification where not permitted under (a) or (b).
He had acted in bad faith.
If the board reimbursed Waltuch for all his expenses (both for the private litigation and for
the government enforcement action) could shareholders recover in derivative action?
- Yes, the court ruled corporation lacked the power to reimburse him with respect to
enforcement action.
o This action would be ultra vires? (illegal) so no BJR protection and derivative action
would be successful.

May bind themselves by written agreement to pay expenses beyond requirement
145(f) authorizes corporation to enter into written indemnification agreements with officers
and directors that go beyond the statute Lets firms bind themselves to pay certain expenses.
But, cannot make agreement violating express prohibition (e.g. good faith)
LIMITATION: Cannot make an agreement that violates something prohibited above

explicitly, e.g., waiving the good faith requirement,
E.g. would permit indemnification agreements that mandate firms advance expenses, even
though under 145(e) only makes its option.
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Corporation may limit Directors personal liability for breaches of fiduciary duties
102(b)(7) provides that a certificate of incorp may (but need not) contain:
- A provision eliminating or limiting he personal liability of a director to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as director
o ONLY applies to directors. Officers are denied exculpation here.
Restricted to monetary liability still can get injunctions against them.
This is affirmative defense for directors
o Applies to the Duty of Care
Exceptions provided that such provision shall NOT eliminate or limit the liability of a
director:
- (i) For any breach of the director's duty of loyalty to the corporation or its stockholders;
- (ii) for acts or omissions not in good faith or involve intentional misconduct or a
knowing violation of law; (iii) under 174 of this title [relating to liability for unlawful
dividends]; or
- (iv) for any transaction from which the director derived an improper personal benefit
o Self dealing director would not be protected, or director engaged in insider trading
would not be protected
May advance funds if D/O agrees to pay back if later found not entitled to indemnification
145(e) the corporation may advance expenses to the office or director provided the director
later undertakes to repay any such amount if it turns out he is not entitled to indemnification.
Rules for Insurance

May purchase insurance without good faith requirement even if cant indemnify
145(g) allows for insurance without good faith requirement imposed by 145(a), (b) and (f),
e.g., because conduct was done in bad faith.
- 145(g) lets them purchase insurance for directors and officers even if not permitted to
indemnify them.
Argument: for letting them do it: prevents them from being judgment proof.
- Almost all corporations provide for such insurance but have exclusions for fraudulent
conduct, which often pushes them to settling b/c they want to be covered.
Control in Large Corporations

Proxy Fights
Shareholders Role in Governance
Do not manage the corporation

Mainly elect directors who mange the company
- Shareholders do have the advantage of not having conflict of interest be a real issue.
Shareholders are generally less informed decision makers than are directors.
- But perhaps have fewer conflicts of interest than incumbent managements who may be
motivated by self-entrenchment.
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Proxy Process
Mechanism that governs communication with shareholders that are related to the shareholder
voting process: main goal is investors are informed and the process is not plagued by
misleading information (lies, falsehoods, or omissions) so there is meaning to shareholder
franchise.
Shareholder Voting: Annual Meeting
Required to meet at least once per year under most states statutes. e.g., DGCL 211(b)
Failure to call meeting may give right to sue e.g. DGCL 211(c)
Main task is to vote for directors (although on rare occasions) may vote on other matters
- All the board may be replaced at the same time or it may be a staggered board
Notice and quorum requirements must be met.
- Firm must notify shareholders of time, place and subject matter of meeting.
- Important: decide whether to attend, whether to delegate vote, would want to get
informed on issue.
- Quorum: Minimum number of shares that need to be present in person or proxy to hold
vote on particular matter.
o Delaware: Default is that a majority is a quorum. However, it cannot be altered < 1/3
Special Meeting
- Not regular, but called by BoD for special issues under DGCL 211(b)
o Mergers, charters, amendments, sale of major assets, dissolution
o Notice and quorum requirements must still be met.
Votes Per Share
- Default is one share, one vote,
o But different classes of shares can have unequal voting rights.
Consequences of Dispersed Ownership
Few individual shareholders have sufficient incentives to attend meetings in person

Yet most states have quorum requirements
Proxies are the solution so that quorum requirement can be met.
- Shareholder with interest can solicit proxies and collect enough to affect in another way.
Proxy Voting
Shareholder appoints a proxy to vote his/her shares at the meeting

- A form of agency: shareholder is principal and proxy is agent.
- Proxy card: either tell them how to vote or give them discretion to vote as they want.
Street name
- Most stocks are held in street name in the brokers name. So the broker sends the
material to the beneficial owner.
Securities Exchanged Act of 1934
- Federal securities legislation
o There is federal jurisdiction over the matter, because of this act
- But still governed under state corporate laws.
All proxies RE registered securities must comply with Commission rules

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Securities Exchange Act 14

- It shall be unlawful for any person, by use of the mails or by any means or
instrumentality of interstate commerce or of any facility of a national securities exchange
or otherwise, in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the protection of
investors, to solicit any proxy in respect of any security registered
2 important goals
- 1. Make sure shareholders make an informed vote.
- 2. Make managers accountable to shareholders (which is related to first, because if
shareholders are not informed cannot hold management accountable.
Must provide written proxy statement before soliciting proxy
Rule 14a-3
- Anyone who solicits a proxy must provide shareholders a written proxy statement
before soliciting the proxy and
- Proxy statement must provide information on
o Subject matter of the meeting
o Shareholders voting rights
o The person(s) soliciting the proxies.
E.g., Warren buffet seeking it
- In the cases of proxy fights for control, incumbents must also provide:
o Background information about the nominees
o Information on the board structure and its operation.
o Information about directorial conflicts of interest
o Information of management compensation
o Information on annual report, projections
- This puts pressure on corporations so just knowing they have to include this information
may give them an incentive to make sure their procedures are sound.
Rule 14a-6: All this must also be filed with the SEC
Proxy materials may not be false or misleading about material facts
Rule 14-a-9
- Prohibits proxy materials which are false or misleading with respect to material facts
o By omission or commission
- Examples
o Claims of future market value, like stock price doubling in a year without support.
o Blanket statements without backing them up.

Private Right of Action in both direct/derivative lawsuits
J.I. Case Co. v. Borak
- Court reads private right into 27
o Grants jurisdiction to District Courts over all suits brought to enforce any liability or
duty created under the Act.
- Injury usually flows to shareholder through damage done to corporation, so not
permitting private action would be to deny all private relief.
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o And the Commission is busy and needs the help of shareholders acting as private AGs
But shareholder are rationally apathetic.
Elements of Action
Violation of Rule 14a-9

- Material misstatement or omission of material fact
o Material if there is a substantial likelihood that a reasonable shareholder would
consider it important in deciding how to vote.
o Must have significantly altered the total mix of information available.
- Causation: Misstatement of material fact causes the harm
o 1. If omitted fact was material, no need to show that omission was essential to
completing transaction
o 2. But, must show that proxy solicitation was an essential link in completing the
transaction
So if didnt need the vote to go through, no action.
Mills v. Electric Auto-lite
- An allegedly false and misleading proxy was distributed to shareholders of a target for a
merger at a special meeting at which proposed merger was voted on.
o It not disclose that the majority of the board of the target was dominated by the
acquirer, and it was a close vote.
- Elements of Action: Materiality*
o TEST: Would a reasonable shareholder consider the information important in
deciding how to vote: statement or omission must have a significant propensity to
affect the voting process.
o Modern definition material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote. (Texas Gulf Sulfur
and TSC Industries): Probability/Magnitude test
- Elements of Action: Causation* How Proven
o 2 Elements
1. If omitted fact was material, no need to show that omission was essential to
completing transaction
2. But, must show that proxy solicitation was an essential link in completing the
transaction
Footnote 7: i.e., if it didnt need the vote of the minority shareholders in order to go
through then okay.
o These are the elements for private litigation: SEC could still inflict harm.
Seinfeld v. Bartz p.543
- Derivative action saying company should have included Black-Scholes valuation of stock
options in proxy approving an increase in options for Outside Directors.
o Would have been easy for them to do because they used this same formula to report
the value on their financials statements.
- Substantial likelihood a reasonable shareholder would consider this important in
deciding how to vote?
o Other courts had held this valuation of grants was not material as a matter of law.
o Wouldnt the investor want to know if it was a reasonable value?
But, at the time the law didnt require the company to expense these options at the
time they were granted.
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Now, they must expense when granted.

Probably changes outcome here. They distinguished from a case because tax
regulations required the options be valued at the time of the grant.
Prof: Id want to know! Why does it matter if the law requires them to calculate.
- Held: Nothing required the company to calculate the value of the options at the time of
the grant.
Remedies
Prospective (if hasnt gone through yet)

- Injunction (corrective disclosure)
Retrospective
- Damages
o Must be a monetary injury; plaintiff must prove
Rescission (undo transaction)
- Most courts say no if the deal is long since done.
Reimbursement of expenses
- If the Ps win, their costs of bringing the suit are reimbursed.
Attorneys fees
- Default American rule is no reimbursement
- But, exception when confers substantial benefit on corporation.
o All the shareholders benefited at s expense.
o So, corporation must reimburse successful plaintiff.
Control contests
Additional requirements for proxy statements
See above under 14a-3.
Timeline
Annual report sent

- Only incumbents in control need to do this
Proxy statement and card sent
- Check how want to cast vote: both sides will do this
Free writing w/o statement
- Free written communication, cant do before previous step.
Vote
- Everything else must occur so sufficient time for them to process information before vote
Corporation must provide shareholder list or mail insurgents proxy materials
Rule 14a-7.
Insurgents have to pay the expense of mailing.
Note: Theyd rather have the list so they can contact the major shareholders and not pay to
contact everyone.
Proxy Contests Relatively Rare
Costly: Asymmetry
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- Insurgents only reimbursed if they win.

- Most benefit goes to other shareholders (Free-Riders)
- Tender offers allows insurgent to capture full benefit of increase corporate value.
o Buying control is more expensive in absolute dollar terms, but then to extent you
benefit the firm you capture full benefits b/c majority or total owners of firm.
Shareholder apathy
- 100 votes out of 30 million.
- Opportunity cost of being informed, why bother
- Wall Street Rule
o If really dissatisfied, why not just sell rather than try to influence management.
Proxy fights fell into disfavor when tender offers became more popular.
- Proxy fights have come back recently as a way of undoing management defenses for
takeovers from tender offers.
- There are also state law rules that protect current management: which says they can take
into consideration other interests than just shareholders when deciding how to respond: it
can consider effect on employees
- Quite often to see tender offer and a proxy contest: Oracle did an offer for peoplesoft
initially failed. So they did a proxy contest to elect their people to board of directors.
They then ended up agreeing to work something out.
Dispute must concern policy and not personal control/personality
Must be an effort to inform shareholder (strategic vision)

- Not just spending this money for a contest of personality as opposed to policy underlying
the business.
Amount must be reasonable
Firm may reimburse only reasonable/not excessive and proper/legal expenses.

- Disclosure statements to shareholders
- Telephone solicitations
- In person visits to major shareholders
o Winging and dining said shareholders
o Private jet to bring to HQ
o Lavish expenses are really only justifiable for persuading major shareholders.
But great deference as to what is reasonable. Rosenfeld
Firm may reimburse incumbents (current mgmt), win or lose
Incumbents can have corporation pay or reimburse expenses without shareholder approval
Presumably protected by BJR, assuming a bona fide policy dispute.
- Plaintiffs would have the burden to show wasteful, but waste is much harder to prove
than mere unfairness.
Levin v. MGM
- Mgmt can use corporate funds to pay for expenses it incurs in conducting their proxy
solicitation.
- Policy: Why allow management to solicit proxies?
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o Corporate stability is an important value, because could be very harmful to

shareholders to continuously change.
o Having current management pay personally out of pocket to defend themselves is
insane, because someone sitting on the board of directors may have little or less
incentive to be on board.
Firm may reimburse insurgents only if they win
Shareholders must ratify the payment after full disclosure.

Policy: Insurgents may only be compensated if they win. Is asymmetry justified?
- Dampens their incentive to seek out firms. But will only do so if they think they can win.
- Weed out frivolous insurgents.
- However, could argue fact they are being contested might suggest doing a bad job, but by
providing disincentive you weed out both frivolous and some non-frivolous cases
Challenges due to Conflict of Interest
Can challenge expenses if there is an apparent conflict of interest.

- E.g. hire PR firm partly owned by Directors brother.
Duty of loyalty claim: Burden shifts to the incumbent management
- They dont have to show just that the process is fair (i.e, arms length), but entire fairness:
e.g., reasonable rate.
- Under DE 144, transaction would be acceptable if approved by majority of disinterested
directors or shareholders in either case after full disclose of material facts/conflicts of
interest.
What if merely owned by a friend?
- Friendship is generally NOT sufficient to do a duty of loyalty review requiring entire
fairness.
Rosenfeld v. Fairchild Engine & Airplane Corp.
Reimbursement is the issue here. The losing incumbents were paid 106k +26k, and the
insurgents (win) $127k.
Judgment for new management, insurgents can get reimbursed.
Management may use corporate funds to pay for expense they incur in conducting their
proxy solicitation provided
- The amounts are reasonable
- The contest involved policy questions rather than personal control
- Can reimburse successful insurgents under the same conditions.
o NOTE: management must believe in good faith that policy is in the best interest of
the firm and the firms shareholders
- Lingering issue: is it that easy to separate policy from personal dispute?
o Dissent makes a convincing case that the distinction is unreal because
You can frame an argument that the underlying motive is concern about protecting
your position.
Great Deference for reasonableness (cite to for this proposition)
- Majority was unwilling to carve out an exception for having too much fun while
informing shareholders
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Shareholder Proposals
Qualifying shareholders may submit proposals for shareholder vote
Rule 14a-8: Allows qualifying shareholders to put a proposal to a shareholder vote

o See below for definition of qualifying
- At the companys expense
- Company must include proposal in its proxy materials for upcoming annual or special
shareholder meeting.
Why prefer/oppose a proposal as compared to a proxy fight?
- Expense
o Shareholder proposals are cheaper, because happens at the companys expense.
o Proxy fights are very expensive.
- Board of Directors
o Proposal, with you dont get any people on the board of directors: it is much more
indirect: company need not actually implement your proposal.
o If your underlying motive is control: Management often tries to exclude shareholder
proposals
Not often successful
- Lose getting it in the proxy materials more than they win.
- However, there could be some abuses of it which are wasteful: proposals that are
submitted by radical fringe groups: no evidence they actually improve companys stock
price.
Why Proposals Good
- Gives shareholder voice
- Gives shareholders motivation to make good suggestions; by lowering the free rider
problem of making suggestions: More Democratic.
Two Common Types of Shareholder Proposals
Corporate Governance
- Eligibility criteria for directors (i.e. age)
- Require directors hold a specified minimum number of corporate shares
- Split CEO and chairman of board
- Executive compensation
- Shareholder committee to advise directors
Social/Political Issues
- Human rights
- Environment
- South Africa
- Animal rights
- Anti-discrimination
- Anti-Affirmative Action
Note Rule itself deliberately written in question answer format to make it easier to read.
Responses to Proposals
Attempt to exclude on procedural or substantive grounds

- Must have specific reason to exclude that is valid under Rule 14a-8.
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Include with opposing statement

- We recommend you dont vote for
Negotiate with proponent
- Wide range of possible compromises
Adopt proposal as submitted
Process for excluding a proposal
Mgmt files a notice of intent to exclude with SEC

- Accompanied by opinion of council if relying on legal issues
- Under 14a-8, must give notice to shareholder is something that can be remedied.
SEC Response
Shareholders can ask for another review or seek injunctive relief

Eligibility for 2011 version
Same as below (1% or $2,000 and held >1 year)
Shareholders may now submit and vote on proxy access proposals
In the 2011 revision to 14a-8(i)(8).

Can put in proposals to give shareholders the right to include director nominees in company
proxy materials.
- Cheaper than soliciting proxies at your own expense.

(b) Ownership threshold (1% or $2,000 of companys voting shares for at least one year and
through the voting date).
(d) Less than 500 words:
(c) 1 proposal per shareholder per meeting:
(h) Must attend shareholder meeting (or have representative at meeting).
(e) Deadline: Rule 14a-8(e)

Burden of Proof on company
Company seeking exclusion bears burden of proof Rule 14a-8(g)
Provision 1: subject would be improper under state law
Delaware 141(a) says all corporate powers will be exercised under the authority of the
board of directors
- So cant be a binding order. Lovenheim
- But if it is drafted as suggestion then often okay.
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Provision 2: Violation of law

Provision 3: Violation of Proxy rules
Any of the rules, including 14a-9 (false or misleading)
Provision 4: Personal grievance or special interest

Personally benefiting you and not shareholders at large
E.g. proposal by union to offer employees a more generous pension.
Provision 5: Relevance (not significantly related to company).
First prong: If issue is NOT 5% of earnings, assets or sales AND

Second prong: If issue is NOT otherwise significantly related to the companys business
- Interpreted to mean ethically/socially significant and relates to the business.
- If social/ethical issues implicated & show society thinks important (e.g., b/c on news
channels): then only need to be related to companys business
o E.g., humane treatment of animals of companys food supplier. Lovenheim
o But, not if you submit proposal on rainforest preservation for a company performing
arts
Provision 6: Beyond Power to Effect/Control/Implement Proposal
E.g., suggesting company lobby for national health care reform may be futile.
Provision 7: Management functions (ordinary [mundane] business)
E.g. proposal directing Microsoft to evaluate a particular litigation strategy.

Not bright line rules, so bring in as much evidence as can to make it look like it falls within
the exception.
Exception:
- Significant strategic decision
- Will significantly affect the manner in which a company does business
- Involves an issue of social significance evidenced by widespread public debate
Provision 8: Concerns a Director election
If it seeks to include a specific individual, not just a proposal to allow shareholders in general
to nominate Directors.
- Also if would disqualify nominee, question nominees qualifications, etc.
- Or would otherwise effect upcoming election.
Provision 9: Conflicts with companys proposal
Giving explicit preference to companys view (e.g., management may put its own
environment proposals to exclude shareholders)
Co. could probably prempt by making its own proposals that conflicted with the
shareholders.
- Must abide by the required procedures.
- But, bad PR for most proposals so dont do.
Lovenheim v. Iroquis Brands PG 559
Shareholder proposed they form a committee to investigate the methods used by the firms
suppliers in producing stuffed ducks and to report results to shareholders.
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- Does not actually say they have to exclude it so doesnt violate Provision 1
o An attempt to shed light on the issue, but does not require the company to take a
particular course of action.
Rule 14a-8(i)(5) analysis
- First prong: Not 5% of earnings, assets or sales
- Second prong: If issue is NOT otherwise significantly related to the companys
business
o Lesser std if social/ethical issues implicated
o FN 3: Significant in ethical or social sense: e.g., human treatment of animals.
Must demonstrate both you and society think this is important issue.
Prove with historical stuff, news coverage, legislative debate, support of nonprofits, NGOs, etc.
- Must be related to the business though
o If you submit proposal on rainforest preservation to a company performing arts it
would not adequately be related.
CA v. AFSCME
Proposal requiring board to reimburse successful insurgents of reasonable expenses.

- Allowed board to determine reasonable.
Held, improperly impinges the boards discretion whether to reimburse or not.
- Simply requiring expenditure of funds doesnt remove process component.
o E.g. requiring the board to rotate cities for shareholder meetings
- But, cant require the board to potentially violate their duties.
Hypos
Proposal recommending firm to ban sexual orientation discrimination

- Ordinary Business Grounds because relates to personnel policy.
- Just recommendation: so not improper under state law
- (Economically not relevant AND not implicating important social or ethical issues:
however from the animal cruelty case you could assume this is a lower standard)
- Merely a personal grievance and not related to shareholders at large
- SEC: Did not allow the company to exclude the proposal (did not issue a no action letter)
Anti-affirmative action proposal submitted by white supremacist group
- Ordinary Business Grounds
- Personal Grievance
- SEC: AT&T had to include the proposal, but wrote a statement deploring the proposal.
To prepare report on companys in Burma: particularly to ensure not benefiting from human
rights violations (.01% of sales)
- Economic threshold and not significantly related socially and adequate nexus
o Includable
Having Microsoft include particular strategies in their anti-trust litigation
- Object: on ordinary and business grounds (no ethical/social exception here.)
- No action letter
Requiring company to report sales in developing country
- Object on ordinary business grounds
- Had to include it.
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Problem 1, p.555: Auto Co. that specialized in small economy cars began producing sports
car. Expected not to make a profit but thought it would improve their image.
- Proposal 1: Company shall not make car.
o Excludable, making it obligatory IVO (7).
o Also improper under (1) because improper under state law.
- Proposal 2: Shareholders recommend not make the car.
o Probably permissible.
Gets around (1) because not binding.
Not a management function under (7) because significant strategic decision.
o But, Co. could still not implement and get BJR protection so long as make some kind
of consideration and then decide not to.
- Proposal 3: Amend by-laws to prohibit production of sport cars.
o Didnt get to in class, check slides.

Board decision not to act is protected by BJR
Even if resolution passes board can still not act and is protected by the BJR.
Shareholder could try to submit a duty of care claim but absence fraud, self interest, or
illegality protected by rule.
Bylaw Amendments
Under state law, shareholders can amend the bylaws.

Includable under AFSCME v. AIG, Inc. (2d Cir. 2006)
- Company may exclude a shareholder proposal for a bylaw amendment concerning a
specific seat that allows shareholders to place their nominees on the corporate ballot.
o They want included alongside incumbent boards nominees in the companys proxy
materials.
- Exclusion for proposal that relates to an election.
o They dont want a specific person put on the ballot, they want the procedure changed.
- Court says conflicting SEC interpretations and they go with earlier one: exclusion only
applies to proposals RE a specific seat.
- The rule was subsequently modified to over-rule this outcome.
o But then it was amended again so now the outcome would be the same as here.
- Pros/Cons of excluding:
o When employee union, proposals may be beneficial to employees but not to
shareholders.
o Might fight shareholder apathy
Shareholder Inspection Rights
Note: this is one of the tools at hand mentioned in demand cases to obtain sufficient
information.
In proxy fight, rules dont require disclosure of shareholder list
Rule 14a-7: Requires a corporation to mail the insurgents material at insurgents expense or
simply give them the shareholder list and allow them to send out the materials.
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- Corporations prefer not to give up their shareholder list.

- Does not require them to provide the shareholder list or other corporate records.
Insurgents often find this unsatisfactory so look to state law for requirements
Interest in holding the board accountable via proxy system (b/c agency problems/may shirk
obligations).
But junk mail and competitor access to proprietary corporate info (solely to gain advantage)
cautions against releasing lists.
General requirements
Own shares for at least 6 months or own > 5% of company

- Keep you from buying litigation, but note that DE doesnt have this requirement.
Have a proper purpose

Any shareholder has the right to inspect and copy for a proper purpose
Right: Any stockholder shall have right to inspect and make copies of stock register, list of
stockholders, and its other books and records. DGCL 220(b)
Shareholder must make a written demand setting forth a proper purpose. DGCL 220(b)
Corporation must respond within 5 business days, and if they dont they may apply to the
Court of Chancery (which has exclusive jurisdiction) very broad discretion DGCL 220(b)
Burden of Proof
DGCL 220(c): If shareholder only seeks access to the shareholder list, BOP on
corporation to show improper reason
o Arguably, the shareholder list is less invasive so require corporation to meet burden
If shareholder seeks access to other corporate records, BOP on shareholder to prove proper
purpose.
Directors may always inspect if reasonably related to position
If directors did not have such access, it could be impossible to exercise their duty of care.
DGCL 220(d)

Must be reasonably related to such persons interest as a stockholder
DGCL 220(b)
Proper
- Gather information to help prove mismanagement or help you value your shares.
- Seeking explanation for decline in profits.
- Communicating to engage in proxy contest to oust others. Crane Co.
Improper (ulterior or vindictive motives)
- Proprietary info for competitors
o But, mere fact that requestor is a competitor isnt enough.
- Get prospects for personal business
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- Institute strike suit

- Pursue political/personal agenda
Communication with other shareholders RE wellbeing or value of corporation is appropriate
Crane v. Anaconda p.557

- Crane wanted to buy shares of Anaconda. Crane requested a list of the shareholders but A
only wanted to contact the large shareholders to save money.
- Anaconda argued seeking control was not a proper purpose for demanding the list.
- Held, the matter was proper as it was one of general interest to As shareholders by virtue
of their common interest in the corporation as shareholders.
o Whenever a corporation faces a situation having potential substantial effect on its
wellbeing or value, the shareholders are necessarily affected and the business of the
corporation is involved.
Primary purpose must relate to the value of your investment
State Ex Rel. Pillsbury v. Honeywell p.560

- P bought Honeywell stock because he was upset that they were making fragmentation
bombs. requested access to Honeywells shareholder list and corporate records relating
to production of the bombs. He admitted didnt care about the effect of the value of this
on the stock
o Applying Delaware because Delaware corporation
- How could he have prevailed?
o Framed his argument: these fragmentation bombs are harming our reputation, which
will ultimately hurt our bottom line.
- Shareholder proposal assuming 14a-8 okay (procedural req. ownership amount, holding
period)
o Companys natural inclination would be to exclude it because not relevant but he
could argue that this is exception for social significance.
- The primary motivation must have to relate to the value of your investment.
o If sole purpose is maintaining proceedings of this kind, the person is not truly
interested.
Doesnt matter if you have a secondary purpose, so long as primary is proper
Doesnt matter if have a secondary purpose so long as the primary purpose is okay.
- Once you successfully frame it is about your investment doesnt matter you have
secondary purposes.
Sadler v. NCR Corp PG 578
AT&T doing tender offer and proxy contest and wants to take over the board. NY
shareholder access statute applies here. AT&T had no right under NY or Maryland law to
shareholder list because didnt own 5% of the shares and didnt own it for 6 months. So they
work with Sadler (shareholder) who did meet this requirement. They call AT&T an agent for
Sadler.
- AT&T wants the CEDE list (doesnt give the names of shareholder but only the
intermediaries) and the NOBO list (gives the specific names of the underlying investors
who have not objected).
o NOBO list is what is crucial here.
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Corporation is trying to argue that the statute gives access to the CEDE list but not the
NOBO list (because NOBO list takes significantly more time to prepare.)
Holding
- Corporation must provide both lists to AT&T
- NCR must prepare NOBO list even if not pre-existing
o Delaware law to the contrary: Delaware only requires preparation of CEDE list.
- Rationale
o Liberal interpretation of statute to facilitate shareholder communication.
Now changed by legislation, they only have to provide the NOBO list if it is already
maintained.
- It is of course possible they may have it for their own purposes.
- Makes NY more like Delaware courts: Delaware courts do not require the company to
produce the NOBO list.
Shareholder Voting
Common Stock as a Bundle of Rights
Economic rights (i.e., cash flow rights)

- Receive dividends (distribution of profits) when and as declared by the board of directors
o BJR standard of review for dividend decisions
- Residual claim on assets in liquidation
o Many other creditors paid first, then preferred shares, then common stock.
Voting rights (i.e., control rights): Elect directors and approve some extraordinary matters
Rationale for Shareholder Voting Rights
Link ownership and control

- Put your money at risk, you should have some say in how the company is run.
- Residual control right accompanies residual cash flow right
Prevent managerial overreaching Managerial authority v. accountability

The economic/control rights of shares can be unbundled.
- Have to have one of three or its not a share though.

Stroh v. Blackhawk Holding
- Class B shares have both economic rights and control rights. But, Class B shares have
voting rights but no economic rights. For management, the per share cost of a vote was
cheaper. Managers paid 50 cents per vote. (and 500,000 votes at $1,250) Shareholders
paid $4/vote.
- Risk: management may be unaccountable to shareholders; agency costs.
o May be more motivated to make a big gamble because less at stake.
- Why didnt they just sell nonvoting shares to the public?
o IL constitution at the time it was unconstitutional to sell shares without a voting right,
so couldnt simply sell nonvoting shares.
- Validity of Class B shares: Ps argues stock interest necessarily includes both economic
and voting interest
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o Court disagrees, Class B shares are valid. Stock, need not have all three rights, it can
be unbundled.
o Illinois statutory definition of share: units into which a shareholders rights to
participate in control [voting] of the corporation in its surplus or earnings [cash flow],
or in the distribution of its assets, are divided [cash flow].
Policy analysis
Against allowing
- Voting shareholders might take advantage of non-voting shareholders
o Power without accountability (classic agency problem)
o Possibly perverse incentives for voting shares
- Inverse relation between value of voting and non-voting shares.
Positive reasons for promoters wanting to maintain control
- Startup company: founders need to raise additional capital but reluctant to give up control
b/c they believe they have the best vision for company.
Why might shareholders wish to deviate from perfect alignment of cash flow (economic and
control voting rights?
- Attract top employees.
- Lender, well lend to you, but perhaps bank will also want at least temporary voting
control.

Voting Thresholds
DGCL 216(1): quorum = majority of shares entitled to vote (default, but no less than 1/3)
(2): matters other than election of directors majority of quorum present (default)
(3): election of directors plurality (default)
Default rule regarding per share voting right
DGCL 212(a): One share, one vote

- Can be modified. DGCL 151(a).
- Delaware is liberal, no votes are possible, but some states more restrictive view.
P&W v. Baker
- 1 vote for each share of 50 or less. 1 vote for every 20 shares after 50. & Limit of 25%
voting shares for any stockholder: Plaintiff had 28% of the shares but only 3% of the
vote. P tried to say this is against Delaware law, but court upheld this.
- What legitimate purpose? Structure generally ensure promoters maintain control over
corporation.
o Lack accountability, but may accept anyway if expected return is high enough.
Classes of stock can have different voting/cash flow rights
DGCL 151(a): Classes of stock with differential voting rights and/or cash flow rights is
permissible. (but must be noted in the articles)
- Stroh v. Blackhawk
o Stock need not have the rights, e.g., can be voting only. SEE NEXT PAGE
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Plurality voting
Default rule for BoD elections in the majority of states.

Whoever receives the most votes winsdont need a majority.
- So, theoretically a director could be elected with one vote in an uncontested election.
Example
- 20 shareholders each with one vote, 5 board seats, and 6 nominees.
o Each shareholder gets to vote for 5 directors (so each candidate has up to 20 votes
for/withheld).
o Top 5 directors by # of for votes are elected.
Majority voting
Each candidate must receive a majority of votes or they arent elected.

- 81% of S&P 500 companies now use majority voting.
- So if three candidates had 8 yes/12 no, etconly the other 3 would get elected because
the other 3 dont get a majority.
Failed elections
- In practice, many companies have provisions that require the failed director to tender
their resignation but give the board large discretion to not accept it.
o Result is that most companies have failed elections but those directors remain seated.
Theory: If move to majority, may result in failed elections but will increase director
accountability.
Cumulative voting
DGCL 214: Cumulative voting

In straight voting, a shareholder with a majority of shares will control all elections.
Straight Voting
- E.g., straight voting 6 director slots: Shareholder A: 60 shares. Shareholder B 40 shares.
- Straight Voting: Shareholder A chooses all 6 seats (60 votes per candidate)
Cumulative voting: each shareholder can cast total votes in any manner.
- Total votes per shareholder = number of votes per director times number of directors.
o Shareholder A 60 x 6 = 360
o Shareholder B 40 x 6 = 240
- Number of shares required to elect one director
o Approximately = Number of Voting Shares / Number of directors +1
o 100 shares / (6 slots + 1) = 14.28
o At least 15 votes per director should get a person on the board.
Shareholder A has 40 shares / 15 shares/position = 2 directors of 6.
- Thwart this formula by
o Increasing the total number of voting shares (of majority shareholder)
o Elect fewer directors voted on per period (staggered board elect 2 every year) (play
with denominator)
Staggered vs. annual board elections
Under annual, all directors elected each year.

- 81% of S&P 500 now use.
Under staggered, portions are elected each year.
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- Results in the incumbent board being more entrenched. If you want to replace the board
by proxy, have to do it for 3 years.
Control in Closely Held Corporations

Salient Features
Only a few shareholders (often founders and family members)

Shareholders are usually also directors, officers, or employees
- Degree of familiarity and awareness not present in public corporations
- Passive investing is rare.
Awkward fit, b/c default rules designed for public corporation (kind of rules would have
negotiated by default)
- Closed corporation shareholders are likely to want to modify the default rules.
No secondary market (public trading) for the shares
- i.e., Wall Street rule inapplicable.
- Raises peculiar liquidity issues
- No exit implies minority investors need more voice
Common Contracting Issues in Close Corporations
- How decisions will be made
- Personnel, Hiring and Firing: Who will be directors/officers and their tasks
- Salaries and dividends
- Bringing in new shareholders
Remedy: is specific performance appropriate in context of closely held corporations
- Many courts award specific performance.
- Damages perhaps preferable.
Requirements to be a Closely Held Corporation
DGCL 342 allows election of close corporation status, if:

- Articles provide that company is a close corporation
- No more than 30 shareholders
- The corporation did not issue stock in a public offering
- Stock is subject to one/more transfer restrictions specified in 202
o Mandatory redemption / Forced transfer
o Corporation or SH approval of the transfer
o Restriction on transfer to certain persons (unless manifestly unreasonable)
o Any other lawful restriction on transfer or registration
o Etc.
Shareholder Agreements
Mechanisms for adjusting the authority structure
Shareholder agreements restricting directors discretion, e.g., McQuade, Clark

Shareholder Voting agreement:
- Vote pooling (where shareholders will agree to vote together), e.g. Ringling,
- Voting Trusts (title of shares transfer to trust and trustee votes shares according to
provisions of the trust agreement)
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Different classes of shares
Shareholders may agree to elect directors, but cannot remove BoDs discretion RE officers,
salaries, or policies
McQuade v. Stoneham
- McQuade Treas. & Dir (70 shares); McGraw VP & Dir (70 shares); Stoneham Pres & Dir
(1306 shares). They make an agreement to use their best efforts to elect themselves as
directors. And as directors, they agreed to appoint themselves as officers at specified
salary. Stoneham and McQuade then have a falling out.
o Minority shareholders are not part of this agreement.
o Court granted monetary damage but didnt award specific performance.
- Doctrinal basis: Inappropriate to give shareholders right to fundamentally interfere with
the directors.
o A contract is illegal and void so far as it precludes the BoD . . . from changing
officers, salaries, or policies, or retaining individuals in office.
- So the court voids the restriction on the boards discretion.
o Problem is that they agree not to fire McQuade for any reason. Removes all
discretion.
Pooling their votes and agreeing who will elect as directors is not the
problem.
They cannot agree as shareholders what officers they will elect.
- How could they have assured him of his position as an officer?
o Through an employment contract (could put in provision only for cause, and require
unanimous consent of all directors, large penalty clause.)
- Dissent: This is an artificial distinction. They are shareholders and can remove directors
not electing officers they like.
Exception: Unless all shareholders are party to the agreement
But still look for fraud/injury to public.

Clark v. Dodge p.588
- Two drug companies with two shareholders. Clark 25% knows formula; Dodge owns
75%. Main agreement is keeping Clark as an officer in exchange for him revealing
formula to Dodges son.
o Dodge promises that he votes his shares in such a way as Clark as a director and as
director vote to keep Clark as general manager (subject to Clark being faithful,
efficient and competent) and agree Clark gets at least 25% of profits.
- Clark got ousted from general manager, b/c of personality conflict
o Court upholds agreement.
- Agreement similar to McQuade.
o But court upholds the agreement because no minority shareholders or creditors
here to worry about (they had all agreed).
Court worries about protecting minority shareholders in closely held corporations
because they cant just sell their shares due to no market.
- Court grants specific performance and orders him to be reinstated.
Under modern approach, also more latitude if reasonable, no objecting minority interest and no
public injury
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Galler v. Galler p.595

- Ban (& Emma) own 47%; Isadore (& Rose) own 47%; Employee Rosenberg owns 6%.
Two 47% shareholders make agreement that benefits surviving widows if one of the
brothers die. Isadore and family refuse to perform agreement when wife tries to collect
the death benefits. Minority shareholder Rosenberg did NOT object to agreement.
o Agreement Valid even despite lack of unanimous shareholder consent
- Adopts modern approach: Protect freedom of contract where no one appears to be hurt
and no policy rationale against it.
o 1. Corporation is closely-held (look at substance of corporation)
o 2. Minority shareholder did not object (under McQuade if agreement does not include
all the shareholders cannot bind the board in that matter but, no problem if no object)
o 3. Terms are reasonable
- If Minority shareholder Rosenberg had objected about any of the agreements terms?
o No because the agreement probably would have appeared to be reasonable.
Penalty for violating pooling agreements = contract damages (and maybe vote invalidation)
Ringling Brothers (Del. 1947) p.576

- Agreement between 2 of 3 stockholders that theyd agree on directors and vote as a bloc,
if they couldnt agree theyd arbitrate and the arbitrators decision would be binding.
They cant agree and one of the shareholders refuses to vote as the arbitrator directs.
o Stated purpose was to aid them acting jointly.
- The agreement didnt empower the arbitrator to actually vote the shares.
o No express delegation and it was not a necessary or usual incident to that function.
o Agreement did not make the arbitrator a trustee of an express trust.
- Nor did it empower one party to vote the others shares.
o No express provision and the language used suggests action by each.
o This would be a more effective way of enforcing the arbitrators decision, but no
grounds for the court to read it in.
- Pooling votes like this is not illegal.
o There was a statute imposing restrictions on voting trusts, but the court held this
statute didnt address mere agreements to vote.
Voting trusts and pooling agreements are very different things.
o A group of shareholders may, without impropriety, vote their respective shares so as
to obtain advantages of concerted action.
o Reasonable provisions for cases of failure to agree are also unobjectionable.
Here, agreement doesnt allow them to take any unlawful advantage of the outside
shareholder.
- So, the votes here were in breach of contract. And DE law allows the court to reject votes
from registered shareholders that are in violation of the rights of another person.
o Thats the proper remedy, not voting her shares or declaring the election invalid.
Agreement may be enforced by allowing others to buy violators shares

Ramos v. Estrada
- Voting agreement between two groups of people that formed corporation together to get a
tv broadcast license. This is not a closely held corporation but it resembles one.
o Agreement provided that is any shareholder voted against the group, it was deemed
consent to sell to the remaining shareholders at a predetermined (fair) price.
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- Court holds this agreement was not a proxy (subject to different rules).
o They werent giving someone else the authority to vote their shares, they were
agreeing how theyd vote them.
- A statute recognizes the right of shareholders in closely held corporations to pool their
votes by written agreement.
o Even though the corporation is not legally a closely held corp (no declaration), the
court says the agreement is valid and binding.
The comment to the statute said it wasnt intended to affect other valid
agreements, like the one at issue here.
- Nor is the buy-out clause a problem.
o The statute gives the court equitable power to enforce shareholder voting agreements.
o There was no fraud in procuring the partys agreement.
o And, this isnt a forfeiture of their shares, they voluntarily chose to breach and they
get full compensation for their shares.
Fiduciary Obligations of Shareholders

Introduction
At early common law, shareholders had no fiduciary obligations to firm or fellow

shareholders.
- Some erosion vis a vis controlling shareholder of public corporations (e.g., Sinclair Oil v.
Levien)
- More erosion in close corporation
Mass. Golden Rule: Shareholders in CLC owe each other duty of strict good faith
- Utmost good faith and loyalty = may not act out of avarice, expediency, or self-interest
in derogation of their duty of loyalty to the other stockholders in the corporation.
Donahue v. Rodd Electrotype analogized close corporations to partnerships
- Very protective of minority shareholders in close corporations
- Applied partnership like fiduciary duties to shareholders of close corporations
o Explicitly invoked Cardozos decision in Meiinhard v. Salmon. (duty of finest
loyalty)
o Tampering off: Initially appear to be fully force with partnership standards but they
lesson so fiduciary obligation ends up between partnership and public corp, but closer
to partnership.
But, balance legitimate business purpose with practicality of less harmful alternative
A balancing test between fiduciary duty of majority and right to selfish ownership
- 1. If challenged majority must have some legitimate business purpose (burden on them
D)
- 2. Burden then shifts to minority P to show less harmful alternative
o Court must then balance the legitimate business person against practicability of
proposed alterative.
- Rationale: majority invested more in corporation, so should have more control, but not
come unduly at the expense of the minority: minority investor new full well of control
structure (assumption of risk)
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Wilkes v. Springside Nursing Home

- 4 equal shareholders. All officers and directors of corporation. There is a disagreement
relating to the sale of a corporation asset to one of the shareholders, which makes him
mad so then takes it out on Wilkes out by (1) stripping him of his employment and
director position, and (2) refusing to buy his shares at fair price.
- Wilkes gave notice of intent to sell shares: He was stripped of his salary and offices;
Other shareholders continued to draw salaries. Connor made lowball offer for Wilkes
shares.
o Problem is that he loses his investment entirely, because it is paying it out only in
terms of salary, and third person reluctant to buy in, in this situation.
So from this, the court infers an employment right.
- Legal Claim:
o Breach of fiduciary duty by being improperly frozen out
Directors breached their duty or as controlling shareholders breach fiduciary duty.
o Ways to be frozen out:
Donahue way: bought back only majority shareholders at given price, not
minority.
Denial of employment (when employment is essential way to realize return)
Frozen out by voice, but still receive dividends
- Stockholders in close corporations must discharge their management and stockholder
responsibilities in conformity with strict good faith standard.
o Therefore, must ask whether the controlling group can demonstrate a legitimate
business purpose for their action.
Legitimate Business Purpose: Court have argued P services are no longer
necessary, but P could argue he has other skills
Or that P was violating duty of care/loyalty or behaving in a negligent manner.
o If a legitimate business purpose is advanced, burden shifts to minority stockholder to
show that the same legitimate objective could have been achieved though alternative
course less harmful to the minoritys interest.
o Court must then balance the legitimate business purpose against practicability of
proposed alternative.
- What remedy does the court grant to Wilkes against other shareholders?
o Not granted reinstatement, but awarded damages against others in their personal
capacity
o In general sense the excess value is outside of the corporation so needs to recover
unjust enrichment
Could Wilkes have brought another claim against them as directors?
- A derivative claim on behalf of the corporation: The corporation is harmed by paying the
others excess salary.
Controlling shareholders were all directors
Paid excessive salaries to themselves as officers in violation of DoL to
corporation and shareholders
o What standard would apply to the claim
Conflict of interest: So, no BJR
Entire Fairness standard would apply: D directors must prove that the salaries
they paid themselves were entirely fair to the corporation.
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o Remedy: repay excessive salaries to corporation. But sometimes courts just send the
correct amount directly to minority investor:
- Why reluctant to bring derivative claim?
o Concern is forced to pay excessive salaries to corporation.
o They may decide then to keep money in the firm and decline to pay a dividend, and
then we would get to the question of by refusing to declare dividend if freezing
minority out.
o JWC: potential tax ramifications
Result under partnership law?
- Cannot fire Wilkes as a partner
o Partners are entitled to participate in the business
- What remedy would Wilkes have in that situation?
o Wilkes could have threatened to dissolve the partnership, thereby forcing the others to
buy him out
This seems to have been what he wanted
Problems
- Suppose board had declared $1,000 dividend for all except for shareholder
o Shareholders are entitled to pro rata payment of dividends.
To extent that the salaries exceeded a fair payment for services, they were (non
pro rata) dividends.
o Claim would be duty of loyalty so no BJR presumption: have to prove decision was
entirely fair.
If salaries exceeded fair payment for services, would implicitly contain a
dividend.
- Suppose there was evidence that board found another person to do the grounds at a lower
salary, and then fired him?
o They would be able to show a legitimate business purpose, he may have been able to
argue there was an alternative: giving him a lower salary.
Ordinary BJR and Wilkes would lose (legitimate corporate objective is lower
wage bill)
o Problem arises if other officers receive above market salaries: i.e., included an
implicit dividend
o Have parties implicitly contracted out of the BJR b/c agreed to keep each other on
directors/officers?
- How would you advise parties to avoid this litigation
o Shareholder agreement to maintain each other in office. Enforceable?
Probably under McQuade (contracts where the shareholders bind the directors
hands regarding which officers they appoint and run the company would be null
and void, but under Galler if there are no minority shareholders not privy to
agreement then enforceable per Galler.)
o Explicit employment agreement with Wilkes proving for termination
o Buyout agreement under which the parties are requires to buyout a disgruntled
investor on fair terms.
Mass.: A minority shareholder has fiduciary duty to majority if has a veto power
Smith v. Atlantic Properties Inc. p.623 (Veto Power Case)

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- 4, 25% partners. Articles say 80% must vote in favor, which means anyone has veto
partner. (Original intent was the initial owner didnt want to be ganged up on, but
downside is creates potential for deadlock.) They got a lot of accumulated earnings
(accumulated earnings tax), so much if they didnt pay them out or re-invest them theyd
be assessed a penalty.
o Mr. Wolfson was in highest tax bracket ranging 70-90% for income (and dividends).
Maximum capital gains tax rate 25%, so it did not make sense to him to have them
pay dividends.
o Others refused to do renovations, because they wanted dividends.
- A minority shareholder, at least where he has a veto power over corporate action, has
fiduciary duties to the majority (which flips the normal rule that majority have
fiduciary obligation to majority)
o Wolfson use of his veto power was inconsistent with that duty because it subjected
the corporation to an unnecessary assessment of penalty taxes; dividend declaration is
ordered
- Why is the problem Wolfsons Fault?
o Could argue the others voted for dividends because they were in the lower tax
bracket.
o You could argue that each shareholder rationally voted their self interest, and that
caused the corporation liable for this accumulated earnings tax.: if all equally liable
because indep. voted in self interest then keep the liability at the corporate level:
courts view is more he acted out of spite.
In Delaware, no special fiduciary duties for close corporations
Controlling shareholders only subject to Sinclair std RE conflict of interest

- Nixon v. Blackwell
o Delaware rejects special close corporation fiduciary duties
Emphasizes freedom of contract, definitive provisions of self-ordering
Controlling shareholders subject to Sinclair Oil fiduciary standard that we see in
the public corporation contract.
o Minority stockholder may bargain for protection before parting with consideration.
It would be inappropriate judicial legislation for courts to fashion a judicially created
rule for minority investors who could have bargained ex ante or favorable provisions
in charter by laws or shareholders agreements.
Applicable Sinclair Oil fiduciary std
- Intrinsic fairness and BoP on only if D is self dealing (i.e, on both sides of the
transaction) or other conflict of interest
o BoP on D to show transaction was intrinsically fair to P.
- Otherwise Business Judgment Rule (std of review)
o BoP on to rebut presumption of business judgment (prove fraud, waste,
irrationality)
How would Wilkes be decided under Delaware law?
- Issue was whether entitled to continue in his position because a minority shareholder.
- Delaware would say you should have bargained for that explicitly
o But Mass. (following golden rule) was willing to infer right and reasonable
expectation of continued employment.
- Freedom of K
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o Critique
There is a problem of ex-post opportunism on part of majority.
Also a problem with unsophisticated investors not realizing what entering into.
o Pro
From an economic point of view: you paid the price for discount (meaning you
paid less because you knew youd have less control)
Critique: but could counter hard to value shares in advance, and maybe you
miscalculated the discount.
Some investors prefer more flexibility (corporation) others want more fiduciary
standard (opt for partnership)
Courts should respect the partys intent by leaving private investors free to go as they
wish and not intermix.
Some profitable investments / opportunities will never be made if one cannot
make such bargains limiting the minoritys rights.
Remedy for breach

Proper remedy for freeze-out: restoration to position would be without wrongdoing
So, if reasonably expected employment, may order reinstatement, back pay, or both.
- If expected to participate in favorable result of operations (profit), entitled to participate
to the extent those results have been wrongly appropriated by the majority.
Brodie v. Jordan (Mass. 2006) p.619
- Widow of deceased founding shareholder and former president frozen out by other two
shareholders. They paid no dividends but paid themselves salaries. They refused to vote
for her nomination to the board. Trial court ordered a forced buy-out of her shares.
- They didnt dispute they froze her out. They disputed the remedy.
o A freeze out is a violation of the duty of utmost good faith and loyalty.
She should be allowed to participate.
Giving her access to financial records.
Maybe paying her a small dividend.
Reasonable effort on others to justify their salaries.
o But, the court held that a forced buy-out was not the appropriate remedy in this case.
- The proper remedy for a freeze-out is to restore the party to where theyd be without the
wrongdoing.
- But here, there was no buy-out agreement between the parties. The judges order created
an artificial market for shares that, as a close corporation, have little or no market value.
- Remand to consider monetary relief (where injury can be quantifies) and injunctive relief
requiring they allow her to participate in the company.
o Arguably, theyd be putting her into a tough position (animosity) and dividends would
be more appropriate.
Mass.: No right to continued employment unless reasonably expect continued employment
Ingle v. Glamore Motor Sales

- 4 Shareholders. Explicit buyout agreement gave dominant shareholder option to buy
shares of any other shareholders whose employment ceased for any reason. Ingle,
person being bought out, is not unhappy about the price of his shares.
o Argument: as shareholder he wants to have fiduciary protection against being fired.
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- Court: Concludes as shareholder (who was previously just an employee) no legal right to
employment security.
- Dissent: argued once he became minority shareholder he could no longer be fired at will
and he should have some fiduciary protection for continued employment.
o Distinction by majority: Ingles is an employment case primarily; Wilkes is primarily
closed corporation.
Is it possible to reconcile the result in Ingle with result in Wilkes?
- The parties in Ingle had a shareholder agreement while the parties in Wilkes did not:
explicitly acknowledged could be terminated.
- In Wilkes all the shareholders started together as shareholders which created basis of their
relationships, whereas in this case Glamore was original owner who brought in a person
who started as employee and only later brought in as shareholder.

4 Grounds for ordering buyout at fair value
1. Buyout agreement between parties

2. Forced buyout in lieu of judicial (involuntary) dissolution
- Oppression, fraud, illegality, waste, deadlock
- Because liquidation is extreme remedy, courts have recognized alternatives such as
ordering the purchase of the minority shareholders stock at a fair price.
3. Statutory Appraisal
- Fundamental corporate change (merger/consolidation/sale of almost all assets) and
shareholder dissented
4. Remedy for breach of fiduciary duty to her (only if other shareholders were offered a
buyout not offered to the shareholder suing)
- Equal Treatment Rule: Treat equally with the other shareholders
- Remedy is limited to what the others received that she didnt.
Involuntary judicial dissolution if fraud, oppression, illegality (towards the minority), deadlock, or
waste
Deadlock among directors to extent firm unable to function & shareholders unable to resolve
it. MBCA 14.30(e)(i)
- Unable to elect board for two consecutive years. MBCA 14.30(e)(iii)
Oppression is defined differently in different jurisdictions
Meiselman Approach to oppression: Conduct that defeats the minoritys reasonable

expectations
Did they invest with reasonable expectation of employment or participation in management

and were they defeated by majority shareholders conduct
- Must be something more than mere disappointment
- The very reasons for participating in the business have been defeated
Reasonable Expectations?
- 1. Were reasonable under the circumstances
- 2. Known or should have been known to the majority
- 3. Central to the petitioners decision to join the venture
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- 4. Limited it to expectations embodied in understandings express or implied among

participants.
Examples of oppression
Directors paying themselves salaries and fees, but not providing any return to her.
Not telling her about shareholder meetings until too late.
Nor providing pro rata dividends among shareholders.
Freeze-out and low ball offer for shares.
Alaska Plastic v. Coppock p.640
- 3 Investors. One transferred 1/6 interest to ex-wife. 3 Original owners paid themselves
directors fees and some personal expenses (and actually overpaying previous husband),
but paid no dividends. Shes not realizing any return on her investment.
o Professional valued company at $23,000-40,000. They offered her $20k, she refused.
o Lower Court required AP to buy her shares at their fair value and both sides
appealed. Remanded, for more facts determination.
- Besides oppression, what other claims could she have brought?
o Derivative suit (Duty of Care/ Duty of Loyalty)
Court disallows it because argues no evidence corporation was harmed: size of pie
was the same, just made her slice too small.
Argue: paying themselves excessive salaries
o Individual action against the corporation for her share of the constructive dividends
(0 vs. 1/6)
But this would just be a one shot fix, and not get at the fundamental problem of
being generally shut out form operation of business.
Constructive, meaning in terms of inflated salary.
- Individual Action against the other shareholders for her share of the constructive
dividends to extent of their excess payments.
o Because her ex-husband got 1/3 instead of 1/6 and she got zero.
Reluctance to dissolve, so generally just order buyout at fair value
Because buyout can destroy synergies

Although if dissolution is ordered, they will probably just bargain and agree on fair value
to avoid going through court channel or be sold at FMV.
Disillusionment statutes may provide for buyout if oppression (frustrate expectations)
Pedro v. Pedro (Minn. 1992) p.657

- Family Business: Alfred, Carl, Eugene. 1/3 each. Each an employee for all adult life.
Equal vote in management. Had a stock retirement agreement (device to buy-out exiting
investor at 75% of book value of the firm).
o Appears that Carl and Eugene were stealing money from the firm b/c cash is missing
from firm. When Alfred demands an investigation, they fire him so he gets no salary,
and they pay no dividends.
Denial of employment when reasonable expectation of lifetime employment w/o
cause
Concern about his ability to realize investment return.
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- Court finds that shareholders have duty to each other to deal openly, honestly, and fairly
with other shareholders.
o Pretty broad expansion of duties!
- Statute grants court broad authority to fashion equitable relief in closely held
corporations.
If oppression, increase damages to FMV despite buy-out agreement
Damages for breach of fiduciary duty to act openly honestly and fairly are FMV minus
amount due under SRA (plus SRA amount already getting).
- So full book value and not the discounted SRA amount.
Damages for breach of implied contract of lifetime employment
- Closed corporation there may be reasonable expectation of lifetime employment for
stockholder, but relates to shareholders intent.
- Unlike Ingles, this buyout K does not appear to contemplate being terminated. Just death
or their voluntary sale.
o Note: Right not originating from this status as a shareholder, inferring his expectation
from their course of dealing.
They had all founded, other family members worked there entire life, they seemed
to plan that the brothers would work until they died/retired there.
- Damages for breach of implied contract of lifetime employment wages until 72
- Should the court have found such a contract?
o In corporate law if you want a contractual right, you negotiate it. It wasnt reasonable
for him to expect lifetime employment.
Maybe provide damages and lost wages if see owner/employee as separate interests
Court says this isnt a double recovery because two separate interests: owner and employee.
- Again broad equitable power of court due to statute.
o Without this broad grant, the court may not have granted to double recovery like
they did in Wilkes.
- Could argue they thought they were King out of the statute with the SRA.
o But, the SRA doesnt address oppression so theyd still have recourse there.
Does the court interpret the SRA or impose mandatory terms?
- It appears to be imposing the mandatory terms of the statute. Its awarding FMV even
though they Kd for less than that.
- It appears from this that the court considers the statute to be more than simply a default
provision.
After this case, the statute is amended to make clear that the court should consider the
expectations of all the shareholders. Not just the .
- And, they added language that written agreements should be presumed to reflect the
parties reasonable expectations.
o Their expectation appears to be that theyd be entitled to 75% of book value, not
FMV.
- The courts themselves have also become less permissive in granting relief when a
minority shareholder was terminated.
o Probably wouldn't change the conclusion about lifetime employment given their
course of conduct.
o So his recovery would be lost wages and the amount provided by the SRA.
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But, should still have buy/sell agreement because only covers oppression
Still useful if want to exit and havent been oppressed. There the statute doesnt help you.
- Want a legally enforceable mechanism to exist.
- But, stating you want to negotiate a buy sell up front may raise some suspicion.
Not oppressed unless completely shut outno dividends (disagree with strategy not enough)
Stuparich v. Harbor Furniture Mfg., Inc. p.663

- Family business. Malcolm has 52% of voting stock. Candi and Ann each own 19% of
the voting stock. All of them also own 1/3 of the non-voting shares.
- Court refuses to grant a dissolution.
o Relevant provision: was that it would be reasonably necessary to protect their rights
and interests.
The court applies the BJR and finds that it is not sufficient they are not getting
along with their brother about business strategy.
Their only interest as a minority shareholder is the right to receive dividends.
They will never be able to win against the larger voting bloc.
o Not a per se right to get a dividend, but once its declared all shareholders must get
a pro rata share.
o There was no evidence of abuse and they received dividends (even without a salary).
They have no complaint about not taking a salary.
They hadnt been frozen out like in Alaska Plastics, so no need to dissolve here to
protect them.
- Could Malcolm reduce dividends to modernize the furniture business (they were upset
because losing money) and buy them out?
o If self-dealing (somehow it disproportionately helped his family who was employed
there), he would have to demonstrate entirely fair to corporation.
o But if done so genuinely to improve, then protected by BJR.
Restrictions on Transferring Controlling Bloc

Market rule: No obligation to share control premium with other shareholders
Zetlin v. Hanson Holdings, Inc. Hanson Holdings and Sylvestri family own 44.4% of the
shares of company. Controlling bloc sells share at more than market price. P argues should
share in the premium.
- Under US law controlling shareholders have no fiduciary duty to share in this premium.
o Rejects the equal opportunity rule
- Absent looting of corporate assets, conversion of a corporate opportunity, fraud or other
acts of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy,
that controlling interest at a premium price
Why would the purchaser pay this premium?
Entrepreneur: Shares worth more in hands of new controlling owners because incumbent is
doing a bad job of managing the new business or because new owners have better mgt skills,
resources, etc.
- Ideally entrepreneur would want to buy all the shares (to capture all of the added value
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Looter: New owner pays a premium because he believes that the control shares carry special
benefits in the form of generous excessive salaries perquisites, self-dealing. (e.g., controlling
shareholder on board appoint themselves as officers and set their own salaries and generally
speaking courts reluctant to intervene b/c BJR unless absurd.)
- Looter, would only want to buy sufficient shares to exercise effective control over the
firm.
Equal Opportunity Rule (not the rule)
Must share premium with minority shareholders.

- Would transform sales of control blocks to a tender offer for all the shares and would
discourage looters.
Would create greater expense, making it harder for potential buyer to do it.
Critique: More direct way to deal with self-dealing by shareholders.
- But it will preclude a lot of beneficial take over by company

Duty not to sell to known looter (act in bad faith)
Duty not to engage in naked sale of corporate office w/o selling underlying shares
Essesx Universal: naked sale of corporate office (selling control of the board when not
selling effective control of shares) is impermissible.
- e.g., one of the elements of the K is the board resigns is impermissible.
- While he was selling them a majority share, their board was classified so it would have
taken several years for the purchaser to actually obtain control of the board.
- Exception if buyer purchases enough shares to gain control of the board.
- Concurrence (Friendly): Directors are fiduciaries of all shareholders so you need 51% for
the election to be a mere formality.
Litigation over what fraction is sufficient to gain effective control (28.3% appears that it
might be enough in public corporation).
Duty not to usurp a corporate opportunity or asset
Permlan v. Feldman. Feldman is shareholder director and CEO. He sells his stake in steel
company to Wilport for a premium ($20 when trading at $10 to $12). Wilport wants access to
steel at standard market price w/o implicit premium, so took control.
- P alleges Feldman sold a corporate asset, the ability to get an implicit premium, not just
control.
- Court concludes violated duty as director, officer, and shareholder.
o Probably strongest argument is violated duty as director: if as director you are
agreeing to sell corporate asset, thats not in the best interest of corporation.
- Does not overturn the market rule. Unique profit-making opportunity here because of
government price controls.
o Value of that profit could be capitalized and divided between the purchaser and seller
of the control block.
o He wasnt merely selling his controlling stake, it was also a valuable corporate asset.
- Dissent: Argues as controlling shareholder did not violate fiduciary obligation b/c under
market rule can sell shares for premium, but P may argue that as director violated
fiduciary obligations. Professor agrees.
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- Remedy: Compensate corporation for lost value: shareholders are entitled to recover their
proportionate share of the premium: didnt want it going back to the corporation b/c back
to the bad doers

Right of First Refusal
Majority must first offer stock to person at the same rate they are asking from anyone else.
But, a merger is not a sale that would trigger most provisions because company extinguishes
and so cant be stuck with majority.
Also, doesnt cover sale of corporate assets such as stock in other companies. Frandsen
Take me Along provisions
If sell, the majority must purchase the persons stock at the same price they paid.
Rationale
Dont want to be left behind with a stranger majority that may be oppressive, etc.
Frandsen v. Jensen-Sundquist Agency p.669
Holding company owned stock in bank and wanted to sell out. First they proposed the deal as
a merger whereby Jensen would extinguish. Then they simply sold the stock they owned
(corporate asset) and liquidated.
- Shareholder agreement
o Right of first refusal: Majority would offer stock to Frandsen first if they decided to
sell.
o Take me along: If Frandsen declined to buy, they had to buy his shares for the same
price at which they sold their shares.
Frandsen tried to exercise his right of refusal so Jensen sold its shares in the bank and then
liquidated.
Held: There was no offer to sell stock so Frandsens right of refusal wasnt implicated.
- This wasnt a sale of stock, it was a merger at which Jensen would extinguish and have
no more stock.
o These agreements protected him from being stuck with a stranger majority that may
be oppressive and thats not implicated here.
o Note: Very formalistic interpretation to reach a result that matched the expectations
the agreement addressed.
Nor is the word sell sufficiently ambiguous to include the sale of all or some of the
companys assets.
- Not the same thing as selling a majority bloc and it doesnt have the same stranger risks.
- And right of first refusal agreement are to be interpreted narrowly.
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Limited Liability Companies

Salient features
Unincorporated business entity

Tax advantages of partnerships, i.e., not double taxation and loss pass through
Limited liability of corporation. ULLCA 303
Financial Interests
Profit and Loss Sharing = distributions

Absent contrary agreement, most statutes allocate profits and losses on the basis of the value
of member contributions
- Compare with partnership laws equal division.
- ULLCA 405(a) uses partnership like equal shares rule for distributions (analogous to
dividends)
Withdrawal
Member may withdraw and demand payment of their interest upon giving the notice
specified in the statute of the LLCs operating agreement.
Member may assign an interest in cash flow rights to third party, but can only get other
control rights if can become a member.
Formation
File articles of organization in the designated State office
ULLCA 202(a)
Required and optional contents set forth in ULLCA 203
Filing fees and Franchise tax
Other Formation Tasks
Choose and register name: LLC statutes generally require the name of the LLC to include the
words limited liability company, the abbreviation LLC or similar phrases. ULLCA 105
- Water, Waste & Land v. Lanham: once registered, sufficient to state Name, LLC to put
party on constructive notice that it is a LLC.
o If agent contracting on behalf of LLC you should disclose you are an agent to avoid
liability under agency law.
o Common law rule of agency: liable
Designate office and agent for service of process
Draft operating agreement
- Basic contract governing the affairs of LLC and stating the various rights and duties of
the members.
Conversion
902 discusses conversion of partnerships to LLCs

- But note that the partners would remain liable for pre-existing debts
There is no provision for corporations to convert. However, a LLC can merge with an LLC.
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Funding and Management
Members contribute financial capital but may also contribute other forms, e.g., property,
services other obligations ULLCA 401
- Analogous to shareholders
- In exchange for contribution, members get management and financial rights in the LLC
Absent contrary agreement, each member has equal rights in the management, ULLCA
404(a)(1)
- Most matters decided by majority vote. ULLCA 404(a)(2)
- Significant matters (e.g., merger, new member, dissolution, etc.) require unanimous
consent. ULLCA 404(c)
Manager managed LLC option, ULLCA 404(b)
- Management may be structured as a board of directors, a CEO or both.
- Must be specified in the articles or organization
- The default is member-managed.
Limited Liability
No member or manager of a LLC is obligated personally for any debt, obligation, or

liability of the LLC solely by reason of being a member or acting as a manager of the limited
liability company ULLCA 303 PG80
- Veil piercing is still possible, which well discuss later.
Operating Agreement
Can alter most of the default rules but cant unreasonably reduce duty of care/loyalty
- Courts are highly deferential to private contracts
Elf Atochen NA Inc. v. Jaffari
- Two corporations that come together and decided want to be an LLC as a joint venture.
One party brings knowledge to table of making solvent-based stuff. Other party brings
capital. Delaware gives people ability to sue under their corporate law but the operating
agreement mandated arbitration and forum. alleged breach of fiduciary duty and
brought suit in Delaware court.
- Arbitration and forum selection clause enforceable
o Court says: LLC law is designed, like the Limited Partnership law, to give parties
considerable freedom of contract.
o The LLC itself is bound by the operating agreement even though it didnt sign.
- Compare to Arbitration Clause with a Corporation
o Probably upheld if in corporate bylaws under modern approach
- Enforceable Hypo: each member relieved of liability for acts against other members or
the LLC, irrespective of any allegations of willfulness, intention, or gross negligence
o Not enforceable, against public policy
o 103(b) places limitations on freedom of K: members cannot eliminate duty of
loyalty entirely (but could say certain conduct does not violate this duty). No
unreasonably reduce the duty of care.
Make sure not to structure so deadlocks happen as courts wont add terms on its own
- Fisk Ventures LLC v. Segal
o Three classes of shares, both class A and B got to put people on board. They
deadlocked when couldnt raise money.
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o Court granted judicial dissolution because deadlocked so not reasonably practicable

to carry on and agreement didnt provide way around. So there was basically no
business to operate.
o Segal counterclaimed alleging breach of K but court found they hadnt agreed to the
Class B people waiving their put options.
Piercing the LLC Veil

LLC liable for members or mangers actionable conduct
A limited liability company is liable for loss or injury caused to a person, or for a penalty
incurred, as a result of a wrongful act or omission or other actionable conduct, of a member
or manager acting in the ordinary course of business of the company or with authority
of the company.
But, members/managers not liable for LLCs liability solely because members/manager
ULLCA 303 Liability of Members and Managers

- . . . A member or manager is not personally liable for a debt, obligation, or liability of the
company solely by reason of being or acting as a member or manager.
Of course they can contract around this, and opt out of limited liability.
Under ULLCA, failure to follow formalities is not grounds for imposing personal liability
ULLCA 303 Liability of Members and managers

- (b) The failure of a limited liability company to observe the usual company formalities or
requirements relating to the exercise of its company powers or management of its
business is not a ground for imposing personal liability on the members or manager for
liabilities of the company.
If a company does not observe usual company formalities not a ground for
imposingly personal liability
- Different than corporation: Where failure to follow the corporate formalities was at
least the first prong for piercing the corporate veil piercing for corporations.
Remember Walkovsky hit by taxi cab. Seeon Cap Corp was thinly capitalized.
Effect of limited liability is to shield claims. Issue in that case, was whether
corporation was mere alter ego. Doctrine messy not clear cut. Under capitalization
not sufficient by itself, co-mingling, not following proper formalities. Also separate
prong in Sea Long, failure to post corporate veil would impose fraud and injustice.
Absent a statutory mandate, courts will still probably apply PCV in appropriate cases
It did so Kaycee Land & Livestock v. Flahive

- Available corporate law doctrines as readymade body of law are attractive to courts.
- We can discern no reason, in either law or policy, to treat LLCs differently than we treat
corporations.
- But piercing not contemplated by LLC statue while it is in corporate statue.
If Judge ask: law and economics does it induce efficient behavior / legislative history.
- They are distinct, what is efficient in LLC may not be efficient.
Should LLCs be treated like corporations for veil piercing?
Theoretically: contract-arian model views rules that govern business entities as off rack
default rules, and some cannot be contacted out of.
101
Important value of keeping these distinct is parties can choose which one they want: many
vs. few owners actively involved in business.
Courts may allow people to maximize their welfare by keeping stuff separate.
Proper role of courts: should courts do this, or should it be left to legislature.
Why would you want to be a corporation given benefits of LLCs tax basis?
Decision making much harder to coordinate
Fundamental Differences between corporations and LLCs that are relevant to veil piercing?
Degrees of informality and separation.

Perhaps in LLC context degree of informality should not be enough to pierce corporate veil.
Fiduciary Duties in LLCs

Managers (manager-managed) and Members (member-managed) have duties of care/loyalty
Managers of a manger-managed LLC have duties of care and loyalty.
But, members in manager-managed have no duties to the LLC or other members
In contrast, members of a manager-managed LLC usually have no duties to the LLC or its
members by reason of being members.
Duty of Loyalty
409: Duty to account and hold in trust any benefit derived in conduct/winding up
Refrain from dealing with the company during conduct/windup on behalf of party with
adverse interest.
Refrain from competing with the company in the conduct of the companys business before
dissolution of the company.
Duty of Care
Limited to refraining engaging in grossly negligent or reckless conduct, intentional

misconduct, or a knowing violation of law.
Corporate Opportunities
Like Corps, breach to take opportunity from LLC
ULLCA 409 like Corp. Opp, acct profit/property/no compete but can opt out in op
agreement unlike corporations
But, unlike Corps, can limit duty in Operating Agreement and permit members to compete
Can also do in Partnership agreements, just not Corporations

McConnnel v. Hunt Sports Enterprises
- Seeking a hockey franchise. One party was acting unilaterally ultimately rejects the
offer. McConnel then says fine, I want to venture off on my own take the lease and build
the franchise. That is what they did. McConnel wants a declarative judgment that, that is
fine.
- Taking an LLC Opportunity?
o In absence of Operating agreement, McConnel has taken a company LLC
opportunity.
102
- Any member has a duty to account to company any property/profit/no compete with
company per ULLCA 409(b)(1), (3)
o Completely analogous to corporate opportunity doctrine.
- Effect of operating agreement
o Did McConnel breach his fiduciary duty in the CHL by competing with it for the
arena and franchise?
No, because their operating agreement explicitly allowed them to compete
with the corporation including any business that might compete the company.
See ULLCA 103(b)(2): Operating agreement may not eliminate the duty of
loyalty, but may identify specific types of categories of activities that do not
violate the duty of loyalty, if not manifestly unreasonable
o Corporate Context Different: They cannot opt out of corporate opportunity doctrine
Limitations on Duty just cannot be manifestly unreasonable
103(b)(2): Cannot eliminate DoL but can identify specific types of conduct that dont
comply and specify required number to authorize or ratify otherwise violating conduct.
Disassociation & Dissolution
Unlike partnership, dissociation does not lead to dissolution by default
Disassociation = withdrawal or expulsion

Dissolution = winding up of LLC
Dissociation without Dissolution

Withdraw/expulsion of mbr does not lead to dissolution like in partnerships
Withdrawal or expulsion of a member. ULLCA 601

- This does not lead to dissolution of the LLC by default, as it would with a partnership.
UPA.
Disassociated members interest must be bought by LLC
Dissociated members interest must be purchased by the LLC ULLCA 603

- Judicial appraisal proceeding available ULLCA 702
Members rights to participate in the business terminates (ULLCA 603(b)(1)
Management right extinguishes except to extent participating in winding up
Dissolution
Events of Dissolution
ULLCA 801.
By operation of law: Upon the happening of
- Any event specified in the LC operating agreement.
- Vote of members (as specified in operating agreement)
- It becomes unlawful for all or substantially all of the business to carry on.
Upon court order:
- Economic purpose frustrated (e.g., deadlock, one goes to court and seeks judicial
dissolution).
- Misconduct by members
103
- Not otherwise practicable to carry on in conformity with Operating Agreement

- Etc.
New Horizon v. Baack
Kickapoo, LLC went out of business leaving 1,000 owed to New Horizons. (Account was in
the name of the LLC). Haack made representations that she was a partners and that she
would make payments on bill. LLC was then dissolved but formal procedures were not
followed. Some assets were distributed to Haack, may have been used to pay off other
creditors.
New Horizon sued Haack on an alter ego theory (she and the business entity are not distinct
entities, and that it should be treated as general partnership rather than an LLC, and
personally liable for its liabilities)
- Trial court entered judgment against Haack (1,009) but erroneously relied on fact they
filed taxes as partnership.
Why is Haack liable?
- She did not follow the proper procedures for dissolution.
o She didnt properly notify the outstanding creditors.
o If she had notified properly, shed only have been liable for her 50% share.
Statutory basis 183.0907
If the dissolved limited liability companys assets have been distributed in
liquidation, a member of the LLC to the extent of the members proportionate
share of the claim or to the extent of the assets of the LLC distributed to the
member in liquidation, whichever is less, but a members total liability for all
claims under this Section may not exceed the total value of the assets
distributed to the member in liquidation.
o Technically fully following the statute she would only be liable for half if her
brother was a 50-50 member, only get half, but perhaps he was no longer a
member.
For dissolution, creditors get first rights. She didnt show what happened to the
assets, that she didnt receive $1,000 or more from the firm.
Business must be wound up if dissolved per 802(a)
Business must be wound up,

Any member who did not wrongfully dissolve may participate in winding up.
May be continued, with unanimous consent if per 802(b)
Requires unanimous consent (including partner wanting dissolution) of all members, except
wrongfully disassociating partners.
104
Corporate Debt
Classes of Securities
Equity (residual control rights) Common Stock / Preferred Stock

Debt (fixed contractual claim w/o control right)
- Bonds: secured long-term
- Debentures: unsecured long-term
- Notes: short term (secured or unsecured) Commercial paper / Secured or unsecured
Typically issued in 1,000 denominations

Coupon rate expressed as some percentage of the face value of the bond
- A 1,000 bond with a 7% coupon rate pays $80 per year in interest.
Duration
- Bond instrument will prescribe a time when interest and principal must be paid.
- Bond may be callable at option of issuer before the due date of principal amount.
- Zero-coupon bond: Issuer simply agrees to make one payment in the future; No periodic
interest
o E.g., 10 year bond sold for $386 today, pays $1,000 at maturity assuming implicit
10% rate.
Valuation
- What is the relationship between the bonds current price and the market interest rate?
o Inverse relationship: if market rates have risen, since the bond was issued, its current
price will fall.
o Intuition: get a fixed coupon rate: if paying 8% annually, but market rate goes up to
10%, bond worth less. So they are only willing to purchase it from you if they
discount the price. (Comparable risk/duration)
Risks
- Issuers two promises: 1. Interest to be paid periodically 2. Principal to be repaid in future
on maturity
- Interest rate fluctuations: macroeconomics factors beyond debtors control
- Prepayment risk
- Default: factors within debtors control
o Change in nature of business risk of return are proportional.
o Change in risk without corresponding return is problematic.
Bonds
Bond Indenture
A contract in which corporation agrees NOT to engage in specified conduct that would
increase bondholders risk
Key players:
- Issuer
- Lead underwriter
- Indenture trustee (representative of bondholders who is to enforce their terms, and
supposed to mitigate the collective action problem with dispersed bondholders.)
Bond Indenture: Key Provisions
105
- Statement of events of default

o If a default occurs bondholders are entitled to accelerate the maturity of the bonds:
they become immediately due and payable.
- Redemption provisions:
o Call provisions (if they can retire the bond before maturity date)
- Restrictive covenants:
o Limit the firms ability to pay dividends
o Limit uses of proceeds
o Specify financial ratios E.g., current assets to current liabilities
- Negative pledge covenants PG 884
o Restrict the firms ability to issue debt senior to the bond in question
o Restrict the firms ability to incur new debt
o Rationale: pretend issue new debt above yours in priority
Debtors Sale of Substantially All Assets

Boilerplate: Right of immediate redemption if liquidate company
Sharon Steel v. Chase Manhattan Bank

- UV Industries has 5 series of unsecured notes/debentures. The company has 3 major
concerns: 1. Federal Pacific, 2. Oil & Gas, and 3 Mueller. Divesture starts in late 1978
pursuant to plan of liquidation (must be completed in 12 months for tax reasons). Sold
Federal for 345 million. Sold other +100 million. Sold Mueller to Third Party, and
wanted Third Party to assume the debt. Trustees were not happy.
- Lenders are unhappy because?
o They want Sharon to pay off the face value of the bonds now because the FMV is less
than that.
- Indenture Provision
o Successor obligor clause in covenant on consolidations
In the case of merger or sale of all or substantially all the corporations assets, the
surviving corporation assumes issuers debt
Sharon: argued that it was the surviving corporation; clause applies and it assumes
the debt.
o Trustee Chase Bank: clause does not apply and Sharon must immediately redeem
debt, because the third party only has 51% of the book value of the assets.
- Sharons position: it bought all the assets of UV and therefore is entitled to assume
liabilities
- Debt holders: that all assets include those at the start of UVs plan of liquidation
o Courts concern about asset substitution.
o Court is concerned that the debtor gradually substitute assets to shareholders and
transfer it to new debtor with substantially different risk profile.
- Trustees objection
o Debtors assets and management have changed.
If they had a security interest in specific assets or had some contract clause
requiring continuity assets they might be entitled to relief.
But they didnt because they held long term unsecured debt.
- Holding
106
o boilerplate successor obligation clause do not permit assignment of the public debt
to another party in the course of a liquidation unless all or substantially all of the
assets of the company at the time of the plan of liquidation is determined upon are
transferred to a single purchaser
So P holders win; indentures are due and payable.
o Rationale: Keep Company risk profile constant and protect debt holders.
o JUDGE
Judge goes beyond assets at the third stage and looks at the beginning when
liquidation planned.
Stretches interpretation beyond plain text to provide protection.
But if acquired all assets that existed when liquidation planned, then right to assume debt
Hypothetical
Successor obligor clause if sold substantially all then theyd assume the debt. Actual Case
- In the case, they sold off two lines first, and then sold the last, and question was acquiring
corporation entitled to assume debt or trigger immediate redemption: if you look at the
corporation at the time of transaction that would seem to constitute sale of substantially
all assets, however court held relevant time frame was how company looked at initial
time of liquidation.
Suppose UV had decided to switch from being a manufacturing company to a financial
services company. UV sells of its existing assets gradually, but along the way it acquires new
assets, such as a bank and an insurance company. Along the way it also acquires new
management. Would this trigger the clause?
- No; there is never a disposition of substantially all assets.
- Yet, there is no continuity of assets or management in that causewhich is precisely
what the trustees claim the holders are entitled to.
Simultaneous sale of all the assets and purchase of all the other?
- Sold substantially all assets, so would seem to let purchaser obtain the debt.
- Doesnt give good guidance because court went beyond plain language.
Suppose UV had merged with Sharon, would that have triggered the redemption?
- No Sharon would clearly have been allowed to assume the debt.
Incur Additional Debt

No implied covenant not to take on extra debt unless Kd for
Metropolitan Life Insurance Company v. RJR Banisco Inc.

- KKR private equity firm engages in a leveraged buyout of the company financed by both
cash, buying out existing shareholders, and issuing new debt as part of consideration for
new debt. New debt is on equal terms with the old debt. Metlife, owner of old debt is
upset.
- Two relevant provisions
o Negative pledge clause (did not prohibit issuance of new debt or subordination of
new debt.
No senior debt; no security interest in assets
Allowed unsecured debt
Did not mandate a debt to equity ratio
Did not mandate subordination of new debt.
107
o Successor obligor provision in M&A clause

Allows mergers conditioned on successor firm assuming debt obligations.
What happened in transaction was equity cushion was diminished which increased
probability of default.
P Sue: Contractual claim, there is no fiduciary obligation for debt holders: breach of
implied covenant of good faith and fair dealing
Issue #1 Interpreting Boilerplate
o P argued Executives implied debt would remain safe implicitly promising they would
not lower their credit rating.
But cant consider the executives speeches on importance of protecting RJRs
crediting rating because of parol evidenc rule.
Issue #2 Implied covenant of good faith?
o Designed to fulfill mutual intent of parties. Determined from the express terms of the
contract
o Breached? No
Implied only to protect the fruits of the contract
Limited to protection of interest and principal
Derives content from express terms of contract
Ne new terms of contract can be implied
o Policy reasons
If we dont know what the court would imply it will stabilize the market.
Moreover, initial 11% probably reflected the risk that such a thing could occur.
Effect of New Issue on Bond Value
Assume Acme has assets 1 billion -- liabilities 30 year bond with face amount of 100 million
bearing interest at rate of 11%. Balance Sheet: Assets 1 Billion; Liabilities 100M;
Shareholder Equity 900 Million.
New debt issues: 1.7 Billion Assets = 100 M liabilities, 700 M new liabilities, Shareholders
Equity 900Milliion.
Buyback shares: Old Assets 1 billion = Liabilities 100 M + Liabilities New 700 +
Shareholder Equity 200M
Basically equity cushion
So new issues have to be at higher rate.
Why did MetLife hold on to the RJR bonds and invest in US treasury obligations?
- Because added return justified the risk
How could company signal that is has lower probably of risk?
- Issue more restrictive covenants, and pay lower rate on debt
What about a provision that we will not take any action that will materially reduce
probability of paying interest and principal when it is due?
- Too vague, too broad.
What effect on bond prices if RJR Nabisco prospers?
- Increase value
- Investors in high yield bonds expect to profit (in part) from increase in the value of the
bonds if their judgment about the future success of the issuer is sound and the risk of
default declines.
- Thus, protection against redemption (call protection) is important; without such
protection debt investors will lose the benefit of declining default risk.
108
109
Detailed Index
AGENCY
DETERMINING AGENCY
Legal Definition (Rst 1)

Judged from objective reasonable person standard
Policy rationale
5
5
5
Become liable if exercise de facto control over debtor
PRINCIPAL LIABILITY
TO
RD
PARTY
IN
CONTRACT
Authority is the starting point for analysis
Actual Authority
Express Actual Authority

Implied Actual Authority
6
7
Apparent Authority
Requirements
Policy rationale
7
7
Distinction from Apparent authority

Restatement treatment
E.g. Acts of Manager appearing to be Owner
Rationale
Power v. Authority
Watteau v. Fenwick (1892)
8
8
8
8
8
8
Ratification
Rules
Botticello v. Stefanovicz (1979)
Problems
9
9
9
Estoppel
10
Rules
Hoddeson v. Koos Bros (1957)
10
10
AGENTS
LIABILITY TO
3RD PARTIES
IN
CONTRACT
Disclosed Principal
Partially disclosed (know P exists but no who) or undisclosed principal
BUT Default Rules can be circumvented by agreements.
LIABILITY
OF
PRINCIPAL
TO
3RD PARTIES
IN
TORT
10
10
10
11
11
General rule
Analysis
11
11
Actual Agency
11

Factors
11
11
110

Policy
Humble Oil & Refining Co v. Martin
Hoover v. Sun Oil Co
12
12
12
12
Franchises
Defined (R. Rosenberg)
Compare FTC Definition
Advantages of Franchisee Agreements
Murphy v. Holiday Inn
Vandemark v. McDonalds
13
13
13
13
13
14
Apparent Agency
14
ONLY APPLIES IN TORT

Elements
Restatement
Miller v. McDonalds
14
14
14
14
OF
AGENTS
15
Duty of Care
Duty of Loyalty
15
15
15
Test: Sole cause vs. opportunity

Disgorgement of profits.
Exception: Using time only and not in competition with principal
Reading v. Regem p.80
15
15
15
16
16
Rash v. JVIC
16
16
Competition
Use of confidential information
Accounting for profits if misuse confidential information
Cleaning Service: Town & Country v. Newberry
Problem: Hairdresser leaves salon
Remedies under fiduciary breach vs. contract claim
16
16
17
17
17
17
PARTNERSHIP
18
Statutory body of law

What is a Partnership?
General vs Limited
Partners Liability (UPA 15)
DETERMINING
18
18
18
18
THE EXISTENCE OF A PARTNERSHIP
18
Rules for determining existence of a partnership (UPA 7)

Summary of Factors Relevant to Partnership Existence
18
18
Formation
19
No formalities necessary to form a partnership

The parties must agree to be partners
A written agreement is evidential but not conclusive
Fenwick v. Unemployment Comp. Commn p.91
19
19
19
19

Degree of Profit sharing/veto right okay if interest on loan & no day-to-day control
Martin v. Peyton p. 96
20
20
20
111
20
Rules
Hypo
Young v. Jones p.101
20
20
21
OF
PARTNERS
21
Default rule
Limitations on modifying
Relevance of Partner Status
21
21
21
21
Rule
Meinhard v. Salmon p. 105
Sandvick v. LaCrosse
Hypos
21
22
22
22
23
Rules for Analysis

Meehan v. Shaughnessy p.117
23
24
Expulsion
24
Lawlis v. Kightlinger & Gray p.125
24
PARTNERSHIP PROPERTY
25
What is partnership property?

Partnership capital
Indemnification for personal payments
Legal claims are partnership property
25
25
25
25
26
Sales of interest/property require consent of all partners

Removal of property contributed to partnership
Assigning rights
26
26
26
RIGHTS
OF
PARTNERS
IN
MANAGEMENT
26
Rights
Partners authority to bind partnership
26
26
Voting
27
Majority vs Unanimous
Allocation of votes
Deadlock situations
Partnership Agreements can significantly deviate from default
27
27
27
28
PARTNERSHIP DISSOLUTION
29
Timeline
When can a partner dissolve the partnership?
29
29
29
Grounds for judicial dissolution

Benefit of judicial dissolution
Owen v. Cohen p.150
Collins v. Lewis p.153
Page v. Page p.158
29
29
30
30
30
31
Actions after dissolution
31
112
Rules for distribution

Choice between continuing business vs. liquidating is crucial
Acquisition of assets/business by some partners is fine
31
31
31

Early dissolution of a term partnership is a wrongful dissolution
Remaining partners have absolute right to continue the business
Wrongfully dissolving partners entitlement if continued
Pav Saver v. Vassco Corp p.164
32
32
32
32
32
Sharing losses
Default rule = losses follow allocation of profits
Exception (UPA only): Service partnerships
Kovacik v. Reed (p. 179)
33
33
33
33
Buyout Agreements
34
Malpractice not to recommend

Key negotiating points
Parties can contract buyout formula that is more/less than FMV
G&S Investments v. Belman (p. 183)
34
34
34
34
LIMITED PARTNERSHIPS
35
General partnership liability

Formation
Structure
Liability in Limited Partnerships
If exercise too much control, limited partner will be treated like general partner
Holzman v. De Escamilla p.179
LIMITED LIABILITY PARTNERSHIP
36
True general partnership . . . but with limited liability

State variations: Contract vs Tort
Formation
CORPORATIONS
OF
37
37
CORPORATIONS
38
Legal personality
Limited Liability
Separation of Ownership and control
Liquidity
Flexible capital structure
Contingent Financial Claims: Debt v. Equity
Shareholders have two rights
38
38
38
38
38
38
39
THE INCORPORATION PROCESS
39
Delawares Preeminence
Post-Incorporation Activities
39
39
40
LIABILITY
40
Promoters and the Corporate Entity

Limited Liability of owners (except for PCV)
Limited Liability Praises and Problems
PIERCING
36
36
36
37
The Universe of Corporations

Partnership / Corp comparison chart
KEY FEATURES
35
35
35
35
35
35
THE
40
40
40
CORPORATE VEIL (PCV)
41
113
Alter-Ego Liability
41
Sea-Land test (individual as shareholder)

Subsidiaries (only when corporate shareholder)
Parent corporation vs. Individual distinction
Justification: Tort vs. Contract distinction
Note: Can insulate from PCV by having Limited Pship with Corp General partner
Sea-Land Services Inc. v. Pepper Source p.194
In re Silicon Gel Breast Implants Products Liability Litigation p. 204
41
41
41
42
42
42
43
43
Evidence needed
Walkovszky v. Carlton p.207
43
44
CHALLENGING BUSINESS ACTS
44
Ultra Vires Acts
44
Purposes of Corporations
Definition
Consequences
Charitable Donations
But, businesses arent run to serve as charities themselves
44
44
44
44
45
45
Rebuttable presumption acting in interest of corporation

Rationality is the outer limit
Shlensky v. Wrigley p.275
Chart showing BJR application and fiduciary duties
Two ways of thinking about the business judgment Rule
45
45
46
46
46

Standard
Irrationality is the outer limit
If required to pay under K, look at whether K obligation itself constituted waste
Cannot be ratified
47
47
47
47
47
Derivative Actions
47
Direct v. Derivative Suits

Delaware approach to determining direct vs. derivative
Should recovery go to individual or corporation?
47
48
48
48
Policy Rationale
Structural issues
Potential abuses Strike suits
Checking abuses Security statutes
48
48
49
49
Demand requirement
Role of the Demand Requirement
Advantages
Universal Demand Requirement
Delawares Demand Requirement
Legal Effect of making Demand
Cohen v. Beneficial Industrial Loan p.214
Grimes v. Donald p.223
49
49
49
49
49
49
50
50
50

Timeline
Policy
51
51
51
114
Court may evaluate SLCs independence and procedures

Standard for reviewing SLC recommendations
Zapata Corp v. Maldonado PG 261
OF
DIRECTORS, MANAGERS, & OFFICERS
52
52
52
53
De Facto Officer
53
Duty of Care
53
Directors duties
Essentially all about the process
Board can appoint committee to provide process
Uninformed Decision
If informed decision and followed process BJR Protection
Failure to act or make a decision = no BJR
Illegal decision or action = no BJR
53
53
53
53
54
55
55

BJR is essentially a standard of review
55
55
Duty of Loyalty
56
DoL arises when directors interest on both side of the transactions

Example: Direct vs Indirect
Once conflict shown, directors burden to prove good faith and inherent fairness
Possible defenses
Bayer v. Beran p.336
56
56
56
56
56

When a CO exists
Board or Shareholder approval not required but creates safe harbor
Corporation cannot have CO if illegal for them to perform act
Even if not a CO, Agency law may require profit disgorgement
Ebay Shareholders Litigation PG 389
57
57
57
57
57
57
58
Not a separate cause of action

Includes actual intent & conscious disregard for duties
Duty to be Informed & Act
58
58
58
Will not evaluate reasonableness of advisor fees
In re Walt Disney Co. Derivative Litigation p.376
58
58
58
Director oversight
Standard
In re Caremark
Elements of Law Compliance Program
58
58
59
59
59
OF
DOMINANT SHAREHOLDERS
Controlling shareholders owe other shareholders fiduciary duties

Controlling shareholder can own <50%
If parent is self-dealing, defendant has burden to show intrinsic fairness
DEFENSE
59
59
59
RATIFICATION
60
Ratification of conflicted interest transactions

Effect of ratification
Delawares approach
60
60
60
Board Ratification
60
Board ratification shifts the BoP to
60
OF
115
Applicable standard of review

Quorum rules
60
61
61
Not corporate opportunity claims

Duty of Care claims
DoL with interested director = BJR
DoL with controlling shareholders = fairness
If all material facts are not disclosed or no majority = fairness
Fliegler v. Lawrence p.367
In re Wheelabrator p.370
Hypoos
61
61
61
61
61
62
62
62
INDEMNIFICATION, INSURANCE, ADVANCING FUNDS
63
At CL, directors not entitled to indemnification
63
63
Opt (Direct): May indemnify D/O for expenses, judgments, fines in civil/criminal if good faith
Opt (Derivative): May indemnify D/O for expenses (incl atty fees) if good faith or with court order
found liable
Good faith = manner reasonably believed in, or not opposed to, best interests of company
Reqd (both): Must indemnify D/O if successful on the merits or otherwise
If unsuccessful, indemnification optional unless prohibited by statute
Waltuch v. Conticommodity Services
63
if
63
63
63
64
64

May bind themselves by written agreement to pay expenses beyond requirement
But, cannot make agreement violating express prohibition (e.g. good faith)
Corporation may limit Directors personal liability for breaches of fiduciary duties
64
64
64
64
65
May advance funds if D/O agrees to pay back if later found not entitled to indemnification
65
Rules for Insurance
65
May purchase insurance without good faith requirement even if cant indemnify
65
CONTROL
IN
LARGE CORPORATIONS
65
PROXY FIGHTS
65
Shareholders Role in Governance

Proxy Process
Shareholder Voting: Annual Meeting
Consequences of Dispersed Ownership
65
65
66
66
Proxy Voting
66
All proxies RE registered securities must comply with Commission rules

Must provide written proxy statement before soliciting proxy
Proxy materials may not be false or misleading about material facts
66
67
67

Private Right of Action in both direct/derivative lawsuits
Elements of Action
Remedies
67
67
67
68
Control contests
Additional requirements for proxy statements
Timeline
Corporation must provide shareholder list or mail insurgents proxy materials
Proxy Contests Relatively Rare
69
69
69
69
69
116
70
Dispute must concern policy and not personal control/personality

Amount must be reasonable
Firm may reimburse incumbents (current mgmt), win or lose
Firm may reimburse insurgents only if they win
Challenges due to Conflict of Interest
Rosenfeld v. Fairchild Engine & Airplane Corp.
70
70
70
70
70
71
SHAREHOLDER PROPOSALS
71
Qualifying shareholders may submit proposals for shareholder vote

Two Common Types of Shareholder Proposals
Responses to Proposals
Process for excluding a proposal
71
72
72
72

Eligibility for 2011 version
Shareholders may now submit and vote on proxy access proposals
72
72
72
73
73

Burden of Proof on company
Provision 1: subject would be improper under state law
Provision 2: Violation of law
Provision 3: Violation of Proxy rules
Provision 4: Personal grievance or special interest
Provision 5: Relevance (not significantly related to company).
Provision 6: Beyond Power to Effect/Control/Implement Proposal
Provision 7: Management functions (ordinary [mundane] business)
Provision 8: Concerns a Director election
Provision 9: Conflicts with companys proposal
Lovenheim v. Iroquis Brands PG 559
CA v. AFSCME
Hypos
73
73
73
73
73
73
73
73
73
74
74
74
74
74

Board decision not to act is protected by BJR
75
75
Bylaw Amendments
75
SHAREHOLDER INSPECTION RIGHTS
76
In proxy fight, rules dont require disclosure of shareholder list

Insurgents often find this unsatisfactory so look to state law for requirements
General requirements
76
76
76
76
76
Any shareholder has the right to inspect and copy for a proper purpose
Burden of Proof
Directors may always inspect if reasonably related to position
76
76
77
77
Must be reasonably related to such persons interest as a stockholder

Communication with other shareholders RE wellbeing or value of corporation is appropriate
Primary purpose must relate to the value of your investment
Doesnt matter if you have a secondary purpose, so long as primary is proper
Sadler v. NCR Corp PG 578
77
77
77
78
78
117
SHAREHOLDER VOTING
78
Common Stock as a Bundle of Rights

Rationale for Shareholder Voting Rights
78
78
78
The economic/control rights of shares can be unbundled.

Policy analysis
78
79
79
Voting Thresholds
Default rule regarding per share voting right
79
79
Classes of stock can have different voting/cash flow rights
Plurality voting
Majority voting
Cumulative voting
Staggered vs. annual board elections
80
80
80
80
80
81
CONTROL
81
IN
CLOSELY HELD CORPORATIONS
Salient Features
Requirements to be a Closely Held Corporation
81
81
SHAREHOLDER AGREEMENTS
82
Mechanisms for adjusting the authority structure

82
Shareholders may agree to elect directors, but cannot remove BoDs discretion RE officers, salaries,
or policies
82
Exception: Unless all shareholders are party to the agreement
82
Under modern approach, also more latitude if reasonable, no objecting minority interest and no
public injury
83
Penalty for violating pooling agreements = contract damages (and maybe vote invalidation)
83
Agreement may be enforced by allowing others to buy violators shares
83
OF
SHAREHOLDERS
84
Introduction
Mass. Golden Rule: Shareholders in CLC owe each other duty of strict good faith
But, balance legitimate business purpose with practicality of less harmful alternative
Mass.: A minority shareholder has fiduciary duty to majority if has a veto power
In Delaware, no special fiduciary duties for close corporations
84
84
84
86
87
Remedy for breach
88
Proper remedy for freeze-out: restoration to position would be without wrongdoing
88
MASS.: NO
RIGHT TO CONTINUED EMPLOYMENT UNLESS REASONABLY EXPECT CONTINUED

EMPLOYMENT
88

89
4 Grounds for ordering buyout at fair value
89
Involuntary judicial dissolution if fraud, oppression, illegality (towards the minority), deadlock, or
waste
89
Meiselman Approach to oppression: Conduct that defeats the minoritys reasonable expectations
89
Examples of oppression
89
Reluctance to dissolve, so generally just order buyout at fair value
90
Disillusionment statutes may provide for buyout if oppression (frustrate expectations)
90
If oppression, increase damages to FMV despite buy-out agreement
90
Maybe provide damages and lost wages if see owner/employee as separate interests
91
But, should still have buy/sell agreement because only covers oppression
91
118
Not oppressed unless completely shut outno dividends (disagree with strategy not enough)
RESTRICTIONS
ON
TRANSFERRING CONTROLLING BLOC
91
92
92
Market rule: No obligation to share control premium with other shareholders

Why would the purchaser pay this premium?
Equal Opportunity Rule (not the rule)
92
92
92

Duty not to sell to known looter (act in bad faith)
Duty not to engage in naked sale of corporate office w/o selling underlying shares
Duty not to usurp a corporate opportunity or asset
93
93
93
93
93
Right of First Refusal

Take me Along provisions
Rationale
Frandsen v. Jensen-Sundquist Agency p.669
93
93
93
94
LIMITED LIABILITY COMPANIES
95
Salient features
Financial Interests
Withdrawal
95
95
95
FORMATION
95
File articles of organization in the designated State office

Other Formation Tasks
Conversion
Funding and Management
Limited Liability
Operating Agreement
PIERCING
THE
LLC VEIL
97
LLC liable for members or mangers actionable conduct

But, members/managers not liable for LLCs liability solely because members/manager
Under ULLCA, failure to follow formalities is not grounds for imposing personal liability
Absent a statutory mandate, courts will still probably apply PCV in appropriate cases
Should LLCs be treated like corporations for veil piercing?
Why would you want to be a corporation given benefits of LLCs tax basis?
Fundamental Differences between corporations and LLCs that are relevant to veil piercing?
FIDUCIARY DUTIES
IN
95
95
95
96
96
96
LLCS
97
97
97
97
97
98
98
98
Managers (manager-managed) and Members (member-managed) have duties of care/loyalty

But, members in manager-managed have no duties to the LLC or other members
Duty of Loyalty
Duty of Care
CORPORATE OPPORTUNITIES
98
98
98
98
98
Like Corps, breach to take opportunity from LLC

But, unlike Corps, can limit duty in Operating Agreement and permit members to compete
Limitations on Duty just cannot be manifestly unreasonable
DISASSOCIATION & DISSOLUTION
98
98
99
99
Disassociation = withdrawal or expulsion

Dissolution = winding up of LLC
99
99
119
DISSOCIATION
WITHOUT
DISSOLUTION
99
Withdraw/expulsion of mbr does not lead to dissolution like in partnerships

Disassociated members interest must be bought by LLC
99
99
DISSOLUTION
99
Events of Dissolution
New Horizon v. Baack
99
100
CONSEQUENCES
OF
DISSOLUTION
100
Business must be wound up if dissolved per 802(a)

May be continued, with unanimous consent if per 802(b)
CORPORATE DEBT
101
Classes of Securities
Bonds
Bond Indenture
DEBTORS SALE
OF
100
100
101
101
101
SUBSTANTIALLY ALL ASSETS
Boilerplate: Right of immediate redemption if liquidate company

But if acquired all assets that existed when liquidation planned, then right to assume debt
Hypothetical
INCUR ADDITIONAL DEBT
102
102
103
103
103
No implied covenant not to take on extra debt unless Kd for

Effect of New Issue on Bond Value
DETAILED INDEX
103
104
105
120

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AGENCY

Creditor Liability for Acts of Debtor

Express Apparent Authority

Implied Apparent Authority

Inherent Agency Power (catch all)

Servant vs. Independent Contractor

Service station cases

Use Principals assert during agency relationship

Stealing Principals business

After termination of Agency

THE EXISTENCE OF A PARTNERSHIP

Partners vs. Lenders

Grabbing and Leaving

Sales of property/ Transfers of rights

Wrongful Dissolution Continuation Option

LIMITED LIABILITY PARTNERSHIP

THE INCORPORATION PROCESS

CORPORATE VEIL (PCV)

CHALLENGING BUSINESS ACTS

Ultra Vires Acts

Business judgment rule

Waste of Corporate Assets

Special Litigation Committees

DIRECTORS, MANAGERS, & OFFICERS

Interaction of Duty of Care and Business Judgment Rule

Corporate Opportunity Doctrine

Obligation of Good Faith

INDEMNIFICATION, INSURANCE, ADVANCING FUNDS

Rules for Indemnification (DE)

These rules can be altered by the corporation

Rules for Insurance

Private Right of Action if false or misleading

Proxy access proposals

Grounds for exclusion 14a-8

Failure to meet procedural requirements(s)

Failure to satisfy substantive requirement(s) a/k/a Question 9

Board refuses to act

SHAREHOLDER INSPECTION RIGHTS

Inspection of Book and Records per DGCL 220

What is a Proper Purpose?

Stock can only have voting rights

Delaware Default Rules for Voting

CLOSELY HELD CORPORATIONS

Remedy for breach

RIGHT TO CONTINUED EMPLOYMENT UNLESS REASONABLY EXPECT CONTINUED

Involuntary Dissolution / Forced Buy-outs

TRANSFERRING CONTROLLING BLOC

Duties of Shareholders Selling Control Bloc

Exceptions That Require Sharing the Premium

Right of First Refusal and Take Along Provisions

LIMITED LIABILITY COMPANIES

DISASSOCIATION & DISSOLUTION

SUBSTANTIALLY ALL ASSETS

INCUR ADDITIONAL DEBT

Agency is contractual: can be explicit or implicit

Legal Definition (Rst 1)

Judged from objective reasonable person standard

Creditor Liability for Acts of Debtor

Gay Jenson Farms Co v. Cargill Inc. (1981) p.7

Principal Liability to 3rd Party in Contract

Express or implied to agent because incidental/reasonably necessary

- Express or Implied Consent (Restatement 26)

P expressly manifests consent to A by spoken or written words (Restatement 7)

Implied Actual Authority