§2 The Corporate Entity and Limited Liability

Walkovsky v. Carlton
Facts: Walkovsky sues Carlton after run down by a taxicab owned by Seon Cab
Corporation. Walkovsky alleged that Seon was one of ten cab companies of which
Carlton was a shareholder, and each of the ten only had two cabs in its name. He alleged
that the corporations were operated as a single entity with regard to financing, supplies,
repairs, employees, and garaging. Walkovsky named each corporation and its
shareholders as defendants since the multiple corporate structure constituted an unlawful
attempt to “defraud members of the general public” because each corporation only
carried the minimum auto liability insurance required by law ($10,000).
Issue: Did the complaint state a sufficient c/a to recover against each cab corporation,
Carlton, and each corporation’s shareholders?
Held: No. The court will only “pierce the corporate veil” and hold the stockholders
liable if it can be shown that the stockholder was conducting business in his individual
capacity. The corporate veil may not be disregarded just because the assets of the
corporation, together with the liability insurance, are insufficient to assure recovery.
Leave it to the legislature. Walkovsky, who also wants all corporations to be
liable, is asking for enterprise liability so all treated as one corporation.
Like PCV, but must show disrespect for corporations vis a vis the
corporations. Unlike PCV, where that is showing disrespect vis a vis
the shareholders.

Dissent: The corporations were formed by Carlton and intentionally undercapitalized for
the purpose of avoiding responsibility for acts that were bound to arise as a result of the
operations of a large taxi fleet. All income was drained out of the corporations for this
purpose, and so individual shareholders should be held liable.

Sea-land Services, Inc. v. Pepper Source

FACTS: After Sea-Land (P), an ocean carrier, shipped peppers for the Pepper Source
(PS) (D), it could not collect on the substantial freight bill because PS (D) had been
dissolved. Moreover, PS (D) apparently had no assets. Unable to recover on a default
judgment against PS (D), Sea-Land (P) filed another law suit, seeking to pierce the
corporate veil and hold Marchese (D), sole shareholder of PS (D) and other corporations,
personally liable. PS (D) then took the necessary steps to be reinstated as a corporation in
Illinois. Sea-Land (P) moved for summary judgment, which the court granted. Marchese
(D) and Pepper Source (D) appealed.
ISSUE: Will the corporate veil be pierced where there is a unity of interest and ownership
between a corporation and an individual and where adherence to the fiction of a separate
corporate existence would sanction a fraud or promote injustice?
HOLDING AND DECISION: (Bauer, J.) Yes. The corporate veil will be pierced where
there is a unity of interest and ownership between a corporation and an individual and
where adherence to the fiction of a separate corporate existence would sanction a fraud or
promote injustice. There
can be no doubt that the unity of interest and ownership part of the test is met here.
Corporate records and formalities have not been maintained, funds and assets have been
commingled with abandon, PS (D) was undercapitalized, and corporate assets have been
moved and tapped and
borrowed without regard to their source. The second part of the test is more problematic,
however. An unsatisfied judgment, by itself, is not enough to show that injustice would
be promoted. On remand, Sea-Land (P) is required to show the kind of injustice
necessary to evoke the court's power to prevent injustice. Reversed and remanded.
Fraud is a crucial part of the PCV analysis. This additional injustice
must be found. If don’t PCV, look at whether promoting injustice
through fraud, unjust enrichment, etc.

Chapter Five: The Duties of Officers, Directors, and Other

Insiders

§1 The Obligations of Control: Duty of Care

Kamin v. American Express Company

Facts: Stockholders sue AmEx because they didn’t like what AmEx was doing with the
shares of DLJ that AmEx had acquired. If the company had sold the stock, it
would have recognized a $26m tax loss that could have been offset
against its taxable income. Shareholders wanted AmEx to take the
benefit instead of issue the stock as a dividend which would cause
AmEx to lose the tax benefit. The shareholders recognized the divided
income equal to the FMV ($4m) of the DLJ stock, and got a basis in the
DLJ stock equal to that amount.

Held: The Court said no claim of fraud, self-dealing, bad faith or oppressive conduct in
the complaint. This was a business decision.
The courts will not impose liability for dumb decisions. Strong
Abstention doctrine use by the Court. Even if evidence of clear self-
dealing by the four directors, the Court would toss this out since can’t
prove those 4 dominated and controlled the other directors.

Andrew M. Ballard, Majority of Companies Will Sacrifice Value to Meet

Earnings Expectations, Survey Finds; BNA Corporate Accountability
Report- Feb. 13, 2004: 3/4 of surveyed corporations would knowingly
sacrifice shareholder value to meet earnings expectations, according
to a study released by Duke U and U of Wash Feb. 9. According to
“The Economic Implications of Corp. Financial Reporting” financial
executives are focused on short-term results and are willing to sacrifice
long-term value to achieve them.

Smith v. Van Gorkem

FACTS: Van Gorkom (Δ), Trans Union CEO, began to explore the opportunity to sell to
a company w/ more taxable income. CFO tells him a leveraged buy-out by mgmt at
$50/share would be easy, but $60/share difficult. CEO said he would take $55/share for
his shares. CEO then met with a corporate takeover specialist, who agreed to make a
cash-out merger offer at $55/share. Senior mgmt & CFO responded negatively to this, but
he still brought it to the Bd. CEO gave the Bd a 20 min presentation & the Bd approved
the proposed Merger agreement, w/o reserving the right to actively solicit alternate offers
($55/share higher than market price of $39/share).
HELD: Πs attacking a Bd decision must rebut the presumption that its business judgment
was an informed one. Directors are liable if they were grossly negligent in failing to
inform themselves. Directors did not adequately inform themselves as to (1) the CEO’s
role in forcing company’s sale & in establishing the per share purchase price, and (2) the
intrinsic value of the company (not necessarily $39/share market). They were grossly
negligent in approving the sale in such a short period of time & without important info.
a. The Bd breached their fiduciary duty of care to stockholders by (1)
failure to inform themselves of all info reasonably available to them
and relevant to their decision to recommend the merger and (2)
failure to disclose all material info such as a reasonable stockholder
would consider important in deciding whether to approve the offer.
b. Dissent - Experienced directors such as these are not easily taken in by a
"fast shuffle." Wouldn’t have entered into a multi-million dollar corporate
transaction without being fully informed.
Timeline: Aug-Sept 1980: Mgmt discussions. Sept 13-19 1980: Van
Gorkem agrees to LBO (leveraged buy-out). Sep 20 1980: Senior Mgmt
Meeting and TU BoD approves merger after 2 hour meeting. Oct 8
1980: BoD approves revised deal. Feb 10 1981: TU shareholders
approve merger by 69.9% to 7.25%.
The party must prove gross negligence by directors who failed to
inform themselves of “all material information reasonably available to
them.”
The record, apart from the company’s historic stock market price and
Van Gorkom’s long association with Tran Union, is devoid of any
competent evidence that $55 represented the per share “intrinsic
value” of the company.
The board knew Pritzker was willing to pay a $17 premium over the
prevailing market price. Why wasn’t that enough? What is the firm
worth to Pritzker? Under Del. 141(e), BoD are able to defend actions
like this on the basis that they were lied to in the reports by directors.
In this case, there were no reports relied upon.

Francis v. United Jersey Bank

Creditors sue the trustee of Pritchard’s estate.

§ 2 Duty of Loyalty
A. Directors and Managers
Bayer v. Beran, 49 N.Y.S.2d 2 (Sup.Ct.1944)
Facts: The Doctors Dreyfus and their families own about 135,000 shares of common
stock, the other directors about 10,000 share of a total outstanding issue of 1,376,500
shares. Some of these tother directors were originally employed by Dr. Camille Dreyfus,
the president of the company. His wife, to ho he has been married for about 12 years is
known professionally as Miss Jean Tennyson and is a singer of wide experience. All
ofher suggestions as to personnel were adopted by the advertising agency.

History: The advertising cause of action charges the directors with negligence, waste and
improvidence in embarking the corporation upon a radio advertising program beginning
in 1942 and costing about $1 million a year. IT is further charged that they were
negligent in selecting the type of program and in renewing the radio contract for a second
year. Additionally, there is a charge that the directors were motivated by a noncorporate
purpose in causing the radio program to be undertaken in expending large sums of money
therefore

Issue: Was there a breach of fiduciary duty on the part of the directors?

Holding: No. Directors acted in free exercise of their business judgment

Rule: (1) The business judgment rule yields to the rule of undivided loyalty, to avoid the
possibility of fraud and to avoid the temptation of self-interest (2) included within the
scope of undivided loyalty is every situation in which a trustee chooses to deal with
another in such close relation with the trustee that possible advantage to such other
person might influence, consciously or unconsciously, the judgment of the trustee (3)
Personal transactions of directors with their corporations when challenged are examined
with the most scrupulous care, and if there is any evidence of improvidence or
oppression, any indication of unfairness or undue advantage, the transactions will be
voided (3) Directors’ dealings with the corporation are subjected to rigorous scrutiny and
where any of their contracts or engagement with the corporation are challenged the
burden is on the director not only to prove the good faith of the transaction but also to
show its inherent fairness form the viewpoint of the corporation and those interested
therein (4) As a general rule, directors acting separately and not collectively as a board
cannot bind the corporation

Reasoning: The radio program was not adopted on the spur of the moment or at the whim
of the directors. They acted reading studies reported to them by the advertising
department. Some care, diligence, and prudence were exercised by the directors before
they committed the company to the program. The president knew his wife might be one
of the paid artists on the program, but the other directors did not know this until they had
approved the campaign of radio ads and the general type of radio program. Evidence fails
to show that the program was designed to foster or subsidize her career as n artist or to
furnish a vehicle for her talents. Failure to follow formal requirements was not fatal when
the board was close working.

B. Corporate Opportunities

Broz v. Cellular Information Systems, Inc., 673 A.2d 148 (Del.1996)

Facts: Broz is the President and sole stockholder or RFBC. Broz was also an
outside director member of the Board of plaintiff, CIS, a competitor of RFBC at the time
of the events at issue. In May of 1994, Broz was contacted about RFBC’s possible
acquisition of Michigan-2. Michigan-2 was not offered to CIS, and directors of CIS told
Broz that CIS was not at all interested in the transaction. June 28, 1994 CIS directors
entered into agreements with PriCellular to sell their shares in CIS. PriCellualr’s interest
in Michican-2 was fully disclose to CIS’s chief executive. On Nov 14, 1994, Borz agreed
to pay 7.2 million for the license, thereby meeting the terms of Pri’s option agreement.
An asset purchase was then executed between seller and RFBC. Nine days later, Pri
closed its tender offer for CIS. Prior to this, Pri owned no equality interest in CIS
History: Court of Chancery held that Broz had usurped a corporate opportunity?
Issue: Did Broz breach his fiduciary duties to CIS by usurping a corporate
opportunity?
Holding: No
Rule: (1) If there is presented to a corporate officer or director of a business
opportunity which the corporation is financially able to undertake, is, from tits nature, in
the line of the corporation’s business and is of practical advantage to it, is one in which
the corporation has an interest or a reasonable expectancy, and, by embracing the
opportunity, the self-interest of the officer or director will be brought into conflict with
that of the corporation, the law will not permit him to seize the opportunity for himself
(2) Financially, the corporate opportunity doctrine is implicated only in cases where the
fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to
the corporation and the self-interest of the director as actualized by the exploitation of the
opportunity (3) The It is not the law of Delaware that the presentation to the board is a
necessary prerequisite to a finding that a corporate opportunity has not been usurped.
Reasoning: CIS was not financially capable of exploiting the opportunity.
Although the opportunity was within CIS’s line of business, it is not cognizable that they
had an interest or expectancy in the license. Broz took care not to usurp any opportunity
which CIS was willing and able to pursue. Broz was not obligated to refrain from
competition with Pri.

D. Ratification

Fiegler v. Lawrence, 361 A.2d 218 (Del. 1976)

Facts: Defendant Lawrence in his individual capacity acquired certain antimony
properties under a lease-option for $60,000. Lawrence offered to transfer the properties to
Agau, but after consulting with Agau’s Board he and they agreed that the corporation’s
legal and financial position would not permit acquisition and development of the
properties at that time. Thus it was decided to transfer the properties to USAC, a closely
held corporation formed just for this purpose, a majority of whose stock was owned by
the individual defendants. Agau was gratned a long term option to acquire USAC if the
properties proved to be of commercial value. The option agreement was executed. Upon
its exercise and approval by Agau shareholders, Agau was to deliver 800,000 shares of its
restricted investment stock for all authorized and issued shares of USAC. The exchange
was calculated on the basis or reimbursement to USAC and its shareholders for their
costs in developing the properties to a point where ti could be ascertained if they had
commercial value. Agau board resolved to exercise the option, and this was approved by
a majority of shareholders.
History: Derivative action brought on behalf of Agau against its officers and
directors and USAC to recover the 800,000 shares and for an accounting
Issue: Whether the defendants in their capacity as directors and officers of both
corporations wrongfully usurped a corporate opportunity belonging to Agau, and whether
all defendants wrongfully profited by causing Agau to exercise an option to purchase that
opportunity
Holding: Defendants proved the intrinsic fairness of the transaction
Rule: (1) Shareholder ratification of an interest transaction, although less than
unanimous, shifts the burden of proof to an objecting shareholder to demonstrate that the
terms are so unequal as to amount to a gift or waste of corporate assets, however this is
not the case if the majority of shares voted in favor were cast by officers and directors in
their capacity as Agau shareholders
Reasoning: Agau received properties which by themselves were of substantial
value, and received a promising potential self-financing and profit generating enterprise
with proven markets and commercial capability which could be expected to provide Agau
with the cash it needed to undertake further exploration and develop its own properties.