Documente Academic
Documente Profesional
Documente Cultură
ñelationships
Owners
Investors
Managers
Employees
Business Itself
Businesses are seen as separate entities, viewed as an individual person, separate
from its owners.
Corporation
Owners shareholders (SH)
Managers Board of Directors (Board)
Employees Officers
C
Owners Members
Managers Members
- Agency law has to do with one person acting on behalf of another person (business/fictitious
person [must have the authority to act for that person])
- Every corporation formed is a C-Corporation, unless it is a Professional Corporation, or unless
you elect to become an S-Corporation, or unless you are a Non-Profit Corporation.
^ Main Elements of a Business Entity
Taxation
Liability
Management
Capitalization
Exit Strategy
Tax
1. Double Taxation (seen mostly in C-corps), OR
2. Pass Through Taxation- no tax at business level, only owners pay tax on
income received (seen in P.C., LLC, proprietorships, LLP, partnerships)
iability
Limited Liability- liability to amount invested
Unlimited Liability- not limited to amount invested if business¶ assets do not
suffice for adverse judgments. Can go after personal assets. (sole proprietorship)
Management
Capitalization(ability to raise capital)
C-corps are most flexible.
Sole proprietorships, partnerships, LLCs are least flexible.
Exit Strategy
Relates to how long business will last and transferability.
Corporations have perpetual existence.
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Ôgency
Agency is the fiduciary relation which results from the manifestation of consent by one
person [the principal] to another [the agent] that the agent shall act on the principal¶s
behalf and subject to the principal¶s control, and consent by the agent so to act.
1. Fiduciary Relationship, based on 2. Consent
Elements of Ôgency
1. Manifest Assent
Express or Implied
2. Control by principal over agent¶s actions. Actions of agent must be on
principal¶s behalf.
A. Gay Jensen Farms Co. V. Cargill, Inc.
Generally, a lender-borrower relationship foes not form an agency relationship. In this case,
however, it does. There was consent and control.
Duties a Principal owes to an Ôgent
1. Compensation to agent when reasonably expected.
#1Unless there is an agreement to the contrary a principal must reasonably
compensate agent for work done.Exceptions: Minor Acts, Family
Relationship. Any breach by principal may result in a lien by agent against
principal.
2. Principal reimburses agents expenses incurred in furtherance of agency
relationship.
#2 Entitled to reimbursement for expenses incurred (reasonably) in
furtherance of the agency.
3. Indemnity
#3 Reasonable indemnification against loss by agent incurred in
furtherance of the agency (If reasonable, of course)
4. Duty To Take Care
#4 Usually arises in employer-employee relationships. Duty cannot be
delegated. Has to do with control over employee.
5. Good Faith and Fair Dealing
#5
Ôgent¶s Duties
1. Duty to account for money/profits/property received of principal.
2. Duty of full disclosure.
#2 Duty to disclose all relevant facts having to do with dealings
reasonably affecting the interests of the principal.
3. Duty of loyalty.
#3 Must keep principal¶s foremost interest in mind. Must keep principal¶s
interest above all others including your own. Highest fiduciary duty.
Exceptions: No duty to keep criminal behavior secret.
4. Duty to obey.
Meinhard v. Salmon (Cardozo)
Any act of the agent to the extent that the agent acted w/in the authority of the agencywill bind the
principal.
Ôuthority
-Actual Authority (express or implied)
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-Apparent Authority - Gives agent power, not right, to act when actual authority is
lacking, but agent has reasonable belief that he has authority to act on behalf of the
principal.
-Ratification
Principal
Actual Authority Apparent Authority
When the activity done by one partner is adverse to the requests of the other partner and that
activity is not in the scope of the partnership¶s business then it would be manifestly unjust to
permit recovery of an expense which was incurred individually and not for the benefit of the
partnership, but rather for the benefit of one partner.
National Biscuit Co. Inc. v. Stroud
Dissolution
When you leave the partnership your fiduciary duties cease at that time.
Element of good faith exists while a partner is in the process of dissociating itself
from the partnership.
Dissolution vs. Dissociation
Page v. Page
Partnership For Term OR Partnership At Will?
Whether one or the other the other there still has to be good faith in the
termination of the partnership.
imited Partnerships
- Must file documents w/ Sec. of State.
- Must contain at least one general partner and at least one limited partner.
- General partner active/has unlimited liability
- Limited partner passive/has limited liability
- RUPA 304/UPA silent on provision RUPA 304
- What does ³substantial control´ mean?
- Has to do with limited partner taking management type role or making management
actions.
imited iability Partnerships
Lewis v. Rosenfeld
imited iability Companies
Cross b/w a corp. and a partnership.
Owners are called ³members´
Members have some liability as SH in a corp. or limited partners in an LLP
Members are shielded from vicarious liability from other members who they did not
supervise or take part in.
Management (two types)
Equal management b/w all the members (Member Managed LLC)
Manager Managed LLC
Members can take part in management and still have limited liability shield.
Members have right to bind LLC
Members owe fiduciary duty to LLC and other members
LLC can be made up of one person
Operation of LLC is generally covered by an operating agreement. This is not required.
Only submission of certificate creating LLC to Sec. of State is required.
Elf Atochem NA, Inc. v. Jaffari
Harbison v. Strickland
Even though members have freedom of K, the members may not K away certain
rights. Cannot ignore rights imposed by statute. In this case the parties attempted
to K away (or around) fiduciary duties.
Corporations
Creature of statute
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De facto corp.- corp. made in good faith although you did not meet all the
requirements. Good against the entire world except the State in which it exists.
(Technically been abolished by statute. MBCÔ º.04) 3 ñequirements
Corp. by Estoppel- when other parties have dealt with you as if you were a
corporation. Other party is estopped from denying they were dealing with a corp.
because they dealt with the entity as if they were a corp.
Cranson v. IBM Corp.
Corporate Finance
- Corp. needs capital
Comes from borrowing (debt)
Investment by owners (equity)
- Debt & Equity= capital structure (debt:equity ratio)
- Creditors (holders of debt) absolute right to repayment/get paid first
- Investors No absolute right to repayment/get paid last
- Types of Debt
Loans
Bonds (secured) or Debenture (unsecured)
- Types of Investment
Stock
Common (holders are last to be paid)
Preferred (next to get paid)
Creditors are first to get paid.
- Debt has priority over equity.
- Common and preferred have no right to a distribution (i.e. dividend), but preferred has a
right to a distribution before common.
- Cumulative dividend right vs. non-cumulative dividend right
[oting preference
Generally only common shareholders retain voting rights.
Preferred may want to convert to common if it can be determined that the value of the
corp. is increasing. (look into this)
- Redemption rights- used when a company is not doing well.
- A corp. has almost absolute discretion to accept any type of consideration for their shares.
- Corp¶s cannot issue stock for less than its par value. Otherwise it is called watered stock. If this
is done it makes SHs personally liable for corporate debt.
- Articles of incorporation should contain information for issuing shares and rights retained by
the shares.
- Authorized shares (has nothing to do w/ ownership value) is how many shares a corp. may
issue. However, the shares issued represent the total ownership interest. Use the issued and
outstanding shares to determine ownership interest in the corp.
- Primary reason why corp. doesn¶t issue all shares at once is b/c they have to get SH approval
b/f more shares can be authorized.
- Stock Repurchases- when a corp. repurchases its own stock (treasury shares) those shares are
still considered outstanding, but not issued. The issued & outstanding stock still out there
represents 100% of the ownership interest. These repurchased shares can be re-issued by the
corporation at a later time.
- A person¶s ownership interest becomes diluted when their ownership % goes down, and other
owners¶ goes up. How does someone protect against this?
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19 different factors:
(1) commingling of funds and other assets of the corporation with those of the individual
shareholders;
(2) diversion of the corporation's funds or assets to noncorporate uses (to the personal
uses of the corporation's shareholders);
(3) failure to maintain the corporate formalities necessary for the issuance of or
subscription to the corporation's stock, such as formal approval of the stock issue by the
board of directors;
(4) an individual shareholder representing to persons outside the corporation that he or
she is personally liable for the debts or other obligations of the corporation;
(5) failure to maintain corporate minutes or adequate corporate records;
(6) identical equitable ownership in two entities;
(7) identity of the directors and officers of two entities who are responsible for
supervision and management (a partnership or sole proprietorship and a corporation
owned and managed by the same parties);
(8) failure to adequately capitalize a corporation for the reasonable risks of the corporate
undertaking;
(9) absence of separately held corporate assets;
(10) use of a corporation as a mere shell or conduit to operate a single venture or some
particular aspect of the business of an individual or another corporation;
(11) sole ownership of all the stock by one individual or members of a single family;
(12) use of the same office or business location by the corporation and its individual
shareholder(s);
(13) employment of the same employees or attorney by the corporation and its
shareholder(s);
(14) concealment or misrepresentation of the identity of the ownership, management or
financial interests in the corporation, and concealment of personal business activities of
the shareholders (sole shareholders do not reveal the association with a corporation,
which makes loans to them without adequate security);
(15) disregard of legal formalities and failure to maintain proper arm's length
relationships among related entities;
(16) use of a corporate entity as a conduit to procure labor, services or merchandise for
another person or entity;
(17) diversion of corporate assets from the corporation by or to a stockholder or other
person or entity to the detriment of creditors, or the manipulation of assets and liabilities
between entities to concentrate the assets in one and the liabilities in another;
(18) contracting by the corporation with another person with the intent to avoid risk of
nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge
for illegal transactions;
(19) the formation and use of the corporation to assume the existing liabilities of another
person or entity.
You can incorporate yourself solely for purposes of obtaining limited liability for
yourself, unless you are trying to perpetuate a fraud, or evade a K.
Reverse Piercing- when SH goes after the corp. by piercing the corporate veil.
Equitable Subordination (only seen in a bankruptcy action)
Costello v. Fazio
Ñltra [ires- when a corp. acted beyond its purpose or its powers necessary to carry out the
reasons of its formation.
Wiswall v. The Greenville and Raleigh Plank Road Company
Cross v. Midtown Club, Inc.
Ultra vires is generally not available today b/c most businesses have in their articles that
this business is being set up for ³any lawful business purpose.´ Gives the corp. a wide
berth.
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Corporate ñesponsibility
What is a corp¶s responsibility w/ regard to its SHs?
A.P. Smith Manfg. Co. v. Barlow
Charitable contributions (statutory)
If give money away must receive some benefit from it. Not necessarily money, could be good
will.
Adams v. Smith
No benefit to corp.
Dodge v. Ford Motor Co.
Management of Corporations
Board of Directors (managers of corp.)
Charlestown Boot and Shoe Co. v. Dunsmore
MBCÔ 8.01
Only duties owed by Board are fiduciary duties. The Board has the sole discretion to manage the
business in any way they see fit, as long as it is w/in its fiduciary duties.
No director is an agent.
Only majority of Board may bind the corp.
Auer v. Dressel
President (agents/employees) must comply with the bylaws. President has no discretion w/ regard
to these bylaws.
SHs of a particular class have the rights to vote for/remove directors of the corp. authorized by
their class of stock.
Board appoints officers, not SHs.
SHs do, however, have the right to be appointed officers by the directors.
- Quorum- # of directors who must be present to act on behalf of corp. This is usually a
majority. (ex. 6 of 10 must be present. Then majority of quorum voting can bind the
corp., i.e. 4 of the 6) ³Once a quorum, always a quorum.´ However, quorum busting is
permissible. MBCÔ 8.º4(c)
- Board meetings can be held in person or over the phone.
- Actions of Board can be made w/o a meeting, however, there must be unanimous,
written consent by the Board to bind the corp.
- Board may delegate certain duties to a committee, but it depends on how broad that
scope of delegation is.
- Board is not required to have committees, unless it is a publicly traded company. Under
- Sarbaines-Oxley: must have independent audit committee.
Campbell v. Loew¶s Inc.
Voting by proxy: may be likened to an absentee ballot in a political election, but there are some
critical differences. A proxy is an appointment by a SH of a third person (often the secretary of the
corporation) to act as the SH¶s agent in casting the vote in a designated manner. This is an agency
relationship, and agency law will control the actions of a proxy hold.
SHs can revoke the proxy by showing up to vote or by expressly revoking proxy agreement.
Board¶s Fiduciary Duties to SHs (Duties of Care, Good Faith, oyalty)
Duty of Care
- Measured by the Business Judgment Rule (MBCÔ 8.31)
Not concerned w/ decisions of Board. Concerned w/ how Board came
to that decision. The ñule does not protect decisions which are not
business related or irrational decisions.
- Director may not act negligently
- Measured by what other people in the same or similar circumstances would do.
- Must act in corp¶s best interest.
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CL vs. Statute
Court¶s Analysis
1.
OR
(Modern View)2.
OR
3.
Marciano v. Nakash
If the substance is intrinsically fair, then lack of full disclosure will not void the transx.
The question remains, was there a vote?
Corporate Opportunities
1. Determine if opportunity is a corporate opportunity.
2. Determine if corporation wanted to or was able to take advantage of the opportunity.
- Determining a corporate opportunity:
1. Interest/Expectancy Test
OR
2. Line of Business Test (Guth v. Loft, Inc.)
OR
3. Fairness Test
Competition & the Duty of oyalty
Lincoln Stores, Inc. v. Grant
No absolute prohibition to competing w/ corporation to which you owe a fiduciary duty, but must
be done with good faith.
Duane Jones Co., Inc. v. Burke
Executive Compensation
Must be rational relation b/w compensation and employment duties. Must look at what
circumstances went into the compensation. Determine if it is waste.
Shareholder¶s ñights
Election of directors
Filling vacancies on the Board
Amendments to bylaws and articles
Votes on major structural changes (mergers, liquidations, asset sales)
MBCÔ: º.07, 7.0º, 7.03, 7.04, 7.º0, 7.º1, 7.ºº, 7.º8, 7.30, 7.31, 7.3º, 7.40-7.47, 8.08,
8.09, 8.10, missing one, 9.31, 9.º3, 10.03, 10.º0, 11.04, 1º.0º, 13.0º, 14.0º, 16.0º, 16.º0
- Straight Voting
- Cumulative Voting
Allows minority SHs to have some say in matters of corp.
Conditions:
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SHs Meeting
Quorum
Must have a quorum to vote (usually stated in bylaws)
Once a quorum is met, it cannot be busted for that meeting, unlike
board of directors meetings where a director can leave, busting a
quorum.
Traditional Rule MBCÔ
Majority of shares Plurality may pass the
must vote for the motion
motion for it to pass.
Record Owner vs. Beneficial Owner
Corp. is only required to deal w/ record owners.
Record date- anyone who was a record SH as of a certain date is
entitled to vote or to a dividend.
Schnell v. Chris-Craft Industries, Inc.
Proxy
- Documentation (appointment form)
- Authority authorizing someone¶s vote
- Person (MBCÔ)
- Appointment form must be in writing
Limited to 11 months b/c want to limit proxies from one annual meeting to
the next.
Revocable at any time.
Things which will terminate proxy
««««
««««
««««
Only one kind of irrevocable proxy:
Proxy coupled w/ an interest. MBCÔ 7.ºº (no clear definition)
Proxy Contests (3 situations)
1. challenge to replace directors
2. want to push a certain transx through
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McQuade v. Stoneham
SH agreements may not interfere w/ duties of directors.
Clark v. Dodge
Because of the features of a closely held corp. you can infringe on the duties b/w SH and directors.
Only 2 SHs who were also directors/officers
Duties of Controlling SH
- Don¶t have to own 51% or more.
- De Facto control (working control) can be significantly less than 50%.
- Controlling SH by virtue of their control owe a fiduciary duty to minority SHs.
- Most issues come up w/ duty of loyalty.
Did controllers SH get some benefit at the expense of (or to the exclusion of) the
minority SH? ³self-dealing´
- Was the price fair?
Sinclair Oil Corp. v. Levien
Parent-subsidiary relationship.
Sinclair- majority ownership (97%)
Minority ownership (3%)
Business judgment rule? OR intrinsic fairness standard?
Burden on Sinclair to prove, subject to careful judicial scrutiny, that its transx w/ Sinven is
objectively fair.
Applies when there is self-dealing on part of controlling SH. (fiduciary duty as controlling SH)
If no self-dealing, then use business judgment rule.
Court says distributions of dividends were given out proportional to SH interest.
Do not use intrinsic fairness standard. Use business judgment rule.
Zahn v. Transamerica
Controlling SH must treat each class of stock fairly and cannot take actions to
enhance the value of one class at the expense of another.
Loss of opportunity to convert due to failure to disclose. Directors cannot modify
the call b/c the call grants right/benefit which cannot be taken away.
Purpose of SH actions matter.
Jones v. H.F. Ahmanson & Co.
Transfer of Corporate Control
Zetlin v. Hanson Holdings, Inc.
Controlling SHs can sell their shares at a premium only if there is good faith and fair dealing.
Duty of loyalty.
Gerdes v. Reynolds
Pearlman v. Feldman
Securities aw
Securities Act of 1933 (governs issuance)
Securities Exchange Act of 1934 (governs subsequent trading of that stock)
Section 10b unlawful for any person to use the mails or facilities of interstate
commerce: ³to use or employ in connection with the purchase or sale of any
security«..any manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the Commission (SEC) may prescribe as
necessary or appropriate in the public interest or for the protection of investors.´
c
Others who are afforded this inside information: attorneys, publishers, printers.
Diamond v. Oreamuno
Injury has to be to the corporation for a derivative suit to be brought.
General proposition: person who acquires special knowledge or information by virtue of a
confidential or fiduciary relationship with another is not free to exploit that knowledge or
information for his own personal benefits but must account to his principal for any profits derived
therefrom.
Broader principle, inherent in the nature of the fiduciary relationship, that prohibits a trustee or
agent from extracting secret profits for his position of trust.
Court said no monetary injury, but there may be an injury to the company in maintaining its
reputation of integrity, an image of probity for its management, and in insuring the continued
public acceptance and marketability of its stock.
Freeman v. Decio
ñe-read and add notes.
Disclose or Ôbstain ñule
Cady, Roberts & Co.
Insiders must disclose material facts which are known to them by virtue of their position but
which are not known to person with whom they deal and which, it known would affect their
investment judgment. Failure to disclose in these circumstances constitutes a violation of the anti-
fraud provisions. If, on the other hand, disclosure prior to effecting a purchase or sale would be
improper or unrealistic under the circumstance.
Extended the reach of Section 16(b) to
1. those with the existence of a relationship giving access, directly or indirectly to
information intended to be available only for a corporate purpose and not for the personal
benefit of anyone, AND
2. the inherent unfairness involved where a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing.
Constructive Insiders
SEC v. Texas Gulf Sulphur Co.
Information becomes material on November 12th because that is when the insiders
bought stock. Makes it look material. This is the day when they thought that the
oil was a big enough probability to buy.
Insiders do not have to disclose predictions or guesses, but do need to disclose basic facts. A good
test for materiality is whether a reasonable man would attach importance in determining his choice
of action in the transaction in question. To determine materiality under 10b-5 balance the
probability that the event will occur and the anticipated magnitude of the event.
Before insiders may act upon material information, such information must have been effectively
disclosed in a manner sufficient to insure its availability to the investment public.
Misappropriation
Chiarella v. U.S.
Tender offer
Bidder Attorneys Printer Printer Employee
Employee traded in stock of bidder¶s target and was convicted for insider
trading.
S.Ct.: No duty could arise from employee¶s relationship with the sellers of the target
company¶s securities, for employee had no prior dealings with them. He was not their
agent, he was not a fiduciary, he was not a person in whom the sellers had placed their
trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only
through impersonal market transx. Here the employee of the printer had no agency
relationship with the source.
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U.S. v. O¶Hagan
Same facts as above, but an attorney, not related to the tender offer but in the
same firm, traded in the stock of the target.
A person (any person) commits fraud under 10b-5 when he misappropriates clearly confidential
information and breaches a duty owed to the source of the information. Here there was an agency
relationship between himself and the source.
U.S. v. Kim
Whether it was a violation of 10b-5 for a member of a club to violate confidences
which he pledged to keep.
The relationship between defendant and the club members was not characterized by any measure
of superiority, control, or dominance. It was not the functional equivalent of a fiduciary
relationship. While the rules of the club may have forbidden defendant's actions, the federal
securities laws--at least in this instance--did not.
³Tippee iability´
- Arises when an insider passes inside information to another person knowing that other
person will trade on that information.
- Tipper- person passing the info
- Tippee- person receiving the info
1. An insider who trades is liable, OR
2. An insider who tips (rather than trades) is liable if he intends to benefit from the
disclosure, OR
3. An outsider who trades is liable, OR
4. An outsider who tips (rather than trades) is liable if he intends to benefit from the
disclosure.
- Other duties have to be present with these as well:
Duty to disclose must be present.
Dirks v. SEC
Whistle blower received info from an insider of corporate fraud. Told investors in the company
that the stock was not worth what the company said it was worth. These investors sold their shares
as a result of receiving this info. All the whistle blower was doing was exposing the fraud, but
SEC censured him for insider trading anyway.
Court says absent some personal gain, there has been no breach of duty to stockholders. And
absent a breach with the insider, there is no derivative breach.
- Ex: Riding up on an elevator you overhear insider info on a merger. You trade on it. No
tippee liability. No insider trading b/c 10b-5 doesn¶t cover negligence.
Spousal ñelationships and Insider Trading
The spousal relationship does not by itself create a relationship upon which to base a
misappropriation claim under Rule 10b-5. SEC Rule 10b-5-2 alters this by presuming
that the necessary fiduciary relationship does exist with respect to spouses.
Exceptions:
1.
2.
SEC v. Yun
Ñse vs. Possession
SEC v. Alder
There is no 10b-5 violation if there is no causal connection between the nonpublic info you
possess and your trading. (rebuttable presumption) If you can show your trading is part of some
preexisting plan then you can rebut the presumption of insider trading. Mere possession of inside
information is not a per se violation of inside information.
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Corp.
Insider Outsider
Violation Violation
C
A and B merge into a new corp. (C). C survives and A and B disappear. C assumes the
liabilities of A and B.
A and B¶s SHs are left and receive either, shares in C, cash, or a combination of the two.
Triangular Mergers
A (Parent) B
A¶s Subsidiary
A owns 100% of the subsidiary. A may not want to merge with B directly b/c they might
not want to take on some obligation of B. B merges with A¶s subsidiary.
1.c Mergers and Ôcquisitions
a.c Corporate Combinations: 4 main ways in which 2 corps can get together
i.c Merger: A is absorbed into B and disappears as a separate entity. B then issues
its shares or pays cash to A SH.
ii.c Consolidation: This is recognized by DE but not recognized by MA. A and B
corp combine into C²a new corp²and A and B disappear. C is what
distinguishes consolidation from a merger. Same rules apply to consolidation as
merger.
iii.c Sale and Purchase of Ôssets: A buys all the assets of B. A would then issue
stock or pay cash to B for the assets. B then usually liquidates.
iv.c Sale and Purchase of Shares: A acquires control of B though stock purchases
from SH either through the open market or by means of a tender offer. This is
subject to federal securities regulation.
b.c Corporate Divisons: spins off, split offs, etc can divide assets to all or some of the SHs.
c.c Mergers:
i.c Statutory Merger (ong Form): A absorbs B, B disappears, and A becomes
surviving corp. Surviving corp steps into the shoes of the acquired corp when
merger document filed in the state. By operation of law, the survivor becomes the
owner of all assets and is subject to all liabilities and is substituted in pending
litigation. Acquired corp¶s SH can get cash, have their converted or get other
consideration.
1.c Process:
a.c BOD Ôpproval: Each BOD initiates merger by adopting a plan of
merger. The plan outlines the terms and conditions and the
consideration.
c
v.c For example, a real estate developer whose regular course of business is buying
up and selling land will not pass the second prong of this test.
Gimbel v. The Signal Companies, Inc. (ADD MORE HERE)
Is the sale in the ³ordinary course of business?´
If it is then the sale does not require SH approval, no matter how big of a sale,
HOWEVER,
Must look at the sale to see if the asset sold was quantitatively substantial to the operation of the
business. If it is, then you have to seek SH approval. Must also look to see if the sale is
qualitatively substantial.
Ôppriasal ñights
Creature of Statute
SHs have generally the rights to appraisal of shares in which they have an interest.
Statutes usually have elaborate procedures which SHs must follow in order for a dissenter
to have appraisal rights.
MBCÔ 13.01, 13.0º
If there are so many dissenters that the corporation cannot pay them the appraisal value of
their shares all at one time the corporation has an out. It can make those dissenting SHs
creditors of the corporation. In the event of a liquidation the creditors will be paid first.
Procedure for Exercise of Appraisal Rights
13.º0- 13.º6
Farris v. Glen Alden Corp. (PA case)
List¶s assets were sold to Glen Alden for shares of Glen Alden and the assumption of List¶s
liabilities by Glen Alden. List then dissolved. Glen Alden becomes List-Alden. Shares of Glen
Alden went to List SHs. Glen Alden said this was an asset sale. Was structured like a merger.
Court says you cannot look at just the sale of the assets, you must look at the totality of the
circumstances to determine what the transx really is. This was a ³de facto merger.´ Dissenters are
entitled to an appraisal.
Hariton v. Arco Electronics, Inc. (DE case)
Almost identical facts. The court allowed the transx. The only distinction b/w the two cases is that
they were in different states with different statutes.
- In order to show unfairness in a merger transx you as a SH must show that those
facilitating the merger had some duty to you and whether they breached that duty.
BJñ is only a defense for a claim of violation of the duty of care.
Sterling v. Mayflower Hotel Corp. (not an asset sale)
i.c Merger of Parent and Subsidiary
: B/c there is self-dealing (parent is
majority stockholder of sub) the parent will have the burden of proving that the transaction is
entirely fair. The minority SH should receive the substantial equivalent of what it had before. This
was fair to the SHs of the minority corporation
1.c Court puts little value in liquidation value of assets, as it is a going concern.
2.c Court defers to judgment of the BOD, but will look to fairness.
3.c Courts more likely to defer in stock deals than cash deals, due to participation.
4.c DE says that appraisal rights are exclusive. You cannot go into court and challenge the
fairness. But then in Singer, they allowed the SHs to sue rather than exercising appraisal
rights, so they are not exclusive. Then there was a development of cases expanding this
nonexclusivity. You can go to court to have the court determine if it was a breach of
fiduciary duty. BUT you have to do one or the other- can¶t hedge your bets. Can¶t say I
am going to get the appraisal remedy for half my shares and go to court for the other half
º prong test
1. Must be full disclosure of the transx/conflict of interest to the interested
SHs.
c
º. Was what the SHs received fair compared to what the SHs would have
received on the open market.
Weinberger v. UOP, Inc.
i. X : Signal owned a maj of UOP and thus owed them a fiduciary duty. 21 a
share was agreed upon for the cash-out merger. Signal never told them that they had a feasibility
report that showed that anything up to 24 would be a good investment and that they would have
paid 24.
1.c This is a cash out merger/freeze out transaction
2.c This is a conflict of interest case and directors have burden of showing that it is a fair
transaction
3.c This is unfair because they should have told them they would pay as much as $24 a share.
This is a Globe Woolen problem (because of their relationship there is a higher duty of
disclosure
4.c Fairness has 2 parts: fair dealing and fair price- you need them both and in this case you did
not have fair dealing because you did not have candor
5.c DE says that appraisal remedy is exclusive in the absence of fraud or illegality. Most states
have adopted this rule. But what is illegal? In Rabkin, DE court in 1985 said that self dealing
is illegal, so exclusivity may not be as exclusive as it sounds b/c you can get into court by
alleging self dealing
6.c MA §13.02(d) deals with this and says self dealing does not qualify as illegal. It is an attempt
to narrow the view of when you can go to court. This is not the law as it is in most states
Rabkin v. Philip A. Hunt Chemical Corp.
In Weinberger the court defined fair dealing as embracing ³questions of when the transx was
timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the
approvals of the directors and the SHs were obtained.´
³Specific acts of fraud, misrepresentation, or other items of misconduct´ must be carefully
examined in accord with our views expressed both here and in Weinberg.
c.c ³Kitchen Sink´ disclosure not likely valid, unless honestly might
do everything.
5.c Ramifications for Violating § 13(d)
a.c T has implied private right of action against the acquirer, but the
remedy is almost always limited to filing an amendment.
b.c SEC may bring an enforcement action, which may include
disgorgement of profits as a remedy. May also have criminal
penalties.
6.c There is a 10 day window²you can creep up to five percent and then
continue to acquire stock without disclosure within that ten day period.
The critique is that the window defeats the purpose of the act b/c acquirers
can acquire so much more than 5% before disclosure is made.
7.c Once filed, 13D has continuous updating requirements. If there are
material (>1%) changes (you intend to acquire more or your intentions
change), then you must update that information with the SEC.
8.c Can exceed the 5% threshold in a share repurchase without any action.
9.c EXCEPTIONS TO § 13(d):
a.c De minimis exception for purchases that do not exceed 2% of the
class of stock in prior 12 months under § 13(d)(6)(B).
b.c § 13(d)(5) allows passive investors to file a § 13(g) if acquired
stock in ³ordinary course of business´ and ³not acquired for the
purpose of and do not have the effect of changing or influencing
the control of the issuer.´ Usually applies to institutional investors.
c.c § 13(g) applies to ³owners´ not ³acquirers.´
d.c § 13(g) requires only person¶s identity, residence, citizenship, # of
shares, and nature of interest.
ii.c Section 13(e) Gives SEC power to make rules regarding share repurchases.
1.c 13(e) talks about when a company purchases its own shares²if a
company is going to buy back enough of its share to no longer be a public
company, then the company has to disclose this so that SH know they
have lost their information rights.
2.c 13(e)-4: all rules that apply to 3rd party TOs, then also apply to
repurchases.
iii.c The Tender Offer Provisions 14(d), 14(e), and 14(f):
1.c R14(d) ³It shall be unlawful for any person . . . to make a tender offer for .
. . any class of any equity security which is registered pursuant to § 12 [of
the ¶34 Act] . . . if, after consummation thereof, such person would . . . be
the beneficial owner of > 5% of such class, unless copies of the
offer . . . are
published or sent or given to security holders such
person has filed with the SEC a statement [Schedule TO] . . . .´
a.c Basic ñequirements: If you have a tender offer, you cannot
commence it until you have filed a Schedule TO with the SEC, T,
and exchanges²who you are, what your intentions are, etc. This
way investors who are subject to a TO can decide.
b.c SHs can withdraw their shares (revoke their tenders) at anytime
while the TO is open.
c
c.c Ôll holder¶s rule: The tender offer must be open to all SH of the
same class and not exclude any SH from tendering. Response to
Unocal.
d.c Best Price ñule: If you change the terms of the offer, everybody
who tenders under a single tender offer gets the same highest price.
e.c Pro rata ñule: if tender offer is oversubscribed, all SHs get pro
rata acceptance.
f.c imited to 3rd party offers (not repurchases).
2.c R14(e):
a.c Prohibits material misstatements, omissions, and fraudulent
practices in connection with TOs.
b.c Gives SEC power to regulate TOs
i.c Ôpplies to
TO, not only ones R1º corporations.
1.c Needs interstate commerce tie as with 10b-5.
c.c 14e-1: TO Open for º0 days: The TO must be open for a
minimum of 20 days business days. If any change is made in the
terms, another 10 period is extended.
d.c 14e-º: Target Management must ñespond: If your company is
the subject of a tender offer management has to react to it within
10 days: (1) support; (2) oppose; or (3) take no position. Must also
explain why.
e.c 14e-3: Insider Trading ñule: Prohibits the knowing possession of
material non-public information about a tender offer and trading on
it. There doesn¶t seem to have to be a duty or deception.
f.c 14e-^: While a TO is open, you cannot purchase any other shares
in any manner.
g.c Limited to 3rd party offers (not repurchases).
3.c R14(f):
a.c Anytime there is an arrangement to turn over control of
management in a public corp., it must be disclosed. Remember,
sale of control cases of public company trigger this.