CORPORATIONS SHORT OUTLINE

General Intro
• Theme of course – mechanisms of private governance
o Governance - systems for making decisions
o Comparison to contracts
 Contract – agreements to decide exactly what to do in the future
 This course – deciding how the parties will decide what to do when the time comes
o Three forms of private governance
 Agency
 Partnership
 Corporations
• Forms of Business Organizations
o Agency
 When one person contracts to “work for” or “represent” another person
 2 decision making arrangements
• When the boss is silent, your choice goes
• When the boss is verbal, his choice goes
 Termination ends decision-making system
o Partnership
 2 or more working together, rather than one working for the other
o Corporations
 Unlike agencies and partnerships, not created by common law
 Governance scheme created by statute
 Formally seperates ownership from control
• Assigns ownership and control to a fictional person (corp itself) created by state
• So directors and officers can run business w/o having ownership in it
• Shareholders can enjoy benefits of owning business w/o power to run it
• Governance Contracts
o Meaning of a Governance Arrangement
 Governance
• agreeing now on a system for deciding what to do in the future
 Non-Governance Contracts
• agreeing now on what you’ll do in the future
o Elements of a Governance Arrangement
 Who decides? (Authority)
• Discretion
o Governance means giving someone else power to make decisions for you without your direction or
approval
• Limits on Discretion
o Discretion to govern is always limited. What kinds of decisions does the power cover?
• Obedience
o Can someone override the decision making power if it has not yet been exercised and direct the
decision?
 How to decide? (Fiduciary Duty)
• General Idea
o Assuming governing authority means agreeing to make decisions for another person. The duty to
faithfully pursue that person’s interests in exercising governance authority is the fiduciary duty
• Care
o People make their own decisions carefully to avoid harm to themselves. Fiduciaries have a duty to
exercise care to avoid harming the people they serve
• Loyalty
o People naturally consider their own interests when they make their own decisions. Fiduciaries have a
duty to consider the interests of the people they serve as if those were the fiduciaries own interests

AGENCY: DEFINITION TERMINATION TWO-TIER STRUCTURE

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1. RST § 1. Agency. Agency is the fiduciary relation which results from the manifestations of consent by one person to another
that the other shall act on his behalf and subject to his control, and consent by the other to so act.
i. §1 Agency; Principal; Agent – page 4
ii. §14 Control by principal – page 4
1. Principle controls agent
iii. §15 Manifestations of consent / Creation of agency – page 4
1. Agency relationship only exists if there has been manifestation of consent by principal to agent that
the agent may act on his accoundt
2. And
3. Agent must consent too
2. Termination of Agency: Agency exists only so long as mutual consent continues (RST § 118);
a. §118 Termination of agency – page 5
i. Principle or agent manifests to the other dissent
ii. Principal – power to REVOKE
iii. Agent – power to RENOUNCE
iv. Comment b
1. Statement in contract that authority can’t be terminated by either party is effective only to create
liability for wrongful termination
2. if termination of agency constitutes a breach of K, agency is STILL terminated but terminating party
may owe K damages.
3. General Agency Duties: Two-Tier Governance Structure:
a. 1. Authority: If the principal doesn't want to intervene, the agent's authorized decisions are binding between the
principal and agent.
i. Duty to act only as authorized by the principal (RST § 383)
1. except when an agent is privileged to protect his own or another’s interest.
2. An Agent is subject to a duty to principal not to act in principals affairs except in accordance w/
principals manifestation of consent
b. 2. Obedience: If the principal wants to intervene, the principal's decisions are binding between the principal and
agent.
i. Duty to obey all reasonable directions of the principle (RST § 385)
1. Agent has discretionary authority only if the principal leaves the decision to the agent
2. Reasonability: Compatible with what the agent signed on to do in general. Reasonability puts an
objective limit on the agent's duty to obey (courts decide what's reasonable, not principals or
agents).
a. What is “reasonable” principal order?
i. Compatible with the agency; as long as it is compatible then the principals decision
governs
ii. Reilly v. Polychrome Corp.
1. 1) An agent has relative authority/discretion to decide ( to come into work or stay home or not) in this
type of situation when the principal is Absent or Silent, BUT this is irrelevant b/c the principal
spoke..
a. 1. there was an express provision in the contract that stated he had to come in at certain
times
b. and
c. 2.his superior 3 t imes demanded he come in at these times….and “generally accepted
business customs” do not rise above OBEDIENCE DEMANDED IN A CONTRACT
2. was the demand reasonable? - “compatible w/ the agency”
a. here it was reasonable b/c it was a year end closing and although possibly not necessary for
reily to come in, it was certainly reasonable for it to be asked of him, especially considering
the circumstances (asked three times)

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AGENCY: ACTUAL APPARENT INHERENT AUTHORITY
4. Authority of Agent to Bind Principal: Authority is the power of the agent to affect the legal relations of the principal by acts
done in accordance with the principal’s manifestations of consent to him. (RST § 7)
i. scope of discretion to act on behalf of the principal without direct supervision
1. if there is some type of authority, the agent will not be liable to principal for bad results
5. Actual Authority: Principal manifests consent directly to agent; if actual authority exists principal is bound by agent’s
authorized actions even if the party with whom the agent deals is unaware that the agent has actual authority or it would
be unusual for agent to have such authority. Can be (1)express or (2)implied.
a. express (express statements/directions from principal to agent)
b. implied - because it is hard to define actions in every situation, agents often have a lot of Implied authority
i. Makousky, Inc. v. Stern
1. IMPLIED AUTHORITY - Principals are responsible for acts of their agents that are a standard
practice
2. Hiring a broker in a real estate transaction is fairly standard practice, so you are bound
c. Objective test – how a reasonable person would interpret the principal’s words and actions….would a reasonable
person (agent) think the principal gave them authority?
6. Apparent Authority: Arises when agent is without actual authority, but principal manifests consent directly to third
party who is dealing with the agent that the agent has authority to perform the act. Third party MUST KNOW he is
dealing with agent. (RST § 8).
a. Agent’s actions alone are NEVER relevant, no matter how convincing – MUST be action of the principal
b. Makins v. District of Columbia - FACTORS to consider (NOT sure where I got these….)
1. 1) actual authority of the agent
a. In this case, just the authority to go to the conference and negotiate (not settle)
2. 2) usual or normal conduct of the agent in the performance of his or her duties,
3. 3) previous dealings between the agent and the party asserting apparent authority
4. 4) declarations or representations allegedly made by the agent
5. 5) customary practice of other agent’s similarly situated
ii. The key is in
1. 1) What the Principal ( Makins) does herself in front of third party
a. Makins, herself never gave indication to DC that she had given her attorney power to settle
2. 2) what the Third Party (DC) perceives
a. so DC never perceived anything from Makins that them believe she had given authority
iii. Makins had only given her attorney “actual authority” to attend the conference and negotiate…NOT settle
1. . Restatement of law: in absence of contrary agreement, lawyers can generally negotiate, but not end a
settlement/dispute
a. This is reserved to the client
2. Burden is on third party to realize the agent might not have the power to settle
7. Inherent Authority (Not apparent authority b/c it this is indirect implication ofauthirtyt): Gap filling device used by courts
that is implied from the agency relationship. (RST § 8A).
a. if the principal puts the agent in a certain position (clerk is at front of store), the principal should expect that third parties will
presume a certain amount of authority
i. Third parties can reasonably rely on actions by the principal that are only indirectly aimed at conveying the agent’s
authority to them
Liability for Action in Scope

Manifestation of Principal’s Third Party

Consent for the agents to act Knowledge of Principal to
Type of Authority on their behalf Agency Agent to Principal Third Party

Express Express to Agent Unnecessary No Yes

Implied Implied to Agent Unnecessary No Yes
Apparent Express/Implied to Third Party Necessary Possible (if didn’t grant Yes
agent specific or implied
authority, may be liable)

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 Inherent Agency Power None – Implied from Agency Unnecessary Possible Yes
Relationship

AGENCY: FIDUCIARY DUTY OF LOYALTY DUTY OF CARE

8. General Rule: An agent is a fiduciary w/respect to matters within the scope of his agency. (RST § 13)
i. generally you must work towards someone else’s interests…not your own…without having a specific command from
them to do it
1. “don’t do anything I wouldn’t do

b. Duty of Care: An agent must act with the amount of care that is standard in the geographic area for the task
performed, including
i. 1. procedural (informed); and
1. US Liability Ins. Co. v. Haidinger-Hayes, Inc.
a. There was PROCEDRUAL negligence – not digging enough
i. If you would have looked at everything Crescent had given you, you would have realized that
it was a bad idea (
1. Would have found why it was so costly for prior insurers of crescent
ii. 2. substantive care (act reasonably with information).
1. US Liability Ins. Co. v. Haidinger-Hayes, Inc.
a. Hayes somehow anticipated reducing the loss ratio through his own diligent work
i. But you can’t take this substantive risk on behalf of the company b/c you are an agent
acing for someone else…this was not a reasonable risk taken by this agent, given the information he
knew
1. You could take it on your own, but not on the behalf of your company
iii. Exercising special care
c. He must also exercise any special skill he has. (RST § 379)
1. must act a/ standard care and skill which is standard…and exercise any special skill
a. Don’t do anything stupid
b. objectively….be careful…
d. GRATUITOUS AGENCY: even if gratuitous, you still must do your best (pro bono – we will expect top quality)
i. Contractual variance: Elimination: The principal and agent can agree to define, limit, or eliminate the duty
of care….or its scope or range

e. Duty of Loyalty: An agent is subject to a duty to his principal to act solely/exclusively for the benefit of the principal
in all matters connected with the agency. (RST § 387).
1. Don’t betray me
2. Subjectively….don’t act against my wishes
3. This only applies to matters within the scope of the agency
a. An agent need not be “loyal” outside of his job duties
i. You can work for other companies doing similar work once you are off duty at your first place
ii. You are not required to shop at the place you work for
ii. FACTORS to consider under Duty of Loyalty
1. Relationship of Principal to the Opportunity
a. Would the opportunity fit into the corporation's business?
b. Has the corporation specifically pursued the opportunity?
i. If Pricellular was the true principal, they actually had an option on the bid, but they
weren’t Broz’s true principal at that point
c. Is the opportunity essential to the principal's ability to do business?
2. Relationship of Agent to the Opportunity
a. Did the agent discover/develop the opportunity in service to the principal?
b. Was the opportunity offered to the agent in the agent's official capacity (i.e. was it offered to the
principal)?
c. Did the agent's position with the corporation facilitate discovery or development?
3. Relationship of Agent to Principal
a. Full time exclusive v. part-time non-exclusive: What scope of services (and loyalty) did the principal
obtain?

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 b. Nature of Position: Was the nature of the agency such as to create a duty (mail room worker v. CEO)?
i. If Broz was working for Pricellular, clearly this would be an obvious competition, but he
was for CIS at the time

AGENCY: PER SE BREACHES REMEDIES FOR BREACHES

9. Pre Se Rules: Per se rules create an evidentiary presumption of disloyalty (irrespective of intent) on proof of an objective
conflict of interest.
a. B/c it is so difficult to prove subjective intent for loyalty, common law has established per se rules
b. These per se rules dominate litigation and are generally just referred to as “the duty of loyalty” – duty to act in good faith and
not to act in bad faith
10. Acting As adverse party: Agent is subject to a duty not to deal with principal as an adverse party in a transaction w/in the
scope of his agency without principal’s knowledge, and if principal does have knowledge must deal fairly and disclose all facts
that agent knows or should know would reasonably affect principal’s judgment, unless principal manifested expressly that he
does not want nor need to know. (RST § 389 –w/out consent, 390 – w/ consent)
11. Acting For Adverse Party: Agent can’t act as adverse party in transaction connected with agency without principal’s
knowledge, and if principal does have knowledge, must disclose all facts that would reasonably affect judgment of principal.
(RST § 391 –w/out consent, 392– w/ consent)
12. Principal’s Consent: If the principal knows (consent) (Restatement §§ 390 & 392), the agent can avoid liability by:
a. 1) Full disclosure-He disclosed everything the principal might need to know to make a judgement about it
b. 2) “Fair dealing” with the principal (procedure and substance)-He treated the principal “fairly”
i. Many times can do this by “obtaining approval from a “disinterested person
ii. Rule: Even if facts disclosed, agent still has burden of proving that any conflicted transaction was fair to the principal.
c. Globe Woolen Co. v. Utica Gas & Electric Co.,
i. Even if he honestly wanted the best for both companies, this is a per se breach of fiduciary duty – 390 or 392
ii. But his principal knew….392….so?
1. Disclosure (fair dealing)He could say that he disclosed that he was dealing with the “other team”
2. Fairness (fair dealing / fair price)=He could have the affirmative defense that his principal gave him consent to
do what he wanted: Refusing to vote (he sat on the board) does not nullify the influence and predominance
he exerted without a vote (he still crafted the contracts to his own benefit and his companies detriment)
3. Fair Price (harder to get) -could say this is same price a completely neutral person would have gotten as well
d. All of these must outweigh the “conflict” that the principal has a prima facie case establishing
13. Competing w/ Principal: a duty not to compete with principal concerning subject matter of agency. (RST § 393).
14. Acting for One with Competing Interests: cannot act for someone who has competing interests of principal. (RST § 394).

15. REMEDIES FOR ABOVE BREACHES………Property of the Principal and Profits of the Agency –
a. Profits: Profits resulting from the agency belong to the principal unless otherwise agreed. (RST § 388).
i. Unlike 403 below…where the profits result from violation of duty of loyalty
b. Loss Caused: §401 – liability for loss caused – agent is liable for losses caused
1. Comment a. Can be if agent just screws up (duty of care) – liability for Chattels OR Breach of Duty
2. Comment e. Or for violating direct orders ….if it causes a loss a loss, agent is liable for loss if that loss was
within the risk of the action he took, even if the risk was less than the risk of following the principals orders
c. Accounting for profits received: Remedy for breach of duty of loyalty is not only damages suffered but also profits
taken (or conferred to others). (RST § 403). §403 – liability for things received in violation of duty of loyalty
i. If a you breach duty of loyalty and recover profits as agent by virtue of that breach, you better pony up the profits
you made by virtue of the breach
ii. Comment C) if you spend money to effectuate the breach, your expenses are not deducted. You still owe the full
amount that you profited
iii. Burg v. Miniature Precision Components, Inc. – Steps to Proving entitlement to remedy
1. 1. Prove fault of defendant, 2. Prove that P lost something, 3. Prove that the defendant was “fat” – got
something b/c of P’s loss Or that the Defendant fattened someone else that should not have gotten fat
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 2. So these profits that he made himself, or that he made wrongfully for someone else, should all go to the
plaintiff…(less his costs that he can prove)
d. Forfeiture of Contractual Compensation (salary): Not an automatic remedy for disloyalty. A disloyal agent can
still provide compensable services. The principal must show that the disloyalty affected the agent’s right to be
compensated at all. Might have to give up your salary if you weren’t actually working for the company you were supposed to
be working for
i. Burg v. Miniature Precision Components, Inc. If your payment of salary to the person ended up just being unjust
enrichment – they took the money , didn’t do their job, and run -Then you must pay back your salary
1. Burg did not have to forfeit his salary b/c there was not unjust enrichment from the salary
a. Although there was a breach of fiduciary duty….
b. he still actually did his work/job for them, even though he sought profit for himself in a couple days
i. They tried to prove that he didn’t show up to key things…but there was enough contrary
evidence that he did do a job for them, even if he was duplicitous in a couple of the deals
1. If it would have been all the deals, we maybe have a different story

AGENCY: THE CORPORATE OPPORTUNITY DOCTRINE

2. When conflict involves a corporation as principal and one of corporations high – level agent
3. scope of agency – means a lot for this subject
a. Competition with the Principal: An agent may not compete with the principal as to the
subject matter of the agency (RST § 393)
i. If the agent competes with the principal then liable for breach of loyalty. This is a per
se rule—even if in the agent’s own mind he thought it was not a good idea for the principal, that suggestive
thought does not matter.
16. Two aspects important in determining whether someone has really competed w/in the scope of the agency
a. 1) What role the agent plays in the principal’s business
i. The more authority an agent has within the principals business (higher up you go), the less of
the principals business falls outside the scope of her authority
1. Meinhard v. Salmon- Salmon has sole power to “manage, lease, underlet, and
operate the building”
a. Salmon held it as a fiduciary, for himself and another, sharers in a
common venture
ii. The higher you go, the more likely you are to be competing b/c almost everything comes
into the scope of your agency…..Eg if you are a janitor in a car buying-reselling company, it is unlikely you would be
competing buy getting a great deal on a rare car for yourself, whereas if you were the CEO, different story
1. Given your position…would the corp be interested to share in your knowledge of the
opportunity?
a. Would the Principal have “interest or expectancy” in the opportunity
b. Meinhard v. Salmon- Being a manager - The fact that Salmon was in
control w/ exclusive powers of direction charged him EVEN MORE OBVIOUSLY with the DUTY OF
DISCLOSURE, since only through disclosure could opportunity be equalized…As a manger…
EVERYHITNG WAS IN SCOPE OF HIS AGENCY …even if he wasn’t manager…the lease
extension should have logically fallen in the scop
c. Deciding fact: Salmon didn’t tell Meinhard
b. 2) how an opportunity comes (presents itself) to the agent
i. in connection w/ functions or duties?If the third party clearly presents an opportunity to the
agent as an agent for the principal, the agent can’t take it for himself
1. Meinhard v. Salmon -If Eldrige knew Salmon was an agent, he would have presented
the lease deal to Salmon and Meinard together, not just Salmon himsel
b. IF you used your position or corporate information to find out, secure the opportutnity, this is also tending to implicate you
1. Irrespective of Scope of agency, is it a corporate opportunity? FACTORS
a. Broz v. Cellular Information Sys., Inc., …….from Guth v. Loft, Inc.
b. weigh following factors, none is dispositive .Corporate officer or director MAY NOT TAKE a
business opportunity for his own if
i. 1) the corporation is financially able to exploit the opportunity
1. CIS’s financial problems would have prevented it from getting it
ii. 2) the opportutnity is w/in the corporation’s line of business
iii. 3) the corporation has an interest or expectancy in the opportunity
1. Must be some tie between that property and the nature of the corporate business
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 a. –Johnston v. Greene
2. A Director’s right to “appropriate an opportunity depends on the circumstances
existing AT THE TIME it presented itself to him WITHOUT REGARD TO SUBSEQUENT EVENTS
a. “The right of a director or officer to engage in business affairs outsideo f his
or her fiduciary capacity would be illusory if these individuals were required to consider EVERY
POTENTIAL, FUTURE OCCURRENCE in determining whether a particular businesss strategy would
implicate fiduciary duty concerns”
b. “He must be allowed to make decisions based on the situation as it exists AT
THE TIME a given opportunity is preseentd”
i. Broz was NOT required to consider the contingency of a Pricellular
acquisition of CIS and the related contingency of PriCellular thereafter waiving restrictions on the
CIS bank debt
ii. Broz didn’t have to consider the future speculation of Pricelluars
acquisition
iv. 4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed
in a position inimicable to his duties of the corporation
1. Broz interest in acquiring and profiting from Michicgan – 2 cretaed no duties
inimicable to his obligations to CIS
Directory or officer MAY TAKE a corporate opportunity for his own if (also looking at above factors)
v. 1) the opportunity is presented to the director or officer in his individual and not his corporate
capacity
1. Daniels approached Broz in his individual cpacity
vi. 2) the opportunity is not essential to the corporation
vii. 3) the corporation holds no interest or expectancy in the opportunity
viii. 4) the director or offier has not wrongfully employed the resources of corporation in pursing or
exploiting the opportunity
1. Broz comported himself in manner whoolly in accord w/ obligations to CIS
2. Although he did not “present the possible opprotunity to the BOD”, which creates a
“safe harbor” (failsafe way to escape liability), it is not the law of delware that presentation to the BOD is a
necessary prereq to a finding that a corporate opportunity has not been usurpred, so he was fine anyway

PARTNERSHIP: CREATION, MODIFIABLE RULES, MANDATORY RULES

a. Creation of Partnership: The association of two or more persons to carry on as co-owners of business for profit
forms a partnership regardless of intent to form a partnership. (RUPA § 202(a)).
2. Presumptions under § 202:
3. Co-ownership of property does not create any presumption of partnership (§ 202(c)(1)).
a. 1) joint tenancy, tenancy in common, joint prropty .does NOT by itself create partnership, even if the owners were in it for profit
4. sharing of returns..does NOT by itself create partnership, even if person sharing have joint right (RUPA § 202(b)).
5. Splitting profits (as opposed to revenues) creates a presumption of partnership unless it seems part of a less mutual
arrangement (loan w/ equity kicker) (RUPA § 202(c)(3)).
i. 3) person recing a share of profits is presumed to be a partners in business, unless profits were received in payment:
1. I) of a debt, ii..for services ,Iii) of rent ,Iv) annuity, V) interst on loan, Vi) sale of goodwill of business,
Default Rules which may be modified
ii. General Rule: Being a partners means both a property interest (non-fiduciary) and management powers
(fiduciary power).
b. Profits and Losses: Default rule: §401(b) - Absent agreement to contrary, profits and losses are shared equally
c. Agency Authority: Partners have equal actual agency authority to act for the partnership. (RUPA §§ 301, 401(f)).
i. Modification: The partnership agreement can eliminate actual authority. BUT The partnership agreement has no
direct impact on apparent authority. That depends on the reasonable perceptions of third parties.
ii. Ordinary Course: A partner has actual general agency authority for the partnership (power to make decisions for the
partnership) in the ordinary course of its business. RUPA § 401(f) & 301(1).
iii. §301: Partner Agent of Partnership:
1. (1)ordinary course: each partner is an agent for the partnership
a. ACTUAL and APPARENT agency authority. An act by a partner in ordinary course of business
binds partnership, UNLESS (1) partner had no authority to act in that matter…. And….
b. (2) Person whom partner was dealing knew partner lacked authority
2. 2) outside ordinary course – only binds partnership if it was authorized
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 a. NO actual or apparent agency authority
b. Lundy v. Haymond….. If a partner “purchases or disposes of any material asset” he must get
permission of the majority of the partners if the asset’s value exceeds 10K - this time they put a
number on the “extra – ordinary – requiring – everyone’s agreement “…..Even if
i. (1) it might be a “customary referral fee,” and (2) court ordered Lundy to pay it
c. Lundy is still required to consult his fellow partners before giving it
d. So everything above 10K (which he can spend/do w/o firm permission) he owes personally
iv. §401(f) : Partner has equal rights in management and conduct of partnership business
1. Partner may go out and do something for the partnership without consulting the other partners, as long as it
falls under the ordinary course/ordinary matters ,
a. Below the level of “extraordinary matters” as in 401(j)
b. determining whether it is “ordinary course”……turns on MAGNITUDE OF DECISION
c. If aware that it might be outside of ordinary course, he should seek council…
d. Internal Decision Making/Disputes: Partners must agree unanimously to admit new partners and amend the
partnership agreement , all other internal disputes are governed by majority vote on a one-partner-one-vote basis
i. §401(j) differences as to ordinary matters must be decided by a majority
a. partner only needs to consult other partners if he is aware there might be a disagreemeent
2. difffernces as to extra ordinary matters must be decided unanimously
a. UPA §18(h) – any change must be decided by a majority of shareholders
3. TIE BREAKER GOES to NAYS: If partners r equally divided, those against the change have their way
ii. Rule: In the absence of any consensus between partners, the status quo continues.
1. Covalt v. High: Except where partners expressly agree to the contrary, they have equal rights in
management of business of partnership… when disagree, power to exercise discretion is suspended
a. one partner may not sue another partner b/c the other partner disagrees w/ a decision being made
b. there was no breach of fiduciary duty ( in absence of mutual agreement to contrary
Default Rules which may NOT be modified
6. Dissociation: Any partner can dissociate at will. (RUPA §§ 602(a), 103(b)(6))
7. §103(b)(3) & (b)(5) and cmts 4,5, and 7: Effect of partnership agreement; nonwaivable provisions
i. (b)(3) partnership agreement MAY NOT eliminate duty of loyalty 404(b) BUT
1. I) may identify activities not violating duty of loyalty…if not unreasonable
2. Ii) may authorizy or ratify a specific act or transaction that would otherwise violate duty of loyalty
ii. (b)(5) can’t eliminate duty of good faith and fair dealing 404(d)
8. Partner Liability: Third parties can collect partnership obligations (contract and tort) from each partner individual; partners
are liable jointly and severally for all obligations of the partnership. (RUPA § 306). §306(a) – Partner’s Liability
a. A) partners r liable jointly and severally for obligations of partnership unless otherwise agreed by the claimant or provided by law
b. B) liabilities before joining: person admitted into partnership is not liable for partnership obligations incurred before he joined
c. Comment 1: joint and several liability
PARTNERSHIP: DISSOCIATION DISSOLUTION WINDING UP
Partner Dissociation
d. Events Causing Dissociation: A partner is dissociated if (RUPA § 601)
i. (1) the partner expressly withdraws;
ii. (2)upon an event agreed to in the partnership agreement causing dissociation;
iii. (3) upon application by partnership or other partner, by judicial determination because of wrongful conduct or
conduct making it impracticable to continue;
iv. (4) in death or incapacity of partner.
e. A dissociation of a partner does not necessarily cause a dissolution and winding up
i. What Dissociation DOES NOT MEAN: It does not mean that the partnership or the partnership's business is ended or
will end. Ever. Really.
ii. RUPA § 603(a). Effect of a Partner’s Dissociation: If a partner’s dissociation results in a dissolution and
winding up of the partnership business, Article 801 applies; otherwise Article 701 applies.
1. Winding Up: RUPA § 801 identifies the situations in which the dissociation of a partner causes a
winding up of the business…….when it is an AT WILL partnership
2. Continuation: RUPA § 701 provides that in all other situations there is a buyout of the partner’s
interest in the partnership, rather than a windup of the partnership business and in those situations
the partnership entity continues unaffected by partner’s dissociation.

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 a. All dissociations not resulting in dissolution result in continuation by remaining partners
b. Right of Dissociating Partner to Payment:: A continuing partnership must pay the dissociating
partner’s share of the partnership’s appraised value (no right to force “market valuation” by action).
c. Reductions of Payout: : Dissociating partner’s payout is reduced by amounts owed, including damages
for breach of contract.
d. Deferral Rule when DISSOCIATION IS WRONGFUL. Payment may be deferred (with interest) to
the end of any fixed term/endeavor if the dissociation was wrongful, unless the dissociating partner can
prove that immediate payout would not cause hardship to the partnership
f. Inalienable Power to Dissociate: partners can dissociate at any time, whatever contract says. RUPA § 602(a))
i. generally thought of as a necessary compliment to unlimited liability (with limited control). However, act of dissociation
may constitute a breach of the partnership contract (wrongful dissociation), bringing liability for damages.
ii.
Partner Dissolution (continued next page)

9. At Will Rule: Dissolution is the moment when all the partners end their association as partners with the partnership and each
other, other than for purposes of winding up. (RUPA § 801)
a. "At-will" partnership: A partner can force dissolution by dissociating. RUPA § 801(1).
i. definition – formed w/o agreement that the partnership shall continue for a specified term or undertaking
ii. This can almost NEVER BE WRONGFUL….unless you are breaching some other duty by doing this
b. Can continue only as long as every member assets- Any partner may “dissociate” and therby cause a “dissolution” of the
partnership by simply expressing his will to cease association with the partnership
c. AFTER Dissolution -, partners must Wind up businesss, Pay off debts, Settle accounts with partners

10. Term/Endeavor Rule: In a term/endeavor partnership, a partner cannot force dissolution by dissociating before the end of
the term/endeavor. Such dissociation is wrongful under RUPA § 602(b). It results in dissolution only if a majority of the
remaining partners vote to dissolve (RUPA § 801(2)).
a. Wrongful dissociation:
i. (1) breach of an express provision of partnership agreement; or
ii. (2) in term/endeavor--before the expiration of the term or completion of the undertaking
iii. RUPA § 602(b)
iv. Drasner v. Sorenson
1. Wrongful dissociation when a partner
a. Willfully and persistently commits breach of partnership agreement
i. D threatens to dissolve when S refuses D’s requests
ii. Tries to take 1/3 before they have hit 7500 mark
b. Conducts himself in matters relating to the partnership business so as to render impracticable the
carrying on of the business in partnership with him
i. D spent a lot of time at the bar
ii. When D had overdrawn and was also indebted to S for personal advances, he requests $100

Partner Dissolution - Continued

11. Judicial Intervention Rule: RUPA § 801(5) provides a mechanism for a partner to seek judicial dissolution on proving
certain extreme breakdowns in purpose or function of the partnership (not reasonably practicable to carry on, partnership
unreasonably frustrated). A partner who cannot dissolve the partnership by dissociating can therefore nonetheless seek relief
in extreme circumstances without wrongfully dissociating.
a. RUPA § 801(5) - Dissolution by Judicial Decree:
i. (i)Frustration of economic purpose
ii. (ii)Partner's bad conduct makes it reasonably impracticable to continue in business in partnership with that partner+
1. Drasner v. Sorenson – guy’s bad actions makes it impossible to continue the endeavor for profit
a.
To get judicially ordered dissolution
i. CAN’t MERELY SHOW Wrongdoing Or breach
b. Must show impracticability of continuing …………Must be business impracticability
i. can’t just be “oh I can’t keep working here with this guy..”
iii. (iii)Otherwise not reasonably practicable to continue the business under the partnership agreement
b. Importance of Judicial Power to Dissolve:
9
 i. Escape Hatch: If partners don't provide for exit and ptnrship isn't at will, can get stuck in bad situations with no way out.
ii. Uncertainty: If a partner is uncertain whether it has the power to dissolve the partnership by dissociating, it will
generally seek declaratory relief, rather than risking a wrongful dissociation (and no dissolution).
iii. Importance of Discretion: Dissolution involves a danger of hold-up (both by the party seeking dissolution and the party
opposing) and a danger of letting people out of exactly the arrangement to which they agreed. Discretionary court power
discourages misuse.
c. IF existing exit strategy doesn’t give you a way to wind up your business, seek the courts: Haley v. Talcott Rule:
An agreement does not provide an adequate exit for a partner wishing to dissociate if they would still be personally
responsible (i.e. personal guarantee on a mortgage) but would have no further control. Such circumstances make
judicial dissolution a viable alternative.
i. Haley v. Talcott- LLC example
1. 1)MUST have a practicable exit strategy
2. 2) AND exit strategy must allow business to continue without resolving disagreements
a. Here, Haley would not be relieved of his liability on the joint mortgage, which means this strategy
wouldn’t effectively end the partnership b/c it doesn’t account for the mortgage
3. Therefore, b/c current agreement doesn’t, (1) provide equitable opportunity to leave, (2) effectively end
partnership, it is NOT practicable…..judicial intervention ok..
12. Continuation after dissolution: Dissolution starts the “winding up” process. It does not end the partnership’s business. A
partnership continues after dissolution ONLY for purposes of winding up its business. (RUPA § 802(a)).
Winding Up(continued next page)
i. Definition: The process by which a dissolved partnership pays its creditors and settles accounts with its
partners (distributing any surplus in cash or collection the deficit). At end of process, the partnership actually ends
(“terminates”).
ii. There are three things you can do in winding up……803(c), as long as they are 401 oridinary courtse and
satisfy 802(a) (partner has the right to wind up (not wrongful dissociation)
1. Finishing existing work (…preserve “GOING value” of bidness can justify seemingly “non-
winding up” activites)
2. Selling the entire business (often to partners who want to continue it)
3. Selling individual assets or parts of the business.
iii. existence during winding up: The partnership exists ( for purposes of winding up) during winding up (RUPA
§ 802(a)).
1. Right Wind Up: Each partner (except wrongfully dissociating partners) has right to wind-up
partnership. RPA 803(a))
2. Judicial supervision: If a partner shows cause, a court will supervise. (RUPA § 803(a))
3. Rights and Duties of Winding up Partners: Winding up is a fiduciary activity. Partners participating
in winding up are entitled to reasonable compensation for their activities in winding up. (RUPA § 401(h))
a. H) partner is NOT entitled to remuneration for services performed for partnerhisp, EXCEPT for “reasonable
compensation for services rendered in “winding up” the business of the partnership
4. By default, partners get no compensation for their work (beyond their share of profits). RUPA §
401(h). Negotiated agreements often modify this rule.
a. “SWEAT EQUITY” - Shamloo v. Ladd - Upon dissolution of partnership, and in absence of agreement to contrary,
is a partner entitled to remuneration. for rendering services to the partnership. other than profits?
1. NO, Sweat equity is not capital contribution.
b. Accounting - §807a,b,d – Settlement of Accounts and Contributions Among Partners
i. A) assets must first discharge obligations to creditors, including partners who are creditors
ii. B) profits and losses resulting from liquidation of partnership assets are credited and charged to partners accounts
iii. D) after settlement of accounts, each partner shall give, in proportion in which the partner shares partnership loss
Winding Up Continued
5. Rights and Duties of Winding up Partners:
a. Accounting - §807a,b,d – Settlement of Accounts and Contributions Among Partners
i. Ultimately winding up means (in order…1,2,3)
1.Paying all debts and other fixed obligations (including paying amounts owned to partners
as salary or loan repayment)
a. 401 D) partnership shall reimburse a partner for an advance to partnership beyond amount of
capital (401A) the partner agreed to contribute

10
 i. Shamloo v. Ladd - Upon dissolution of a partnership, and
absent an express agreement to the contrary, is a partner who has made a loan to the
partnership in excesss of his capital contribution entitled to interest on the loan from
the date the advance was made
ii. Ladd made a loan (not a capital contribution) to Sahmloo and Ginnyex, so he
should be entitled to get it back
b. 401 E) a partner’s payment or advance which gives rise to obligation
under © or (d) constitutes a loan to partnership which accrues interst from date of payment or
advance
b. IF ONE PARTNER IS UNABLE TO PAY (bankrupt) the others will have to pony up to
cover for them… §306(a) – SEVERAL…. (not joint) Partner’s Liability
1. Returning the partners’ capital contributions (both initial and
subsequent)
a. 401 A) each partner has an account that is
i. Equity Capital: By default, partners have a capital account, equal
to money or property contributed to equity capital, plus undistributed profits, minus
distributions. The partnership must pay out capital accounts only when the partnership
dissolves and only after debts are paid.
b. “SWEAT EQUITY….By default, a promise to work does not entitle a
partner to a capital account (just profits). Shamloo. BUT Negotiated agrements sometimes
recognize a capital account for intangible contributions.
c. Shamloo v. Laid Rule: In absence of express agreement to the contrary, the person advancing
capital is entitled to its return before division of income or profits-- Capital contribution are
returned to partners (RUPA 401(b)(1); 807(b)). Sweat equity is not capital contribution.
1. Distributing anything that remains (the profits) to the partners equally
(or as otherwise agreed in the partnership agreement)…
a. 401(b)By default, partners share profits/losses equally. RUPA § 401(b).
“OPERATING LOSS”
b. Kovacik v. Reed - - - Original capital contribution losses (not from
further loans or whatever)
c. By default, partners share in partnership losses, whether they contribute
money or not.
ii. capital loss cases (not 401(b)), the initial investment or labor investment, even if it is not
equally split…it is just bore by the person that put it down
1. When there are $0 left in the partnership at time of dissolution, the capital that each
partner puts down, even if unequal, is acknowledged to be lost
a. bUt this ONLY APPLIES when
i. 1) each party contributes capital (both of them contribute
investment $)
Here, Reed just contributed labor
ii. 2) each party was to receive compensation to be paid to them
before computation of the losses or profits
Reed agreed to conditional compensation
He would only get compensated if they both profited
13. 401(b) ONLY APPLIES TO “OPERATING LOSS”: A “NEW” loss (loan taken out after capital contribution... shared…401(b)
a. Therefore, REED is off the hook…
i. There may be no "losses" to share if a partner has agreed to
contribute money (as equity capital) to cover partnership expenses. Kovacik.
b. WHY IS REED OFF THE HOOK (why doesn’t he have to compensate
kovacik for his original 10K capital contribution loss)?
i. b/c in the event of a loss, each party would lose his investment,
ii. one money
iii. one labor (his TIME investment)
c. SO, In a joint venture in which one party contributes funds and the
other labor, neither party is liable to the other for contribution for any loss sustained
b. Auction versus Buyout RUPA 807 provides that partners are entitled to distribution of any
surplus over creditors claims “in cash” implying that all assets must be reduced to cash (sold)

11
 a. Courts often envisions that “reduction to cash” means discontinuing the business and
selling its assets piecemeal, which would often destroy value. Some have read RUPA 807 to allow the court to
value the business and order the buy out of the dissociating partner’s interest (using partnership assets) at that
value
PARTNERSHIP: EXPULSION AND DEPARTURE
b. Expulsion of Partners: Neither the partnership nor any partner has a statutory power to expel a partner under RUPA,
but the partnership agreement may and often does specify a procedure for expelling a partner.
i. Judicial Expulsion: Under RUPA 601(5) the partnership or a partner may petition a court to order the
expulsion of a partner on showing specified wrongdoing by that partner…… expelling partner for self gain is breach of
fiduciary duty…
a. You must show proof of fault §601(5)
1. 1) wrongful conduct
2. 2) willful or material beach of duty
3. 3) engaged in conduct which makes it NOT practicable to carry on
b. Bohatch v. Butler & Binion
i. Bohatch suspects a partner is overbilling a client and reports it, but It is investigated and
determined that it is ok……….Firm tells her this and also lets her know she is fired
ii. They expelled her cuz she was a rat, not for self gain, so they did not breach fiduciary duty
1. You must show proof of fault §601(5)
a. 3) engaged in conduct which makes it NOT practicable to carry on
b. No one could work with her anymore….
ii. Consequence of Expulsion:
1. Dissociation: A partner expelled pursuant to a contractual power or a judicial order is dissociated from
the partnership (RUPA §§ 601(3) & (5)).
2. No Dissolution: Under RUPA § 801(1) & (3) neither contractual nor judicial expulsion causes
dissolution unless the partnership agreement provides otherwise.
iii. The Conflict. Partners are both
1. Principals: Holders of contractual rights under which they have powers exercisable to protect their individual
interests and
2. Agents: Holders of fiduciary powers in a governance system under which they have duties to act in the interests
of the partnership and the other partners.
c. Fiduciary Duties in Departure and Expulsion
i. Exercise of Contractual Rights in Self Interest: A partner does not violate any duty merely by taking action
to further its own interests. (RUPA § 404(e)).
1. Meehan v. Shaughness They did NOT breach fiduciary duty by improperly handling cases for their own
benefit
1. This was ok in the contract as long as they gave notice
b. There are fiduciary limits that you must acknowledge – you can go against your co-partner’s interest
but can’t completely violate the basis of the partnership…see below
ii. Good Faith and Fair Dealing: Partners (like contractual parties) have a duty of good faith and fair dealing in
exercising their contract rights (including expulsion and departure). (RUPA § 404(d)).
1. Rule: Partnership agreements can reasonably define the 404(b) requirements of good faith and fair
dealing.
a. RUPA § 103(b)(5). The partnership agreement may not eliminate the obligation of good
faith and fair dealing under Section 404(d), but the partnership agreement may prescribe the standards
by which the performance of the obligation is to be measured, if the standards are not manifestly
unreasonable.
iii. Loyalty: Partners have duties of loyalty in dealing with the partnership (RUPA § 404(b)).
1. Rule: The partnership agreement can reasonably define the requirements of loyalty and provide
mechanisms for approving specific actions (RUPA § 103(b)(3)).
2. Meehan v. Shaughnessy
a. ABA standard for leaving attorneys
i. 1) Any notice of leaving must explain to the client that he has a choice to decide who will
continue representation-1) they unfairly acquired consent b/c their letters made it seem to the client like
the client didn’t really have a choice

12
 ii. 2) Also, the leaving partner has obligation to render on the demand of any partner true
and full information of all things affecting the partnership- they didn’t contact their firm till they had
acquired consent from all the clients…and didn’t inform the firm about acquiring this consent
iii. They should’ve talked to the firm before solicting conset
iv. They took advantage of their partners confusion by not letting them also talk to the
clients about it first
b. A) They did breach fiduciary duty
i. 1) by unfairly acquiring consent from clients -Lack of notice
ii. 2) referring attorney to withdraw cases-again, sneaking behind their back
14. Other nonwaivable provisions
15. RUPA § 103(b)(2). Partnership agreement may not unreasonably restrict the right of access to books and records under 403(b).
16. RUPA § 103(b)(4). Partnership agreement may not unreasonably reduce the duty of care under Section 404(c) or 603(B)(3).

CORPS: DIRECTORS OFFICERS SHAREHOLDERS FORMATION

1. Directors:
a. Board Represents Corporate Principal. It has ultimate control over all of the business of the corporation, including shareholder
voting and distributions.
b. Board Has No Agency Power. It selects the corporate agents and is the source of all corporate agency authority, but cannot execute
directly.
c. Board's Powers Are Collective Only: Individual directors have no agency power.
d. Board Power Not Dependent on Ownership: Directors, as such, need not have any stake in the corporation (DGCL § 141(a)).
e. Typical rule: business of corporation is entrusted to directors – except as otherwise provided in the articles of incorporation
f. Amending the articles of incorporation can only be done on Board initiation
i. MBCA §8.01 and Delaware GCL §141(a) default rules
1. Provide that the articles of incorporation can only be amended on initiation from the BOD, and it is unlikely they
would initiate something to curb their own power
g. Number of Directors: The number of directors is fixed in the bylaws unless the certificate of incorporation fixes the
number in which case a change in the number can only be made by amendment to the certificate. (DGCL § 141(b)).
h. Classes of Directors: Directors can be divided by certificate of incorporation or bylaw, be divided into up to 3 different classes. (DGCL § 141(d)).
i. Filling Vacancies: Vacancies of directors may be filled by a majority of the directors then in office (DGCL § 223).
2. Officers (DGCL § 142(a)).
a. Officers are usually employees and the agents of the corporation.
b. They are selected by the board from whom they derive their authority.
c. "Officer" means "high corporate agent." Officers do not differ legally from other agents (they are usually employees). The certificate,
bylaws, the board or other authorized officers select their titles and authority.
d. Officer Power Not Dependent on Ownership: Officers, as such, need not have any stake in the corporation
3. Shareholders” Shareholders own shares which entitles them to a pro rata share of the corporations profits.
a. Relation to the Board (141(a)): They select the board and can remove it, but the board does not owe them a duty of obedience.
b. Voting: Shareholders can vote on board members and specified fundamental changes;
i. e.g. amendment to the certificate of incorporation (DGCL § 242), merger (DGCL § 251).
c. Shareholders also have individual rights to initiate action (board nomination and bylaws) and seek information (DGCL § 220).
4. Formation of a Corporation: Certificate of Incorporation
a. General Rule: The certificate is hard to change, the board proposes (and only the BOD can propose) amendments and
shareholders vote on them. Parties put important protections in the certificate for this reason. (DGCL § 242).
b. Contents of Certificate of Incorporation (DGCL § 102(a)): Name of the corporation, address of registered office and agent, nature
of the business or purposes to be conducted, total number of shares of stock and classes of stock, as well as value.
c. Amendment to Certificate of Incorporation (DGCL § 242(b)): Must call a special meeting of the stockholders entitled to vote or
direct that amendment be considered at next special meeting. Must be approved by a majority of outstanding stock entitled to vote.
d. Issuing Stock
i. Shares of Stock: Fungible slices of the equity interest (and accompanying rights) in a corporation.
ii. Authorization: The certificate must specify how many shares of stock the corporation is authorized to issue and
can specify the rights of the stock (or different classes of stock) or authorize the board to set terms. (DGCL §
102(a)(4)) and §151
iii. Issuance: The board of directors has the power to decide how many shares will be issued, when, and for what
consideration (and what rights). (DGCL § 102(a)(4); 151(a)).
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 e. Bylaws-The corporate "statutes."
i. The bylaws lay out the rules for running the internal governance system:
1. Rules for calling and conducting shareholder meetings and other shareholder actions
2. Rules for calling and conducting board meetings and other board actions
3. Top offices and their basic authority
ii. Amendment : Bylaws are easy to change. Shareholders can always propose and vote on changes. The certificate usually
allows the board to change them, too. : Power to adopt, amend, or repeal bylaws is in the stockholders and any
corporation can in its certificate of incorporation confer that power upon the directors as well. (DGCL § 109)
iii. Substance: Bylaws can contain any provision not inconsistent with law or certificate relating to business of the
corporation, conduct of affairs, rights or powers of stockholders, officers, directors, employees (DGCL § 109(b)).
5. The Importance of Being Delaware= dominant state for incorporation, large corporations and corporations w/ publicly-traded stock.
a. Permissive Statute: Delaware's corporate law is aimed purely at protecting its incorporation franchise. It generally
allows parties great freedom to vary their governance arrangements.
b. Well-Developed Law: Delaware courts have answered more corporate law questions than any other jurisdiction.
c. Responsive Legal System: The Secretary of State, courts and bar are specialized, experienced and focused on efficiency.
The legislature also wants to protect its franchise.

VOTING RIGHTS ELECTING DIRECTORS MEETINGS COI BYLAWS

d. General Rule: The corporate law default rules may be changed by inclusion of the preferred rule in the article of
incorporation or the bylaws. Articles are public docs that can be changed only by action of corporation’s directors and
shareholders, whereas bylaws can be changed by directors alone and are not publicly filed. (DGCL § 109).
e. Electing Directors – pg 147 helpful illustration
i. Straight Voting (Default): Each stockholder casts one vote per share in separate votes for each seat avilable. (DGCL §
212)
1. Directors elected by plurality vote, based on one vote per share basis
2. With straight voting, a 51% shareholder will be able to elect 100% of the board seats, b/c 1 vote, 1 share, he
dominates
a. b/c you can guarantee 51% of the votes to each candidate you want…. (one vote / director )
ii. ILLUSTRATINTG DIFFERENCE BETWEEN THIS AND CUMULATIVE
a. illustration….shareholder A has 4 shares…he can cast 4 votes for each seat that is open (hypothetically
voting the same candidate each time for each open seat (4 votes for that candidate per seat))……4 seats open
b. whereas w/ cumulative, he can cast 16 votes for one general candidate and if that candidate gets one of the
top 4 vote counts, he takes one of the 4 open sets
iii. Cumulative Voting: Each stockholder has a bucket of votes equal to the number of shares held, multiplied by the
number of directors standing for election. This rule may change the default (above) by being included in the certificate of
incorporation. (DGCL § 214).
1. Shareholder casts total number of votes equal to number of shares multiplied by number of positions to be filled
a. and you can spread these votes around everyone
b. or concentrate them in one candidate
i. you can’t do this in straight voting
2. Increases likelihood that you canidtate will be one of top vote getters
a. Purpose – permit minority shareholders to have a place on the board
3. Maximum voting power of a block of shares: To elect X directors, a shareholder needs MORE THAN:
a. SX/(D + 1) …shares…..easy way of determining highest possible X…set X = 1, solve, then
multiply
i. S = total number of shares voting
ii. D = number of directors to be elected
iii. X = number of directors one group could elect.
iv. Class Voting: A corporation may in its articles of incorporation divide its shares into classes and permit each class
to select a specified number of directors, which serves to allocate the right to elect directors between different sets of
investors. (DGCL § 151(a)).
1. Dual class common mechanism
a. Gives greater voting power compared to their relative capital contributions
b. Useful for company going public- Original BOD can retain 10 or 100 votes per share while selling stock to
public for 1 vote per share – retain control of corporation

14
 v. Classified/Staggered Boards: By default, the entire board stands for election each year. If there is no majority shareholder
(or coalition), this allows strangers to take control. As a defense against sudden changes of control, many certificates divide the
directors into "classes" only one of which stands for election each year. A maximum of three classes are allowed. DGCL § 141(d).
f. Rules Relating to Meetings
i. Types of Meetings – power to initiate
1. Annual Meeting: By default the board has exclusive power to initiate the annual meeting. It may also
determine that the meeting be held instead by remote communication (DGCL § 211(a)(1)).
a. IS MANDATORY:Hoschett v. TSI International Software, Ltd.
i. Pursuant to §211(c) , shareolder is asking court to exercise their discretion and force TSI to hold
its annual meeting - TSI objects to this, saying under §228, they don’t need to have the meeting b/c there is
enough (not unanimous) shareholder consent
ii. Consent action that designates directors of TSI fails to satisfy corporations obligation to hold
annual meeting where they are elected, in conformity w/ certificate of incorporation
iii. Creating consent in place fo the meeting does not produce more practical and efficient system –
Hoschett argues there are many reasons to have a meeting beyond just to vote….this is why §228
doesn’t trump §211(c) (211© requires that there be a meeting be held….but 228 says can have consent
of stockholders in lieu of a meeting)
1. 1) formality of notice to all shareholders and a meeting could have an effect on how
majority of shareholders vote- Not having meeting might legitimately effect how people vote –
the BOARD is in a better tactical position to get their result this way…instead of regular meetings
they can use “surprise attacks”
2. 2) other matters which shareholders might want to bring up are not made irrelvent
by a consent designation of directors- Other stuff that wouldn’t otherwise get brought up
g. Rules Relating to Meetings
i. Types of Meetings – power to initiate
1. Annual Meeting:
a. Business Conducted – somewhat constrained: Annual meetings always elect some or all of the
directors and allow the board or stockholders to raise other business, but bylaws often impose rules on
those wishing to raise matters at a meeting (DGCL § 211(b)).
b. Court discretion to order a meeting: The Chancery Court has discretion to order a meeting if the
board waits more than 13 months (or delays more than 30 days after a specified date) to hold the annual
meeting. (DGCL § 211(c)).
2. Special Meeting: By default, the board has exclusive power to initiate a special meeting but the
certificate of incorporation or bylaws could alter this (many states allow holders of 10% or more of the stock to
call such a meeting). (DGCL § 211(d)).
3. Action by Written Consent: By default, the board and stockholders have equal power to initiate an
action by written consent and only the certificate can vary this default. (DGCL § 228(a)).
a. Shareholders can act by written consent in lieu of a meeting….shareholders don’t need unanimous….just
enough to pass…..different than action initiated by th board..
ii. Notice and ACTION BY WRITTEN CONSENT
1. Stockholder Meetings: The board must give the stockholders 10-60 days written notice of meetings.
Notice of special meetings must specify the purpose of the meeting. (DGCL § 222).
2. Stockholder Action by written consent: Only notice after the fact is required in the case of a non-
unanimous action by written consent. (DGCL § 228(e)).
a. DIFFerent than 141(f) which is board actions by written consent
b. The board can act by written consent only unanimously
iii. Record Dates
1. General Rule: Shares are transferable and the number of shares may fluctuate, so stockholder actions
need a “record date” to fix the eligible shares and the stockholders. State corporation codes provide that
shareholders entitled to vote are those owning shares on the “record date” specified by the directors.
a. Stockholder Meetings: The board must choose a record date after the date on which it decides
(what?) and between 10 and 60 days before the meeting. The default is the day before notice. (DGCL §
213(a)).
b. Action by Written Consent: The board can set a date within 10 days after it decides (the default
date is the decision date.) If the board has not fixed a date, the default is the date on which the corporation
receives the first written consent. (DGCL § 213(b)).
iv. Requirements for Quorum and Success Threshold
15
 1. Quorum: The minimum number of shares that must be represented for a meeting to convene &
conduct business. The default is the majority of shares eligible to vote and the minimum is 1/3. (DGCL § 216).
2. Success Thresholds:
a. To elect directors the default is a plurality of the votes of the shares represented in person or by
proxy entitled to vote (DGCL § 216(3))
b. and
c. a majority of shares represented for other matters (eg…amend bylaws) (DGCL § 216(2)).
d. Proxies: Stockholders can vote at a meeting without attending by giving a proxy (instructing an
agent to vote their shares). (DGCL § 212(b)).:
i. Defined (absentee ballot): Almost all votes are cast by proxy at meetings of publicly-traded
corporations. Normally, the board acts as proxy for all the shareholders.
ii. Proxy Fights: Corporate electoral contests are called "proxy fights" because the two sides
compete by soliciting stockholders for proxies to vote their shares.

Diff between 141(f) and 228(a)?

h. Protection against Change in Delaware Corporations

i. Certificate: By default, a majority of stockholders can amend on board recommendation. Provision requiring
supermajority stockholder vote to amend is enforceable by minority. DGCL § 242(b).
1. Contract: Express contracts between stockholders (or stockholders and the corporation) are enforceable, subject to
preservation of fiduciary discretion and the prohibition on sale of fiduciary power.
a. Centaur Partners, IV, v. National Intergroup, Inc.
i. Rule: a charter or by-law provision altering (state law) principle that majority of votes cast at
a stockholders meeting is sufficient to elect directors must be
1. Positive
2. Explicit
3. Clear
4. Readily ascertainable
ii. Holding: National’s original law in COI – 8 (requiring SUPER-majority) is clear and consistent
enough that they intended and presented it to shareholders as a way to prevent hostile
takeovers….therefore it applies to 16, which was adopted at same time….so # of directors will require a
SUPER majority (even though state law only requires majority…§109)
ii. Class Rights: Certificate amendments affecting the rights of a particular class of stock require a majority vote of
the class by default. DGCL § 242(b).
iii. Bylaws: By default, a majority of stockholders can amend bylaws without board involvement. Provision
requiring supermajority stockholder vote to amend is enforceable only if contained in the certificate. DGCL § 109.
iv. Removing Corporate Directors: The basic paradigm is that stockholders cannot control the board, but they
can remove directors at will by vote or written consent. DGCL § 141(k).
a. VGS, Inc. v. Castiel – FIDUCIARY DUTY IN LLC….not sure where logically belongs in outline
i. §18-404 of LLC Act
1. Mangers of LLC can take actions w/o a vote IF a consent in writing, setting forth the
action taken, is signed by the manager shaving not less than minimum votes that would be
necessary authorize action at meetin
a. So technically Q and S didn’t’ need to give notice
i. So Q and S say we went by the law….we could technically do this!
ii. But underlying purpose of this was to – enable LLC managers to take quick, efficient action in
situations hewn a minority of mangers could not block or adversely affect course set by majority, even if
minority were notified and objected it

16
 1. Meant for situations where the objecting minority wouldn’t be able to block it
anyway… ….but here ….the majority WOULD HAVE BEEN ABLE TO BLOCK IT…..so
defeats the underlying purpose
iii. THERE WAS A FIDUCIARY DUTY NOT TO DO THIS – duty of loyalty
1. Equity looks to intent, rather than form
a. Statute should be tailored to say w/o notice by constant or fixed majority
i. Here, Q was appointed and could be removed easily (not fixed) and S
was self appointed
2. Does not apply to “illusory, will of the wisp majority which would implode should
notice be give”
a. Castiel would have taken Q out and it would not be a “true” majority supporting
the action then
b. Castiel was the MAIN MAN and they should have known that…
v. Filling Vacancies: By default, the board fills vacancies and newly-created positions (stockholders removing
directors can simultaneously elect successors to prevent vacancy. DGCL § 223.

FIDUCIARY DUTY & BUSINESS JUDGEMENT RULE

1. Fiduciary duties within the Corporation
a. Officers’ and Employees’ Duties: These are agency duties (obedience, loyalty, care) owed to the corporation as
principal, represented by the board and other superior agents.
b. Fiduciary Duties of Directors: The board generally owes its fiduciary duties to the enterprise in the abstract (the
corporation), but they owe NO duty of obedience to shareholders.
i. But do have fiduciary duties owed to corporation, (not shareholders)
1. 1) loyalty - directors should be absolutely fair and candid in pursuing personal interests
a. Wrong to unfairly compete or divert resources or opportunities to personal use
2. 2) official conduct describes bounds of acceptable conduct for directors in carrying out individual and collective
duty to manage corp
2. The Business Judgment Rule: Directors are not liable to the corporation for their decisions if they make those decisions
a. (1) without conflicting interests (duty of loyalty);
b. (2) on an informed basis (duty of care – procedural and substantive);
c. (3) in the good faith pursuit of the corporation’s interests (duty of good faith – not to act in bad faith).
d. For the business judgment rule to apply there must have been a business judgment made (an act); it does not apply to
a board that does nothing.
i. Traditionally operates as shield to protect directors for liability from their decisiosn
1. If they are protected by the rule, courts can’t second guess their decisions
2. If NOT protected, courts will scrtunize decision for Intrinsic fairness to corp and minority shareholders
e. Presumption: There is a presumption that directors have acted within their fiduciary duties of care, loyalty and good
faith, i.e. presumption that their decision falls within the scope of the business judgment rule.
i. CHALLENGERS bear the burden of rebutting the presumption
ii. REBUTTING THE BJR:
1. conflict of interest: Proof that directors were personally interested in the decision (breach duty of
loyalty).
2. gross negligence: Proof that directors were grossly negligent in informing themselves (breach duty
care).
3. bad faith: Proof that the directors acted out of an ulterior motive (bad faith/lack of good faith).
4. OR typically…..
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 5. Fraud
6. Illegality
7. Conflict of Interest
8. Shlensky v. Wrigley
a. What type of breachs of fiduciary duty does this establish?
i. Duty of care (substantive – the research and facts (procedural) are out there, but they are
ignoring them and making a bad decision):
1. Cubs statistics
2. Industry statistics
ii. Duty of loyalty (you are only supposed to pursue interest of corporation…….or ignoring
interest of corporation in making decision – bad faith):
1. Wrigley’s personal statements
a. He is purusing his own personal interest (He is choosing other interest
besides the corporation (principal)
2. Directors acquisence
a. In allowing a directors personal preference to sway their position away from
corps best interest
b. There is no requirement that directors must consider only financial concerns in mapping out a
course for the corp
i. Wrigley’s decision isn’t necessarily against the best interest of the corporation..
iii. AFTER REBUTTING, burden will shift to BOD to prove entire fairness (see later)
f. Policy Behind Business Judgment Rule
i. Intrinsic to centralized management separated from ownership
ii. Desire not to deter directors from taking risks- potential profit corresponds to risk, so the law should not create incentives for cautious corporate
decisions
iii. Allows directors to consider other constituencies
iv. Relative expertise of directors and judges
v. Directors have little ability to spread risk
vi. Value of group decision making.
vii. shareholders voluntarily undertake risk of bad business judgment
viii. after the fact litigation is a bad device to evaluate decisions

g. Other Rules from Case Law

i. Interests of Others: The board can make decisions that have an incidental benefit to those not in the
corporation as long as the corporation still has the interest of the shareholders in mind (to a certain extent). Dodge.
1. Delaware - - Directors may consider interests of other constituencies as long as there is
a. “some rationally related benefit accruing to the stockholders”
b. Or
c. If so doing “bears some reasonable relation to general shareholder interests”
2. Many states have added “safety statute”
a. Director’s “may” consider other interests of suppliers, employees, customers, and communities
b. Not a requirement, but this will shield them from court scrutiny if they make a decision perhaps
not BEST for corp, but was good for outside interests
3. Dodge v. Ford Motor Company.
a. Shareholders of Dodge are suing directors of Ford Motor
b. Allege that they should be receiving dividends instead of Ford using $ for
i. 1) building /investment in other plant and increase productivity
ii. 2) cutting prices on cars (sell them for less)
iii. 3) retaining some of it (54 mill)
c. Ford has stated his motives
i. He wants to “better mankind”, “create jobs”, “give back to public”
ii. – they clearly don’t match up with corporate purpose
d. 1) building/ investment in other plant and increase productivity
i. Ford says purpose is to “better mankind” (more jobs, more provided, etc..)
ii. BUT
iii. In reality…this could help the corp in the long term (even if there is loss in short term)
1. the court looks PAST Ford’s own personal statements and looks at the entire
BOD…the entire BOD still supported this decision and their motives could be good for
corporation ( different than ford’s “non-corporate” goals)
iv. So YES allowed to do this

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 ii. Short term losses: Board can incur losses in the short run as long as it is doing so to gain some long term
gain. Dodge
1. Dodge v. Ford Motor Company.
a. . 2) cutting prices on cars (sell them for less)
i. Ford says purpose is to “better mankind” (more jobs, more provided, etc..)
ii. BUT
iii. In reality…this could help the corp in the long term (even if there is loss in short term)
1. the court looks PAST Ford’s own personal statements and looks at the entire
BOD…the entire BOD still supported this decision and their motives could be good for
corporation (( different than ford’s “non-corporate” goals)
iii. Dividends: Courts are not willing to allow a board not to pay dividends because it alleges it needs money
sitting around just in case. Dodge; DGLC § 170(a) Dividends.
1. Dodge v. Ford Motor Company.
2. 3) retaining some of it (54 mill)
a. There was NO RATIONAL PURPOSE FOR KEEPING THE $
i. BOD can’t give any explanation
ii. Court can’t find one
b. If you are keeping money, you better be using it for the business (spending it)
c. The board was just sitting on the $20, not doing anything with it….this is NOT HELPING the
corp in any way (they weren’t even putting it towards the new plant, which they took out loans to have)
d. sO b/c BOD couldn’t state a reason for keeping money, must give back

DERIVATIVE SUITS DEMAND REQUIREMENTS SPECIAL LIT COMITTEE

3. Stockholder Derivative Suits: A lawsuit brought by an individual shareholder on behalf of the corporation.
4. Difference between derivative and direct.
a. derivative……injury on CORP….suit brought by shareholders
i. nature of injury
1. breach of due care, fiduciary duty, self dealing, excessive compensation, corporate opportunity
ii. Shareholder must make demand to BOD to bring suit first
1. (but if they were the ones involved, this will likely be excused)
b. Direct…injury on SHAREHOLDERS….
i. Nature of injury
1. Voting rights compromised, Dividends, Anti-takeover defense, Inspection
2. Protection of minority sharehlders (especially where a closely held corplll)
c. shareholder PREFER direct, b/c harder to win w/ derivative
5. Problems with Derivative Suits:
a. Incompatible with Corporate Governance Model: Stockholders do not have the power to make corporate management
decisions (including decisions to sue). DGCL § 141(a).
b. Incentive Issues:
i. Economic Incentives: Plaintiff may have only a marginal interest in corp… (danger of improper cost-benefit analysis).
ii. Lack of Fiduciary Duty: Stockholders do not have a fiduciary relationship to the corporation (danger of improper
motives - strike suits).
6. Demand Requirement Del. Ch. R. 23.1:
a. 141(a)….Board magnages businesss and affairs
i. So it is board’s responsibility to bring litigation claims….not shareholders….this will come to mean that shareholders
must make a demand to the board first, to sue on behalf of corp, before bringin action hiself
b. Del. Ch. R 23.1………STANDING REQUIREMENTS to BRING DERIVATIVE SUIT
i. Shareholders can bring suit to enforce a right of a corp or of an unicoproated association….the corp having failed to
do this itself Must make “demand” of corporation – OR show why they couldn’t do it (demand excused)
ii. Complaint must allege efforts to get the directors to do the action themselves…and reasons why it hasn’t happened
iii. Something about dismissal
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 c. Plead with Particularity: A stockholder trying to usurp the board’s power must plead with particularity the predicate
for usurpation: i.e. the board cannot be trusted to vindicate the corporation’s rights. Ideally, the shareholder should first
execute a written “demand” the board to bring suit itself (to confirm that it won’t). Stockholder must plead either:
i. Demand refused: Stockholder made a demand on the board which the board rejected in breach of its fiduciary duty; or
ii. Demand futile(excused): Stockholder made no demand on the board because the board is so conflicted that any board decisions to
reject demand could not have the benefit of the business judgment rule.
d. Contemporaneous/Continuing Ownership: Plaintiff must have owned his shares of stock at the time of the
transaction of which he complains and he must continue to own the shares until the moment of judgment (sometimes
excused by some courts if there was a merger and P was compelled to give up his shares).
7. The Aronson Test for Excusing Demand:
a. FOR EXAM!!!! Professor thinks Rales should be the tests, but that if you sue the entire board and they are still
sitting, you must cite Aronson.In practice, for the Aronson test only the second prong matters B/C Rales governs all cases
where the first prong might turn on facts that do not meet the first prong….so Aarson only matters where (1) the Board
Made a decision but they were (2) both non-interested and indepent so Rale would not apply
b. WHERE NOT TO APPLY THE The Aronson test: in these cases, apply the rales test
i. A majority of the current BOD was not involved in challenged decision (BJR doesn’t apply to current BOD)
ii. The claim does not challenge a board decision (BJR wouldn’t apply at all)
iii. decision being challenged was made by board of different corporation (BJR wouldn’t apply to current BOD
c. Aronson Test: To establish that demand is excused as to a claim against the board, plaintiff must plead particular facts
that establish (as to the hypothetical decision to accept or reject demand to sue on the claim) A “REASONALBE
DOUBT” THAT… ( that the board could not be expected to pursue a valid claim because):
i. (1)It is not disinterested and independent in the decision to accept or reject demand (e.g. a majority of
directors are materially beholden to a self-dealing officer), (Rales Test)……OR
ii. (2) The business judgment rule does not protect its earlier decision that is challenged in the suit (e.g. the
challenged decision amounted to self-dealing by a majority of the directors who voted on it).
1. This could happen if and when the board
a. 1. did not follow adequate procedures in reaching their decision…..OR
b. 2. decision was so irrational as to be outside the bounds of reasonable business judgment

8. Rales Test: As to the claims above to which Aronson does not apply (see above) , Rales applies and the test is “whether or not the
particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is
filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”
a. This is really the “independent and disinterested” prong of Aronson (above) and what you are looking for in
that situation.
i. Independence involves two things (1)That the person in question cannot be presumed to make an
independent decision; and (2) That relationship is material to that person.
ii. RALES TEST: In doing this….board must be able to do so 1. independently and 2. disinterestedly
1. 1. Interest
a. A director is considered interested where he or she will receive a personal finaical benefit from a
transaction that is not equally shared by shareholders
b. Decision to bring suit against Easco would have impacts on Danaher’s directors….Rales, and Caplin…
b/c they are EASCO directors as well as Danaher directors
2. 2. Independence
a. means that a directors decision is based on corporate merits rather than extraneous considerations or influences
b. Other directors have pretty sweet jobs based on relationship w/ Rales so they are not sufficiently independent
9. Special Litigation Committees
a. The Problem: If a stockholder establishes standing under Rule 23.1 (i.e. takes control of a derivative suit), can the
board ever reassert control under DGCL § 141(a) and dismiss the suit?
i. Independent Litigation Committee: Attempt to remove taint from the board’s decision to dismiss the suit:
1. Name independent members to the board
2. Constitute the independent members as a committee
3. Delegate the board’s authority to investigate and conduct litigation (including dismissing) to the
committee.
4. How it works…As soon as P Files derivateive suit Or Makes demand on board
a. Board appoints a supposedly “independent committee

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 ii. Corps do this b/c
1. 1. Usually these committees will vote to dismiss
2. 2. courts more likely to afford “independent” committees decision to dismiss protection from the business
judgdmnet rule
iii. Problems w/ the independent committee:
1. Non-independent board appoints (and can dismiss) the "independent" committee- committee is appointed
by directors, many of whom will be “interested” in keeping their arses covered…
2. Structural bias (it is socially hard for directors to judge their colleagues dispassionately)
a. “independenet directors” will still look to protect other directors
b. Zapata Two part test to see if ILC committee decision not to litigate falls within BJR:
i. Pre-requirement: ONLY when demand is EXCUSED (futile)
1. b/c if BOD could hypothetically make decision themselves (they are independent and disinterested)
then their decision to use an independent committee , and the committees subsequent decision, will be
protected by BJR (court would only look at Step 1 in these cases…..no fiduciary breach…)
2. If demand is excused, an independent litigation committee can move to dismiss, but must prove
business judgment …….2 steps:
ii. 1. Burden of Proof: ILC bears the burden of proving the validity of its business judgment
1. Independence, good faith and, reasonable investigation
a. If answer to any of these is no, court disregards the comities dismissal recommendation and allows suit
to proceed………..BUT IF answers are all yes, then go to step 2
iii. 2. Judicial Discretion: Even if you passed Step 1, Court still has discretion to exercise independent business
judgment and reject the committee’s decision to dismiss the suit.
1. (ie) independent committee’s decision has NO protection from the business judgment doctrine
10. STAY of PROCEEDINGS AND DISCOVERY during Special LIT
a. General Rule: court will stay proceedings and discovery while a special litigation committee makes its determination, considering challenges
to its good faith, independence, investigative procedure, and conclusions only if and when it moves to dismiss.
b. Biondi Exception: If the plaintiff can demonstrate that waiting for the committee to decide is futile because its
business judgment could not be respected under Zapata, a court will allow the plaintiff to proceed.
i. WHY does the court refuse to grant a stay?....Normally the court would wait and see what the committee would say, but in this
case the committee is not sufficiently independent and the court would not trust its judgment regardless of what it decided
a. The committee moved for a stay w/o EVEN INVESTIGATING!!!...this is blatently obvious they are trying to
protect the board…
ii. If shareholder can prove that under no circumstances the decision would be reasonable under the BJR then we
should move right on….no stay
DERIVATIVE SUITS INFORMATION RIGHTS PROPER PURPOSE
c. Shareholder Information Rightsshareholders have difficulty w/ pleading w/ particularity (in complaint) b/c they don’t have
facts to show mismanagemtt…..courts urge them to first find these facts by demanding company documents…which becomes another issue
entirely
i. List of Stockhodlers entitled to vote – 219
1. A)
a. 10 days before meeting of stockholder
b. must prepare complete list of stockholders entitled to vote
c. list shall be “open to examination” by any stockholder for “any germane purpose” 10 days prior to the meeting
d. on
i. i) a reasonlbe accessible electronic network, provided that a means to gain accesss Is present at place of business
1. corp can take “reasonable menas” to make sure unauthorized 3rd parties can’t get it
ii. ii) during ordinary business hours at place of business
e. must make it reasonably availbe
2. b)
a. upon willful neglect or refusal to produce list or make available when it involes election of directors
b. Directors wont’ be eligible for office
3. C) stock ledger shall be only evidence as to who are stockholders by this section
11. General Rule: Shareholders have the right to inspect corporate books and records for a “proper purpose.” (DGCL § 220)….
Can review any documenst that have a reasonable bearing upon shareholders investment
a. Inspection of books and records (directors and shareholder)s 220
i. A) definitions
ii. B) stockholder, on written request..has right during usual hours to inspect for any proper purpose to make copies
and extracts from (Proper purpose – “ reasonably related to such person’s interests as a stockholder “)
1. 1) corps stock ledger
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 2. 2) subsidarys book to extent that
a. A. copr has possession
iii. D) director’S Right to inspect
b. Problem with Inspection: The issues relating to shareholders' inspection rights result from a tension between the role and interest
of a shareholder -
i. Non-Fiduciary: Shareholders cannot be presumed to be acting for the benefit of the corporation.
ii. Ownership Interest: Shareholders may be legitimately interested in all corporate information as holders of residual
profit and control rights.
c. Common Legitimate Uses of Inspection Rights:
i. Investigation of Wrongdoing: Information to persuade fellow stockholders to get rid of the board or to make an
argument for derivative standing under Rule 23.1.
ii. Valuation and Sale: In closely-held corporations, stockholders may need information to determine the value of their
shares.
12. Predicate for Inspection: (1)Sworn written demand stating (2)proper purpose reasonably related to interest as stockholder
(DGCL § 220).
a. Essentiality: Stockholder bears the burden of proving that each category of books and records it requests (and, if
necessary, each item), is “essential” to the proper purpose it has stated. Security First.
i. Scope of insepctions
1. 220© - court may prescribe limitations or conditions w/ reference to the inspection
a. Can restrict the scope of the inspection, even if purpose is found to be proper
b. Must prove FOR EACH DOCUMENT YOU REQUEST…that that document is
i. “essential And Sufficient”
ii. To its stated purpose
b. Judicial Balancing: Court has duty and power to limit both the scope and the terms of disclosure to balance the
stockholder’s stated purpose with protection of the corporation’s interest in protecting its confidential information.
Court’s routinely require stockholders to execute a confidentiality agreement with company. Security First, Schoon.
i. Chancery Jurisdiction: § 220(c) gives shareholders the right to bring suit on the issue of inspection and court
of chancery has exclusive jurisdiction.
13. Who has the Burden of Proof of Proper Purpose w/ respect to different items:
a. Stock ledger and stockholder list (Records of the current stockholders and the history of transfers. Corporation…burden
is to show why the shareholder doesn’t need it
i. Solicitation of proxies – most common reason shareholder would want it
b. Other records(e.g. board minutes, financial records and contracts). Stockholder…..why the shareholder does need it
c. Rule: In a § 220 action, a stockholder has the burden of proof to demonstrate a proper purpose, but is NOT required
to prove by a preponderance of the evidence that waste and mismanagement are actually occurring. It must be a
credible showing through documents, logic, testimony, or otherwise, that there are legitimate issues of wrongdoing.
i. Not about whether wrongdoing has occurred….just a matter of whether the shareholder is trying to abuse his right to
inspect….Shareholder only has to have credible showing that thare are legiistimate issues of wrongdoing
ii. Security First.
1. What is a proper purpose (2 AND 4 ARE NOT)
a. 4 catagories (2 of six listed below are not proper)
i. 1. Evaluation of investment
1. Determine if
a. 1. mismanagement
b. 2. price is accurate
c. 3. why arnt dividends being paid
d. 4) anything else
ii. 2. pursuit of unrelated personal goals - NOT PROPER
1. Eg..gain access to trade secrtes to sell (rarely do they admit a bad purpose though)
iii. 3. deal w/ shareholders as investors
1. Contact fellow shareholders…solicit proxies..initiate tender offer for our shars
2. i. hostility to management
a. just b/c the request is hostile doesn’t mean purpose is not proper- as long as
shareholder is “motivated by desire to maximize investment”
3. ii. Suit against corporation
a. just b/c request is for list of fellow shareholders for purpose of bringing suit
against them doesn’t render this an imporoper purpose – solicity co-plaintiffs

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 4. iii. List of “non-objecting beneficial owners”
a. can find list of people that perhaps have shares in trust….
iv. 4. Pursuti of social and/or political goals – NOT PROPER
1. If unrelated to corps business for other reasons….
a. Must be
i. “germane to his economic interest as shareholder”
ii. “concerned w/ investment return”
2. Schoon v. Troy Corp
a. Claimed purpose: “to evaluate share value”
i. Once the corp attaches conditionality to this, however, it
UNDERMINES the proper purpose…b/c if you can’t tell others about what you find…
how can you maximize your value?
ii. Ramification ….IF “evaluating share value” is a proper
purpose…then ability to disclose must be attached
iii. So court will ultimately differentiate on where confidentiality will
attach BASED on WHO steel or SchooN wishes to share the information with
v. 5. Financial reports for shareholders
1. There are no financial records you can automatically get w/o a request
2. Except for requirement that corp sends shareholders an annual report
vi. 6. directors right of inspection…220(d)
1. Many times directors have automatic/absolute right of inspection b/c they need more
info than the shareholders do in general
a. Unless they have improper motive…..(interest in competitor)
2. Schoon v. Troy Corp
3. Schoon sues Troy under 220(d) – directors right to inspect
a. But troy argues that schoon only wanted to look at recoreds b/c he would
then give steel information about how much they could sell their shares for to third party
competeitors of troy?
i. SCHOOON was lying….if court thinks you are lying about your
purpose, then you won’t get access to your demanded information
ii. Court knows that it is improper purpose to give confidential
information to competitors – worried about industrial espionage

CONTROLLING SHAREHOLDERS CONTROLLING SUBSIDIARY

14. The Duty of Loyalty in Corporations
a. Rule: Self dealing/interested transactions are voidable by the corporation unless the controlling shareholder can prove
entire fairness to the corporation.
i. Burden of Proof Reversal: DGCL § 144 reverses the burden of proof and may restore the business
judgment review in the absence of a controlling shareholder if
1. Disclosure to the shareholders or disinterested of material facts:
a. As to director’s/officer’s interest
b. As to contract/transaction
2. Authorized by majority of disinterested directors
3. Approved in good faith by shareholders; or.
4. Transaction is fair to the corporation at the time authorized
15. Parent/subsidiary relations start page 259
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 i. Usually arises in case of not-wholly-owened subsidiary..Parent has fiduciary duty to other shareoldres of subsidiary
b. Merger…………When parent wants to turn subsidiary into wholly owned subsidiary by buying out minority shares and merging
subidary into partent………….Just need to make sure it is fair price to minority
c. Dividends………Controlling parent can often control dividend policy, so if minority shareholders maybe think its too low or too
high, they can argue self dealing and ask for court scrutiny……Often hard to make this arugment…see Sinclair above…
d. Self dealing between parent and subsidiary……….Dominated board
i. when parent company dominates entire subsidiary board…unless minority shareholders can ratify the self-dealing
transaction, court can strike it down if it was not fair to them
ii. once minority shareholders show self dealing, burden shifts to D to show fairness (-sinclair ….failure to enforce entire
contract was not intrinsically fair)
16. leads a KEY OBSERVATION – WHEN DO (majority) SHAREHOLDERS HAVE FIDUCARIY DUTY to minority shareholders?
a. When they basically control the BOD….
b. This is where SELF DEALING can come into play…disproportionate transactions
17. General Rule: Stockholders hold their powers (voting, information, economic) as personal property, not as fiduciaries for the
corporation. They can exercise these powers out of pure self-interest or caprice.
18. Controlling Stockholder Exception: A stockholder who actually can and does exercise control over the management of
the corporation is held to fiduciary duties in doing so
a. Standard Applicable to Review of Controlling Stockholders’ Actions (Sinclair):
i. Business Judgment Rule normally applies BUT
ii. Interested-controlling-stockholder transactions are evaluated for entire fairness.
1. 1st, Plaintiff has the burden or proving self-dealing.
2. Sinclair Rule: Self dealing occurs when the parent, (1)by virtue of its domination of the subsidiary
causes the subsidiary to act in such a way that the (2)parent receives something from the subsidiary to
(3)the exclusion of, AND to the detriment to, the minority stockholders of the subsidiary.
b. Sinclari Oil Corp v. Levian - -- ANALYSIS here centers on PROPORTIONALITY
i. 1st…court will automatically apply BJR to BOD decisions…
ii. .but does not apply in situations where parent company
1. (1)uses its domination to
2. (2)benefit from its control over a subsidiary to
3. (3) the detriment of the subsidarys minority shareholders ..in this case, the 3% of the minority shareholders in Sinven
4. 4.. if they do, then BOD has no BJR protection … burden shifts to D to show “intrinsic fairness”
iii. Excessive payment of dividends
1. 1. plaintiff fails burden b/c didn’t show Sinclair received a benefit at detriment of sinven minority shareholders
a. They are still paying 3% of dividends to the minority shareholders....meaning that the benefit is
PROPORTIONAL….just as it would be under any other circumstnace
2. So BJR applies and BOD is protected
iv. Dividends prevention of expansion? 1. plaintiff fails burden b/c Levin can’t prove any loss of business opportunity due
to the cash drain from sinven
v. Contract w/ international 1. International reciveved benefits from contract (100% benefit to Sinclair) but sinven didn’t
force international (Sinclair) to uphold its side of the bargain to sinven (which although screws 97% Sinclair…more
importantly…it screws over the 3% of shareholders in sinven)
a. ResultS: Sinclair gets 100% benefit from international…97% loss from sinvent
i. Minority shareholders get 0% benefit from international and 3% loss from sinven
ii. This is NOT PROPORTIONAL
b. Therefore, P meets burden of showing no reasonable business objective….NO protection from
BJR….burden shifts
2. 2. looking at above results, Sinclair wont’ be able to prove “entire fairness”…..therefore they lose on this
issue . SELF DEALING…
CONTROLLING SHAREHOLDERS SALE OF CONTROL
vi. What is “controlling block? If he has the power to use the assets of a corporation as he chooses
vii. NOT necessarily “majority” Even a minority shareholder owning 30% can control if they have the highest amount….as
long as you have the largest single interest and the others are fragmented
viii. General Rule: Stockholders are not fiduciaries when they are acting as stockholders. General rule – controlling
shareholder can sell his stuff for a premium and keep premium himself
1. A controlling stockholder has no general duty to
a. (1) share any control premium with the corporation or other stockholders, or

24
 i. Logically you would think they should share this premium with the minority shareholders but
at common law…this is not the case….courts give them wide latitude b/c they had the foresight and
capital to acquire the controlling block
b. (b) allow any other stockholder to participate in a sale of stock.
ix. Tryon v. Smith Ramifications: SHAREHOLDER duties DEPEND ON CONTEXT
a. Why does court reject Tyron (as a majority shareholder) having a fiduciary duty to minority
shareholders in selling his stock? b/c it is his profit…he is selling what he owns….
b. they can sell for whatever price they want, provided they act in good faith (don’t drive down the minority
shareholders value)…here, he didn’t drive down the minority shares value….in fact he did the opposite
19. Exceptions……….when you may NOT just sell your control…….(continued next page)

20. Corporate Opportunities: If a buyer approaches a corporate officer (who also holds a controlling stock interest) proposing to "buy the
company," whose opportunity is it? Tryon, Meinhard.
a. Problem from his supplement – what if the original buyers approached Smith just b/c he was president and “seemed like he was
in charge”
i. In this situation….he is acting as agent for bank…and accordingly has fiduciary duty to look out for ALL the
shareholders….Unlike in the way it happened, where he was just a stockholder (separate from his duty as a bank
president) considering sale of his personal share

21. Sale of Fiduciary Office: Controlling stockholder can sell stock whose voting power allows exercise of control. Someone who merely
holds a fiduciary office (e.g. director) cannot sell it. Essex.

22. 1. Looting
a. Can’t sell to one who intends to loot the corp by unlawful activity
i. Investment companies - when corps sole assets are liquid assets (readily calculatable) and controlling shareholder sells
for more than all of these are worth….just b/c he can get a premium
ii. Looting: Someone might agree to overpay for bare control (much less than 50% in a publicly-traded
corporation), planning to abuse control and loot the corporation’s property. If a controlling stockholder
recklessly sells control to a looter, it aids and abets the looter’s subsequent breach of fiduciary duty.
1. Harris v. Carter Rule: While a person who transfers corporate control to another is surely not a
surety for his buyer, when the circumstances would alert a reasonably prudent person to a risk that
his buyer is dishonest or in some material respect not truthful, a duty devolves upon the seller to
make such inquiry as a reasonably prudent person would make, and generally to exercise care so
that others who will be affected by his actions should not be injured by wrongful conduct.
a. The duty of care imposed is a normal negligence duty here—knew or should have known.
This is not the standard for DIRECTOR liability—there the standard is GROSS
NEGLIGENCE
2. Factors considerd
a. 1) buyers willingness to pay excessive price
b. 2) buyers excessive interest in the liquid and readily saleable assets
c. 3) buyers insistence on immediate posssions
d. 4) buyers lack of interst in how corp operates

23. Exceptions… may NOT just sell your control…SALE OF VOTE, SEPEARTE PAYMENT, PARENT/SUBSIDIARY
24. SALE OF VOTE
a. Generally (aside from sale of stock)
i. You can’t “sell” your office to someone…
ii. Correspondingly you can’t sell stock where that would be the result
b. Applied to sale of stock control
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 i. 1. where control block is much less than a majority of shares but seller happens to hav unusall influence over composition of board
ii. 2. where contract provides for additional payment if seller delivers control of board (similar to essex)
c. Small minority
i. Even when shareholder has only small control of board, but controls majority of BOD, if he sells his shares and takes
action to have that majority resign and be replaced by buyers preferred directors, this can equate to sale of office
ii. Seriatim resignations – (not bad if this would be result in upcoming election anyway but here it is minority)
1. (simlar to essex)
2. Whereby buyer doesn’t want to wait till next meeting to get control of BOD so seller and buyer arrange that
the BOD members buyer controls will resign one by one , each replaced by Buyer’s preferred directors
iii. Sale of majority of stock – COURT is NOT bothered….
1. court is only bothered by above approach when it is less than majority seller doing it….b/c then the buyer is
getting control he wouldn’t’ even be able to get if he were made to wait till the next meeting!!
2. Therefore court won’t question this approach when it is a majority seller shareholder doing it b/c then the buyer
would be able to get control anyway
iv. “working control” block
1. When it is less than majority…but enough that buyer could technically control the BOD…
2. This IS ESSEX (see below)
a. Difficult to determiene b/c you don’t’ really know whether the control block will eventually allow
buyer to control all of board…..
3. Essex Universal Corp. v. Yates
a. Contract provided that there would be a scheduled election whereby immediate transfer of control of
the BOD would go to Essex (by the control that Yates had)
b. Whereby one by one, Yates directors (which he controlled) would resign one by one and essex directors
would replace them
c. IF 28.3% is NOT ENOUGH to elect the entire board….then this is circumventing the yearly
election process which affords minority shareholders to share their opinion as to what should
happen….This is to detriment of minority stockholdrs…Yates defense holds
d. If 28.3 IS ENOUGH to elect the entire board…then this is NOT A BREACH OF FIDUCIARY
DUTY…..b/c this is just speeding up the process ( if essex buys it and waits, they will still be able to
get the entire board)..This is NOT to detriment of minority stockholders…Meaning Yates HAS NO
DEFENSE….b/c wouldn’t be contrary to public policy
25. Separate payment for control – per se illegal
a. When you get extra money on delivering control of board
1. 3. diversion of collective opportunity
a. Courts find that funds should be split between all b/c
i. 1) the control premium was really a business opportunity that the corp should have purused
as a coproation (rather than just the controlling shareholder)
ii. 2) where buyer initially tries to buy most or all of the assets (and fails) and then resorts to
buying controlling shareholders interests

BOD’s DUTY OF CARE REVIEW – GROSS NEGLIGENCE 102B7 can exculpate though

26. Agency versus Business Judgment Rule - Comparison:

26
 27. Agency: RST § 379. A paid agent owes the principal a duty . . . to act with standard care and with the skill which is standard
in the locality for the kind of work which he is employed to perform and, in addition, to exercise any special skill that he has.
a. Standard: Simple negligence (reasonable person)
b. Procedural: Agent must not make decisions without reasonable care to gather information (e.g. lawyer must diligently
research applicable law).
c. Substantive: Agent must not make decisions that are unreasonable in light of information actually or reasonable
available (e.g. lawyer must not give unreasonable advice in light of applicable law).

28. Business Judgment Rule – PROCEDURAL ONLY……CAN’T REVIEW SUBSTANTIVE DECISIONS

a. Standard: Gross negligence (minimally reasonable person)
b. Procedure Only: The directors’ duty of care in making business decisions extends only to informing themselves.
Under the business judgment rule, there is no liability for an unreasonable decision based on full information. (
i. DGLC § 141(e)).
ii. BOD, in performance of duties, is fully protected in relying in good faith on company records, etc,
1. 1. reliance on information requires good faith….that you actually believe it
2. 2. all that is required is that they properly inform themselves – just avoid Gross negligence here
iii. Rule: A director is reasonably informed if the director considers the material facts that are reasonably
available. Smith v. Van Gorkum; DGCL § 141(e).
iv. Smith v. Van Gorkom – HELD THAT directors could be liable for gross negligence (Holding overturned by statute
below)
1. VG calls meeting…quick meeting 20 minuts
a. Gives his schpiel on doing the merger
b. And then in 2 hours BOD approves cash – out merger
2. Board breached their duty of care stockholders by
a. 1) not informing themselves of all information reasonably available to them and relevant to their
decision to recommend the pritzker merger
b. 2) failure to disclose all material information such as a reasonable stockholder would consider
important in deciding whether to approve it
3. 141e…says BODs are safe if they, in good faith, rely on internal records/reports
a. Could they rely on Roman’s study…$55…141e says yes …
b. but that is IRREVELANT to whether they used proper care in making the decision b/c they still did
not use proper care
i. 141 says in making the decision, they can rely in good faith on the records they have…but
does NOT say whether that will be enough ( for the limited things they are relying on ) to
make an informed decision
v. Aftermath of Van Gorkom:
1. Delaware legislature added 102(b)(7) very quickly to allow corporations to exculpate directors for gross
negligence – delaware doesn’t want a van Gorkon case to happen again…wants to protect BOD
2. No reported cases of liability (there might be settlements)
3. As long as BOD is not GROSSLY NEGLIGENT procedural care….they adequately inform themselves in
using the right “process”….then it will be hard to call them out for the decision they make

EXCULPATION (corp won’t sue you, but can’t protect you from third party lawsuits)

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 29. Exculpation (absolving MONETARY liability): The corporation prospectively gives up claims against fiduciaries for
fiduciary breach. corporation (like everyone else) can only give up its own claims, not third party claims. DGCL § 102(b)(7).
30. Explanation of 102(b)(7): Permits exculpation by certificate only for monetary liability to the corporation for breach of
fiduciary duty………….ONLY APPLIES TO DUTY OF CARE VIOLATINOS……
a. Even the Certificate cannot exculpate against
i. Equitable relief
ii. Breaches of duty of loyalty and breaches providing an “improper personal benefit” to the fiduciary
iii. Intentional wrongs (bad faith, intentional misconduct, knowing violation of law)
iv. Unlawful dividends (§ 174)
b. 102(b)(7) is an affirmative defense but is NOT automatic….corp must have it in COI
c. BURDEN OF PROOF:
i. Directors have evidentiary burden of proof by a preponderance of the evidence that if they breached their
fiduciary duties, that they acted in good faith, did not breach duty of loyalty, only breached duty of care.
d. 102(b)(7) is a way to prove for individual directors that they are not liable for money damages once a breach of
fiduciary duty has been proved against them at trial.
31. DISMISSING CASE ON PLEADINGS…In the context of pure due care violations, § 102(b)(7)
a. Malpiede v. Townson
i. Fredericks has exculpatory provision similar to §102(b)(7)
ii. Shareholders initially seek to enjoin the merger, but then seek money damages…
iii. Fredrickers Shareholders say it was breach of fiduciary duty for the BOD to have …breached their duty of care
iv. Burdens of proof?
1. All the board has the burden of doing is raising the affirmative defense of 102(b)(7) …. So IF the pleadings
ONLY plead
a. 1. Due care….
2. And fail to plead adequately
a. 2. Duty of loyalty
b. 3. Bad faith
3. Then at the pleading stage, we won’t let this go any further…. b/c all the board needs to do is raise the
defense (and nothing more – this is the purpose of 102(b)(7) …to take burden off the directors), which
automatically exculpates them from (1) so there is no point in going further b/c the only thing the that P’s
could win on would be 2 or 3…lets not waste our time
32. Steps for applying Exculpation….. Emerald Rule – ONLY IF the decision fails the entire fairness analysis must you
look to the indemnification provisions………SEE 9© below….more on entire fairness anlysis w/ 102(b)(7)
a. 1. First look at if it was a FAIR DECISION- ENTIRE FAIRENSS ANALYSIS…..look at this FIRST to find out what, if
anything the BOD did (BASIS FOR LIABILITY), and who is liable among each director, if anyone
b. BURDEN ON DEFENDANT
i. Has 2 basic aspects
1. 1) fair dealing
a. How it was timed, initiatied, structed, negotiate,d disclosed to directors, approvals from stockholdrs
2. 2) fair price
a. Relates to assets, market value, earning,s future prospects, anything else affecting stock price
3. Both must be examined AS A WHOLE…to demonstrate either….BOD must represent evidene that they
didt their duties in both aspects
c. 2. And then SECONCD., look at exculpasion (102(b)(7), within what you found in (1)
d. Application to Emerald
i. even if BOD fails entire fairness….
ii. BOD can still absolve itself by showing
iii. If the board cannot prove that the transaction was fair, the board (as a body) becomes irrelevant, since there was no
untainted board action. The plaintiff must then show the nature of the breach (if any) by each director by a preponderance
of evidence. If the certificate contains a "102(b)(7)" exculpation provision, each director can try to show that any breach
she committed amounted to gross negligence, at worst. Evidence supporting gross negligence only…..
1. Sufficient independent (not Hall) director approval
2. Or
3. Fully informed shareholder approval
4. Which will show adequate execution of duty of procedural care, so they would still be absolved under
exculpation, even if wasn’t entirely fair…
INDEMNIFICATION(corp reimburses you for lawsuit brought by corp or third party) INSURANCE (last page)

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 e. Indemnification: The corporation agrees to reimburse a fiduciary for the costs of defending and paying the
consequences of claims against that fiduciary for fiduciary breach (acts or omissions). DGCL § 145.
i. Difference between Indemnifcaiton and Exculpation
1. Exculpation – corp says we know you would normally liable to US, but we will let you off the hook
a. The corporation prospectively gives up claims against its fiduciaries for fiduciary breach. A
corporation (like everyone else) can only give up its own claims, not third party claims.102(b)(7)
2. Indemnifcation - reimbursement – not forgiving liabilties, but paying for them when the bill comes
a. The corporation agrees to reimburse a fiduciary for the costs of defending and paying the consequences
of claims against that fiduciary for fiduciary acts or omissions.
ii. PERMISSIVE Indemnification: (don’t necessarily have to be successful) 145(a) and (b)………..
iii. Limits on Permissive Indem….CAN’T INDEM WHEN
a. 1. D is found to have acted in knowing violation of a serious law
b. 2. D is found to have received in improper financial benefit
c. 3. D pays a fine or penalty…wehre policy behind law precludes indemnification; OR
d. 4. amount in question is payment made to corp in derivate action
iv. Third Party Claims (third party suing director): The fiduciary must have believed in good faith that he was
acting in (or not against) the corporation’s interest. DGCL § 145(a).
 A) corp can indemnify by reason of fact that person is part of corp (or list of other things)… IF
• The person acted in good faith (see next page) and mmanner reasonably bleiveed best interest of corp AND
• No reason to think actions unlawful
• HOWEVER……….Termination of suit doesn’t create presumption that they were bad
1. Applies to when someone, besides the corp, is suing the corp or a director personally for their actions
33. Corporation’s Claims (corp suing director): Fiduciary must have believed in good faith that he was acting in (or not
against) the corporation’s interest, but if the fiduciary loses case, indemnification may only happen at the discretion of
the court , and in some cases only get defense costs (not judgments or settlements). DGCL § 145(b).
a. B) corp can indemnify person who is or was or is threatened to be made part to procure judgdement by reason of fact that the
person WAS part of corp (or list of other things)…
i. ONLY APPLIES to lawsuits brought “BY, or IN RIGHT” of corporation….where corporation is suing a director
ii. Derivative suits – WHAT CAN THE D RECOVER THROUGH INDEMNIFCAITION..?..
1. Settlements or judgments - do NOT permit corporation to indemnify a director or officer for
a. a judgment on behalf of the corporation OR
b. for a settlement payment made by d to the corporation
c. to prevent circular recoveries (B/c these would result in circular payment)
2. expenses - D can get litigation expenses if D has settled BUT NOT if he has been found liable
3. Fines and penalties - May be indemnified as long as he acted in good faith
34. Mandatory Indemnification: Mandatory indemnification given only to the extent a fiduciary is successful. CL § 145(c).
a. C) if a former director was successful on merits under (a) or (b), such person shall be indemnified against expenses (including
attorneys fees)………..Requires indemnification if they are successful on merits
b. Two situations
i. 1. when director is “successful on merits or otherwise”
1. “on the merits” ………..Win at trial on the merits
2. “or otherwise”…………Director raises defense of SOL and wins on technicality… (not on merits)
3. “success” can sometimes mean a big settlement…provided the D has not conceded liability…If Director
doesn’t have monetary penalties, but still “technically” loses (court finds liability) then he is not indemnified
4. What about multiple counts?
a. If you are successful on some but not on others, you will still be reiumbusrsed pro-rata for the ones you
won on in Delaware ..Merritt-Chapman & Scott Corp. v. Wolfson
ii. 2. corp has bound itself by contract to indemnify…but Can’t run awful of statutory prohibition (cant ditch good faith)
35. Differnce between © and (a) and (b)
a. (A) and (b) do NOT require success on merits but there IS a requirement that specific factual prerequiests be established as
a condition for the indemnification
b. © applies ONLY where there has been a prior proceeding that determined his success…then he can be reimbursed for expense
i.
ii.

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36. Mechanisms and Nature of Promises to Indemnify:
a. Ad Hoc: Corporation can decide to indemnify without prior obligation to do so.
b. Indemnity Obligations: Corporation can obligate itself in advance by certificate, bylaws, contracts with fiduciaries, or
all three. Wherever memorialized, an indemnity commitment is always deemed a contractual right of the indemnitee.
Amending the bylaws or certificates eliminates only prospectively. Owens

37. Advancing Expenses:

a. Current Directors and Officers: The corporation can advance expenses if the indemnitee commits to repay the
corporation if eventually found not entitled to indemnification. DGCL § 145(e).
i. E) expenses may be paid by corporation in advance on “recepti of an undertaking by or on behalf of such director”
1. To repay the full amount if it is determined he was bad
2. Corp can forward payments to director as trial goes on as long as he agrees to repay them at end if found
liable
b. Others: As corporation “deems appropriate.”

38. Good Faith Requirement—

a. Owens Corning Rule: A corporation cannot avoid the good-faith requirement under DGCL § 145(d) through
provision of an alternative basis for indemnification; the ability to provide indemnification is constrained by its
corporate form as governed by the law of Delaware.
i. D) indemnifications under (a) and (b) can only be made by corp on determiatinon that person has met the applicable
standard of conduct set forth in 145 (a) and (b)
1. Determination OF GOOD FAITH shall be made by
a. 1) majority vote of directors who are not parties to such action
b. OR
c. 2) by a committee of such directors designated by majority vote
d. Or
e. 3) IF there are no such directors, by independent legal counsile
i. Can allow independent legal council to make good faith determination
f. Or
g. 4) stockholders
ii. F) xxx
1. Courts are likely to use this to invalidate or refuse to enforce contracts that are inconsistent w/ public policy
reasons for allowing indemnification
a. But permits indemnification on terms other than the as set forth in the rest of 145, as long as it is
consistent with the policies expressed in other parts of 145
i. Can’t do away with the good faith requirement
39. Extra Shield – REUBUTTAL PRESUMPTION OF GOOD FAITH
a. Owens v. Corning v. National Union Fire Insurance Co.
i. Corp CAN extend indemnification to require “rebuttal presumption of good faith” …but this is the maximum
permissible leeway you can cut them, and this is what owens has doen
1. A BY – LAW can, “pursuant to law” create a presumption of good faith whereby NO INDEPENDENT
person would have to make the determination…
a. So Good faith may be presumed by owens by-laws, even if the relevant determination is not made
2. In this case
a. 1. as long as there is a technical “success on the merits” (settlement)
b. And
c. 2. NUFI didn’t try to rebut the statutory presumption of good faith (which is the most leeway you
can afford your directors – presumption…)

b. Insurance: The corporation buys an insurance policy for a fiduciary, covering the costs of
defending and paying the consequences of claims against that fiduciary for fiduciary acts or
omissions. DGCL § 145(g).
i. G) corp can purchase and maintain insurance on any person who is or was part of the corp…

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 BAD FAITH (lack of GOOD FAITH) – never exculpated DUTY TO MONITOR
40. Good Faith……..Bad faith or lack of good faith is BEYOND THE STANDARD OF GROSS NEGLIGENCE
41. Agency: RST § 387. Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the
principal in all matters connected with his agency.
42. Corporations: Directors have a duty to exercise their powers in the corporation’s interest.
a. There are two kinds of subjective motivations that violate this duty:
i. Bad faith: Decisions motivated by a desire to serve interests other than the corporations (e.g. a relative or
friend)
ii. Lack of Good Faith: Decisions not motivated by the corporation’s interest (even if not motivated by someone
elses).
1. Inattention to the duty to serve corporate interests. – CONSCIOUS DISREGARD….
2. Rule: Inattention moves from gross negligence to a lack of good faith when it is so egregious as to
suggest that the director did not understand (or did not take seriously) his duty to oversee management
of the corporation. Stone, Disney, Caremark.
a. Distinction:
i. Gross Negligence: Slipshod attempt to pursue the corporation's interest.
1. But still protected by exculpation 102(b)(7)
ii. Lack of Good Faith: No attempt to pursue the corporation's interest.
b. In Re Walt Disney
i. Shareholders suing BOD of Disney
ii. Suing for
1. Hiring Ovitz
2. Firing Ovitz
iii. But court thinks otherwise – these facts lend themselves to a lack of care / disloyalty….but
this was NOT A CONSCIOUS DISREGARD OF DUTY or RISK…must be a
CONSCIOUS (they KNEW they weren’t doing the right thing) DISREGARD
1. They weren’t even TRYING
2. It is one thing to try and fail and it is another thing entirely to no do it at all.
3. Almost equates to Recklessness (beyond gross negligence…which is shielded by
102(b)(7))

43. Duty to Monitor………..VIOLATION = LACK OF GOOD FAITH

44. Basic Rule: Directors have a duty to keep reasonably informed. This includes a continuing duty to monitor to make sure they
get the information they need and to pay attention to the information they get.
a. Elements of Monitoring
i. Personal Ability: Directors must have some minimum mental ability and familiarity with the business
ii. Information Systems: Directors must be satisfied that systems exist to get relevant information to the board.
iii. Monitoring Activities: A director must attend board meetings and understand resolutions and other materials
delivered to or considered by the board.
45. Limits of Board Monitoring: The board's primary role in a large corporation is to confer authority on agents. Ideally, most business
decisions in a corporation should be made by those agents without the board's direct knowledge. Too much board involvement is
inefficient.
a. Stone v. Ritter,
i. Caremark OVERSIGHT liability TEST :Only a Sustained and systematic Failure to exercise oversight (such as an
utter failure to attempt to assume a reasonable information and reporting system exists) will establish lack of good faith
that you need to attach liability:
1. DIRECTORS liable IF:
a. 1.Total failure to establish systems of information and control (disconnecting the telephone),
i. Here, they had one
b. or
c. 2.Conscious failure to monitor the results of such system (refusing to answer the telephone)
i. Just 2 months of bad monitoring is not “sustained and systematic” enough
d. Or
e. Yet another way – if your system is producing troubling results or missing things..you better take
action to correct this…or this will also be a conscious disregard
2. So directors weren’t liable

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 CONTROLLING SHAREHOLDERS SHORT FORM MERGER
b. Actions where Entire Fairness Will Apply:
i. Disproportionate Transactions: The stockholder is not dealing with the corporation as a stockholder, but as a
director/officer on the one hand and a “stranger” to the corporation on the other hand (e.g. as a contractor)
ii. Oppressive Actions: Stockholder uses its power to affect the corporate machinery in order to deprive other
stockholders of their proportionate rights (e.g. coercing a vote by threatening to use control in a manner harmful to the
corporation).
46. Lynch Claims: Applying Entire Fairness to Controlling Shareholders (It is NO LONGER APPLIED –see below)
a. Short form merger…..253…….90% REQUIRED
1. D) if all of the stuck of a subsidiary party to merger is not owned by parent immediately prior to
merger…..subsidiary gets appraisal rights
ii. If corp P owns overwhelming majority of shares of S, so they are basically parent-subsidiary, S can be merged into P w/o
consent of either crops shareholdrs
iii. Rationalle
1. Vote by S is pointless, since P already owns enough votes to win
2. Approval by P is pointless (B/C P IS THE ONE DOING IT), b/c wouldn’t make much economic difference
iv. Percentage required…..90% or more…delaware §253
v. Minority holders of subsidiary.
1. Possibility of unfairness
a. If given stock in parent in exchange for stock in subsidiary, they might be given too little, same w/ cash
b. Remedy is restricted to APPRAISAL RIGHS…court determines fair value of the minority shares,
c. But if dramatically unfair (as in Weinberger) court may approve recessionary damages or
injunction…purpose of this section
vi. Statute 253
1. authorizes a parent corporation to merge w/ its wholly owend subsidiarty by filing and recoding certificate
2. Statute authorizes a UNILATERAL act
a. Deision by parent company ythat its subsidiary shall no longer exists as a separate entity]
b. No
i. Notice required
ii. Director approval
iii. Vote
3. Those who object are given appraisal rights (D)
4. Parodoxial statute
a. If corporation follows the statute it is impossible for them to satisfy entire fairness standard
b. Whereas
c. If instead, they elect an independent committee to make the decision, they lose the benefit of the
statute………Simple, fast, inexpensive process
47. Short form mergers NO LONGER GOVERNED BY ENTIRE FAIRNESS……..so APPRAISAL IS ONLY REMEDy 253d
a. The decision to execute a short form merger under DGCL § 253 is not subject to entire fairness analysis (statutory power
granted in specific anticipation it would be exercised by controlling stockholder). Glassman.
b. Avoid necessity of having to go through motions of getting approval by public corp shareholder
c. Glassman v. Unocal exploration corp. - -using 253 to effectuate a short form merger
i. 2 companies………..Unocal Crop……………..Unocal Exploartion Corporation (UXC) – Unocal owns 96% of UXC – controlling shareholder
ii. Glassman, minority shareholder of UXC sues Unocal (as the controlling shareholder of UXC)
1. Breach of fiduciary duty (self dealing and lack of full disclosure)
iii. But for the statute, the shareholders (as seen in Wienburger) would not be limited to appraisal….they could get remedy
taking into account “all relevant factors”
1. But this was a short form merger SO
a. – appraisal is only remedy
iv. HOLDING: absent fraud or illegality, entire fairness rule doesn’t apply…so appraisal is the only remedy (whereas
when entire fairness applies (as in Weinburger) you can get more than just appraisals)
1. If we held otherwise, it would violate the purpose of the statute
2. Purpose of 253 was to set up this summary procedure….so if we penalize people for following it (by
applying an entire fairness standard – and then granting more than mere appraisal rights as a remedy) it will
defeat the purpose of the statute
3. Stockholders may NOT recive recessionary relief in a short form merger
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 4. Can only get appraisal - and appraisal will take into account whether or not the corp was trying to take
advantage of a low market price
v. But there are still fiduciary duties that come along with this….such as
1. you still must give full disclosure….even if not required by statute 253,
2. even if appraisal is their only remedy (or accept merger consideration) you still must give be candid full
disclosure on these details, even if the statute doesn’t require anything else

CONTROLLING SHAREHOLDERS FREEZEOUTS LYNCH or TENDER OFFER

vi. Shifting the Burden of Proof in “Freezeouts” of Minority Shareholders
1. Majority of Minority Stockholder Vote: Shifts the burden of proof as to entire fairness if the
minority stockholders were fully informed.
2. Independent Committee: Shifts the burden of proof as to entire fairness if the committee can
convince the court it had authority to act independently and did so without coercion. Lynch.
Two Paths to Freezeout
3. Which method generates higher premiums?
a. Lynch ….b/c
d. 1. greater leverage to independent committee
e. 2. governing standard of review always gives the plaintiffs settlement value
f. 3. reality that signing up a merger when the votes are locked up results in greatest certainty for a controller
g. 4. signing up a merger w/ a special committee and a settlement w/ plantifiss lawyrs provides deal certainty and a broad release and discouragement of appraisal
claims
1. Factors controlling which method a shareholder will chose
a. Controllers owenership stake
b. Extent of public flot
c. Pressure of big holders
d. Desire for certaintly and closer
e. How can a I get best price

2. Lynch/ Short Form Merger - - apply BJR to discourage frivoluous litigation and limit
plaintiffs attorneys fees
a. Mechanism: Controlling shareholder proposes merging the corporation with another
corporation the controlling shareholder owns completely, cashing out the minority in the process.
b. Review: Entire fairness always applies (self-dealing and the coercive threat of control – I
THOUGH THIS WAS OVERULED BY GLASSMAN?) but convincing negotiation by an apparently valid independent
committee or approval by a fully-informed “majority of the minority” shifts the burden. –Cox
c. In re cox communications, inc. shareholders litigation – MODIFIED Lynch –grant BJR for short
form
i. Plaintiff lawyer fees
a. 1. Plaintiffs lawyer never refuse to settle once an independent committee
has agreed on a price with controlling shareholder
b. 2. independent committee helps to negociate a higher price from the
controlling shareholders
c. 3. usually initial offer (32) goes up in these transactions anyway (its
bargaining – duh)
2. Conclusion –Plaintiffs lawyers really didn’t do that much to get the price that
much higher
a. But they can still techinically claim “success” in their settlement
i. “oh, after we filed suit for you……the price rose!”
ii. Proposes modified Lynch standard whereby these going private mergers get BJR when
1. 1. controlling shareholder proposes merger
2. 2. its subject to negotiation and approval of the merger by independent
committee
3. 3. approved by majority of minority
iii. Why give these BJR?
1. SO council won’t bring frivolous suits, just to get attorneys fees
a. They can’t bring the suit b/c they have no case b/c of BJR protection

33
 2. This rule would encourage only real litigation….when
a. 1. Ps plead particularized facts that the special committee was not
independent or effecgtive b/c of breach of fidcuarity dtuy
b. 2. approval of minority stockholders was tainteid by misdisclosure or
structural coercion
c. The chance to free ride on the expected increase in controllers original
proposal would be eliminated and litigation would only be filed by those who possessed real claims
iv. B/c OTHERWISE…. Controlling shareholders (majority – like Cox family) are usually
pressured to settle since litigation is expensive and the price is ok with them anyways (after their negociations with
independent committee)
d. After Cox: Chancery court limits attorneys fees in a context that
i. indicates the plaintiffs' lawyers faced little risk
ii. put in little effort
iii. and played a minor role in obtaining a benefit for the stockholders.
iv. Result: Litigation diminishes

3. “Non-Coercive Tender Offer”…..§251 merger

a. Mechansim: Controlling shareholder makes an offer to buy any and all shares tendered by
minority stockholders (a “tender offer”).
b. Non-coercive tender offer - If the controlling stockholder can show that it set up a transaction
structured to simulate an uncoerced offer to buy stock, its offer will be treated as non-fiduciary. Pure Resources.
48. TWO APPROACHES…………pure resources…..solomon
a. Pure resources – (“non-coercive”) TENDER OFFER………….burden of proof on P: violated
ENTIRE FAIRNESS
i. Subsidiary of Unocal, pure resources (PR) is suing unocal
1. Seeking to enjoin an exchange offer for ALL of PR’s shares
2. On basis of breach of fiduciary duty
ii. Unocal, controlling shareholder of pure, seeks to get all of PRs shares (that unocal doesn’t
already own)
iii. Burden shifting (in entire fairness)
1. Added to burden of proof of shareholders
2. Harder than just saying self dealing
3. Now, to make a prima facie case, you must prove that it was not entirely fair
b. Solomon approahc
b. Applies to : controlling shareholder tender offer – give them extra protection in regards to tender offer
c. TEST: EVEN THOUGH It is not “technically” coercive, a tender offer requires FIDUCIARY DUTIES
i. 1. Disclosure
ii. 2. Majority of minority
iii. 3. Promise of §253 merger on the same terms
d. Policy behind it :
i. Structural coercion – structured as to force it to happen regardless
1. Catch 22…..shareholders HAVE to tender regardless if they feel
2. Tender offer is at least the same but perhaps even more coercive than a negotiated merger
3. b/c with a negotiated merger you have some sort of say
4. whereas w/ a tender offer , you might get less than what you are offered if you hold out for an appraisal by
the courts
ii. Informational symmetry and timinig control
1. Majority can force minority into doing something regardless if miority approves b/c minority doesn’t have same
information and timeing
iii. so this is definitely a fiduciary issue
49. COURT Chooses Solomon Appraoch – tender offer is only not coercive (we will give you business judgment rule) WHEN
a. (1) it is subject to a non-waivable majority of the minority tender condition,
b. (2) the controlling stockholder promises to consummate a prompt short-term merger…merge out any non-tendering stockholder at
the same price (253) if it obtains more than 90% of the shares, and
i. So they don’t screw the hold-outs
c. (3) the controlling stockholder has made no retributive threats (evidence of overt coercion)
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 d. AND
e. (4) the independent directors are given time and discretion to advise and inform the stockholders.
f. AND of course For information and timing purposes….you must have
i. Full disclosure
ii. Freedom of (subsidiary) board
iii. Board has a fiduciary duty
g. We will give you procedural protection….but if you tried to bum rush us, rush us (Weinberger) or trick us w/ bad information
i. Then you will not be protected…..back to entire fairness analysis..

ENTIRE FAIRNESS AND ITS ABSENSE

50. Entire Fairness Test: If the plaintiff succeeds in establishing a prima facie case that a board decision breached fiduciary
duty, the board (as a whole) can defend the decision by proving that it was “entirely fair” to the corporation. The court
evaluates fairness from two perspectives (neither is determinative):
a. Fair Price: Were the substantive terms of the transaction close to the terms that would have been reached in an arms’-
length negotiation?
b. Fair Dealing: Was the parties’ course of conduct in making the decision honest, open and designed and executed in a
manner likely to produce a fair result?
51. Failure to Prove Entire Fairness (steps): 1. If the board cannot prove that the transaction was fair, the board (as a body)
becomes irrelevant, since there was no untainted board action. 2. The plaintiff must then show the nature of the breach (if any)
by each directors by a preponderance of the evidence. 3. If the certificate contains a 102(b)(7) exculpation provision, the
directors can try to show that any breach amounted to gross negligence, at worst. Emerging Communications.
a. In Re Emerging Communications
i. ENTIRE FAIRNESS
1. I. FAIR DEALING ANALYSIS - Going private transaction is NOT the product of fair dealing where
a. 1. majority shareholder stands on both sides of transaction
b. 2. minority shareholders are frozen out
c. 3. majority of board and special comitte are not independent of majority shareholder
d. 4. material financial information is w/ held
e. 5. board and shareholder approals are uninformed
2. FACTORS….
3. When transaction was timed
a. Disadvantageous to minority and correspondingly beneficial to prosser, who took advantage of
temporarily and artiifically depressed ECM stock price…which became the “floor” for the
privatiizaiton price
4. How it was
a. initiated,
i. Here we have a freeze-out merger (what about majority – miniorty vote of
stockholders) ..initated by majority stockholder (prosser)
1. This is evidence of unfair dealing
b. Structured
i. Appropriation of advisors - Prudential nad cahill, two advisors, were co-opted by prosser to
serve as advisors..unfair b/c during ECMs existence, they had been its advisors and possessed
material nonpublic information about ECMS values, business and prospects

35
 1. Therefore, they were in best positon to represent the interests o the ECM minority but
were now switching sides to represent interests (Prosser’s) adverse to that
minority
ii. At a minimum, board should have insisted that the advisors remain the ECM advisors or leave
the negotations
c. Negotiated and Disclosed
i. Communications were through prossers secretary
ii. Financial things not disclosed
1. Puts in position not to negotiate for higher price…and gave prosser access to the
committees confidential dilberations
2. Therefore, committee couldn’t represent minority shareholders
d. and how director and shareholder approval was obtained
i. directors were also financially beholden (some were getting benefits, etc, advantages from him
b/c of it – raynors 2.4 mill compensation deal) to Prosser so they did not adequately
represent the interests
ii. II. directors breach fiduciary duty of loyalty/good faith when they
1. 1. reciveve improper personal benefit from transaction
2. 2. aid another director in improperly benefiting from a transaction
3. Or
4. 3. approve a transaction that improperly bnefits another director when they knew or SHK it was not fair
5. Decision must be made on director – to director basis

PROTECTING PARTICIPANTS’ EXPECTATIONS IN A CLOSELY HELD BUSINESS: CORPORATIONS

CLOSE CORPORATIONS DISPROPORTIONATE TREATMENT DIVIDENDS
Introduction
a. Closely held businesses lack the separation of function that the corporate form permits with its distinct roles for shareholders, officers and directors
b. No market exists for the ownership interest of closely held enterprises; thus no liquidity for one’s investments and no check on those in control. Only free
transferability of shares enables minority shareholders to adapt individually to changed circumstances and protect themselves from majority opportunism.
i. Shareholder more vulnerable under close corp
1. Majority can refuse to buy it back or only buy it back at low price
2. No guaranteed dividensts either
3. More opportunity for majority opportunism
a. The things that protect the firm from minority opportunism create risk of majority opportunism
c. Similarity to partnership
i. 1. just as no person can become partner w/o consent of all partners
1. Can achive same result by restrictin transfer of corps shares w/ consent
ii. 2. fiduciary duty owed
Stockholder Management by Contract in Closely-Held Corporations
2. Rule: If the Certificate elects formal “close corporation” status, the stockholders can contract to limit directors’ discretion or (by unanimous consent to amend the certificate)
substitute stockholder management. In either case managing stockholders assume duties and liabilities of directors. DGCL § 350.
a. Rule: To be a close corporation under DGCL § 342, the certificate must contain all those provisions in § 102 and there may not be more than 30 people, and no
public offering.
3. Failure to Follow Statutory Provisions—Zion rule: Agreement between sole stockholders that no business or activities of the corporation would be conducted without the
consent of the minority stockholder was valid because despite the agreement’s noncompliance with the Delaware statute’s formalities (DGCL § 342) to qualify as a close
corporation, the agreement’s substance did not offend Delaware public policy in view of the fact that all the stockholders were signatories to the agreement.
Majority Oppression in Closely Held Corporations
4. Oppression Definition: Oppression describes a situation where majority denies the minority (but not itself) any mechanism
for realizing the value of its shares.
5. Mechanisms for Disproportionate Benefit: Uneven right to re-sell stock to corporation (Donahue), uneven access to salaries,
uneven access to public markets or to sale of control to a third party.
6. DIFFERING SOLUTIONS
7. Donahue Solution [APPLIES WHEN MINORITY BEING TREATED disproportionately (opportunity to sell)]:
a. Predicates
i. Applies only to close corporations Conditions for majority oppression exist—majority control and no third-party market for shares
ii. Differences from Normal Analysis Formal governance structure ignored and controlling shareholders are treated as fiduciaries
b. Rule: The minority must be given an equal opportunity to dispose of their shares in the same manner as the
controlling stockholder when the close corporation is the purchaser.
c. Donahue v. Rodd Electrotype Co…..Massachusetts REQUIRES EQUAL treatment
i. Rodd, controlling shareholder, causes corp to buy his stock, but refuses a minority shareholder the same option to sell his stock
ii. Duty of Loyalty to Minority Disproportionate repurchase of shares from controlling shareholders is
presumptively self-dealing unless equal opportunity available to the minority.
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 1. If corp repurchases shares from one stockhorlder, must offer to repurchase from other holders on same
basis – Donahue
a. Same price
b. Same proportion…like partnership….
c. b/c when you force corp to buy back from you, but no one else, youa re using corporate funds for
personal benefit, bad faith
2. Now what happens?
a. Burden shifts to rodd to prove entirely fair (dealing, price)
b. Directors prove that Rodd didn’t rip off company…corp paid fair price for his shares and are in same
position as they were before ….BUT THIS IS STILL NOT GOOD ENOUGH…why? See below
iii. Donahue and Partnership (higher standard of loyalty): Stockholders in a close corporation owe one
another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one anther;
that is, the strict partnership standard of utmost faith and loyalty rather than the less stringent standard of
fiduciary duty to public corporation is applied.
1. close corps are like partnerships, they require utmost trust, loyalty, etc..
a. so partnership-type fiduciary duty arises between stockholers
i. so when majority of close corp causes corp to purchase some of his shares, he must offer same
opportunity to minority to sell a ratable number at the same price
2. if you treat yourself differently as a shareholder (even if it is fair dealing and fair price) this is a breach of
fiduciary duty….not to allow minority have same opportunity
a. especially ture in a CLOSE CORP …b/c of its illiquidity….management of close corp manages
liquidity of corps shares….Whereas in publicly traded company, not as big of a problem b/c they can
sell shares on public market
iv. Remedy Under Donahue: Treat the shareholder the same as everyone else (or rescind unequal treatment).

8. Wilkes Rule: Decision [disproportionately (unequal) harming minority]

a. (1) Minority stockholder in close corporation brings suit against majority under Donahue for breach of strict good faith
duty owed to them by majority and makes prima facie case of disproportionate harm
b. (2) then burden shifts to Majority: must demonstrate a legitimate business purpose for its actions
i. If majority refuses to pay dividends and refuses to employ minority, so minority has no way to participate in fruits of
ownership…….Legimiatae business purpose test - as long as you have LBP, you are protected, but where you do not
show it, you are guilty – Wilkes
c. (3) then burden shifts back to Minority -can rebut legitimate business purpose asserted by demonstrating the same
legitimate objective could have been achieved through an alternative course less harmful to minority interest
d. (4) Court must then weigh legitimate business purpose against practicability of less harmful alternative; BOTTOM
LINE: court exercises business judgment.
e. Application 10 guys agree to start close corp, with equal rights and equal pay…Meeting for payments is held where wilkes is not
included…..Next annual meeting, he is not reelcted.
i. Standard of duty is good faith and loyalty – fiduciary obligations to minority
ii. Application to case
1. Here, there was no valid business purpose,…….Wilkes was performing fine
2. This was a designed FREEZE Out…court will reward Wilkes
9. Nixon Rule: must establish entire fairness and Valid business purpose. But DO NOT NEED EQUAL TREATMENT
i. EC barton gives stock to two groups…..Emplyees - Class A voting stock………..Relatives - class B non-voting
ii. Employee stock ownership plan (ESOP) – standard method used to give employees a stake in profitability
iii. Why do P’s think this plan is violation of fiduciary duty
1. b/c no repurchase plan exists for class B shareholders
2. and the person that makes the decision for Class A stockholders is the majority (who owns Class A stock)
3. disproportionate problem . .. b/c not everyone enjoys it by being a shareholder
iv. Insurance plan. purchases life insurance for execs/directors, proceeds to survivors-only to Class A shareholders
v. Why to P’s think this insurance scheme is violation of fiduciary duty
1. b/c class B stock doesn’t get the same benefit
2. Majority is buying life insurance policies that benefit only themselves….
3. AND the life insurance payments to class A stockholders exceed dividends paid to class B holders!!

37
 vi. Disproportionate liquidity….so class B sharholders sue directors and company for mainitan discrimanotry policy that
unfairly favors class A b/c liquidity plan is offered to A but not B
vii. holding: you must treat minority shareholders fairly , but not necessarily equally (Delaware rule) – OPPOSITE OF
Massachusetts above…which requires equality…
1. court will look at entire fairness…..directors bear burden of proof
a. fair dealing – this is the only part contested
i. court finds as a matter of LAW there was fair dealing b/c of neutral decision maker – the person that established
ESOP and life insurance were established by EC barton….NOT the majority or the corp….EC barton out of
control….and when he was in control there were no other class A stockholders…so he wasn’t trying to provide
advantage for himself
ii. so when there is a neutral decision maker……fair DEALING …does NOT require equal liquidity rights
b. but still requires valid business purpose for excluding minority from
i. ESOP
ii. And
iii. Key man insurance polices
2. Delaware rule – must traty minority shareohdlers . fairly but not necessarily equally
10. DELAWARE
a. Rejects special fiduciary obligation to close corp majority
i. Stockholders Need not always be treated equally for all purposes…
ii. Just as long as it is “entirely fair” it is ok
iii. REJECTS Donahue
11. WHAT are main differences between Wilkes and Nixon?
a. First the similarities
i. Shareholder claiming unequal/disproportionae treatment between shareholders
ii. Self dealing favoring one shareholder over another
iii. Not much difference between proving entire fairness….and legitimate business purpose
b. Now dIFFERENCES
i. Under Wilkes, can bring direct action…solely based on disproportionate treatment
ii. Can’t do that under NIXON
iii. procedurally
1. Burden of proof
a. Must have proof of bad faith intent, so any legit reason will suffice….Zidell

CLOSE CORPORATION DIVIDENDS

12. Three principal avenues for minority shareholder suits:
13. Petition for involuntary dissolution……………OR ……..Derivative suit for breach of fiduciary duty……….OR
14. Suit to compel the payment of dividends to protect other rights belonging directly to shareholders
a. Rule: In suits to compel payment of dividends, the business judgment presumptions and majoritarian-directorial bias
of the traditional norms still leave the majority with substantial discretion.
i. Zidell Rule: Plaintiff has the burden of proving bad faith on the part of directors in determining the amount of
corporate dividends; evidence of bad faith must constitute a motivating factor proving SUBJECTIVE bad
faith to constitute bad faith as a matter of law.
b. Zidell
i. Those in control of coproate affairs have duty of good faith and fair dealing toward minority
1. Just like regular corp, in CLOSED CORP, controlling shareholder/majority has fiduciary duty…and maybe
even more so in this context b/c there is no separation of duties in closed corp
ii. But for dividend policy, duties are discharged IF
1. 1. Made in good faith
2. 2. Reflects legitimate business purpose, rather than private interests
iii. Factors that help minority show that above two didn’t happen
1. 1. hostility of majority to minority
2. 2. exclusion of minority from employment corporation
3. 3. high salaries, bonuses, or loans made to majority
4. 4. majority may be subject to high income taxes if dividends are paid
5. 5. desire by majority to acquire minority stock interest as cheap as possible
6. 6. accumulation by majority of an unreasonably large cash reserve (not paying any dividends) – which can only
be explained by bad faith (
7. IF these are NOT motivating causes…then decision si not bad faith as a matter of law – court is looking
for SUBJECTIVE motivation
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 iv. Burden on minority to show above
1. Arnold fails to meet this duty b/c
a. He resigned voluntarily
b. And didn’t show that he was being forced to sell his stock at an unreasonably low price
c. Emerys facts
i. Emery explained low dividend policy as saving needs for company
ii. 73/74 unusual
iii. Need for cash to pay large inventory orders
iv. Future needs renovation
v. Short term funding for bank loan…
vi. All lead to conclusion that this was a VALID SUBJECTIVE motivation for low dividends
v. EQUAL treatment IS OK (Zidell – everyone got same dividends, even if minority thought was low)
vi. So court concludes….the dividend decision was
1. 1. Made in good faith
2. 2. Reflects legitimate business purpose, rather than private interests
c. Takeaway points
i. Arnold can’t argue self-dealing…b/c they were all getting the same dividends, so was not disproportionate
ii. So he is stuck arguing bad – faith…..
15. Difference between Donahue and Zidell
a. In Zidell , P isn’t upset about unfair dealing….rather is concerned that majority is in control of the money and isn’t using it to
benefit minority… (low dividends)
b. In Donahue , P is upset about unfair dealing (self dealing
i. Majority is in control of
1. Business
2. Liquidity of rest of shareholders shares (including minority)
ii. Court holds …..Disproporiionate treatement is NOT OK, when majority is controlling everything…..
16. EQUAL treatment IS OK (Zidell – everyone got same dividends, even if minority thought was low)
17. DISPROPORTIONATE treatment NOT OK ( Donahue – differeing opportunities to sell shares)

CLOSE CORPORATION REMEDIES OPPRESSION, NEW YORK MINNESOTA P90

i. Possible Court Ordered Remedies
1. Buy-Out: Court orders the corporation (or one or more shareholders) to buy out one or more
shareholders at a court-appraised price. This is the most likely remedy.
2. Dissolution: Does not necessarily result is end of the business, but forces a court-administered sale.
3. Derivative Recovery: Court could order the majority to disgorge profits or pay damages to the
corporation.
4. Dividend: Court could order the corporation to pay a dividend to all shareholders
ii. New York Regime (§§ 1104-a, 1118):
1. Petition for Judicial Dissolution Under Speical circumstances - - - 1104-a
a. C) directors, upon filing of petion, need to make available for inspection the books
2. Petitioner's Case to Invoke Court Discretion:
a. Applies only to closely-held corporations and petitioner must hold 20% to make a claim
b. Gives shareholders direct standing to sue “those in control of the corporation ….that are guilty
of illegal, fraudulent, or oppressive actions” toward the petitioner
c. A) shareholders of close corps entitled to vote Of directors may present a petition of dissolution on
one or more of the following grounds
i. 1) directors guilty of illegal, fraudulate, or oppressive actions toward complaingin
shareholders
ii. 2) property or assets are being looted, wasted, or diverted for non-corporate purposes
iii. OPPRESSIONtwo main classes
1. SELF Dealing - actions that benefit majority at corps expense
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 a. Eg…causing corp to purchase inflated price supplies from other corp that you have interest in
2. Squeeze out moves ….deprive minority from
a. 1. Economic benefits (dividends not paid, etc…)
b. 2. participation in decision making process (demand business records, chance to participate on board)
3. Relates to fiduciary duty
a. Remedy: Express authority to dissolve (implicit authority to order other equitable remedies)
4. Standard for Court's Discretion to Dissolve
a. Court decides whether to grant dissolution, taking into account the following FACTORS:
i. 1104-a: B) the court, in determining whether to proceed w/ involuntary dissolution pursuant to
this section
1. 1) whether liquidation is only means for petioners to get fair value on their
investment
2. 2) whether liquidation is reaonalbly necessary for protection of rights and interest
b. Court can adjust payouts for looting and waste
i. D) court may order stock valuations and provide surcharge on directors upon finding of
willful or reckless dissipation or transfer of assets or corporate property
5. Voluntary Buyout (New York Regimes):
a. Purchase of petioners shares; valuation ---- 1118
i. A) w/in 90 days of petition , or decide to do it later on,,pursuant to a petition brought above,
other shareholders may, elect to purchase shares owend by the petitioners at their fair value upon terms approved
by court
ii. B) if can’t agree on fair price, court may determine fair value of petitioners stocks…may
award interest
iii. C) in connection with election to purchase…
1. 1) reasonable expense attorney fees
2. 2) court may require posting of bond..
b. Intended to Favor Quick Buyout
i. Uncertainty of outcome of 1104-a suit
ii. Early buyout (within 90 days) is a matter of right. Late buyout requires court consent
and carries risk of fee shifting and surcharges for demonstrated looting. Only question of early buyout is one
of price.
1. Buyout: Statute seems to give controlling shareholders a buyout right only in first 90
days, but Court of Appeals (Kemp & Beatley) implies it must always be an alternative to dissolution.
a. Purchase of petioners shares; valuation ---- 1118a
iii. A) w/in 90 days of bringing petition , or we can decide to do it later on,,pursuant to a petition
brought above, any other shareholders may, electe to purchase shares owend by the
petitioners at their fair value upon terms approved by court
iv. This allows any other shareholders to purchase the petitioning minorities shares w/in 90
days of filing suit…..
v. But AFTER 90 day limit, it must be at the courts discretion to allow it……b/c at that
point, minority might be worried that majority will just buy out minority b/c they are worried
about litigation problems (whereas at time of initial filing, they weren’t worried)…
c. Factors Countering voluntary buyout (why court lets it happen after 90 days)
i. Likelihood court will order a buyout (not dissolution) if shareholder wins (giving corp no incentive to buyout now)
1. Court of Appeals in Kemp seems to suggest that buy out should be allowed even after trial and that starts to
limit worst case scenario for the oppressive majority. Worst that happens if minority wins is ordering to buy out and then can fight on the
correct value for buying out.
ii. Uncertainty of price if negotiations fail (court valuation)
6. Two types of Oppressive Conduct……………. NEW YORK
a. 1….Kemp Reasonable Expectations: Conduct that substantially defeats the reasonable
expectations held by minority shareholders in committing their capital to a particular enterprise.
b. Reasonable Expectations: Oppression should be deemed to arise only when the majority conduct substantially defeats
expectations that objectively viewed, were both (1) reasonable under the circumstances and were (2) central to the
petitioner’s decision to join the venture. The expectation must have been had when joined the venture.
i. In Re Kemp & Beatley, Inc.
ii. Gardstein and dissin own 20% stock…..They recive distributions…….But leave employment of corp on less than
friendly terms, while remaining shareholders…………They stop receiving distributions (bonuses) that had been issued
instead of dividends…..They had “reasonable expectatiosn” to get these too

40
 1. Gardstein and dissin petitioning for dissolution of corp on grounds of “oppressive
conduct” under 1104a
2. Must prove undr 1104a
a. 20% shareholder……..Private corp,,,,,,,.Oppressive conduct…………By
i. Directors ……….Or………..“those in control”
3. Oppression test?................Shareholders must
b. Defeat objectively reasonable expectations (known to everyone)
c. Central to petitioners decision to joint the venture ( investment decision)
1. what were their expectations then?.....making out a prima facie case for
oppression…denied reasonable expectations
a. Instead of dividends, bonues were issued
i. LONGSTANDING policy… (based on petitioners
testimony/credibility)
ii. They were denied “dividends” they expected to get as long time
employees
b. Denied buyout policy….that were normally afforded to employees
d. 2……..Gimpel Inherent Oppression: When shares are inherited, oppressive conduct is burdensome,
harsh or wrongful conduct, a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure
from the standards of fair dealing.
i. Gimpel v. Bolstein……………Court approaches “oppression” differently…
2. They look at “inherent oppression”….
a. Decision to treat shareholder differently….for no good reason….
b. But decision in this case to treat him differently… was for a good reason
1. Although oppression can be defined as violating the reasonable expectatison of
minority,….this guy should not have reasonably expected that much, since he was caught embezzeling, and then let
go…
2. So they don’t have to give him employment but must do the following
a. Allow access to records..Pay dividends/share in profits…Give him some
offer for his minority shares
18. Minnesota Regime (§ 302A.751 )
a. 302A.011….pg 224…Definitions
b. 302A.751…pf 224…..Judcial intervention; equitable remedies or dissolution
c. Petitioner's Case to Invoke Court Discretion:
i. non-public corporations…….."those in control of the corporation"…………….acted "fraudulently or illegally" or "in a
manner unfairly prejudicial"……….toward the petitioner…………….in petitioner's capacity as shareholder/director
(non-publicly-held) or officer/employee (closely-held)
ii. Remedy: Any equitable remedy (including dissolution, but expressly as last resort)
d. Standard for Court's Discretion:
i. financial condition………….shareholders' duty to "act in an honest, fair, and reasonable manner in the operation of the
corporation"…………."reasonable expectations of all shareholders" (initial or developing)……..written agreements
(evidence of "reasonable expectations")…………….relief will permanently relieve basis for the petition
e. Buy-Outs:
i. Court has discretion to order the corporation or any shareholder to buy out any other shareholder on
shareholder petition at any stage…………No shareholder can force a buy-out at any stage
ii. Guaranteed minimum financial information to shareholders ordered to sell
iii. This statute is vague, you don’t really know what happens if the shareholder wins, you don’t know what
will happen and what the court will order. Left to the equities. Same for the majority….why? see below
iv. How is this different from new york above?
1. Doesn’t use exact word “oppression”…………Just says “manner unfairly prejudicial.....”
2. Makes “other remedies” more possible (besides dissolution)….whereas new york statute it is not as explicit
(court had to read into it to understand they could grant other remedies)
a. with minnesota statute…..“court may grant any equitable relief…..OR may liquidate assets
(dissolution)”……………In fact……more geared towards these other remedies (geared away from
dissolution)……….By making it the second “or” option………..Court wants majority and minority to
be able to figure stuff out by themselves first (if there are ok with them buying the other out)
3. Design of statute is to create MORE strategic UNCERTAINTY…..(so neither majority nor minority can take
advantage of wording to buy each other out unfairly)……by GIVING more discretion to the court
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CLOSE CORPORATION SHARE REPURCHASE AGREEMENTS
19. Why Shareholders Enter Repurchase Agreements:
a. Liquidity: Close corporation minority shareholders cannot practically sell their shares to outsiders, so they often want
to re-sell the company or other shareholders, sometimes at will, sometimes contingent on some event, e.g. death.
b. Restricting Shareholding to Insiders:
i. Shareholders may not want to be in the business with strangers (and owe fiduciary duties to them).
ii. A controlling shareholder may want to give shares only to current employees, to give them incentives to work
hard and worry about keeping their jobs.
20. Contract Issues:
a. Basic Rule: The contract, as an option on property, is enforceable without fiduciary obligations. Concord Auto, Gallagher.
i. Concord Auto Auction, Inc. v. Rustin
1. Concord auto suing the estate of cox to force him to sell his shares
2. Cox is saying I deserve a yearly revaluation before I sell
a. Saying this is a breach of fiduciary duty NOT to have this valuation
i. This is underpaying me
ii. b/c OTHERWISE this is self dealing……
1. “corp” is setting the price and thereby paying less for the shares, which will go
straight to Powell and Thomas, the majority shares, so they are cheating the system
iii. Powell and Thomas are setting the price on the shares they are buying..
3. So why does Cox lose?
a. Contract law…
b. TAKEAWAY point: people can make agreements and as long as they abide by those and no subjective
evaluation involed, courts will enforce it
ii. Gallagher v. Lambert…….FAILS to illustrate that there are limits on how you can enforce these
1. He had contract, he helped write it
2. Purpose of contract was to avoid costly and lengthy litigation on the fiar value issue…so TO DEBATE
THAT NOW would defeat the purpose of the contract
3. DESPITE.. the fact that these contracts are usually just contracts of adhesion…presented to at-will employees
a. In this case, he helped write it, so that can’t be a defense
4. TAKEAWAY…
a. when it is a contract question…..can only look at WHAT WAS THE DEAL….as long as it is not a
distortion of the original transaction…firing him for no good reason will be not ok….b/c
i. There was a fiduciary decision to fire him – CONTRACTUAL DUTY OF GOOD FAITH
1. That decision was not in interest of eastdil the company (b/c eastdil doesn’t care
who owns the stock)
2. THE DECISION Was in the interst of the majority shareholders who would
benefit by getting his stock back at an extremely undervalued price
ii. STONE thinks they decided this WRONG……thinks they should have looked at underlying
fiduciary duty
b. Good Faith and Fair Dealing: Like all contracts, shareholders agreements presumably include an implied covenant of good faith
and fair dealing, but merely insisting on the agreed price, to the other party's detriment, doesn't breach that covenant. Gallagher
21. Fiduciary Issues: The contract, as an option on property, is enforceable without fiduciary obligations. Concord Auto.
HOWEVER, Fiduciary issues arise if:
a. Corporate Action Involved: If the controlling shareholder(s) must cause the corporation to exercise rights (or
corporate action triggers the shareholders’ contract rights) the corporate action may be subject to fiduciary constraints.
Gallagher (dissent) cf. Bohatch.
i. Gallagher v. Lambert…….FAILS to illustrate that there are limits on how you can enforce these (can’t fire for
wrong reasons….see Gallagher dissent above and below)
1. Guy is at will employee
2. He aggress to, and helps write, buy-back formula whereby if he is terminated, they corp automatically gets to
buy back his shares
3. He is fired (20 days before buy back provision would switch from really low price 90K….to really high full
value ….3MIL), and corp seeks to enforce buy back provisoin
a. Gallagher refuses….claiming breach of fiduciary duty – unfair price
b. Pattern of Fiduciary Abuse: If the controlling shareholders use their power to engage in a pattern of oppression,
beyond merely enforcing the contract, that pattern may bring liability. Pedro, cf. Gallagher, Bohatch.
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 i. Pedro v. Pedr
1. Difference between this case and other cases….no Contract – court couldn’t force him to sell
2. Can get damages separately
a. breach fiduciary duty (as an owner) &
b. wrongful termination (as an employee…for being wrongfully fired…just for personal reasons)
3. this is NOT double recovery
PIERCING THE CORPORATE VEIL INTRO THREE PRONG TEST
1. Elements of a Claim to Pierce the Corporate Veil
a. Shareholder dominated the Corporation: Actual practical control over corporate actions is not enough (not inequitable).
Plaintiff has to show a pattern of exercising power without regard to the corporate form.
b. Shareholder used its domination to commit a fraud: Corporate insolvency (even anticipated at the time the debt is
contracted) is not enough. Plaintiff has to show that the corporate form is being used inequitably (e.g. by failing to provide
enough capital to have a chance of succeeding or by looting assets).
2. Three Prong Test Contract and Tort:
3. (1) Control: Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no
separate mind, will, or existence of its own; and
a. Formalities (see below): In looking at the control prong, look at failure to follow formalities, which are an indication of
whether the defendant recognized or disregarded the legal entity.
b. HOWEVER
i. Consumer’s Co-Op v. Olsen
1. Close corp exception: Failure of statutory close corp. to obsever usual corporate formalities is not grounds for
piercing the veil
a. They don’t need to do everything a public corp does
b. They were making a basic effort to be careful
c. So when olsen approaches banks for loans as himself…this isn’t a huge deal
ii. Baatz v. Arrow Bar
1. . Failure to follow corporate formaltieis?
a. Again, failure to follow a few minor things willl not be bad
b. Must be a pattern of abuse leading to proximate cause of not being able to pay companies liablities
i. These things were just incidental
4. (2)Fraud in contravention of P’s legal rights: Such control must have been used by the defendant to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal
rights; and
a. Capitalization (see below): If the capital is illusory or trifling compared with the business to be done and the risks of
loss, this is ground for denying the separate entity privilege. A corporation is undercapitalized when there is an “obvious
inadequacy of capital, measured by the nature and magnitude of the corporate undertaking”. [Measured at time of
formation in Consumer’s Co-Op]
i. Consumer’s Co-Op v. Olsen
1. adequacy of capitalization is measured at the time of incorporation
a. an adequately capitalized corp. does not subsequently be rendered undercapitalized merely b/c the business
suffers lossess
2. and if we are measuring after time of incorp…continued monitoring of capitalization…if company starts out
well funded and shareholder drains assets out….this will be another form of inadequate (diminished) capital….
a. But IF A WILLING creditor continues to fund business, when they have the opportunity to NOT do it
and have opportunity to monitor financial situation…then this is NOT the fault of the corp controller…
can’t pierce veil….That is what happened here.. Despite ECOS difficulties and failure to pay account on
time, consumer continues to extend line of credit
ii. K.C. Roofing Center v. On Top Roofing, Inc.
1. Guy starts corp after corp, draining assets and leaving nothing but a shell
a. and if we are measuring after time of incorp…continued monitoring of capitalization…if company
starts out well funded and shareholder drains assets out….this will be another form of inadequate
(diminished) capital…….BUSTED – this is precisely the sort of activity for which the doctrine of piercing
the corporate veil was developed…
5. (3)Proximate Causation: The aforeseaid control and breach of duty must proximately cause the injury or unjust loss
a. Western Rock Co. v. Davis……proximate causation of harm
1. In contact daily with stroud
2. Fuller tells (decides with) stroud to continue blasting after complaints have been issued knowing…
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 a. 1. Western rock is running out of $
b. 2. they have no tort liability insurance
3. BE CAREFUL….dont’ look at the proximate cuase of the blasting…
a. Don’t look for proximate cause in terms of how the tort was caused…..
4. We are looking for proximate cause against Fuller….
a. We are looking for what FULLER did that resulted in the harm of not being able to collect damages
from the corp….
b. BUT for… Fuller’s Depriving Western Rock of the capital that it needed (wrongful use of complete
domination) to account for its lawsuits, the plaintiffs would have gotten paid
PIERCING THE CORPORATE VEIL 4 CONSIDERATIONS…….
5. 1. Tort OR contract (tort more likely to pierce)
6. 2. Stockholders engaged in fraud or wrongdoing??
7. 3. Undercapitalization?
8. 4. Corporate formalities followed?
6. 1. Tort v. Contract claims (and the ‘voluntary creditor’ doctrine
a. Voluntary v. involuntary creditor
i. Courts less likely to pierce veil when creditor is voluntary b/c
1. Has opportunity to check credit of crop.
2. Had opportunity to ask for personal guarantee of shareholder(s) to recover damages if they don’t come through
ii. Whereas in a tort case…if someone is wronged by a tort by the company, that person did not have above two opprotunites, so
court more likely to pierce veil….But this is Not dispositive
iii. Law and Economics Speculation: Courts should be more willing to pierce for tort than contract claims because
1. Contract claimants can protect themselves by investigation, contract rights or investigation
2. Owners can best insure tort losses and veil piercing encourages that by forcing the stockholder to internalize the
insurable cost to society.
iv. Thompson Empirical Study: Contract creditors try and succeed more often than tort creditors.
1. Despite the wishes of some professors, the law of veil piercing is not different in contract and tort cases.
v. What is Different in Contract and Tort Cases?
1. Prior, Consensual Relationship Between Creditor and Controlling Shareholder: Contract creditors, unlike tort
creditors, interact with the controlling shareholder and have actual expectations. This means that
a. their claims may face equitable defenses (waiver and estoppel) that are impossible in tort actions,
Consumer's Co-op, and
b. the controlling shareholder may actually have defrauded (mislead as to material facts, inducing reasonable
reliance and causing harm) the plaintiff, which is impossible in tort claims. K.C. Roofing.
2. Contract liabilities are deliberately incurred and are thus
a. easier to quantify and predict (easier to show that the capitalization was clearly inadequate), and
b. more likely to be incurred consciously in the face of insolvency. Consumer's Co-op, K.C. Roofing (Western
Rock is the exception that proves this rule).
3. Insurance – often the primary source of capitalization in these tort type cases:
a. Contract liabilities are not often insured (and often uninsurable), so the debtor's other sources of capital are
more important.
b. Tort liabilities are commonly insured (often making the tortfeasor's solvency irrelevant).
vi. Western Rock Co. v. Davis
1. 1. Complete domination
a. Father confessor……….Fuller admits to having contributed all the mooney, all the equipdment, every
loan………..E IS BEHIND IT…….Attitude beyond “respect for sepearte existence”….doesn’t seem to
be a sepearte existence…….Has ability to withdraw all funds – and DOES….right during/before
lawsuit….leaving the corp as an empty shell
b. Personal assumption of control (and direct control before)
c. In contact daily with stroud…Stroud never had a day where he thought he could run company
completely freely
2. 2. wrongful use of domination
a. Aftermath of the verdict – uses his control to make sure there is nothing left to take from corporation/
UNDERCAPITILIZATION (he gutted it before the adverse judgment came)
i. Has ability to withdraw all funds – and DOES….right during/before lawsuit….leaving the corp
as an empty shell
3. 3. proximate causation of harm
a. In contact daily with stroud
b. Fuller tells (decides with) stroud to continue blasting after complaints have been issued knowing…
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 i. 1. Western rock is running out of $
ii. 2. they have no tort liability insurance
c. BE CAREFUL….dont’ look at the proximate cuase of the blasting…
i. Don’t look for proximate cause in terms of how the tort was caused…..
d. We are looking for proximate cause against Fuller….
i. We are looking for what FULLER did that resulted in the harm of not being able to collect
damages from the corp….
ii. BUT for… Fuller’s
1. Depriving Western Rock of the capital that it needed (wrongful use of complete
domination) to account for its lawsuits, the plaintiffs would have gotten paid
4. Baatz v. Arrow Bar …..can’t expand a personal guarantee on a bank note to tort liability
a. The fact that you guarantee SOME debts does not mean that you guarantee ALL debts…
b. Baatz suing neuroths (to pierce arrow bar’s veil)
c. Dram shop liability….which did not exist when arrow bar inc. incorporated…
i. IF it HAD existed, not carrying insurance for it might have been interpreted by the courts as an
extreme undercapitalization risk
5. 1. Why did council instruct the neurtohs not to get insurance policy?
a. b/c the businesss they were running….arrow bar inc….there was NO RISK…..
b. arrow bar Inc.. OWNED arrow bar….. so arrow bar inc doesn’t need insurance, even if arrow bar does
i. wouldn’t ven be proper to get insurance for arrow bar inc.
c. IF Dram shop liability had existed at the time of incorpoartion, not carrying insurance for it might have been
interpreted by the courts as an extreme undercapitalization risk
6. 2. What about personal guarantees of loans?
a. If loans can’t get paid……what can bank do to collect on its loan?
i. Can go after nueroths personally….b/c they gave personal guarantees, on the loan…..
b. Shouldn’t this be a clear sign that they are not taking the “separate identity” thing seriously?
i. The fact that you guarantee SOME debts does not mean that you guarantee ALL debts…
7. 2. Fraud or wrongdoing.
a. Usually when those in control siphon out the assets, leaving nothing but an empty corporate shell, so controlling shareholder thinks
he’s protected against his debts by the corp shell…also, Misrepresentation obviously is fraud (shareholder LIES to creditor)
8. 3. Inadequte capital (might be single most important factor)
a. Inadequate Capitalization
i. Adequate Capitalization: Public policy presumes that an entity will be capitalized so as to have a reasonable
chance to become (or remain) self-supporting.
1. Sources of Capital:…Equity investment….Subordinated debt……Anticipated revenue from
business………Insurance
ii. Baatz v. Arrow Bar.,…….Hard to objectively prove undercaptilization……no evidence that 50,000 was not enough for
what they were doin
b. Where when starting corporation, you just “underinvest” in such a way that might doom the corporation
i. Eg….having 10 cab companies……..Each company w/ only 2 cabs as only asset………..Each insured for only 10,000
1. So if you 1 company causes tort, you are only liable for the very small amount of that 1 company b/c of your strategic
underinvestment…………Although this case held that was ok
c. Especially important in case of involuntary creditor (tort)
i. Not usually dispositive
1. Minority rule……….even in absence of other factors, this one alone will allow piercing
2. Majority rule…….Usually require affirmative fraud or wrongdoing in addition to piecre veil….such that the
person knowingly and intentionally underinvested to shelter himself and exploit corp
3. Zero capital……….If company einvests no money whatsoever….corps mor likely to pierce veil
a. Corp is nothing more than a shelll….so when nothing is invested in corp, corp provides no protection to
woner………..Nothing in, nothing out, no protection
4. Insurance as rebutting inference of undercapitalization
a. When its tort, cort less likely to pierce value if there is insurance
ii. Siphoning of profits……..General rule is that court measure this at time of incorporation…but if company starts out well
funded and shareholder drains assets out….this will be another form of inadequate (diminished) capital….
a. This is of course also evidence of fraud or wrongdoing
iii. Fraud on creditors…..Taking of excess salries, dividesn, or other transfers that levave corp unable to pay tis debts
iv. Failre to add new capital………..Say something goes wrong causing value of corp to seriously diminish
1. Corp doesn’t “re-buy” to continue its operations, even though it might owe a few creditors some money
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 2. Most courts will NOT find failure to get more capital as a reason to pierce veil
9. 4. Failure to Folow corporate formalities
a. Illustrations
i. Shares never formally issued, or consideration for them not received by corp
ii. Shareholders/director meetings not held
iii. Shareholders don’t distinguish between corporate and personal property
iv. Corp records not maintained
b. Injury to creditor
i. When failure to follow formalites actuall injures creditors….court more likely to pierce veil
1. Eg. Shareholders taking cash from crops bank account to pay own personal debts….
ii. Misleading to creditor…..Shareholder putting his personal neame on business door…
1. Paying some corp bills w/ personal checks
iii. No injuryt….usually failre to follow formalities doesn’t injur creditor
1. Eg. If failure is to hold meetings….that won’t directly result in creditor injury
c. Consumer’s Co-Op v. Olsen………Close corp exception: Failure of statutory close corp. to obsever usual corporate formalities is not
grounds for piercing the veil……They don’t need to do everything a public corp does………They were making a basic effort to be
careful
1. So when olsen approaches banks for loans as himself…this isn’t a huge deal
d. Baatz v. Arrow Bar……..Must be a pattern of abuse leading to proximate cause of not being able to pay companies liablities
PIERCING THE CORPORATE VEIL PARENT SUBSIDIARY
10. Liability of Corporate Parents for Obligations of Corporate Subsidiaries
a. Problems of Double Corporate Personality
i. Parent corporations can only act through agents, meaning that there is
1. High likelihood that key individuals will be formal agents of both the parent and the sub. Craig, Best Foods.
2. High likelihood that people will lose track of their agency roles. Best Foods.
ii. Dual agency can lend credence to piercing corporate veil.
iii. BUT Dual agents not enough. Craig, Best Foods.
1. Plaintiff needs to show that dual agents manipulated the subsidiary corporation solely in the interests of
the parent corporation, disregarding inconsistent interests of the subsidiary. Best Foods.
b. Same Basic Rule: Plaintiff has to show that the parent didn't respect the subsidiary as a separate entity (1. complete domination)
and used that domination to perpetrate a wrong (2. use of control to commit a fraud or wrongdoing that leaves subsidiary
unable to pay its debts). Majority stockholder and dual agents are not enough. Craig, Bestfoods.
i. Craig v. Lake Asbestos…………”potential control not enough”
1. District court findings
a. Charter owns Cape….Cape owns NAAC (north American asbestos) – MAJORITY stockholder
b. Charter’s announced intent to “control”
c. Charter has 3 on board of Cape
d. Charter has majority ownership of Cape equating to a “potential” to control
e. For a finding that a parent will be responsible for its subsidiaries debts…..
i. A finding of “potential control” is NOT ENOUGH…..
1. must be enough control such that Cape exercised no discretion of its own…..
ii. Court of appeals findings
1. Cape and Charter keep sepearte books, use different financial professionals, and don’t
consult with each other on a daily basis, hostile Cape CEO had remained for 10 years,
Cape had disobeyed orders….
iii. This means Charter did NOT have COMPLETE CONTROL…
ii. United States v. Bestfoods………..”person in conflicted role MUST have directly caused the bad actions”
1. Bestfoods (CPC)….owns
a. Ott II…….owns
i. Plant…that is polluting
2. Supreme court findings….
a. They latch onto Williams, an Agent working soley for CPC/Bestfoods….but working at plant….and remand
to find what his exact roles were at the plant……
i. Was he directly instructing people to continue with the polluting…..
ii. Just b/c he was in dual role/conflict of interest doesn’t matter….must have using that to role
effectuate the specific violative acts in question
c. Equity Means Focusing on Things as the Really Are: If it makes sense to talk about a parent and subsidiary disagreeing (i.e. they
really are separate organizations that could clash), the difference is likely be respected.

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 d. Statutory Variations: Statutes can establish liability without regard to corporate fictions. The question is then whether the parent is
liable by the statute's terms, not whether it inequitably harmed someone. Bestfoods.
e. Does Any of this Make Any Sense?
i. Should we allow individuals (let alone corporations) to segregate assets into pockets, protecting the assets of some pockets
from the creditors of others? Why should it make a difference if they take the fiction seriously?
ii. Some possible answers
1. No: Pure legal formalism
2. No: Encourages socially inappropriate risk-taking
3. Yes: Counters people's natural risk aversion and, subject to equitable constraints, facilitates beneficial risk-taking.
iii. Policy: We are comfortable allowing people and companies to set up separate pockets and assets for liability
purposes as long as those are not clearly fraudulent.

MERGERS APPROVAL APPRAISAL RIGHTS

1. Types of Negotiated Transactions
a. Classic Merger: Combination of two corporations into one. Classically, two businesses combine and merging corporations’ stock
is converted into the merged corporation’s stock.
i. Model is built on assumptions
1. 1. shareholders can make an informed decision to approve or reject the merger
a. Their participation adds value for corps and themselves
b. This relies on fact that management will be able to provides shareholders with sufficient, digestible,
and unbiased info about pros and cons of merger
2. 2. it will not be unduly burdensome for corps to await decision of shareholders before beginning process of
integrating assets and personnel
b. Acquisitive Merger: Merger in which one corporation (purchaser) is effectively acquiring the other (target). Target stockholders
either receive purchaser stock or their shares are converted to cash.
c. Asset Sale: Purchaser contracts with target to buy substantially all of its assets (tangible and intangible) and assume some (or
none) of its liabilities. Target distributes the consideration to its stockholders after paying debts
i. Different from mergers
1. 1. corporations selling assets doesn’t automatically disappear
2. 2. selling doesn’t need to transfer all assets
3. 3. liabilities of selling don’t necessarily pass
ii. But can be structured to have the same form as a merger
iii. What must the selling company do?
1. Submit proposal to shareholders for majority vote
a. They can vote but don’t have appraisal rights
2. May not have to submit it for vote unless they are selling “substantial” portion of the businesss
d. Stock Purchase: Purchaser buys all the stock of the target which essentially becomes a subsidiary of the purchaser.
i. Permits aquiring company to acquire all shares of another while leaving the acquired corp in existence
ii. Nonconsenting shareholders of acquired corp are forced to give up their shares subject to appraisal rights
iii. Acquiring corp shareholders do not get these rights
e. Triangular Merger: Target merges with a subsidiary of the purchaser. The target’s stockholders receive parent stock or other
consideration. Nothing happens to the parent’s pre-existing stockholders.
i. One parent company aquires a corporation and either merges it into one of their subsidiares or merges one of their
subsidiaries into the acquired company-Compensation for shareholders of acquired company comes from parent company
ii. Forward Subsidiary Merger- Acauired corporation merges into acquiring subsidiary
iii. Reverse subsidiary merger- Aquiring subsidiary merges into the acquired corporation
iv. Main reason to use this method
1. Elinates voting and appraisal rights that shareholders of the acquiring parent would otherwise have

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 a. b/c the appraisal and voting rights are usually only involved with the acquiring (subsidiary)
company….the aquiring parent will usurp the rights of the acquiring subsidiary and vote for the
merger….
b. also this shuts out the shareholders of the parent corporation
f. Short-Form Merger: Parent owning at least 90% of the stock of subsidiary merges with the subsidiary
2. General Rules:
a. Shareholders of target corp ALWAYS get voting rights
b. Shareholders of acquiring corp DON’T get voting rights unless251(f) Exceptions
i. There is an amendment to the certificate of incorporation
ii. any outstanding stock of acquiring corp no longer becomes outstanding
iii. corp is issuing stock AND shares issued exceed 20% of the shares outstanding of the surviving corporation prior to
merger.
c. To get appraisal rights, must make a demand under§ 262(a); Stockholders who oppose mergers can generally demand cash for the
“fair value” of their shares, as appraised by the Chancery Court. Applies only to stockholders who vote against the merger and
hold their shares through the effective date of the merger.
i. A)If you are making a demand pursuant to (d) of this section…
1. And didn’t vote in favor of merger
2. You shall be entitled to an appraisal of the “fair value”
d. Shareholders of target corp ALWAYS get appraisal rights (if they voted against merger) unless (any will do) 262(b)(1
i. I) their previous stock is publicly traded on NSE AND Ii) their previous stock is held by more than 2000 holders\
ii. OR
iii. merger did not require vote of stockholders of the surviving corporation
1. 251(f) above was met
iv. AND EVEN IF THIS IS THE CASE, they get appraisal rights if they receive something besides…262b2
1. A) shares of stock of surviving corporation
2. B) shares of stock of any other corporation that are either
a. On stock exchange
b. More than 2000 holders
3. C) cash in lieu of FRACTIONAL shares (ca’nt just get straight cash for your shares…then you get appraisal)
4. D) any combination of above
e. Sharhldrs of acquiring corp ALWAYS get appraisal rights (if they voted against merger) unless (any will do) 262(b)(1
i. I) stock is publicly traded on NSE AND Ii) stock is held by more than 2000 holders
ii. OR
iii. if merger did not require vote of stockholders of the surviving corporation
1. 251(f) above was met
iv. AND EVEN IF THIS IS THE CASE, they get appraisal rights if they receive something besides…262b2
1. A) shares of stock of surviving corporation
2. B) shares of stock of any other corporation that are either
a. On stock exchange
b. More than 2000 holders
3. C) cash in lieu of FRACTIONAL shares (ca’nt just get straight cash for your shares…then you get appraisal)
4. D) any combination of above
3. Merger Procedure (DGLC § 251)
a. Merger Agreement (“Signing”): The boards of both merging corporations approve a contract setting the terms of the
merger.
b. Stockholder Vote: The boards of both merging corporations submit the merger to a stockholder vote, absent
exception. A majority of total stock outstanding is necessary for approval. (DGCL § 251(c))
i. § 251(f) Exceptions: Shareholders of the surviving corporation may not vote to authorize the merger if:
1. There is no amendment to the certificate of incorporation
2. No shares of surviving corporation stock are issued or those shares issued exceed 20% of the shares
outstanding of the surviving corporation prior to merger.
ii. NYSE 312.07 versus DGCL § 251(c)
1. Note that 312.07 requires a majority of the stock actually voting to approve the merger, whereas §
251(c) requires absolute majority of all the stock outstanding, making Delaware more demanding in
the sense that if people get lazy and don’t vote you can have a problem.
c. Merger Occurs (“Closing”): The agreement is consummated and the merger is legally concluded.
4. Asset Purchase and Triangular Merger Procedure (DGLC §§ 251, 271)
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 a. Same as merger procedure except that the purchaser’s stockholders do not have approval rights. Stock exchange
rules may require approval by purchaser stockholders if the purchaser issues new stock exceeding 20% of total shares
outstanding after issuance.
b. Seller’s stockholders also DO HAVE approval rights in asset sale
i. but do NOT have appraisal rights……….
5. Short Form Merger Procedure (DGCL § 253)
a. In cases in which at least 90% of outstanding shares owned--requires only a resolution of the parent board. Stock
Exchange rules may require a vote by parent stockholders.
b. Appraisal is the only remedy (§ 253(d)(3)).
6. Appraisal Rights (DGCL § 262)
a. Do you get appraisal rights?
i. § 262(a); Stockholders who oppose mergers can generally demand cash for the “fair value” of their shares, as appraised by the Chancery Court.
1. Applies only to stockholders who vote against the merger and hold their shares through the effective date of the merger.
2. A)If you are making a demand pursuant to (d) of this section…
a. And didn’t vote in favor of merger
b. You shall be entitled to an appraisal of the “fair value”
ii. § 262(b)(1) Exceptions: No appraisal remedy (have to take the price they give you) if
1. Listed on a national security exchange
2. Held by more than 2,000 holders
3. Is a surviving corporation under § 251(f) (triangular) or asset purchase and thus did not require vote for merger.
4. Lists out who appraisal rights are available to
5. 1) UNLESS
a. I) stock is publicly traded on NSE
b. Ii) stock is held by more than 2000 holders
c. And if merger did not require vote of stockholders of the surviving corporation
iii. § 262(b)(2) Exceptions to (b)(1):
1. If shareholders are to receive something NOT listed under § 262(b)(2) (receive something besides cash, shares, etc..listed pg 63 of statuate
supplement) they get appraisal notwithstanding § (b)(1).
2. 2) IF you don’t get any of the following……….you get appraisal rights even if you satisfy (b)(1)
a. A) shares of stock of surviving corporation
b. B) shares of stock of any other corporation that are either
i. On stock exchange
ii. More than 2000 holders
c. C) cash OR D) any combination of above
b. What is the fair value:§ 262(h): Court appraises shares by determining fair value exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation. It may consider ALL RELEVANT FACTORS.
DE FACTO MERGER DOCTRINE
7. De Facto Merger Doctrine: Grants appraisal rights in transactions with the same effect as merger (e.g. stock-for-stock and
stock-for-assets.)
8. Substance Over Form doctrine: When, as part of a transaction between two corporations one corporation dissolves, its
liabilities are assumed by the survivor, its executives and directors take over the management and control of the survivor, and,
as consideration for the transfer, its stockholders acquire a majority of the shares of stock of the survivor, then the transaction
is no longer simply a purchase of assets or acquisition of property . . . but a merger. We will not blind our eyes to the reality of the transaction.
a. Cases finding de facto merger (which are very rare) tend to emphasize two sets of facts:
i. Similarity to Classic Merger Courts look for a transaction that looks like a traditional stock-only merger
with a single surviving corporation. Farris, Applestein, Irving Bank.
1. Farris v. Glen Alden – pg 601
a. They can “get out” by “appraisal” – where they ask the courts to intervene, determine the “fair value” of
the stock and force the company to pay it to them, regardless of what the actual value the participants
got
2. Applestein v. United Board & Carton Corp.
a. Saul Epstein exchanges 1250 shares (majority) of Interstate stock for 160,000 (40%) shares of United Stock
b. By this “exchange of stock,” United now owns Interstate b/c epstien owned a majority of Interstate
c. What standard/TEST will the courts use in determining that substance has overtaken form?
i. Stockholders should not be forced into a merger if the result is fundamentally different than
what they bargained for in obtaining their original shares. Otherwise, corps could use clever
labeling to screw their stock holders over
d. FACTORS TO CONSIDER

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 i. Transfer of assets
ii. Assumption of liabilities
iii. Pooling
iv. Dissolution of target company
v. Combination of management
e. ramification: Appraisal rights are granted
ii. Disguised Acquisition Courts also look for structure that portrays the acquired as the acquirer to avoid
giving shareholders of the acquired corporation voting rights. Farris, Applestein, Irving Bank.
i. Delaware Doctrine (Independent Significance) – minority rule: Sale of assets and merger statute deserve
equal respect and are independent and since it is authorized by statute the court should not interfere. Therefore, the sale of
assets transaction, which looks like a merger, shall go forward as a sale of asset transaction and no appraisal/voting rights
shall be afforded. Delaware court thinks there is no sprit to the statute, no overall policy
iii. Hariton v. Arco Electronics, Inc.
1. Arrco sells assets to Loral in exchange for loral stock, after which the Loral stock would be distributed to arco
shareholders and arco would dissolve
2. Therefore a corporation may create a resulting effect that would be illegal under other statutes by selling
instead of merging
1. The sale of corporate assets statute was followed correctly so the provisions of the merger statutes are of no
relevance
2. DELAWARE LAW §271: No right of appraisal for sale of corporate assets, so hariton knew when he
bought arco stock that they could sell their assets for stock in another corporation….So you can accomplish a de facto
merger w/o giving your shareholders appraisal rights ( as an acquiring corporation)
9. California Approach
a. The California Code attempts to specific changes so fundamental as to require voting and appraisal right for
shareholders, calling them “reorganizations.” Form does not matter.
i. VotingIf a corporation issues new shares amounting to 20% or less of shares outstanding before the
transaction, its shareholders do not vote. Otherwise they do (even if they own shares of a parent corporation
that is not directly purchasing or merger).
ii. AppraisalAppraisal rights follow voting rights, but exclude shares listed on a stock exchange unless at least
5% of the class demands appraisal.
b. Start w/ §181..reorganization …….(b) “exchange reorganization” – yes
c. Should be voting rights. . .. §1201(a)
d. Appraisal rights…look to §1300
i. what does Applestein need to do to demand appraisal rights
1. §1300(b)(1) Must get 5% or more of the other minority shares to agree…unless of course he owns 5% which he
could do it on his own
FREEZEOUTS AND CASHOUT MERGERS
e. Freezeouts Definion: Those in control eliminate equity ownership of the non-controlling shareholders By forcing insiders
to sell their shares…………….Result : exclusive ownership by majority……..SEVERAL WAYS TO ACCOMPLISH THIS:
1. Two step acquisition
a. 1. big corp buys most of shares of little corp in tender offer from little corp shareholdrs (90%)
b. 2. big corp causes little corp to merge into big corp - - - - Minority shareholders are entirely
disinvested during second step…..they are required to take cash (rather than acquire stock in the target)
2. Merger of long term affiliates – Weinburger…one corp has controlling, but not sole interst, in another corp for
a long time and now decides to eliminate minority interst (parent-subsidiary – just cash out minority shares….instead of
giving stock)
3. Going private
ii. Techinuqes
1. 1. “cash out”………Minority shareholders paid cash – most common
2. 2. short form mereger… corp owns a larege percentage of anotehrs stock, subsidiary may be merged into parent w/o a
minority vote
iii. Whats wrong w/ freezeouts?............Possible harms
f. Even if they get fair price…there are transaction costs………&………..“fairness” hard to measure
g. Monetary Differences between Appriasal and normal Fiduciary Breach:
i. Appraisal measures the “intrinsic” value of the corporation’s business as of the date of the merger
ii. Remedies for fiduciary breach can be either
1. Damages: Same as appraisal

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 2. Recissory Damages (Accounting): Profits actually realized by the fiduciary from the breach, regardless of
whether the price paid was fair when paid.
h. Procedural Differences between Appriasal and normal Fiduciary Breach:
i. Appraisal is an individual action. Although multiple actions can be consolidated, each plaintiff must actually bring suit
(a lawyer with a representative plaintiff cannot purport to represent them). Suit for breach of fiduciary duty can be a class action.
ii. Appraisal rights must be preserved at the time of the transaction. Stockholders tricked into voting for a merger or
accepting the offered cash have lost their chance at appraisal rights by the time they discover the wrong.
iii. RAMIFICAITON: The Weinberger Approach……Courts begin to encourage dissasitisfied minority shareholders to
challenge cash-out mergers via a cost-spreading, class action suit rather than pursuing individual appraisal action
i. Two Views of the Cause of Action to Contest a Cash-Out Merger with a Controlling Shareholder:
i. Business Purpose (no longer required – Singer overruled by Weingbruger)-Controlling shareholder must demonstrate
that the decision to cash out the minority reflected an interest of the organization, distinct from the controlling shareholder’s
personal interest.
ii. Fairness: Freeze out merger treated like any interested-fiduciary transaction. The controlling shareholder is presumed to have acted in
its personal interest but may defend itself by demonstrating that the transaction was entirely fair. Weinberger (current DE law).
j. Weinberger v. UOP, Inc. Demonstrating fairness: Plaintiff in a suit challenging a cash-out merger must allege specific acts of
fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority.
k. 1) Instrinsic fairness test 1) fair price………2) fair dealing (procedures)………..3) adequate disclosure
i. Procedural fairness……..Signal NEVER negociated w/ UOPs board…….Just said “we’ll pay 21”…..End of
discussion…Signal used confidential UOP data to prepare the feasibility study….to show that 24 would have been ok,
yet never disclosed the study or the 24 dollar price...Only work done was a hurriedly prepared banker fairness letter
ii. Fair price……….Should have been closer to 24 than 21
iii. Disclosure……..Documents / feasibility study never disclosed
1. Burden of Proof…….Generally – on D to prove it was fair
a. Shifts to P to prove “unfair” when……1. majority of minority approves (weinburger)……….2. D
carries burden of showing adequate disclosure……….3 “arms length process” between minority and majority
i. Basically, when D has rebutted above three points
2. Remedies: Weinberger: If the controlling shareholder fails to demonstrate entire fairness, possible
remedies are (not sure if these are categorized correctly)
a. 1. Normal remedy is “quasi-appraisal” (i.e. damages for cashing out the minority below “fair
price”).
i. Usually get equal to what they would have got with appraisal…Usually CAN’T get an
injunction
ii. All Relevant Factors: All relevant factors should be considered when appraising shares. The
underlying assumption in an appraisal valuation is that the dissenting shareholders would be willing to
maintain their investment position had the merger not occurred.
b. 2. Accounting remedies (disgorgement) also available if necessary to prevent unjust enrichment (i.e.
serious problems with fair dealing, not just unfair price)
c. 3. Recissory Damages……….Where would I be at had the merger not occurred?
l. Massachusetts Law: …..Business Purpose Test (not used in Wienberger): Because the danger of abuse of fiduciary duty is
especially great in a freeze-out merger, the court must be satisfied that the freeze out was for the advancement of a legitimate corporate purpose.
If satisfied that elimination of public ownership is in furtherance of a business purpose, the court should then proceed to determine if the
transaction was fair by examining the totality of the circumstances. Defendant bears burden of proof on proving valid business purpose.
10. Remedys:
a. Rescissiory Damages: Recessiory damages must be determined based on the present value of the organization, that is, what the stockholders
would have if the merger was rescinded.
a. Appraised Value: Fair value of the shares at the time the merger occurred.
HOSTILE TAKEOVERS TENDER OFFERS
• TENDER OFFER – offer to stockholders of publicly owned corp. to exchange their shares for cash or securities at a price above the quoted market price
o Used in hostile takeovers – acquisition of publicly held company over opposition of management
 why do they work?
• All of the other methods require consent of BOD and managmenet
• tender offers need not be approved by BOD…bidder just offers to each individual stockholder…and if a
majority tenders their shares, bidder can take control of corp over BOD and management opposision
• How do tender offers work?
o selecting a target……usually choose an “undervalued” company whose real value is not reflected by market price due to

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  a. inefficient managmetne. (bidder thinks he could turn stuff around)
 b. assets worth more in liquidation than market proce
 c. conglomerate…pg 483
o pre-offer transactions……..once bidder has selected a target, usually purchases small % of comps shares…..why?
 1. can buy the shares at price lower than tender offer
 2. if target defeats takeover attempt or if a “white knight” comes along to buy at a higher price, bidder will at least
recoup some of tis costs
o Financing…….Use of shell corporation……..Has no assets or ongoing business except that at last moment it recives from the
bidder, the funds needed to carry out the share purchase….then it gets merged into target
o Public announcement
 Number of share…….Usually all, but at least wanta majority of outstanding shares…b/c why pay a premium if you
are not going to get control?
 Stated minimum……….Usually offer is contingueent on some minimum number of shares
o Pressure to tender
 Threat of back-end merger……….Effective pressue …there is always implicit threat of back end merger
• Pressure on shareholder to get the higher price while you can….b/c of you hold out and bidder gets 95% and
effectuates a short term merger, you may be screwed by just having an appraisal right at that point
o Emanuels: Pros and Cons of takeovers: 539
 Pros…….Removes wrongdoers and iffecient managers………Discipline to managers to perform better if hostile
takeover looms
 Cons…….Doesn’t discipline…….b/c good mangers in good industry have nothing to worry about
• forces focus on short term….will defer capital spending to boost short term earnings……increases debt
o Hostile Acquisitions – power point slides
 Fiduciary Issues in Takeover Defense
o Complex Consideration………………..Financing Contingencies………………Regulatory Contingencies………….Business
Disruption……………..Varied Shareholder Interests and Time Horizons
 Necessary Role of the Board:
• Centralized Provision of Expertise & Information……………………Centralized Management of
Auctioning/Bargaining
 Fiduciary Conflicts in Control Transactions: OMNIPRESENT SPECTOR - board may be acting primarily in its
own interests, rather than those of the corporation and its shareholders.”
• Personal Incentives to Resist: Officers of big companies get paid more money and attention.
• Personal Incentives to Facilitate: Officers who help the acquiror might be well-treated afterwards.
• Control Transactions as Monitoring Device: Officers who are worried about their job security might manage
better.
o Emanuels on Hostile Takeovers, generally (could probably be infused w/ next couple sections…..508
 Pre offer defensive techniques (shark repellants)
 Potential acquirer who wants control but doesn’t have consent of BOD can
• 1. make a tender offer seeking to buy sufficient shares to gain control
o Front-end loaded tender offer
 In cashing out minority shareholders….2 step process
• 1. bidder acquirees controlling interst via a tender offer
• 2. cashes out minority shares through merger
 In a Front-end loaded tender offer situation, consideration in step 1 is much greater than in
step 2 (the cash they’d get from the merger), so it is more coercive, b/c shareholders who
don’t accept at step 1 will be forced to accept less
• 2. launch a proxy fight seeking authority to vote sufficient shares to gain control
• Usually require Shareholder approval – b/c defenses will be an amendment to bylaws….and shareholders less
likely to approve these, b/c takeovers sometimes result in a lot more money
o But still they are often approved….reasons pg 509……But b/c sharesholders many times are
• Passive….And ………..Ill-informed…..There is danger they could accept a crappy offer in these situations
When they get a proxy seeking their approval of a merger
• Supermajority Provision – require a super majority rather than regular to approve merger or sale of assets
• Poison pill plans

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 o “call plans” flip over….Allows a shareholder to acquire shares of the merged bidder at half pice..also
see below
o Filp in provisions…..Allows shareholder to buy at half price from unmergerd bidder (sale of assets..)
o Put plan……Allows ahreholser to buy at specified price (so they won’t get undervalued in second step
of front end loaded tender offer)
o Practical UPSHOT of the pill….people considering taking over DON’T buy past the critical %,
b/c it screws your attempt to take over………Forces them to talk to BOD
 Post offer techniques
• Defensive lawsuits………..Breach of fiduciary duty, etc..
• Finding wite night…….Lock ups……..Target gives 3rd party a “lock up”………..“crown jewels” option –
offer to white knight to buy one of targets most attractive businesses at below-market price…does’nt require shareholder
approval b/c not “substantially all the assets” but makes target less attractive to other bidder
• Share manipulation
o Sale to friendly party
o Share repurchase…
• Pac man defense
o Make a tender offer for the bidder
• State anti-takeover stattues
 Judicial reponse – usually bidder will ask courts to allow takeover to happen
• Delaware law…..middle ground ……..“modified BJR” …….b/c there is high probability that BOD will be
self interested, rather than concerned for stockholders, BOD must make special showing to qualify for protection of BJR when enacting
defensive maneuvers
o 4 things to obtain BJR…when enacting anti-takeover measures
 Reasonable grouns for belief in corporate objectives……..Must have reasonable belief there is danger to corporate
welfare…..Not merely to perpetuate/entrench their own power…. ….is the BOD looking out for stockholder interest
 Reasonable response…….Based on above…. or is it trying to prevent ALL types of takeover, not just ones posing threat
 Good faith and reasonable investigation – procedural consideration…..Procedural requirement for above two points
 Independent directosr..Lend credence for first tow points if there were disinterested directors that made the decision
 Once obtained BJR, court grants protection ……Unocal……..Moran
• How regulation works in Delaware…examining above in more detail
o Reasonable Basis for fear:…..
 Dangers considered
• Change of business practices…….Belief that bidder will change stuff………Or liquidate corporation
• Coercive tactics…..If unfair or coercive to corps stockholders
• Eg………Attempt while stock price is unusually depressed…….Two tier front loaded offer….coerces on front
end b/c of fear of eunfavorable back-end cash-out merger
• Excessive debt..Where buyer intends to use credit / junk bonds to finance, leaving target company w/ lots of
debt
o Proportionality Requirement – “reasonable in relation to threat posed” :….. working to protect corp, NOT just their
own jobs
 Can’t be “preclusive” or “coercive” Unitrin….
• Preclusive – prevents hostile bidder from succeeding no matter what the bidder does
• Forclosing of ALL takeovers…If a poison pill plan makes it so no reasonable bidder ever want to take over…
• Coercive – crams down a management offered alternative on targets shareholders
o Lower management bid….If BOD could use power to vote out hostile bid ,
even if it is higher than their alternative bid
o Waste of assets……….Selling off your best asset at a ridiculously low price
to a third party to make deal less attractive- crown jewels
 Benefit to stockholders…………….Must be at least SOME benefit to stockholders…
• Eg……….As in Revlon , see next section, can’t enact a takeover defense that
better protects the company’s creidotrs against risk of default but deprives stockholders of highest price for
their shares
o Investigation……..Procedural Aspect of above two points
 Can’t just brand an offer “inadequate”….must have research to back it
 Also, can’t just approve a defensive mechanism w/o some expert analysis and whatnot

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  Also, let outside/disinterested directors meet by themselves, not just rely on internal, potential
self-motivated directors
o Significance of Independent directors…………………. not dispositive though
 Doesn’t allow per-se BJR, but having independent directors increases likelihood that you can
prove 1,2, and 3
 in Delaware, even if NOT a majority of the independent directors approve a defensive action, court still gives credence
• so if 5 independetn, 4 insider and vote is 5-4 for the transaction w/ only 1 independent director approving, they still get presumption
 Who is an “independent director”……..Existence of other significant business or
stockholding relationship with the corp makes director insider, even if he is not employee
• See Revlon (case next section)…………..14 directors on target board………6 were
employees – so only six are “technically” insiders……….BUT………..2 others were significant
stockholders……..4 others had business relationships………..So don’t get presumption
o Consequences if requirements not met
 Court doesn’t automatically strike down the action, but will treat decision as any other self-
dealing transaction…..ENTIRE fairness

HOSTILE TAKEOVERS UNOCAL EXAMPLE

1. Unocal Rule: A board action for the purpose of defending against a challenge to its control is inherently conflicted and subject to an
"intermediate" standard of review (not BJR). If a shareholder establishes that the board acted for that purpose, the board must prove
that
a. It reasonably (i.e. carefully and in good faith) determined it faced a threat to corporate policy or effectiveness, and
i. MESA is offering low value
ii. It is coercive
iii. Greenmails – MESA had done this before and taken a payoff to stop through the use of greenmail
1. MESA had acquired a lot, but before getting complete control and before completing the hostile takeover,
they offered to sell the shares back to Unocal at a premium, so Unocal can avoid being taken over…
iv. As long as there is not evidence that the REAL MOTIVE was…
1. Self-perpetuation (on the part of the board, attempting to entrench its power)
a. Court wouldn’t apply BJR here, b/c this is not looking out for corps/shareholders best
interest
2. OR
3. Some other breach of fiducariy duty
a. Fraud
b. Overreaching
c. Lack of good faith
d. Being uninformed
b. Its response reasonable in relation to threat: was not "Draconian" (inequitable):
i. Not primarily motivated by board memb
ii. ers' desire to stay in office or some other
iii. Reasonable in relation to the threat
1. Application to case: Evidence?
a. Excuding MESA is what will allow the shareholders to GET a FAIR VALUE…countering
threat above…..so it is reasonable…
c. Test is both procedural and substantive…
i. Procedural .
1. (1) Incumbents have the burden of proving they acted in good faith after reasonable investigation.
a. Burden of proof on target board of directors because of the “omnipresent specter that a
board may be acting primarily in its own interests, rather than those of the corporation and
its shareholders.”
2. We researched and determined…
a. 1) legitimate threat
b. 2) that our action was the best action to deal with threat
ii. Substantive
1. (2) The defensive measure must be reasonable in relation to the threat posed.
d. THEN Court will apply BJR to BOD’s decision

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 HOSTILE TAKEOVERS DECISION TO SELL OR BREAK UP
1. Reverse Unocal: When the board decides to sell control or “break up” the company (i.e. abandon
any long-term plan dependent on maintaining the “team”) (opposite of Unocal where it was trying to defend against takeover),
it limits the goal of its business judgments to maximizing immediate shareholder value. If the board favors one bidder over others,
the “omnipresent specter” arises. The board must then prove its decision was:
a. (1) Based on informed determination of an immediate benefit to stockholders.
b. (2) Proportionate to the stockholder benefit sought.
2. Delaware law and the decision to sell the company…..These are for situations where company has
announced decision to sell…..court applies “enhanced scrutiny” in these situations to the steps that BOD takes
a. 1. “Level playing field” rule…as soon as corp starts to consider sellling
i. “all would-be bidders must be treated equally, and insiders cannot favor one bidder (white
knight) over another (original hostile raider)
ii. TRIGGERS “enhanced scrutiny”
1. Court will look for………………….Procedural
defects………………..Substantive defects
2. Court is likely to
a. 1) enjoin or reverse tranaction unless “best reasonably available
price” was obtained
b. 2) strike down defenseive measures that materially lessen interest of
other bidders
3. When used?
a. 1. active bidding process – corp initiates bidding process…puts itsle on
market
b. 2. abandonment of long –term strategy. – in response to bid, seeks
alternative transaction involving breakup of company
c. 3. sale or change of control…when control would go to one person or
entity
4. When NOT used?........Board “just says no” or “refuses to undo some
preivous measure”
3. If they do take measures, must be reasonbel - Time
a. 2. The Revlon case - Revlon, Inc. v. McAndrews and Forbes Holdings, Inc.
i. Illustrates how defensive measures enacted that would otherwise be valid (if trying to
maintain independence) are INVALID if used to favor one bidder over another …AFTER decision to sell has been made (self
initiated bidding process…..as opposed to “putting corp in play” below)
1. Revlon usese defensive maneuvers………These are ok, b/c there are reasonable
response to legitiimte threat
2. Later, after they realize they have to sell, they Negociated a leveraged buyout
with Forstman instead of considering Pantry’s offer…..After you decide to sell, you become an auctioneer, so you can’t,
as they do here, favor a white knight (Forstman) over original raider (Pantry Pride

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 3. But then they realize they will have to sell at least part of the company, so at this
point….see below
ii. Lock ups – locked up deal for one bidder (forstman) over the another (pantry)
1. 1.gave Frostman “crown jewels” option
a. to buy two Revlon subsidiares for way below price IF another bidder
(pantry pride) got to 40% shares…
2. 2.gave frostman “no shop” provision
a. wouldn’t deal w/ any other would be acquirer (pantry pride)
3. 3.gave frostman confidential info that it didn’t share w/ pantry
4. 4.gave high cancellation/break-up fee if Revlon backed out (which would
screw over any other would be acquirer) – sort of like crown jewel, asset depletion
5. Here, the lockups STIFLED COMPETITION, ….they won’t be illegal as
long if they had EXPANDED cmpetition
a. Eg…there is only one bidder and a lock up is the ONLY way to get another
bidder…to increase shareholder value
b. BUT in this case, Forstman was ALREADY A BIDDER, so lock up
was not used to induce more competition, but to stifle it
iii. Early defensive manuevres
1. court had No problem w/ revlons original defensive manuvers, b/c these wer
based on reasonable fear of pantry and that it would ruin corps effectiveness
iv. Auction – duty shift
1. But as SOON as you announce to sell (or break up company by selling assets
or pieces), BOD’s role changes from defender to “AUCTIONEER”
a. Goal? Getting BEST stock PRICE for holders
2. So as soon as Revlon realized they had to sell, they should have reaized their
duty shifted
v. Duty violated
1. Although price was still good, bidding had essentially stopped (on pantrys side)
when Revlon gave Forstman the lockup options….
2. Reasons for doing this?
a. NOT to get better price, but
b. b/c forstman said they would be kinder to Revlons creditors….
c. CREDITORS don’t matter though…stockholders should be BODS
#1 concern
b. 3. Managemtn interested…..wher mangemnet is one of competing bidders.pg 524
c. 4. Taking an action that might “put the company in play”
i. Where corporation takes action that might have the effect of making corp attractive to
bidders / vulnerable to hostile takeovers……..Eg…paramount comm. V.…………Corp merges w/ company….NOT the same
as a decision to sell (above)
HOSTILE TAKEOVERS OFFER BY CONTROLLING SHAREHOLDER, right to say NO
ii. Might be ok to accept a lower than normal offer here b/c this shareholder could
hypothetically block another offer
2. Board’s right to “just say No” -Paramount Communications Inc. v. Time, Inc….Refinign Revlon and Unocal
a. Revlon only applies if the board first makes that decision. Bids by third parties and shareholder preference make no
difference. Time.
b. The timeframe of any direct return on the stockholders' investment (immediate profit v. long-term profit) is within the board's
business judgment. Time
c. Business Judgment of the Board Within Reasonable Range:
i. The decision to commit the corporation to a control transaction or not is within the board's business judgment.
Time.
ii. The board's response to the threat of a low offer is not limited to offering information and/or a better alternative. It
can refuse to allow a tender offer to proceed (leaving the stockholders to replace the board if they disagree). Time.
iii. The board entitled to the business judgment rule in deciding between different permissible defensive tactics and
combinations of tactics. Time.
d. Facts
i. After paramount offer, time restructures merger w/ warner to be asset acquisition so shareholders don’t have chance
to approve, etc……b/c board feels warner merger is better…they can do this!
e. Injunciton denied
i. Denies 2 claims
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 1. Revlon claim
2. Unocal calim
f. Revlon argument
i. Time’s decision to acquire warner doesn’t trigger “level playing field” b/c these duties…only arise when
1. 1. corp initates active bidding process to sell itself
a. time was just looking to acquire Warner, even though Warner would be controlling at end, so this
is NOT an active bidding process/seeking to sell company type deal
b. also, doesn’t gie control to an individuall…not a sale of control (see QVC case below)
2. Or
3. 2. in response to bid offer, corp seeks alternatives to sell itself or break up company
g. No violation of Unocal principals…this is a DEFENSIVE move (restructuring the merger so stockholders can’t approve it
(asset buy) so they can merge w/ Warner as a defense to Paramounts attempt – b/c if they DON’t restructure, then the
stockholders might vote against Warner (they would be confused and interpret the high price from paramount as the way to
go- see substantive coercion below)) even the board has better long term vision than stockholders
i. First prong - danger to “corporate policy and effectiveness”
1. time had reason to believe that merging w/ paramount would be bad in long term
ii. second prong – “reasonableness?
1. Time restructured merger into an asset acquisition of warner b/c of the threatening offer from paramount
a. This is reasonable even though it creates debt
iii. So court will apply BJR
h. Significance of case
i. 1.Board can “just say no”
ii. 2. board is in better shape if it just carries forward with originally announced transaction than if it tries to enact new
measures
1. So court granted more deference b/c the Time-Warner deal was on the table before paramount made its offer
a. Court might not have found reasonable a high leveraged buyout of warners assets in response to
paramount’s offer if it wasn’t on deal before

HOSTILE TAKEOVERS SALE OF CONTROL

2. Triggering Revlon: The question is whether the transaction causes a fundamental change in the
corporate enterprise that both requires the directors to focus only on maximizing stockholder value and justifies higher scrutiny of
their decisions.
a. Change of Control: If an identifiable person or group takes control, the current board’s strategic
plans are effectively moot.
b. Break Up: A plan to break up the enterprise also moots business plans.
i. SALE of Control (as opposed to break up ) - Paramount Communications Inc. v. QVC…
i. What is difference between this and Time-Warner, where there was a merger but NOT a change of control
1. in time – warner, there was NO controlling shareholder
2. HERE, there is a controlling shareholder of Viacom…..Redstone…
3. Whereas paramount is PUBLICLY controlled….no controlling shareholder
a. So ALHTOUGH NOT A BREAKUP, this is a transfer of control from PUBLIC to PRIVATE
(individual) which triggers “enhanced scrutiny”
ii. Facts…..QVC suing paramount to enjoin defensive measures (and merger agreemtn) between paramount and viacom
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 iii. Rather than selling the “company” board can also make a decision to sell “control” to an invidiual or
group….paramount v. QVC
iv. Deal w/ Viacom……After unsuccessful attempt to merge w/ time, paramount decies to enact a defensive merger to
avoid a hostile takeover (by QVC)….a defensive merger w/ Viacom
v. Lock-ups and other protective measures
1. Viacom demands that paramount take measures to make it hard for paroumtn to abandon deal or sell to
someonese sels
a. No shop provisions……..Limits paramouns opportunity to sell or merge w/ other companmy
i. Can’t even respond two unsolicited offers UNLESS
1. 1) offer is not subject to financing continuence
2. 2) necessary to comply w/ fiducariy duties
b. Termination fee priviosn………Viacom gets a huge amount of $ if parmount backs out
c. Lock-up stock option
i. Allows Viacom right to purchase at fixed price 19.9% of paramount stock if any actions
triggering terminating fee occur…
ii. With 2 unusual features…
iii. No cash……….Viacom doesn’t have to pay cash for shares….can just get them on credit
iv. “put” right…..Instead of buying shares, can just make paramount pay the difference
between current market price and fixed value…no cap..open ended liability to paramount
d. Qvc bid…
i. Qvc comes in and offers more than 1 billion more than Viacom
ii. BOD ignores it based on little things (Even though deal w/ Viacom has some of these
same “little thing” problems)………b/c w/ Viacom …paramounts chairman remains in power, whereas he
would not w/ QVC (this is NOT proper purpose)
vi. Court strikes it down
1. “sale of control” also triggers “enhanced scrutiny” - - - - just like Revlon, trigger LEVEL PLAYING
FIELD…..b/c Paramount is not just going to avoid a QVC takeover…but are definitely considering breaking
up/transferring control/putting themselves “on market”
a. Not just when entire company up for sale, but also when control would pass from public to a single
individual or single entity
b. 1. Redstone
i. Paramount shareholders get non-voting Viacom stake – carappy
ii. Viacom has a controlling shareholder , Redstone,
1. Which means control goes out of publics hands into redstones hands
c. 2.Rational for triggering enhanced scrutiny
i. Transfers for control usually come with a price – “Control Premium”…compensates
minority for loss of voting power………HOWEVER, this would’nt happen w/ the Viacom deal…
minority gets screwd…so BOD’s duty is to prevent htem from getting screwed – their actions are
monitored here
2. Deal fails enhanced scrutiny
a. Procedural defects……..Ignores bad parts of Viacom deal…gave insufficient attention
b. Substantive defects………Result was “not reasonable”…….Even after paramount makes
original deal w/ Viacom, board still has power (b/c of QVCs offer) to change, but doesn’t….
vii. Friendly merger into non-controlled public company 529,,,,,,,,If target is merging with another company already
publicly held (as opposed to a controlled company (by an individual)), enhanced scrutiny not triggered…
viii. Significance of Paramount v. QVC
1. Whenver board proposes a transaction that will result in a “shift of control” from the public to a particular individual or
small entity, scrutiny is triggered
ix. Cognizable Threats
1. Substantive CoercionThe board can validly worry that allowing stockholders to make an uncoerced
decision might harm stockholders’ interests because they might be confused into deciding incorrectly. Time.
2. Opportunity Loss The board can validly grant rights to an early bidder that inhibit the board from
shopping the company. Revlon.
HOSTILE TAKEOVERS POISON PILL PLANS as a GENERAL RESPONSE MORAN
3. FormThe company issues to all of its shareholders “rights.” If anyone acquires more than __% of the company’s stock,
the “rights” are triggered and each shareholder except for the acquiror may buy many share for a nominal price. The
company reserves the right to cancel the “rights” for a nominal price any time before they are triggered.

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 a. Upshot: No one ever deliberately triggers a poison pill. In the real world, a proxy contest is waged to replace the
board and if you do that then the new board withdraws the pill and then person who acquires company goes
forward OR you can negotiate with the current board which is what the poison pill is intended to induce.
4. SubstanceImposes a prohibitive cost on a hostile tender offer.
5. LawUnder Moran poison pills are permitted by statute and equity, but Unocal governs both the decision to adopt one
and its actual use in the face of a proposed acquisition…..BOD has right to use poison bill even if not responding to
specific threat
a. Moran v. Household International.
i. BOD, worried generally about the “takeover climate of the times” enact a GENERAL anti-takeover provision
in the form of a poison pill
1. NOT a response to a specific threat
ii. What does court say about Board’s authority to do this?
1. §157 of DGCL….says BOD can issue securities….seemingly allows them to do this within poison pill
provision
a. What is P’s problem with this?
i. The underlying THRUST of §157 is that it is to be used to Raise
capital….financing……NOT for defensive purposes…
ii. The board shouldn’t be allowed to use it to prevent a tender offer to the shareholdesrs…
b. How does court respond?
i. There is nothing in §157 that says it can only be used for financing…
ii. AND
iii. Here we will apply Unocal standard….
1. BOD in this case is NOT using it to prevent tender offer
2. As long as they are using it to protect shareholders….and NOT keep
themselves in office, we will apply BJR
a. Application
b. What they have done so far is pretty mild….haven’t really entrenched
themselves……

• Unitrin Case - -- - CURRENT VERSION OF UNOCAL TEST.

o FACTS

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 
American General Corp tendered an offer for a controlling block of shares of Unitrin.

The Board of Directors of Unitrin, who held 23% of the shares, did not think the price offered was adequate and so
initiated a poison pill and offered a buyback to increase their holdings to 28% of the total shares.
 The trial court found that the offer represented a threat of "substantial coercion", and based on the Unocal v. Mesa
Petroleum test, the poison pill was reasonable but the repurchase was not reasonable . The issue before the Supreme
Court of Delaware was whether the repurchasing was a reasonable reaction to American General's threat.
o EVULATING UNDER UNOCAL……not under Revlon….
 REASONABLE THREAT?
• Board recognizes 2 bad things:
o 1. low price
 YES, a valid threat….
o 2. antitrust law violations….
 NOT A VALID threat….b/c not a real threat…they are not really responding to this threat
•
Under Unitrin, DE law recognized three categories of threats to corp policy and effectiveness for purposes of
Unocal’s first prong:…THESE Are ALL REASONABLE THREATS to which you can take action against
o 1) Opportunity loss = where a hostile offer might deprive target shareholders of the opportunity to
select a superior alternate offered by target management or another bidder;
o 2) Structural coercion = risk that disparate treatment of non-tendering shareholders might distort
holders’ tender decisions; AND
o 3) Substantive coercion = risk that shareholders will mistakenly accept an underpriced offer because
they disbelieve management’s representations of intrinsic value
 This would be the one the board was worried about
 REASONABLE RESPNOSE?
• Poison Pill and Share Repurchase
o Chancery court held that the pill was enough and the repurchase plan would prevent ALL attempts to
displace the board so it was not o (isn’t this preclusive?NO, see why below) k….but on REVIEW
o Courts holding

The Supreme Court found that the lower court erred in applying the Unocal standard.

Only "draconian" defensive measures that have the effect of
• precluding
o chancery court thought this would give the BOD an automatic veto over any offer….
 This court OVERTUNRS this….math was wrong..
o But what about the pill being enough? This was a relatively minor threat…why do you need
share repurchase too?
 Even if the pill is enough….bOD can use Business judgment to enact an additional plan b/c
IT IS still w/in range of reasonable responses…
 will be considered unreasonable conduct of the board.
• So the repurchase was neither preclusive or coercive, so it was ok….
o IMPROTANCE OF Unitrin….when I actually paid attention
 1st point
• When they take action that is ………Coercive……..Or………Preclusive…
• Then we don’t need to ask about proportionality….it is per se unreasonable…
 nd
2 point………Importance of elections…..
• Is it
o Mathematically impossible
o Or
o Realistically unattainable…
o For (BOD) to change in latest election
• This will lend credence to findings of above
6. Limits of Deal Protections i Friendly Mergers
a. Unitrin Version of Unocal: Board shows
i. Threat: Reasonable belief, after good faith investigation, that there was a threat to corporate policy or effectiveness.
ii. Not Draconian: Defense was not coercive (i.e. did not tend to force stockholders to accept the board’s alternative) and not
preclusive (i.e. did not effectively foreclose a proxy contest to remove the board)
iii. Proportionate: Board shows the defense was in the “range of reasonableness”
b. In Search of the Omnipresent Specter
i. Unitrin: Court cannot presume that major shareholders who sit on the board will vote their shares against their economic interests.
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Omnicare…………….NO FIDUCIARY OUT is PER SE invalid when later better bid emerges
o Dissent's Restatement of Omnicare Rule – this STATEMENT Is the narrowest possible statement of holding….precedent
in delaware…
 A merger agreement entered into after a market search, before any prospect of a topping bid has emerged, which locks up
stockholder approval and does not contain a "fiduciary out" provision, is per se invalid when a later significant topping
bid emerges. As we have noted, this bright-line, per se rule would apply regardless of (1) the circumstances leading up to
the agreement and (2) the fact
o Omnicare inc. v. NCS healthcare, Inc.
 Omnicare, shareholders of NCS, suing NCS to enjoin merger
 Facts…….Genissi originally makes bid for NCS……….Omnicare makes competing bid much better
• BOD recommends to take Omnicare bid, but has provisions in merger contract with Genesis saying
o 1. agreement between genesis and ncs MUST be put to a shareholder vote, regardless if the BOD
recommends it to the shareholders……..Permitted by 251©.
o 2. NO fiduciary out clause
 Usually there is a clause that says: If someone else comes along w/ a clearly superior offer,
you can take it………..Not present here
o 3. voting guarantees
 Major two share holders (also on board) agree to unconditionally vote all shares in favor of
Gensis merger
o 1,2,3 and three combine to make it so Genisis is guranteed to win the vote…
• Omnicare is challenging these three provisions
• Why doesn’t Revlon apply here?...
o These are two competing companies trying to take over each other and the board is favoring one of
them!!!
o b/c as in Revlon, there would be no change of control here…….so this will be reviewed under
BJR… but still will exam provisions under enhanced scrutiny
 Unocal Analysis
• 1. Valid threat?
o Yes, valid threat to NCS….Genisis said they wouldn’t bid / would withdraw final offer if NCS didn’t
accept the offer w/in 24 hours..
o b/c we weren’t sure fi there was anyting else at that point….they would lose the only viable deal for
their shareholders
• 2. Reasonable Response to threat posed…..2 step inquiry…
o 1st….is it…. Coercive or preclusive?
 Court findsd it coercive….b/c the deal is being forced down the shareholders throat..not a
REAL VOTE
• Even if they get a vote (it won’t be a real vote, b/c the majority shareholders arge
going to lock it up for Genisis..
 Court finds its preclusive..
• Can’t field any other offers b/c
• BUT THAT’S NOT ALL.///
 court goes onto say the entire contract is invalid b/c doesn’t have fiduciary out clause…
• Reasonable response would have been to allow a fiduciary out clause saying that if a
better deal came along, they could get out of Genesis and better their shareholder
alue….
• BOD is under affirmative duty to protect minority shareholders interest
o ….and b/c TWO majority shareholders are on BOD and have contractual
duty to vote FOR the transaction,. With no possibility of fiduciary out, the
contract PREVENTS THEM FROM satisfying their fiduciary duty:
 looking for a better option for the other minority
shareholders….
o 2nd…..ONLY if you find its not preclusive or coercive would you then seek to ask if the response
was “proportional” ….within “range of reasonableness”
 Don’t even get to this question b/c they found it both coercive and preclusive
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HOSTILE TAKEOVER VOTE INTERFERENCE
• Control of Board's Advantages in Elections
o General Rule: The board has the power and duty to organize elections.
o Purpose: Shareholders act collectively, requiring a "secretary of state" to disseminate information and
supervise the process (nominations, agenda, meeting and proxy mechanics, vote counting)
o Danger: Board's powers to control elections can also be used to influence results (and perpetuate itself in
office).
o Solution: Board's powers are exercised subject to fiduciary duties owed directly to the stockholders to use
them for the proper purpose (facilitating shareholder decision). Schnell.
• Judicial Control of the Board's Advantages in Elections
o Blasius and MM Companies problem: Discretion of board to block hostile takeovers under Unocal and
Moran is premised on the stockholders' ultimate power to replace the board. Attempts to insulate the
board against elections are highly suspect.
o Blasius and MM Companies rule:
 A stockholder can make out a case for breach of fiduciary duty by proving an improper motive - that
the board's primary purpose was to impede the effectiveness of a stockholder vote.
 Board can try to demonstrate a compelling purpose (no one ever has)
• Scnell v. Chirs Craft Industries
o Facts:
 Board changed bylaws to change the date of the annual shareholder meeting
 Schnell and other shareholdes suing board challenging the borad’s decision to change the shareholders annual meeitnd
date, alleging it was doen to keep control of the board.
 Why do they care about the date change?
• b/c they want time to talk with other people and engage in a proxy fight
 board could legally make this decision to change meeting date….211…..but MUST be a proper purpose
 Proper purpose?
• It is NOT a proper purpose to prevent shareholders from displacing the board making the decision
o by setting meeting earlier so as to avoid proxy fight
 Evaluating Board’s purported reasons..
• Better weather, etc…
o Court basically doesn’t buy these reasons…so view it as attempt to keep power…BAD, so ONCE P
satisfies burden of proving improper purpose, they win
• MM companies
o MM shareholders suing BOD to enjoin them from adding two directors to the board
 MM was attempting to take control by either expaninding BOD by adding 4 more directors or nominating 2 directors
o Unocal applies b/c action is defensive….so bod must prove
 1. VALID threat...
• Bod argues that their goal was to protect aginst a merger with Alliance..
• Specifically they were worried b/c MM was likely going to fill the two opening spots with their own people,
which would give them 2 out of 4, and then the other two board members might risign, giving them 2 3
 2. Proportioanl response?
• 2 step analysis?.........Preclusive or coercive?
o Is this action preclusive? Defintion: Make it practically impossible for shareholders (or anyone one) to displace the board
 So this action is NOT preclusive….b/c just means they have to wait a year to change it if they want
• Within range of “reasonable responses”?
o Look to BLASIUS test….

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 
1. If P can prove that the primary purpose (subjective intent) of a BOD action is to interfere
w/ “the effectiveness” of a shareholder vote ( shareholder franchise )(voting rights)
 2. Then BODs only affirmative defense is a “compelling justification”
• To date, no one has ever shown this…
• So Actually NO REAL DEFENSE…
• BLASISU ONLY applies with respect to franchise (voting rights)…..so then BOD would just have to show compelling justification
• APPLICATION TO THIS CASE…Action doesn’t have to prevent them from getting majority control to be illegitimate…
o Although MM might not have acquired a majority….the BODs action still interefered w/ “the effectiveness” of a vote….MM was
advancing towards getting more control…..

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