c

S


 

 

•


 
Restatement (Third) Agency 1.01

 


(1)c the manifestation of 6

 by one person ( a ³principal) to another (an ³agent´)
(2)c that the agent 6


6  and
(3)c 6 

6 6

£
(4)c and 

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6

 to the acts of the agent

I.c P 
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6

 

II.c "
6

  

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III.c "
6

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 when
proven by circumstantial evidence the principal must be shown to have consented to the agency since

6


 

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6


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6 

6 6





 
1) Both must consent to agency;
2) Agent must act on behalf of Principal; and
3) Principal must exercise control over Agent.
4) The agent consents to or assents to the control

• !

"

   Ú (1937) (pg. 1)

Mc ·oty loaned her car to Garst (football coach) to transport members of the team to the game. While driving
Garst had an accident and died£ and Gorton (player/passenger in car) was also injured in the accident.
Gorton¶s father sued ·oty (teacher and owner of the car)£ arguing that Garst was ·oty¶s agent while
transporting the team in ·oty¶s car because she had said£ ³·on¶t let any of the kids drive the car.´
½c ˜Ú Whether the relationship of principal and agent exists when a person undertakes to transact
some business or manage some affair for another by authority and on account of the latter?
½c ôÚP

  

6 





 

6 



  






66 
 

Xc ¯otes The court reasoned that she consented that Garst should act for her and on her behalf
is clear from her act in volunteering the car upon the express condition that only Garst
should drive it£ and that Garst consented to act for ·oty by his act of driving the car.
a.c xurthermore£ the car¶s ownership alone establishes a prima facie case
against the owner for the reason that the presumption arises that the driver is
the agent of the owner.

1
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b.c       

 !  "

# $  !
1.c †anifestation of Agent¶s intent to act
2.c On the principal¶s behalf
3.c Subject to the principal¶s control
4.c And the Principal manifests assent or otherwise consents to the act

%#& '()&!*Ú (pg. 7)

Mc •argill loaned millions of dollars to Warren and also£ eventually£ took over the day-to-day operations of
Warren.
½c $ Whether a creditor who assumes control of his debtor¶s business becomes liable as principal
for the acts of the debtor?
½c $A creditor who assumes control (de facto) of his debtor¶s business may be held liable as
principal for the acts of the debtor in connection with the business.

• #$% 

•

†
&$ &+ !, (pg. 14)

Mc (Implied Authority case) •hurch hired Bill to paint the building. In the past£ the •hurch had allowed Bill to
hire his brother Sam to assist. Bill hired his brother to help and Sam¶s ladder broke and he broke his leg.
Sam filed a Worker¶s •omp claim.
½c $, ·oes a person possess implied authority as an agent to hire another worker where such
implied authority is necessary to implement the agent¶s express authority?
½c $, A person possesses implied authority as an agent to hire another worker where such implied
authority is necessary to implement the agent¶s express authority.
Xc   Bill had the implied authority to hire Sam for several reasonsÚ
1) In the past£ the church had allowed Bill to hire Sam to assist in projects;
2) Bill needed assistance to do the job²the interior of the church simply could not
be painted by one person;
3) Sam believed Bill had the power to hire him£ as had been done in the past; and
4) The church treasurer had even paid Sam for the half hour of work he had done
prior to the accident.




 


  $ $   $ -. 

&

 
#&' (pg. 18)-An agent acts with actual authority when at the time of taking action that
has legal consequences for the principal£ the agent reasonably believes£ in accordance with the principal¶s
manifestations to the agent£ that the principal wishes the agent so to act.
&

 "!.-!  ²depends on the ³reasonable belief´ of the
Agent.

2
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%&

  $  ! // as a result of the principal¶s conduct
based onÚ 0 .$*$  $!


 
( ·o what is necessary to get the job done£ or 
#( To act in a way the agent believes the principal wants him to act based on agent¶s reasonable
interpretation of principal¶s objectives

Mc S "1.$$ 
Mc Both kinds of Actual Authority depend on communication between P and A£ however£ ³communication´ is
liberally construed.
Mc 0
)
 depends on solid communication. (" -)
Mc 0
)
 can result from things that are typical£ customary£ usual£ or proper²and can be based
on ³a wink and a nod.´
½c •ustoms vary depending on time and location. (./ .)

#&


 Ú 
#&'* (pg. 19) ± Is the power held by an agent or other actor to affect a principal¶s legal
relations with third parties when . // the actor has authority to act on behalf of the
principal and that belief is traceable to the principals manifestations.
Mc The authority the agent possesses on behalf of the principal upon a reasonable belief by a third party.
Mc 0 2 $- $.-.3 $
Mc . !/ * !/ -.. 4 /
  ...". $ 
 !!.
½c I.e.£ A police officer at your door£ wearing a uniform is ³Apparent Authority´ b/c the uniform is the
³Apparent£´ the people he represents are the Principal£ and the Police Officer is the Agent. This is
the ³Principal´ communicating (via the uniform) with the Third Party.

*&



 +
Ú(Allot of courts do not follow this rule) The power of an agent which is derived not
from authority£ apparent authority or estoppel£ but solely from the agency relation and exists for the protection of
persons harmed by or dealing with a servant or other agent.
Mc V $- $$. .


-4 (pg. 16)

Mc (Apparent Authority •ase) ·weck is the Principal and the Third Party. He is suing ¯asser for acting as the
Principal to the Agent£ Shibboleth. Shibboleth was not the attorney of record for ¯asser (it was kurt
Heymna)£ but by his words and actions he reasonably led ·weck¶s attorney£ Wachtel£ to believe that they
had an agreement.
½c $ Whether Shibboleth£ who was not the attorney of record for ¯asser£ had the authority£ as the
Agent of ¯asser£ to agree to the Settlement?
½c $
Xc S


 Ú Even though Shibboleth was not ¯asser¶s attorney of record
(Hymen was)£ ¯asser directed Shibboleth the settle the action and permitted him to speak
³in his name.´ †oreover£ he told Shibboleth that he would execute any agreements that
Shibboleth and Hymen presented to him. Given this behavior£ and the long-standing close
business relationship with ¯asser£ it was certainly reasonable for Shibboleth to assume he

3
 c

was authorized to settle the agreement².$ /.  //

!
Xc S



 Ú A principal (¯asser) is bound by an Agent¶s (Shibboleth¶s)
Apparent Authority which he knowingly permits the Agent to assume of which he holds the
agent out as possessing²$ /.  //
 - !  . ! !  
0/


!    "'pg. 23)

Mc (Apparent Authority •ase)Ú Kay¶s (a salesman) accepted on behalf of the company the right to sell memory
cores to Kay. There was reasonable belief by Kay that there was apparent authority. In light of the
communications and since nothing was said otherwise£ Joyce could expect reasonably expect Kay to speak
for the company.
½c $,Was Kay an agent and capable to execute the deal?Was it an offer or a solicitation?
½c $, $  !$ /.


Questions (pg. 26)Ú

1.c To protect itself the company could have used a form contract or communicate better to potential customers
that only certain people have authority.
2.c Joyce could have determined who had the ability to sign and who had authority to bind the company.
3.c ¯o the company had the ultimate responsibility

($#-4Ú pg. 26

Mc (Inherent Agency Power case) xenwick (bar owner) authorized Humble as a purchasing agent£ but only for
specific items not cigars. Humble exceeded this authority when he bought cigars.
½c ˜Ú Whether when one holds out another as an agent£ can that agent bind the principal on matters
related to such agency even if he was not authorized for that particular type of transaction?
½c ô YES. When one holds out another as an agent£ that agent can bind the principal on matters
normally related to that agency£ even if the agent was not authorized for a particular type of
transaction.
Xc The only recourse the principal would have is subrogation and go after the agent





 +
 is a term used in the restatement of this subject to indicate the power of an agent which is
derived not from authority£ apparent authority or estoppel£ nut solely from the agency relation and exists from the
protection of persons harmed by or dealing with a servant or other servants.

RatificationÚ ReS 4.01 (pg. 21)

Mc When the Principal acknowledges the authority of the agent
½c I.e.£ West •oast delivers the car to the principal who takes the keys and says£ ³Thank you.´ This is
ratification.
Xc There is always a Principal£ Agent£ and Third Party.
-c If P talks to A£ it is Actual Authority.
Xc If P talks to Third Party then it is Apparent Authority.
-c This gets more difficult when P uses A to talk to a Third Party.
Types of RatificationÚ

4
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Mc Expressed ± Agent says what they did£ action ratified

Mc Silence or Inaction
Mc Implied ± you imply by accepting benefits
Mc Initiating a Lawsuit

5.  !678

S  
 9 (pg. 31)

Mc (Ratification) ± This case is an appeal from the T• ruling about the sale of real property when only an
undivided half interest was owned. ¯o title search was requested from his attorney so one was not done.
The · never said he was acting as the agent for his wife ³†ary´. And the · refused to honor their lease
sale. Reversed T• holding and dismisses against †ary & remanded for new trial against Walter.
½c $, •an there be specific performance? ¯o. The P has the burden of proving agency. Just
because the wife let him handle some business does not make him her agent. There was no
ratification.
½c $,Agency must be proven on the fair preponderance of the evidence. †arital status cannot in
and of itself prove the agency relationship£ nor does the fact that they owned the property together.


 - this is ·ifferent from apparent authority£ in that the P did not take steps to protect the third party and the
third party experiences a detriment on relying on the P¶s apparent authority.
Mc  !!.*$.!- $.

The liability of a principal to third parties for the acts of an agent many be shown by proof disclosingÚ
1.c Express or real authority which has been definitely granted
2.c Implied authority£ this is£ to do all that is proper£ customarily incidental and reasonable appropriate
to the exercise of the authority granted
3.c And apparent authority£ such as where the principal by words£ conduct£ or other indicative
manifestations has ³held out´ the person to be his agent

+ .. : S  (pg. 3Õ)

Mc (Estoppel) ± Hoddeson wanted to buy furniture from ·. She got a gift from her mom and went shopping at
·¶s store and paid in cash but got no receipt. Some of the items were on back order. After waiting for
delivery£ the · could not confirm her payment. P could not identify the salesman and the one they thought
was him was on vacation at the time of sale. The purported salesman was a con artist. Reversed and
remanded for new trial.
½c $, ·oes the evidence that there was a purported salesman substantiate the existence of apparent
authority and liability by the principal? YES.
½c $,The proprietor has a duty to exercise reasonable care to protect a customer from a loss coming
out of the false appearance of apparent authority.



$% 
•



 ReS 2.04 ±An employer is subject to liability for torts committed by employees while acting
within the scope of their employment.

  ;
&$ (pg. 38)

Õ
 c

Mc P Appeals lower courts verdict... · presented himself as treasurer and mkt. director for a company that did
not exist (seafood). A dissolved company †arketing and ·esign was doing business as Boston seafood
exchange with · set up as the president. · never told P of the existence of †arketing ·esign which was in
not a viable entity. Reversed and remanded in favor of P.
½c $, ·oes the fact that an undisclosed principal relieve the agent of liability?
½c $,¯O. It is the duty of the agent if he wants to avoid personal liability to disclose not only that
he is acting in a representative capacity£ but also identify the principal.
Xc A lot of times when companies are doing business with a corp they required a personal
guarantee from the owner ± ³I the owner will be responsible if the debts can¶t be paid´

 ,


Mc When the agent reveals there is a principal£ but does not reveal the identity of the principal the agent
becomes liable.

• *$%  

ISSUE I¯ THESE •ASES IS WHETHER THE RELATIO¯SHIP IS ³PRI¯•IPAL-AGE¯T´ OR ³E†PLOYER-
I¯·EPE¯·E¯T •O¯TRA•TOR.´

Principal will be liable for torts of an agent committed within the scope

ReS 3rd 7.07

According to the RestatementÚ

Mc

-
.
 is one in which the servant has agreed to work and also to be subject
to the master¶s control.
½c ¯o control over how the work is done
Mc



£ on the other hand£ agrees to work£ but is not under the principal¶s
control insofar as the manner in which the job is accomplished.
½c In general£ liability will not be imputed on the principal for the tortuous conduct of an
independent contractor.
½c Under ³Apparent Agency£´ the mere appearance that a master-servant relationship exists
may subject the principal to liability.
½c The amount of •ontrol over how the work is done is how you determine if there is an
independent contractor

+$/.!& †Ú (pg. 43)

Mc Appeal that Affirmed the trial ct. A gas station owned by Humble and operated/contracted by Schneider had
a car on its lot that rolled away and hit †artin and his two children before any gas station employee touched
it. †artin sued both Love (owner of the car) and Humble Oil.
½c $, Whether a party may be liable for a contractor¶s torts if he exercises substantial control over
the contractor¶s operations?
½c $,V
 //   0 "$/   
  0  

6
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Xc  , A party is not normally liable for the torts of contractors£ but when that party so
substantially controls the manner of the contractor¶s operations£ the contractor relationship
breaks down and a master-servant relationship is formed.
Xc In this case£ Schneider was obligated to perform any duty Humble Oil imposed; Humble Oil
paid some of Schneider¶s operating expenses£ and also controlled the station¶s hours.
Evidence showed that Humble Oil mandated much of the day-to-day operations of the
station£ certainly enough to justify a master-servant relationship.

+ 
$&  (pg. 4Õ)

Mc Summary Judgment for ·. Similar fact pattern as above£ but there is less control of the Sun Oil •ompany
over the operator of the gas station (Barone). The franchisee maintained control of the inventory and
operations; therefore there was no †aster-Servant (Employee) relationship.
½c The test here is to determine whether the franchisor (Sun) retained the right to control the details of
the daily operations of the franchisee (Barone).
½c The court found that while Sun had some control£ Barone retained full control of his operations£
including what inventory to stock.
½c $The court did find a Principal-Agent relationship£ but did not find a master-servant
relationship $ $...  .   $!   
/    - ..&   

†$+ .*(p.48)

 -$ staying at a holiday slips and falls from moisture from an A• unit. Lady sues Holiday Inn. The
hotel is franchised by the Betsy-Len †otor Hotel •orp. The Agreement to franchise claimed the Holiday Inn was
not an agent. ·isclaimers may not be solid if acting in a way contrary to the disclaimer. •ourt looked and several
factors of control that holiday in may have had and the fact that holiday inn was not part of the day to day control as
seen in the maintenance which would have had the opportunity to keep this incident from happening. 


/
+ 

1.c Whole lot of control puts the franchisor at risk of liability.
2.c Less control£ less unified product£ less risk of liability.
3.c Standards to follow will probably not be enough to create liability to the franchisor.
4.c †ust be the ³! "  ´ mainly to the physical conduct. Employee acting within the scope of
employment

†† .0 (p. Õ4)

Mc xranchisee (and not †c·onald¶s) had the control of the instrumentality that caused the harm. 
Mc †c·onalds may have been seen to have this control as it was stemming from food handling which was one
of the points of control. 
Mc •ase was to review whether or not summary judgment was granted incorrectly and whether this should have
been a question for the Jury.
Mc  -•ustomer bit into sapphire eating big mac. 
Mc 
- ·id † rep to customers that the restaurant was acting as its agents? Apparent agent.
½c

 -due to the amount of control that † had over the franchisor.
½c


 -3rd party understood the operator of the †c·onalds was an agent of †c·onalds.
½c



 
-One who represents that another is his servant or other agent and thereby
causes a third person justifiably to rely upon the care of such apparent agent.

7
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½c


 -power perceived by a third party in a supposed agent where there third party
relies on the actions of the agent through his apparent authority.
&c 
 
%

 
0

%.
(

1
/+

2+

.
.



"
Mc    ! //..&  *
 /  -  -  ..&  
a.c But if there is more control you might have a †aster-Servant (Employee)
relationship; in this case liability for tort will flow to the Principal.
Mc 

Ú an Independent •ontractor is subjected to only a little bit of
control by the principal£ but if there is too minimal an amount of control then the
person in question is not even an agent.


S$1
* .
Ú (pg. Õ9)

Mc (Scope of Employment •ase) ·runken •oast guard returned to his ship while it was in dry-dock. Before he
went onboard he turned some wheels on the dry-dock£ which caused part of the floating dry-dock to sink£
causing damage.
Mc $ Whether conduct of an employee may be within the scope of employment even if the specific act does
not serve the employer¶s interests?
Mc $& .$  /-   .  
 0
½c Servants use of force is within the scope of employment if it expected by the master. Like a
bouncer or police officer.
½c Ê 231 of ReS. ± an act may be within the scope of employment although consciously criminal or
tortuous.
½c   This case is the high-water mark for Scope of Employment Issues£ where liability falls to a
Principal for anything an Employee does that is xoreseeable. This case changed the law; previously
liability was based on whether the Agent¶s actions were motivated by a purpose to serve the master;
the new law loosened the requirement to impose liability on the Principal if the conduct arose out of
and in the course of employment.
Xc This amounts to Strict Liability for employers as long as a connection of time and space can
be made with the employment

†! (p.64)

Mc Plaintiff complained that he as a spectator at a professional baseball game was injured by a ball thrown by a
pitcher£ sought in a battery court and in a negligence count to recover damages from the pitcher and his
employer. The district judge directed a verdict for the defendants on the battery count and a jury returned a
verdict for the defendants on the negligence count. The plaintiff appeals from the judgment on the battery
count.
Mc 
Ú ·id the district court correctly enter a directed verdict for defendants on the battery count?
Mc  Ú ¯O
Mc 
 Ú The jury could have reasonable inferred that Grimsley intended (1) to throw the ball in the
direction of the hecklers£ (2) to cause them imminent apprehension of being hit£ and (3) to respond to
conduct presently affecting his ability to warm up and£ if the opportunity came£ to play in the game.
½c ³Where a plaintiff seeks to recover damages from an employer for injuries resulting from an
employee¶s assault « what must be shown is that the employee¶s assault was in response to the
plaintiff¶s conduct which was presently interfering with the employee¶s ability to perform his duties
successfully.

8
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***Look to see if the desire of the employee was to serve the purpose of the employer.

!$ &   * (pg. 66)

Mc •lass-Action law suit was brought against •onoco stores£ where several AA and Hispanic patrons had been
subjected to racial discrimination while purchasing gas and other services. Incidents took place at two
different types of storesÚ 1) Independently-owned •onoco branded stores£ and 2) •onoco-owned stores
whose clerks were employees.
Mc $ Whether a plaintiff must demonstrate an agency relationship between the defendant and a third-party
to impose liability under civil rights legislation for the discriminatory actions of a third party?
Mc $$. !/-...  /$.
&!!  .   .
½c   The •onoco-branded stores in this case were independently owned£ but had a P†A
(Petroleum †arketing Agreement) which allowed them to market and sell •onoco brand gasoline
and supplies in their stores£ although •onoco did not control daily operations or personnel decisions.
P†A¶s stated each store was an independent business and not agents or partners£ so no agency
existed. However£ some of the stores in the •omplaint were not independently-owned£ but were still
owned and operated by •onoco. The employees of these stores were acting within the scope of their
employment b/c they were performing authorized duties for •onoco£ such as making sales and using
the intercoms.

†<   * & !& , (pg. 71)

Mc (Shows that sometimes a Principal can be held liable for the actions of an Independent •ontractor.) Plaintiff
sought compensation from defendants for damage to †ajestic¶s building and to Bohen¶s goods.
Mc $ Whether a person who engages a contractor£ who conducts independent business using its own
employees£ is liable for negligence of the contractor when the contractor performs inherently dangerous
work?
Mc $ / - 4     . . .! $
- 4'$9. $;$)
½c   Inherently dangerous work is work that must be done with special skill and care£ and which
involves grave risk to persons or property if done negligently.
½c Liability is absolute for work that is ³ultra-hazardous£´ but this work was not in that category.


+

%
%




•0  


%

(

1.c Landowner maintains control of the contractor actions.

2.c Where the Principal engages an incompetent Independent •ontractor
3.c Where the activity contracted is a Inherently dangerous activity(ultra hazardous / nuisance per se)

• 3
 , 

 (pg. 76)Ú The purpose of these is punishment and
deterrence. . !$'.! !)!. 





9
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.!! (pg. 76) (Loyalty)

Mc Reading was in the British military and while employed used his uniform to allow ride with trucks from one
end of •airo to the other to pass them through military inspection points.
Mc $ Whether an Agent who takes advantage of the agency to make a profit dishonestly is accountable to
the Principal for the wrongfully obtained proceeds?
Mc $ An Agent who takes advantage of the agency to make a profit dishonestly is accountable to the
Principal for the wrongfully obtained proceeds.
½c . !$'.! !)!. 
Xc   It does not matter if the Principal has ¯OT lost any profits nor suffered any damages£
nor does it matter that the Principal could not have done the act himself.
Xc ˜ 




6 
 
6 


6
6

 
    
˜ 
 

6

 
 

  


 66 


 


 -1& $+1+
*-/Ú (pg. 83)

Mc On appeal. ¯ewbery worked for a house-cleaning company£ which he left with other employees to start his
own company. He took the old company¶s list of clients to build up his own business.
Mc $#   $ .$ / !!  
   -$ 


•
#


!
" •ontrol is critical£ share in profits and losses£ all partners are liable to each other and owe each
other fiduciary duties£ partnership isn¶t taxed.


0


(-
1.c Share profits and losses
2.c •ontrol


% 
(main elements)-
1.c Representation
2.c Reliance

#-4  &  &   (PG. 87)Ú Partners •ompared with Employees

Mc xenwick hired •hesire as a cashier and receptionist for his beauty salon. She requested a raise and xenwick
agreed to give her a raise if the income of the shop warranted it. An agreement was drawn up by a local
attorney stating that •hesire and xenwich associated themselves as a ³partnership´ for the operation of the
shop; however£ •hesire made no capital investment£ had no control over management£ and was not liable for
any losses. It said she would get a year-end bonus of 20% if the business warranted it and that the
partnership could be terminated by either party upon 10 days¶ notice. The relationship was terminated and
the U•• sought to determine whether •hesire was an employee or partner for the purpose of assessing
liability under an unemployment compensation statute.

10
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½c $ Is a partnership an association of two or more persons to carry on as co-owners a business for
profit?
½c $    -       -/$
  
Xc  Although the agreement was termed ³Partnership£´ the essential element of co-
ownership was missing. The agreement was merely one in which xenwick agreed to share
profits with •hesire. •hesire got nothing from the agreement other than the possibility of a
bonus and she risked nothing from it. -.. /
  !


# "Ú
1.c The intent of the parties as evidenced through the language of any written agreements£
2.c the right to share in profits£
3.c the obligation to share in losses£
4.c •ontrol of property and management of the business£
Õ.c The rights of the parties on dissolution.
&c -!- 
.4 -!- 
$..! 

† Ú (pg. 92) Ú Partnership •ompared with Lenders

Mc A company£ K¯ and K£ were having financial troubles and Peyton loaned them $Õ00K. This money wasn¶t
enough and K¯ and K suggested that Peyton and his associates (Perkins and xreeman) should become
partners. They refused£ but drew up an agreement where they would loan $2.Õ million and would get 40% of
K¯ and K¶s future profits until the loan was repaid£ and an option to join K¯ and K£ if desired. Peyton and
his associates were designated ³Trustees´ and kept advised of important matters with K¯ and K. †artin (a
separate creditor of K¯ and K) filed suit against Peyton and his Associates£ claiming their investments made
them partners and therefore liable for K¯ and K¶s debts.
½c IssueÚ Whether the absence of an explicit partnership agreement precludes the creation of a
partnership?
½c RuleÚ¯o. The absence of a partnership agreement does not preclude the creation of a partnership.
Xc ¯otesÚ In the absence of an explicit partnership agreement£ in order to have a ³partnership´
the existence of an intention to form an association to carry on as co-owners a business for
profit must be proven. !.   -.. /
. $-  $-   $
 


$""/ S (pg. 97)Ú Partnership Versus •ontract

Mc An appeal of the ·• ruling that no partnership exits. & *! 

$. ..- The existence of a partnership must be determined based on the
totality of the circumstances test. There is an agreement between RIBA and SE† to host the shows at the
civic center. Southex bought SE† and wanted to renegotiate the deal for management of the shows. RIBA
expresses dissatisfaction with Southex¶s performance and entered into a contract with another management
company£ which is the reason for the suit.
½c They were trying to get access to the partnership assets.

11
 c

½c •ourt used the 6



for determining if the ·• was correct£ they determined that there was no
clear error in the ᥦs ruling.
½c $,P
6  


 


  6
6
6
!"#"$%$&'(&)'(*+
½c In this case there wasÚ
Xc Only slight control by RIBA£ most control was with SE†
Xc SE† bore the risk of loss solely
Xc ¯o corporate property
Xc The way they conducted business and were referred to did not say partnership

4
/





1.c Who was entitled to the profits?
2.c Who bore the risk of loss?
3.c Who had control?
4.c What was the duration of the relationship?

V $!%  (pg. 101)Ú Partnership by Estoppel

Mc On the basis of the unqualified audit letter from the Bahamian PW•£ the P¶s deposited cash in the S.•. bank.
The financial statement was falsified. PW•-US and PW•-Bahamas deny operating as a partnership. P
seeks partnership by estoppel based on the marketing literature of PW•. However£ there is no evidence that
the deposits were made because of the marketing material£ and that the US subsidiary had anything to do
with the audit letter.
½c Partnership in fact ± mutual consent
Xc ¯o mutual consent in this case
½c $Ú Two things you have to show for partnership by estoppel (UPA 1914 Ê16)
Xc Representation
Xc Reliance
Mc 
Ú •ertified Public Accounts ± most import role they play is auditing financial
statements
½c †ake sure info is accurate
½c Presented in accordance with accounting standards
½c After everything is correct they issue an ³audit opinion´
Mc So they are saying PWH-US didn¶t do the audit letter and there is no connection

• *

 

$
  (pg. 132)

Mc P owned a stake in the gin company and wanted to sell it to get out from under the debt. If the P would pay a
little cash the · would assume the personal liable. xor all of the debts. P gave the property over by way of a
quit claim deed£ and the · took over and fired the old bookkeeper. The old bookkeeper was embezzling.
The banks were sued that honored the checks and P was suing for her (Õ0% = 34£000) stake in those funds
before she sold her ownership interest out. P then died. Since she had a partnership interest and conveyed it£
she was not entitled to any part of the bank refund since she sold her interest.

12
 c

½c $, .*  !/ 

!/4$. 
½c !$/- .===
Xc Uniform Partnership Act£ her partnership property rights consisted of her
Mc Right in specific partnership property
Mc Interest in the partnership
Mc Right to participate in management
Xc Uniform Partnership Act 1997 sec Õ02 ± only transferable


• 5
 
6



 S$& 
 $. (pg 140)
Mc Stroud and xreeman entered a ! to sell groceries. Both had equal rights to manage the
business. Stroud told the bread company he would not be liable for any more bread orders£ but xreeman
requested more bread from the company. On the day of the last delivery£ Stroud and xreeman dissolved their
partnership. The assets were liquidated and most of the money went to Stroud to pay liabilities. The bread
company eventually sued Stroud to recover the cost of the bread that had been requested by xreeman when
the partnership still existed. Stroud argued that his notice to the bread company that he would not be liable
for any more deliveries relieved him of any obligation to pay.
½c $ Whether a partner may escape liability for debts incurred by a co-partner merely by advising
the creditor£ in advance£ that he will not be responsible for those debts?
½c $ &P6  


  


   


 

6  





6 , 


"66

 "#" 






  


 ± Unless they have no authority and the person they are dealing with
knows they have no authority
Xc   If a †ajority of partners disapprove of the transaction before it was entered into£ then
they may escape liability.
Xc But in this case xreeman and Stroud were equal partners£ so neither had a veto power.
Xc All acts performed within the scope of the business are binding on both partners£  even
an act outside the scope of the business may bind a co-partner if ratified by that partner.
Xc Partner is an agent of the partnership and is authorized to conduct business on behalf of the
partnership
Xc Uniform Partnership Act 1914
Mc Section 9(1)

   +

 



1.c Authority to purchase up to a certain limit
2.c Indemnification
3.c In the agreement define who does what
4.c for either a LP£ LL• etc (formalities)
Õ.c buy out formula
6.c Events that can cause dissolution
7.c Rules for transition out
8.c How to bring in new partners

13
 c

$  (pg .143)

Mc P entered into a partnership with · to run a trash collection business. The agreement stated that when one is
unable to work he hires a replacement at his own expense. P eventually decided to hire the worker full time
but the · would not pay for any of the expense. Eventually this lack of payment resulted in the lawsuit
which P only got parties relief on and appealed.
Mc ³†anifestly Unjust´
Mc Uniform Partnership ActÚ sec.18
½c $Ú By his behavior the non-consenting partner ratified the act of hiring the third person as he
took profits earned by him
½c $ÚP-6

 6 6



  
.
 





   



.1 $, (pg. 144)

Mc ·ay was a senior partner in a law firm and got a percentage of the firm¶s profits; he was also privileged to
vote on certain matters£ as written in his partnership agreement£ but he was not a member of the firm¶s
executive committee which managed daily operations. When the exec committee began talking about a
merger all the partners agreed to it£ including ·ay. ·ay chose not to attend any of the other meetings that
took place concerning the merger. ·ay resigned 3 months after the merger£ claiming changes after the
merger had made working there intolerable. †ainly he did not like the fact his status of the Washington
office was removed and this is why he claimed fraud and breach of fiduciary duty. The court said he could
not substantiate those claims.
½c $ ·o partners have a fiduciary duty to make a full and fair disclosure to other partners of all
info that may be valuable to the partnership?
½c $7
&#


 6
  6 
  
 




   


 
Xc   !8£  court has recognized a fiduciary duty to disclose the kind of
information handled by the executive committee involving the merger£ the concealment of
which does not produce any profit for the offending partners.


• #
 ,



†.
 Ú (pg. 10Õ) (·isclosure is the lynchpin to the duty of loyalty.)

Mc Salmon entered a joint venture with †einhard to lease a hotel in ¯Y for 20 years. †einhard provided most
of the money and Salmon managed the property£ and both partners were responsible for any losses. As the
old lease nears its end£ the owner approached Salmon with an offer for a new lease. The new lease was for
20 years with a possibility to expand to 80. The new lease was signed between the owner and Salmon¶s
realty company. Salmon did not tell †einhard of the negotiation of the new lease until the deal had been
completed and therefore deprived him of an opportunity to take advantage of wit; †einhard sued£ and it is
now on appeal and †einhard won. He was due 49% and the · Õ1%.
½c $ Whether joint adventurers owe to one another the highest fiduciary duty of loyalty while the
enterprise is ongoing?
½c $7
&%  .$ -   !.$.$  -
 ! !'  >?>6@676)
Xc 
 Salmon kept to himself£ in secrecy and silence£ an opportunity that should have
belonged to the joint venture.

14
 c

Xc The new lease was an enlargement of the old lease; Salmon¶s conduct excluded †einhard
from any chance to compete or enjoy the opportunity that had come to Salmon by virtue of
the venture entered into by BOTH Salmon and †einhard.
½c How do we define ³partnership opportunity?´
Xc

./.&$•
Supplement Õ-11

Mc

.& 
 (pg. 117+

Mc (•ase is probably wrong²lawyers can leave a partnership with their clients£ but probably not given the facts
in this case.) †eehan and Boyle were partners in a law firm and decided to terminate their relationship with
their law firm and start their own firm. Rumors circulated they were leaving as early as July£ and they
weren¶t planning to leave until ·ecember. They denied leaving on several occasions£ but admitted their
plans in ¯ovember. Law firm asked Boyle to I· which cases he wanted to take with him. Boyle didn¶t
respond for two weeks£ during which time he already got permission from his clients to take their cases with
him. After leaving the firm£ †eehan and Boyle commenced an action to receive amounts they claimed were
owed them under the partnership agreement. The law firm counter-claimed that †eehan and Boyle had
violated their fiduciary duty to the firm£ breached the partnership agreement£ and tortuously interfered with
their advantageous business and contractual relationships by engaging in improper conduct in withdrawing
cases£ clients£ and law firm personnel. ·• found for P¶s and on appeal it was reversed in favor of ·¶s.
½c $ ·oes a partner have an obligation to render on demand true and full information of all things
affecting the partnership to any partner?
½c $7
&" 



 
 


 


 
 6




  
 



Xc   Although fiduciaries may plan to compete£ they may not otherwise violate their
fiduciary duties.
Xc †eehan and Boyle did nothing wrong in preparing to leave£ except they did breach their
fiduciary duties by unfairly acquiring the consent from clients to remove cases from the law
firm£ while they were asked by other partners Is it true you are leaving? †eehan should
have acknowledged they were leaving. -/

-:!!1 (pg. 12Õ)

Mc ·• found for · and P appeals. Lawlis (P) worked with a firm (·) until he became partner. He developed an
alcohol problem and sought treatment£ then told the firm. The firm drafted a ³program outline´ which
outlined the conditions he would need to meet in order to continue his relationship with the partnership. It
said no second chance and he signed. He fell off the wagon and the firm gave him a second chance. The
firm put in place an addendum where the partners can vote to lower partnership units. His kept getting
lowered£ and since he had not been drinking he wanted them increased. The firm decided to oust him with a
vote even though he had not had a drink in approx. 2.Õ yrs. He tried to say he got rid of him against the
fiduciary duties£ but the appeals court affirmed

1Õ
 c

• 9
,

,0

:
0;3(<#;(Ú the dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the
business. On dissolution the partnership is not terminated£ but continues until the winding up of partnership affairs is
completed.

-& , (pg. 1Õ0)

Mc This case is about selling the assets to settle the partnerships affairs. P&· had a partnership to operate a
bowling alley. They started to have issues with each other. The court took control and it was decided that
the · had done acts inconsistent with it and that it needed to be dissolved. The · argued that the problems
were not big enough to dissolve the partnership and that the loan could not be paid back since it was
supposed to be paid out of profits. The court denied both arguments.This was a partnership for an implied
term.
½c $, $$.$.  5A'>)'.)--$ . !!
 -. ... $ 
Xc The legal effect of a dissolution is that the partnership does not legally exist

& -, (pg. 1Õ3)

Mc Appellants who own Õ0% of the L-• •afeteria sought receivership of the business and dissolution of the
partnership and foreclosure of a mortgage on the appellees partnership interest. The appellees sought breach
of contract. At the Trial the trial court denied the relief sought by the appellants. Both leased a downstairs
part for opening a cafeteria for 30 yrs. Entered into a partnership agreement which is not complete and is
only ascertainable based on the oral agreements. Lewis had an agreement to pay •ollins and •ollins assured
him the bank note secured in his name would stay open. •ollins tries to claim default by Lewis on not
paying the bank note£ but the agreement to pay •ollins is the only thing that matters here£ not the ability to
pay the bank£ which Lewis did.
½c $,V $0<$.  /$ $$ /4 $
 . .
Xc The jury could find that the partner did meet his end of the bargain.

!! (pg. 1Õ8)

Mc On appeal P wins a reversal. Partners (brothers) are in an oral partnership agreement to operate a linen
business. The partnership¶s biggest creditor is a corp. owned by the P. The Partnership operated for a loss
but was improving£ however the P wanted to terminate the partnership. There was no understanding as to the
duration or term of the partnership£ and the · could not provide facts to support that it was. This is a
partnership at will.
½c $, - / $. B -$! .
. 9   $.4 /



 (pg. 161)

Mc An appeal where 2 of 3 partners at will (P¶s) running a shopping center are seeking dissolution of the
partnership. They claim that the one partner did not provide his proportionate share of the operating losses.

16
 c

· says he was wrongly excluded from the partnership. The T• says there is partnership at will and a
receiver would sell the shopping center. The · did not want the P¶s to be able to bid on it. They did and
won£ and the · appeals. The appeals •t. affirms and says the · was withheld from management£ but there
was no indication that it was done with the wrongful purpose of obtaining the partnership assets. The · had
the same right s to bid on the sale
½c $Ú  $!/..!  


& C & , (pg. 164)

Mc ·ale and PS• had the patent for concrete paving machines. ·ale and PS• formed a partnership with
†eersman and Vasso£ in order to manufacture and sell paving machines. The partnership was to be
permanent and not to dissolve w/out mutual assent. ·ale and PS• began dissolving the partnership w/out
†eersman/Vasso¶s assent. When †eersman heard this he moved into an office at PS• and physically
ousted ·ale£ and assumed daily operations of PS•. PS• then filed suit for a court-ordered dissolution of the
partnership£ return of its patent£ and an accounting.
½c $ Whether£ when a wrongful dissolution occurs£ partners who have not wrongfully caused the
dissolution have the right to continue the business in the same name and to receive damages for
breach of the agreement?
½c $V*-- !$. $  $*-  - !$$.
. $ !  $/$. .! 
/ !
Xc   Wrongful termination invokes the provisions of the UPA. If a partner£ after a
wrongful termination£ elects to continue the business£ he has the right to possess the
ownership property£ but must compensate the withdrawing partner£ minus any damages
caused by the wrongful withdrawal.
Xc However in this case it was a permanent partnership which did not allow for details of the
dissolution£ in the event of one or a buy-out clause. †   
!-  $!

: 4.Ú (pg. 170)

Mc Kovacik asked Reed to be his superintendant on several remodeling jobs. Kovacik said he had $10k to
invest and that if Reed would superintend and estimate the jobs£ he would share the jobs with him Õ0/Õ0.
They did not discuss losses. The oral joint venture lost money and Kovacik demanded Reed contribute;
when Reed refused he filed suit.
½c $Whether£ in a joint venture where one party contributes money and the other labor£ is either
liable to the other for contribution for any losses sustained?
½c $ . < $-  /$$.. / *
/    /$   $.
Xc  !$ is that in the absence of an agreement to the contrary the law
presumes partners and joint ventures intended to participate equally in profits and losses of
the common enterprise£ each sharing possible losses in the same proportion as he would in
the profits.
Mc +(C£ this presumption applies only in cases in which each party had
contributed capital or was to receive compensation paid to them before computation
of the losses or profits.
Mc The rationale is that in the event of a loss£ each party would lose his investment£ one
money and the other labor.

17
 c

S % -
 


 (pg. 173) these are agreements that allow a partner to end his relationship with the
other partners and receive a cash payment or series of payments or some assets from the firm in return for his interest
in the firm.


  ++/%
Mc Trigger events
Mc Obligation to buy versus option
Mc Price
Mc †ethod of payment

1
S(pg. 174)

Mc On appeal. Limited Partnership that owned a condo complex. This suit is related to the misconduct and
death of a general partner (¯ordale). There are 2 issuesÚ 1. whether the surviving general partner is entitled
to continue the partnership after the other partner¶s death? 2. How the value of the dead partners interest is
to be computed. P is a limited partnership. The dead partner was a coke head and disruptive. The p filed
suit to dissolve the partnership£ and while pending the general partner died and the P wanted to continue the
partnership and assume the dead partners interest. Appellant says the filling of the complaint is dissolution
and want liquidation for more proceeds to the estate. Appellees say the filing of the complaint did not
dissolve£ but gave the court the power to dissolve. They next argued over the buyout agreement on the
capital account (and what exactly that was) and how it should be valued x†V or cost. It was determined
cost.


=$



+ 9(p. 179)

Mc ·efendants were partners raising crops on farmland in Sand ·iego. The business named de Escamilla as a
general partner and the other two defendants£ James Russell and H.W. Andrews£ were listed as limited
partners. However£ when decisions were made regarding what to plant£ the limited partners chose the crops.
The limited partners were able to draw on the business accounts while de Escamilla was required to get one
of their signatures on any checks on the accounts. The limited partners checked in on the business twice a
week. The business went bankrupt£ and Plaintiff was appointed as trustee.
½c $,The issue is whether Russell and Andrews should be held liable as general partners in the
bankrupt business.
½c $,A limited partner will be held liable as a general partner if the limited partner acts to take part
in the control of the business

S 
± The Liability of limited partners; when do they cross the line and become general partners?



18
 c

&+ 5D+  #+& 

•
%
•
Mc Legal ³person´
½c xor all purposes is separate ± can sue£ be sued£ separate tax payer
Mc Limited Liability
½c Allows all share holders protection from liability
Mc Separation of Ownership and •ontrol
½c Shareholders
Xc Have the ownership of the corporation
½c Board of ·irectors
Xc Have the control of the corporation ± elected by shareholders
½c Officers/†anagement
Xc Appointed by Board of ·irectors ± serve at the will of the board
Mc Liquidity
½c The share of a •orporation are liquid£ they are transferable.
Mc xlexible •apital Structure through issuance of securities
Mc Bonds
½c ·ebt ± loan money to the corporation
Mc Stocks
½c Equity ± investments in the corporation
½c •ommon Stock
Xc Has no preferences
½c Prefered Stock
Xc Stock that has some preference; ex. preference on dividend rights£ liquidation£ voting rights
Mc Some relevant TermsÚ
½c Authorized Shares
Xc The number of shares authorized by corporations charters
½c Outstanding Shares
Xc Sold shares
½c Authorized but Uninssued Shares
Xc Authorized but not sold
 
•
Mc Where do we incorporate?
½c ·elaware because they have very friendly corporation laws
Xc 9Õ% of public companies are incorporated here
½c Wouldn¶t incorporate in ·elaware ± if you¶re a local company and would only operate in one state it
might not make sense 
Mc Articles of Incorporation
½c This is how one incorporates
Mc ·raft •orporate By-Laws
Mc Organizational †eeting
½c ¯ame ·irectors
½c Adopt By-Laws
½c Appoint Officers
½c Authorize Sale of stock to Initial Shareholders and Issue Stock

19
 c

$
$% Ú (Question in these cases is£ ³The company is out of money£ so who can we sue?´)

(4 4& , (pg. 189) (Enterprise liability case)

Mc Walkovsky was run down by a taxi owned by Seon •ab •orp. In his complaint£ Walkovsky alleged Seon
was one of ten cab corps of which •arlton was a shareholder£ and each company had only two cabs
registered in its name. •omplaint said each company carried only the minimum auto liability insurance of
$10k required by state law. It also alleged these corps were operated by a single entity. Walkovsky claimed
this structure was an ³unlawful attempt to defraud members of the general public.´
½c $ Whether Walkovsky¶s complaint stated a sufficient cause of action to recover against each
cab company.
½c $ -.     /$ /B -*!
//$.& $-.!.   '0& C2) $.
E$
Xc   In this case£ the corporate form may not be ³pierced´ simply because the assets of the
corporation£ together with liability insurance£ are insufficient to assure recovery. The
company had the min amount of required insurance; if the amount is insufficient the remedy
lies with the legislature£ not the courts.
Xc It is very important to note that the Seon •orps saved themselves by following formalities
and kept good records. - .  !! $.*  $.
 /.



%
$
,
0

(./


1)c 

$% ²this is a horizontal ³pierce´ of the corporate veil£ where you go after other
corporations with the same owners
2)c 


0

 (>•ab is an agent of •arlton
3)c ,

• 00
 
•8
)²means ignoring the corporate rules of limitation
on liability)²this is vertical

 .
*
$Ú (pg. 194)

Mc Sea-Land shipped peppers for Pepper Sauce£ but then could not collect b/c Pepper Sauce (PS) had dissolved.
PS also had no assets; unable to recover£ Sea-Land filed another suit seeking to pierce the veil and hold
†erchese£ sole shareholder of PS and other corps£ personally liable.
Mc $ Whether the corp veil will be pierced where there is unity of interest and ownership between the
corporation and an individual and where adherence to the fiction of a separate corp existence would
sanction a fraud or promote injustice?
Mc $V£  -/.-$ . -/- 
...$.-.    "- $. 
$.   <$
½c   •orp formalities had not been maintained and funds and assets had been commingled
with abandon²different corp assets were moved and borrowed w/out regard for their source
(xirst prong of the test satisfied). But on remand the court said SL had to show the kind of
injustice necessary to evoke the court¶s power to prevent injustice²b/c an unsatisfied judgment
by itself is not enough to show that injustice would be promoted.




20
 c

**
 
8
# 

1.c Unity of interestÚ When there is an entity such that the separate personalities of the corporation and
the individual no longer exist£ and
2.c acknowledgement of the separate corps would sanction fraud or promote injustice
c  /E$. 


.


 ± This is when a P tries to pierce the corporate veil of one of ·¶s corporations to get to the
assets of another one of their corporations.

**





 
.


1)c xailure to maintain adequate corporate records
2)c •ommingling of funds or assets
3)c Undercapitalization
4)c One corp treating the assets of another as its own
Mc To avoid veil piercing owners of corporation should abide by the formalities£
meaning to have meetings and votes and separate bank accounts£ etc.

& /  
# 
.Ú (pg. 200) (Attempt to claim a subsidiary is liable for another
subsidiary)

Mc While in Switzerland£ Sheffield entered an agreement to buy a St. Bernard dog£ on installment payments£
from a Roman •atholic monastery. The monastery breached and Sheffield sued The Archbishop of S.x.£
The Pope£ The Vatican£ the •atholic order in question£ and xather •retton£ with whom he had made the
agreement. •omplaint alleged there was a ³unity of interests´ and ownership between all of the defendants£
also that the Archbishop and others are a ³mere conduit´ for the Pope and Vatican£ and that all the
·efendants were ³alter egos´ of each other.
½c $ (1) Whether where a parent corporation controls several subsidiaries£ the corporate veil of one
subsidiary may be pierced to satisfy the liability of another; and (2) Whether the ³Alter Ego´ theory
may be applied where the unsatisfied creditor-plaintiff will merely not be able to collect if the
corporate veil is not pierced?
½c $Ú (1)  (     $/.*    
$/. /. /   (2)  0 ! 2 
 /.-$..  - //  
   .
Xc   (1) The Archbishop of S.x. may be an ³Alter Ego´ of the Pope£ but the Archbishop is
not an ³Alter Ego´ of another subsidiary of the Pope (the Swiss monastery). The Arch of
S.x. had no dealings with the Swiss monastery£ thus negating any possibility that the Arch so
controlled and dominated the Swiss so as to be liable for it under the ³Alter Ego´ doctrine.
  .
$ /-$/!
Xc (2) A requirement to pierce the corp veil is that failure to pierce would lead to an inequitable
result. It is not sufficient to say that Sheffield should collect from the Arch of S.x. just
because to sue in Switzerland or Italy would be prohibitive.

!  When a corporation uses another corporation to its advantage; when a corporation is determined to be
using another as an ³alter ego£´ the courts may use it as grounds to find ³Enterprise Liability´ or ³Respondent
Superior´ for the purpose of ³Piercing the •orporate Veil.´

21
 c


 S .$/! Ú (pg. 204) (Piercing is allowed w/out fraud in tort
cases to satisfy justice£ and to satisfy a judgment.)

Mc Plaintiffs from many states claimed they had been injured by breast implants produced by †E•£ which was a
subsidiary owned by Bristol-†eyers. P¶s wanted to pierce the veil£ even though Bristol had not
manufactured the product.
½c $ Whether£ in a corporate control claim seeking to pierce the veil£ may veil-piercing ever be
resolved by summary judgment?
½c $V*$<$.!  ! $./ .. $.
. /$ $
Xc   Summary judgment was denied here b/c a jury could find that †E• was the alter-ego
of Bristol. When a corp is the alter ego of another£ the corp structure may be denied in the
interest of justice.
Mc  -! $.*<$* E$&  /E$.
 
Mc  * !  -.- $! <$.!





 





.


1)c Parent and subsidiary have common directors or officers

2)c They have common business departments
3)c They file consolidated financial statements and tax returns
4)c The Parent finances the Subsidiary
Õ)c The Parent causes the incorporation of the Subsidiary
6)c The Subsidiary operates with grossly inadequate capital
7)c Parent pays salaries and expenses of subsidiary
8)c Subsidiary only receives business brought to it by Parent
9)c Parent uses the Sub¶s property as its own
10)cThe daily operations of the two corps are not kept separate
11)cSub does not observe the basic corp formalities£ such as keeping separate books and records and holding
shareholder and board meetings

• 3

?

•



†!& S - (pg. 264)

Mc •orporation wanted to give $1£Õ00 to Princeton University£ but the shareholders sued. The shareholders
argued the law did not apply to them b/c they had been incorporated before the laws were enacted.
Shareholders argued the corp¶s charter (1) did not expressly authorize the power to give to charities£ and (2)
the ¯ew Jersey statute legalizing charitable giving by corps did not apply b/c the corp was in existence
before the ¯J statute was passed.
½c $ Whether state legislation adopted in the public interest can be constitutionally implied to
preexisting corporations under the reserved powers?
½c $ Yes£ state legislation adopted in the public interest can be constitutionally applied to the
preexisting corporations under the reserved powers.

22
 c

Xc   Õ0 years prior to the incorporation of A.P. Smith£ the ¯J Legislature provided that
every corp charter would be subject to the discretion of the legislature (³Reserved Power´).
Mc ¯J courts repeatedly showed decided that where justified by the advancement of
Public Interest£ the reserved power may be invoked to sustain later charter
alterations even thought the affect contractual rights between the corporation and its
stockholders.
Mc The court was clearly swayed by the philanthropic concerns and devoted much of
the opinion to discussing the economic and social importance of corp contributions£
especially to universities.

 .!# .†  &  (pg. 270)

Mc In 1916£ despite profits of almost $174 million£ xord announced no future dividend would be paid. The
·odge brothers offered to sell their $3Õ million in shares to xord£ who rejected the offer. The ·odge¶s filed
suit attacking the dividend policy and xord¶s plan to expand manufacturing.
½c $ Whether the primary purpose of a corporation is to provide profits for shareholders?
½c $ Yes£  0$   .   .
Xc   -  0.  / .  .  
 .
Xc The real reason for this ruling was that the court realized xord was motivated not just by a
desire to expand xord¶s manufacturing£ but also by a desire to avoid funding the ·odge¶s
venture (is this fraud£ illegality£ or conflict of interest£ as discussed in the next case?)

4(! (pg. 27Õ)

Mc Shlensky (minority shareholder) sued Wrigley b/c they refused to put lights on Wrigley field£ which would
have allowed for night games and increased revenues.
½c $ Whether a shareholder¶s derivative suit (suit by a third party on behalf of the corporation) can
be based on conduct by the directors that does not border on fraud£ illegality£ or conflict of interest?
½c $  .0.$ //.  .$/. -/ .
$.*!*   
Xc   Shlensky was trying to force a business judgment on the Board of directors of the
•ubs£ but there was no showing of @
 @

.
Xc There were valid reasons for not wanting night games on the part of Wrigley£
notwithstanding his personal feelings about the game; Wrigley believed lights would have a
detrimental effect on the neighborhood.
Xc There was also no showing that night games would significantly increase revenues.


•

Mc Sources of power for a corp areÚ

½c Anything a corp says it can do
½c Anything state law allows
Mc What can shareholders do?
½c Vote on the Board of ·irectors
½c Vote to dissolve the •orp
½c Vote on mergers and acquisitions (decide to buy other corps)
½c Vote on whether to be acquired b another corp
½c Vote on decisions that are big and rare

23
 c

Mc What do shareholders get for their money?

½c •ontrol (as listed above)
½c The ability to make more money²get percentage of ownership
Xc OwnershipÚ ability to make cap gains when they sell stock
Mc What does the Board do?
½c Appoint Officers
½c ·ecide to issue dividends
½c ·ecide other rare£ big£ important decisions
½c Appoint •ommittees²Specialists
Xc Accounting •ommittee to conduct audits in accord w/ xed law
Xc •ompensation •ommittee
Xc ¯ominating •ommittee
Mc OfficersÚ
½c •hosen by the board
½c Employees of the •orp£ which makes them all agents of the •orp
½c xiduciary duty to shareholders and •orp

24
 c

•
5
,

@,
@



S
A 

Ú ·octrine relieving corporate directors and/or officers from liability for decisions
honestly made in the corp¶s best interests. There must be allegation of fraud£ illegality£ or conflict of interest
to bring a •ause of Action



SA

1)c Wide berth to make decisions

2)c •ourts are incompetent? ¯o£ this is not true; courts rule on complicated things all the time
3)c We don¶t want shareholders second-guessing the business decisions of Officers
4)c Prompts risk-taking b/c there is little fear of retaliatory litigation
a.c BJR promotes a lot of successes and also ends in a lot of failures

# 
+
% 



1

SA
&c , •

a.c How?
i.c Gather material information reasonably avail. and deliberate
#&c , $  
a.c How?
&c Avoid conflicts of interest (self dealing) fraud£ illegality£ bad faith


 ·irectors have carte blanche authority to make dumb mistakes£ but can¶t act selfishly or with
grossly negligence or egregious conduct.


  .


(c ·istribute a dividend
#(c Grow the Business
*(c Repurchase the •ompanies Stock
3(c Sell the •ompany




&• 
, •


: "&  (pg. 310)

Mc Am Ex acquired almost 2 million shares of common stock of ·LJ at a cost of almost $30 million; it was later
worth only $4 million. Am Ex made a decision to declare a special dividend and distribute a dividend ³in
kind´ (meaning not of cash) by giving away the $4 million of ·LJ stock£ but Kamin charged this decision
was negligent b/c it negated a possible tax savings of $8 million. Kamin sought£ in derivative action£ a
declaration that the dividend was a waste of corp assets and sought damages.
½c : Whether the courts should interfere with a board of directors¶ good faith business judgment
as to whether or not to declare a dividend or make a distribution?
½c :$ ¯O. (  ...-/."$ /$<$.!
 / .& $-  !. .! .
- $. /$.*!*   

2Õ
 c

Xc  The Business Judgment Rule applies here also (see above). It is not enough to
charge that the board made an imprudent business decision or that some other action would
have been more advantageous. Such a charge cannot give rise to a cause of action.
Xc This rule is used to provide a wide-birth for the board so that it can effectively and
efficiently pursue the corp¶s best interests rather than being constantly influenced by the
need to practice ³defensive management´ or to prevent being held liable.

II.c ,
+


•$+Ú
i.c Ê 141Ú Board of directors; powers; number£ qualifications£ terms and quorum; committees;
classes of directors; nonprofit corporations; reliance upon books; action without meeting;
removal
ii.c Ê 142Ú Officers; titles£ duties£ selection£ term; failure to elect; vacancies
iii.c Ê 143Ú Loans to employees and officers; guaranty of obligations of employees and officers
iv.c Ê 144Ú Interested directors; quorum
v.c Ê 14ÕÚ Indemnification of officers£ directors£ employees and agents; insurance

C 4  (pg. 314) (•ases will probably never be decided like this again)

Mc Van Gorkom£ •EO of Trans Union£ approached a corporate takeover specialist to stage a leveraged buyout
of Trans Union at $ÕÕ/share. Van Gorkom only consulted the company¶s controller£ Peterson£ but no other
members of the board were consulted. On 9/18 Pritzker (the corp takeover specialist) demanded Trans
Union respond to his offer in 3 days; Van Gorkom called a special meeting of the board the next day; the
board approved the agreement based on Van Gorkom¶s 20 minute presentation. W/out reviewing its
contents£ Van Gorkom executed the merger agreement on 9/22. Smith and other stockholders filed a class
action law suit against Trans Union and the board. However£ on 2/10 the shareholders voted to approve the
takeover.
½c : Whether a director or officer of a corp is shielded by the business judgment rule when he
relies on the representations of other directors or officers?
½c :$S$%$.!$..        /
*!/$. *.   .  ./*
!    //
½c The court concluded that the board¶s failure to inform itself before recommending a merger to the
stockholders constituted a breach of fiduciary duty of care and rebutted the presumptive protection
of the business judgment rule.
Xc  A director or officer may not passively rely on information provided by other
directors or officers£ outside advisors£ or authorized committees. The director may only rely
on credible information provided by competent individuals£ after taking reasonable measures
to substantiate it. The BJR presumes the officers are making sound decisions and this
presumption must be rebutted£ but under BJR there is no protection for officers who have
made ³unintelligent or unadvised decisions.´ The concept of gross negligence is the proper
standard to determine if the business judgment reached by a board of directors was an
informed one. Ê 102(b)(7) was created b/c of and after this case.



&c •
8 /
i.c Options for the use of Trans Union¶s cashÚ
Mc LBOÚ

26
 c

a.c Van Gorkom chose this option b/c he was close to retirement and wanted to
cash-in.
b.c If you issue all the shares at one time then you can charge a premium for the
control you are giving over to the buyer.
c.c This option is faster£ which means there will be less time for the board to
deliberate
d.c A buyer right now means there is certainty right now. Even if they could
have gotten more money later they might not have been able to find a buyer
Mc Issue a ·ividend
Mc Purchase another company
Mc Buy back outstanding shares which decreases the amount of shareholders
(probably)£ so the money goes from the company to the shareholders. This is
similar to issuing a dividend.
a.c Issuing a ·ividend is the exact same thing£ economically£ as buying back
shares.
ii.c Worth of the •ompany is based onÚ (Ways to value)
Mc xuture Income
Mc •omparing the company to other companies
Mc Value of assets²this is difficult b/c difficult to assess and these assessments are
usually the lowest possible valuation. This is a way to find the bottom value of the
company
Mc P/E is way to value if you know the whole value and then can divide by the number
of outstanding shares
iii.c LBOÚ Buying a house is like an LBO; typically put 20% down£ which makes this a 20/80 or
4x LBO. Like an LBO b/c you put some amount of money down and then borrow the rest.
Sometimes people with lots of money still engage in LBOs. Why is this?
Mc $S.& -$SÚ leverage greatly magnifies your amount of returns. The
interest rate will be a large factor in determining amount of return.
Mc 
$SÚ The point is that this process takes a long time and is a lot of work.
Also£ the seller cares who the buyer is b/c when they pick a buyer they are also
turning down a bunch of other Bids.
a.c Look at Public Info
b.c Someone places a bid (there is an evaluation of the Bid)
c.c If Bid is accepted£ there is an appraisal (the appraisal must take place after
the Bid b/c the seller won¶t let you appraise w/out placing a Bid b/c the
result of their appraisal will be pubic information. The appraisal is for one
reasonÚ trying to find reasons to lower your Bid. ¯ext question is who fixes
the problems; do you lower the price and fix it yourself or keep the same
price and tell them to fix it.)
d.c After all this there is the mortgage contingency£ which says ³If you can¶t get
the funding by a certain date£ the deal is off.´ You have to find financing
w/in a certain amount of time and it must be at some interest rate.
e.c ¯ext the buyer has to shop for the financing (this involves providing lots of
information)

27
 c

f.c •losingÚ they hand over the deed and you hand over a check
.&c 
8

 
Mc S%, $. 04- /!$ $0<$$
/ . .S%!/-
 .!4*. -!..!*
$.* ; .!
Mc Van GorkomÚ tells us in the absence of illegality£ fraud£ or self-interest£ no informed
business decision will be overturned. ·irectors will be personally liable for their
carelessness.
a.c This caused applicable insurance rates to increase 600%
b.c Also£ the point of this case is that the court got it really really wrong
i.c The court said there was not enough & used by the Board£ but
the court was wrong
c.c What businesses have learned since Van Gorkom is that they need to do a
lot of paper work here to show they have been meeting the ·uty of •are²
this is to cover the requisite formalities

# .%S4 (pg. 328) (BJR only applies to business judgments²in this case †s. Pritchard
didn¶t make A¯Y judgments. ¯ot having BJR in place opens you up to negligence complaints.)

Mc Lillian Pritchard inherited a reinsurance brokerage from her husband and her sons illegally withdrew over
$12 million from the company for personal needs. †rs. Pritchard was completely ignorant of the
fundamentals of the business and paid no attention to the affairs of the corp. •ompany goes BR and is sued
by the Trustee²claim is to cover the misappropriated amount
Mc $ Whether individual liability of a corp¶s directors to its clients requires a duty£ breach£ and proximate
cause.
Mc $S% -. $.3. . 
½c ·uty to act in good faith
½c ·uty to be informed on the business

Liability of a corp¶s directors to its clients requires a demonstration thatÚ

1)c a duty existed£
2)c the directors breached that duty£
3)c The breach was a proximate cause of the client¶s losses.

  If she had at least resigned she would have signaled to the shareholders that there was something wrong with
the company.
This is a departure from the general BJR that a director is immune from liability and is not an insurer of the corp¶s
success.
  .   -.$  .$   The nature of the
reinsurance business distinguishes it from most other commercial activities in that reinsurance brokers are
encumbered by fiduciary duties owed to third parties.
In other corps£ a director¶s duty normally does not extend beyond the shareholders to third parties. Reinsurance
companies¶ and some banks¶ ·irectors have a fiduciary duty to both the corp and its stockholders. This requires
basis understanding of the corp¶s business and a duty to keep informed of its activities.

28
 c

&+ 6D+† SV&† V

(*(1.*.;/;(

Mc •lark contacted Plaintiff to have Plaintiff perform some engineering work. Although a written agreement
never emerged£ both sides made an oral agreement regarding the work eventually performed by Plaintiff.
·uring the negotiations£ ·efendants never notified Plaintiff that they were acting as agents on behalf of their
LL•£ Preferred Income Investors (P.I.I.). The only reference to P.I.I. available to Plaintiff was the initials
³P.I.I.´ on ·efendants¶ business cards. When Plaintiff tried to collect for the work performed£ ·efendants
could not pay. •lark and Lanham asserted that they were not liable because •olorado¶s statutes regarding
LL•¶s provided constructive notice to third parties by the act of incorporation. ·efendants further argued
that the Plaintiff should have inquired into the LL• status£ and the business card sufficed to give some
warning as to the possible existence of an LL•. Although the county court found for Plaintiff£ the district
court overturned£ agreeing with ·efendant¶s reasoning.
½c 
Ú The issue is whether state statutes providing constructive notice of LL•¶s to third parties were
intended to cover agency law claims wherein the agents never fully disclosed the principle to the
outside party
½c 
Ú State statutes providing constructive notice to third parties when an LL• has been
incorporated do not extend to agency law.


    *%

Mc In 1996£ Appellant contracted with Appellee to form an LL• incorporated in ·elaware that would produce
more environmentally-friendly maskants for the aerospace and aviation industries. Appellant produces
solvent-based maskants which have been classified as hazardous. Appellant provided much-needed financial
backing for Appellee¶s operation£ while Appellee retained 70% of the profits from the newly formed LL•.
The LL• agreement called for all disputes to be settled through arbitration in San xrancisco. Appellant
brought this action in 1998 in a ·elaware court against Appellee for breach of contract£ breach of fiduciary
duty and tortuous interference. Appellant argued that since LL• was formed prior to the formation of the
LL• agreement£ and because the LL• never signed the agreement then the agreement and its arbitration
provision are not effective over this dispute. Appellant also argued that the claims were derivative instead of
direct£ and that the ·elaware •ourt of •hancery has special jurisdiction
½c 
The first issue is whether an LL• agreement not executed by the LLS itself is valid. The
second issue is whether the arbitration and choice of forum provisions are valid.
½c $,The ·elaware LL• statutes give great deference to the freedom of LL• members to contract£
providing the terms do not overstep any of the mandatory statutory provisions


:.. 4#

Mc Plaintiff wants to use general corporate veil-piercing principles to hold ·efendant personally liable for
damages that the LL• could be held responsible for. ·efendant argued that although the legislature passed a
statute for piercing the corporate veil as pertaining to corporations£ they have been silent on LL•¶s£ and
therefore there is no express intention to allow for the remedy
½c 
The issue is whether corporate veil-piercing principles can be applied to a limited liability
company.
½c 
xor the purposes of piercing the corporate veil£ there is no law or policy that would require
treating limited liability companies (LL•¶s) different from corporations.
c

29
 c

†& +$
 

Mc Several community leaders in •olumbus Ohio including †c•onnell were contacted by the city mayor based
on their involvement in professional sports to examine the possibility of applying for an ¯HL hockey
franchise for •olumbus.
Mc †c•onnell's colleagues approached Hunt Sports Enterprises as a potential investor.
Mc †c•onnell and Hunt formed •olumbus Hockey Limited. A limited liability company whose general
character was to invest in and operate a franchise in the ¯HL.
Mc xollowing an application for the franchise filed by •HL on behalf of the •ity of •olumbus difficulty arose
when a planned tax to finance the construction of a required appropriate arena failed to pass approval.
Mc When hunt refused to accept an alternative lease proposal that would permit the required construction
†c•onnell offered to lease the arena in hunt's place.
Mc The offer was accepted and the ¯HL required that an ownership group be identified pursuant to its granting
of a franchise. †c•onnell signed the required documents in an individual capacity in the place intended for
•HL's participation as franchise owner thus identifying him as majority owner
½c Rule of law
Xc

%
$$•
%
  
 % 
 

  +



  




 



-+ 9 
$& +4

Mc ¯ew Horizons sold fuel to Haack through the use of a credit card taken out by her
Mc She signed the credit card agreement with no designation indicating whether her signature was given
individually or in a representative capacity on behalf of Kickapoo Valley xreight LL• of which she was a
member/manager
Mc Payments stopped so negotiations began to take place between the parties
½c Rule of law
Xc

%

$$•
 %


%@% @
% 
  
%

+ 
%


$$•@@


#4C$*&
!

Mc 

S
&A,+ V#V V


, $  


++


(1) •orporate Opportunities or
(2) Interested Insider Transactions
Mc  E$ -! !$ $ E$ 02

30
 c

IV.c 



 They cause the corporation to go into some transaction that will benefit an
insider.
Mc I.e.£ Salary negotiations²if a board is going to decide a •EO¶s salary and the •EO
is on the board we might have an Interested Insider Transactions.
ii.c ,




 I.e.£ Salary negotiations
iii.c 




 I.e.£ Stock options or suspiciously beneficial
loans (interest free loans) or£ for example£ if company A buys stuff from company B at an
outrageously high price and we later find out a board member is on the board of both
companies

8&c •


VI.c , $  & ·uty of Loyalty cases will involve the 0 .!2 factor of BJR. Once you¶ve made
the case that self-dealing is present the BJR no longer applies.

SSÚ (pg. 336) (BJR only applies if loyalty to the corp is not violated)

Mc The •elanese •orp had an advertising campaign prior to 1942. After 1942 the xT• said all •elanese
products had to be labeled as ³rayon.´ B/c they believed their products were better than ³rayon´ The
•elanese •orp commenced a radio advertising campaign costing $1 million/year. The decision was made
based on studies by the in-house advertising dept.£ and the employment of a radio consultant and an
advertising agency. The wife of the president of The •elanese was selected to perform in the radio program.
The board was charged with negligence in its selection of the radio program and self-interest in initiating the
program.
½c $ Whether the courts may question decisions of business management made by a corporation¶s
board of directors.
½c $ 0  ! .*...  
 .2'!56> / 4)  /$!  S . 
 . /E$ ./ -! $.*  *  *
. <$.!. /$- $ /
a.c   However£ the BJR only applies to personal liability for negligence if
directors have not violated their duty of   to the corporation.
b.c When directors have personal transactions with the corporation£ the
transactions are vigorously scrutinized²and are voided if there is unfair
advantage.
c.c Although the radio advertising expenditure was not agreed to by resolution
of the entire board£ it is not to be considered 

 (³beyond the
power´) of the board b/c the members authorized it individually.
Mc Structural Bias TheoryÚ Says there is no such thing as an independent board
member; after a certain amount of time£ all board members have some level of bias
(new£ cynical view of boards).

S  4 *S* (pg. 341)

Mc Benihana needed to renovate so they hired †organ Joseph to come up with a plan to raise capital. Abdo was
on the board at Benihana£ but he was also on the board at Bx•. Bx• offered to provide the capital based on
the plan Joseph had arranged to raise money for renovations. Abdo made the presentation to the Benihana
board on behalf of Bx•. However£ at that time the board was not specifically informed that Abdo was the

31
 c

person at Bx• who was actually doing the negotiations with Benihana. Upon agreement£ Abdo sent a memo
to Joseph£ Schwartz (•EO of Benihana)£ and ·ornbush (counsel for Benihana) listing the terms of the
agreement. He did not send this memo to all the members of the board. The trial court found the board was
¯OT informed that abdo had negotiated the deal on behalf of Bx•. A few weeks later£ Schwartz sent a letter
to the board saying it should abandon the transaction and seek other funding based on the directors¶ conflicts£
the dilutive effects of the deal£ and questionable illegality²this was on behalf of Aoki (WHY ·I· AOKI
REALLY WA¯T TO ·O THIS??)
½c $ Whether Abdo breached his duty of loyalty when he used Benihana¶s confidential
information against Benihana?
½c $


S


 
$  •

S 9&$  
*Ú (pg. 347) (Gives factors to determine whether what happened was
²if not fair£ then it was disloyal.)

Mc Broz owned RxB• and also served on the board of •IS. RxB• owned †I-4 cellular area and †ackinac
•orp owned †I-2 cellular area£ both in rural parts of †ichigan. †ackinac contacted Broz to see if he
wanted to buy †I-2. •IS had just come out of BR and had divested of several cellular licenses A¯· Broz
even told •IS¶s •EO that he might buy †I-2. The •EO of •IS did not object. At the same time£ Pri-•ell
was trying to buy •IS. Pri-•ell was also trying to buy †I-2; they submitted an offer that would stand unless
someone offered $Õ00K more than Pri-•ell¶s offer. Broz offered $Õ00k over Pri-•ell¶s offer and bought †I-
2. ¯ine days later Pri-•ell acquired •IS and •IS brought suit against Broz for breaching his fiduciary duty
to •IS by usurping a corporate opportunity that belonged to •IS£ and that Broz should have ³formally
submitted to •IS¶s board.´
½c $ Whether the •orporate Opportunity ·octrine is implicated only in cases where the fiduciary¶s
seizure of an opportunity results in a conflict between the fiduciary¶s duties to the corporation and
the self-interest of the director as actualized by the exploitation of the opportunity?
½c $V*&   $ . -.$0
9$   $$ /-.$0.$  .
  . $9./"     $
a.c  Broz was within his rights b/cÚ
i.c the opportunity became known to him in his individual£ and not
corporate£ capacity£
ii.c the opportunity was more closely related to the business of RxB•
than •IS£
iii.c •IS did not have the financial capacity£ and
iv.c •IS was aware of Broz¶s potentially conflicting duties to RxB• and
did not object to his actions on RxB•¶s behalf.

•
 ,
 The     $ doctrine is the legal principle providing that
directors£ officers£ and controlling shareholders of a corporation must not take for themselves any business
opportunity that could benefit the corporation.
Mc The corporate opportunity doctrine is one application of the fiduciary duty of loyalty 
Mc The corporate opportunity doctrine   $- . . 
   
Mc When the corporate opportunity doctrine applies£ the corporation is entitled to all profits earned by
the fiduciary from the transaction.

32
 c

Mc If the opportunity was disclosed to the board of directors and the board declined to take the
opportunity for the corporation£ the fiduciary may take the opportunity for him- or herself.
Mc +






•

 ,
"
a.c In a Interested Insider Transactions a •orp Officer is making money£
whereas in a •orp Opportunity some Officer or •orporation is spending
money

***3•
 

1.c Is the corporation financially able to exploit?
2.c Is the opportunity within the corporation¶s line of business?
3.c ·oes the corporation have an interest or expectancy in the
opportunity?
4.c Is the opportunity within the official or individual capacity?

Mc !
SBC
+% 6-#"
a.c He can get formal ratification from the board of •IS£ or
b.c He can quit his position on the board at •IS

S*
 .!  (pg. 3Õ2)

Mc Goldman Sachs ³rewarded´ lots of eBay directors and officers by allocating to them thousands of IPO
shares£ managed by Goldman Sachs£ at the initial offering price. Shareholders of eBay filed a derivative suit
against those eBay directors and officers on the grounds that such conduct usurped a corporate opportunity
that belonged to eBay£ which regularly invested in marketable securities£ and constituted a breach of
fiduciary duty of loyalty.
½c $Whether corp officers usurp a corp business opportunity when they accept IPO allocations at
the initial offering price instead of having those allocations offered to the corp? Whether Goldman
Sachs aided and abetted a breach of fiduciary duty when it made these allocations while knowing the
corp¶s officers owed a fiduciary duty to the corp?
½c $ (1) Yes and (2) Yes.
c.c  The concern of the shareholder in this case is that if some bank
comes along later that could do the job of Goldman Sachs at a better deal£
the Officers of eBay will be persuaded by opportunity of kickbacks²
therefore they might not be getting the shareholders the best deal
d.c   Allocation of shares of lucrative IPOs of stock to favored clients.



&  (pg. 3Õ7) (When to apply the BJR vs. when to apply the Intrinsic xairness Test.)

Mc Appeal by Sinclair from an order for an accounting in a derivative action brought by Levien (minority
shareholder) to account for damages sustained by Sinven (wholly owned subsidiary of Sinclair²located in
Venezuela) for breach of fiduciary duty£ overpayment of dividends£ and denial of industrial development. It
is not disputed that Sinven was a wholly owned subsidiary and that the Board was nominated by Sinclair and
that Sinclair owed Sinven a fiduciary duty. Trial court found that b/c of the fiduciary duty£ the BJR did not
apply. Instead the court said the ³Intrinsic xairness´ test should be applied. Sinclair argues the court should
apply the BJR.
½c Three claimsÚ

33
 c

e.c Too much dividend payment (like the xord case). This doesn¶t hold up b/c
the money paid out went in equal proportion to the Plaintiff and to the
·efendants. Sinclair had 97% and Levien had 3%£ but at what percentage
does this become a problem? At what percentage of ownership does a
shareholder start to have to deal with lawsuits of this nature?
f.c xoregone Business Opportunity
g.c Breach of •ontract²Sinclair was found liable here b/c the other subsidiary
that had a contract with Sinven breached its contract.
½c $ Should the # be applied to business transactions where a fiduciary duty
exists but is ¯OT accompanied by self-dealing?
½c $ *#.  -.$.$"/-
.$/./  .!
h.c   Intrinsic xairness Test did not apply here because there was not self-
dealing. The dividend payments in question went to Sinclair£ but they also
went£ in equal proportion£ to the minority shareholders of Sinven.
i.c HOWEVER£ wrt the allegation that Sinclair did engage in self-dealing when
it forced Sinven to contract with Sinclair¶s wholly owned subsidiary Sinclair
International Oil£ and then failed to abide by the terms of that contract£ the
Intrinsic xairness Test did apply. A¯· b/c Sinclair could not show (under
the Intrinsic xairness Test) that its action under the contract were
intrinsically fair to Sinven¶s minority shareholders£ Sinclair was required to
account for damages under that claim.



 Involves both a high degree of fairness and a shift of the burden of proof to the
·efendant who must show£ subject to careful judicial scrutiny£ that its transactions with the Plaintiff (Sinven
in this case) were objectively fair.

***!
 


 Only when the fiduciary duty is
accompanied by self-dealing
Mc $/.! Self dealing is the situation when the parent is on both
sides of a transaction with a subsidiary.
Mc It shifts the burden and puts the burden on the majority shareholder to show that the
transaction with the subsidiary was objectively fair.
Mc .! $ /$<$.!$

&    (pg. 361)

Mc Axton-xisher had three kinds of stockÚ preferred£ class A£ and class B. The charter said that upon liquidation
a set amount was to go to the preferred stockholders with the remainder of the assets to be distributed to the
A and B stockholders. •lass A holders were to receive twice the amount per share as the B holders£ but the
charter also said the A stock could be redeemed by the board by paying $60/share plus unpaid dividends.
Over time£ Transamerica bought 80% of the class B stock and 2/3rds of the overall voting stock²they had
also appointed the Board by electing a majority of the Board members. Between 1942 and 1943 that tobacco
assets of Axton-xisher went from $6 million to $20 million. B/c of this£ the Transamerica controlled Board
of Axton-xisher redeemed the class A stock and then sold the assets of the corporation£ thereby liquidating it
and benefitting Transamerica who owned most of the remaining non-preferred stock.

34
 c

½c $ $/./  .!<  .-

< $   /"  
½c $- / $$,
>)c .  ..$.$. *.
-/ .!   /$.
 !! . .   
B
A)c  *-.   /  $.*
 /  .- */
/ .$
j.c   This case shows that a majority shareholder owes a fiduciary duty to
the minority£ even though he is only acting as a shareholder.

#!-Ú (pg. 367)

Mc Lawrence£ President of Agau£ acquired certain properties under a lease-option for $60£000. Lawrence agreed
to transfer the properties to Agau£ but after talking to Agau¶s Board it was determined that Agau¶s legal and
financial position would not allow the acquisition and development at that time. Agau¶s directors decided to
transfer the properties to USA•£ a closely held corporation formed for this purpose and a majority of whose
stock was owned by Agau directors£ so the capital could be raised through the sale of stock£ without risk to
Agau. Agau was also granted the option to purchase USA• if the properties later became commercially
available. In 1970£ upon vote of the shareholders£ Agau exercised to option to acquire USA•. Agau was to
deliver 800£000 shares of its restricted investment stock for all authorized and issued shares of USA•. The
Board voted to do this and a majority of shareholders approved. Shareholders brought a derivative suit on
behalf of Agau to recover the 800£000 shares and for an accounting£ claiming the officers and directors
wrongfully usurped a corp opportunity and profited from it.
½c $ Whether ratification of an interested transaction by a majority of fully-informed shareholders
shifts the burden of proof to the objecting shareholder (P) to demonstrate that the terms of the
transaction are so unequal as to amount to a gift or a waste of corporate assets?
½c $V* /<  .. .. /$. 
/<! .')  -   $E$  $ 
! -   
k.c You can still prevail without ratification£ but it is still possible£ you just
have the burden to prove it is intrinsically fair.
l.c   Generally£ the rule is the burden of proof involving an interested
director or officer is on that director/officer to prove the transaction was
intrinsically fair.

(/   !*
 .!  (pg. 370)

Mc Waste †anagement bought 22% of WTI. Two years later Waste and WTI negotiated a merger in whichÚ 1)
Waste would acquire another 33% of WTI stock£ and 2) WTI shareholders would receive .Õ74 WTI shares
and .469 Waste shares for each WTI share they held. WTI has a Board meeting w/ presentations where all
speakers declared the transaction was ³xair´; all board members voted in favor and later majority if WTI
shareholders approved the agreement.
½c $ ·oes fully informed£ good faith shareholder ratification serve to extinguish a duty of loyalty
claim?

3Õ
 c

½c $ . $ .*! . .  "!$.$  */$

 4S%/-..-/$.  ! 
 4 .
Mc ,
• ·E law says the Board has a fiduciary duty to disclose all
material facts to the shareholders. The P¶s only argument was that the Board
meeting to ³carefully consider´ the merger was ³only 3 hours´ and therefore not
long enough for them to have fulfilled their duty to ³carefully consider´ the merger£
therefore breaching their fiduciary duty.
a.c The court dismissed this notion£ saying the basis of a short meeting was not
enough to assume the Board had not come to an informed decision. The
court noted that Board members of the two companies had been working
together for two years.
Mc  , • Since the disclosure claim was rejected by the court£ the
court has decided the merger was approved by a fully informed vote of a majority of
WTI¶s disinterested stockholders.
Mc 
, •
• Since the court said the shareholders¶ vote was fully
informed£ the duty of care was met by the Board²they had ratification.

***
, $  •+/
>)c 0.2 /-   .. 
i.c These transactions are not voidable if approved in good faith by a
majority of disinterested stockholders.
ii.c The good faith approval invokes the ³Business Judgment Rule´ and
limits judicial review to issues of gift or waste w/ the burden of
proof on the attacking party
1.c (..  -
<   $ ...
 .0S$%$.!$2$.*-
/$.  ! 

A)c & ! /-   .0  !

 .2
i.c These usually involve parent-subsidiary mergers conditioned upon
receiving a majority of the minority stockholder approval.
ii.c The standard of review here is usually ³Entire xairness´£ with the
burden of proving the merger was unfair falls on the Plaintiff.
>c (  ! . .
! $$0#2.  
-!*-/$.  ! 
.

Mc When there has been ratification£ what happens next depends on whether the · is a
·irector or a controlling shareholder. If you have a circumstance where there is
alleged disloyalty from a controlling shareholder£ even if you have ratification on

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the part of shareholders£ the burden shifts back to the P to show the transaction fails
the Entire xairness Test.
a.c How do you Prove ³Unfairness´? See Broz and Sinclair. See Ê 144 of ·E
General •orp Law on Page 118 in Supplement.

&c  , $  

Mc 
 

a.c Interested Insider Transactions ± I· the act and the ·efendant
b.c •orporate opportunity ± I· the act and the ·efendant
Mc
 SA& The burden is on the Plaintiff to show fraud£ illegality£ or self-dealing
(or •arelessness or ¯on-feasance)
Mc ²ask whether the act in question was ratified
a.c To prove this there is a shift in burden to the ·efendant (the following
applies to the ·efendant¶s burden of proof)Ú
i.c Ê 144(a)(1)Ú Board Ratification
ii.c Ê 144(a)(2)Ú Shareholder Ratification
1.c If you get either (a)(1) or (a)(2) ratification£ then you are
once again concerned with either the Interested Insider
Transactions or •orporate opportunity act.
a.c If the act in question is a ·uty of •are case and it is
shown to be ratified by the ·ef£ then case is over
b.c If the act in question is a ·uty of Loyalty case and
it is shown to be ratified by the ·ef£ and the ·ef is
a ·irector or Officer then the Plaintiff is out of
luck. The burden gets shifted back to the Plaintiff
to try to prove Waste or something like that²this is
functionally a loss b/c they won¶t prove Waste
(probably). If the ·ef is a •ontrolling Shareholder
w/ ratification£ the burden goes back to the Plaintiff
who then has to prove the act was ³Unfair´
iii.c Ê 144(a)(3)Ú ¯o Ratification
Mc Ê 144(a)(3)Ú If no Ratification then all that is left is an analysis of ³xairness´ which
must be shown by the ·efendant.
a.c Use the Broz xactors to determine if it is ³xair´ for •orporate opportunity
acts
b.c Use the Beyer case to determine if it is ³xair´ for Interested Insider
Transactions acts

37
 c

& S ## +

&c %  

I.c Obligation of Good xaithÚ These cases trace the ³triad´ of care£ loyalty£ and good faith. They show the
obligation of good faith in two key areasÚ executive compensation and oversight.

(& ! (pg. 376)

Mc Eisner hired Ovitz as President of ·isney. He was fired a year later b/c the relationship was not working out.
Upon being fired Ovitz got about $130 million£ in accordance w/ his contract. This was a derivative suit
alleging breach of the duty of care of a fiduciary on the part of 1) Eisner and the Board and 2) Ovitz. This
was also an action for breach of fiduciary duty for Waste. This was very costly for ·isney to fight£ but
ultimately the BJR was used and ·isney£ the Board£ Eisner£ and Ovitz all got off.
½c ˜Ú
½c $-$4!/$. .   . 
 ./*! .. / 4-/
 $ //$. -. 
/..$>).$  A)  5) !/. -*
/$. . .. . !. 
 -    . .
Mc Bad xaith •ontinuumÚ
a.c The most culpable kind of Bad xaith is ³Subjective Bad xaith.´ This is
fiduciary conduct motivated by an actual intent to do harm. This is
³·isloyal.´ ExamplesÚ
i.c A xid intentionally acts with the purpose other than that of
advancing he best interests of the corporation
ii.c The xid acts with the intent to violate applicable law
b.c The middle ground of Bad xaith is ³Intentional dereliction of duty.
•onscious disregard for one¶s responsibilities´²this is Recklessness. This
middle-ground is also ³·isloyal.´
c.c At the other end of the continuum of Bad xaith is Gross ¯egligence£ which
is the breach of the duty of care£ but is not ³·isloyal.´ It is defined£ in part£
as ³A failure to inform one¶s self of available material facts.´ Without more
than this£ Gross ¯egligence •A¯¯OT be considered Bad xaith.
Mc ¯ Ú The plaintiffs also alleged that Ovitz breached his duty as an officer and
director to the corporation by maximizing his own interest in his employment and
termination negotiations at the expense of the corporation. The defendant directors
and Ovitz moved to dismiss these claims. In declining to dismiss the plaintiffs¶
claims£ the court concluded that the allegations supported claims for breach of
fiduciary duty against the directors because they failed to make any good faith
attempt to fulfill their fiduciary obligations in the hiring and termination of Ovitz.
The ,
case is important for two reasons. xirst£ it offers guidance to corporate
managers and executives regarding the boundaries of acceptable corporate behavior
in the context of hiring and terminating executive employees. Specifically£ at a
minimum£ directors must carefully consider the proposed compensation packages of

38
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officers and executives before approving them. ·epending upon the circumstances£
in the hiring of top executives£ directors should strongly considerÚ (1) retaining a
compensation consultant; (2) reviewing in advance of approval all agreements
pertinent to the hiring£ the estimated costs of the compensation package that they are
approving£ and the compensation of similarly situated executives at other firms; and
(3) engaging in meaningful and critical discussion regarding the proposed terms of
the hiring (and retaining a written record of such discussion). Officers too£ cannot
engage in conduct that unfairly benefits them at the company¶s expense. Thus£ in
negotiating their personal employment matters£ they must do so in a fair and
impartial manner. The case is also important£ because it may serve as a warning to
corporate decision-makers that ·elaware courts£ and possibly other states¶ courts£
may not permit them to hide behind the business judgment rule for failing to act in
good faith in carrying out their duties.

% +  * (pg. 392)

Mc P¶s sued£ complaining the fees for the mutual fund in question were too high; they argued the mutual funds
advisors were being paid too much b/c the determination of the fees was based on ³market prices.´ 
 $.!.£ saying the percentages paid to advisors were reasonable if tied to market rates b/c investors
would sell the mutual fund and buy a different one if the fees were too high. This is just a case that
articulates the argument in favor of the market£ as opposed to regulation. This case also makes the point that
the market is the best tool to determine reasonable fees and that ³reasonableness´ imposed by courts and
judges would not be better.


0.
 ) &*;5

Mc ·irectors are not expected to know all details of a company£ but should have basic knowledge of how the
business works£ keep informed of the business¶s activities£ engage in general monitoring of corporate affairs£
attend board meetings regularly£ and routinely review financial statements.
Mc ·irectors must attempt in good faith to ensure that a corporate information and
reporting system is in place and is adequate. xailure to do this might render a
director liable for losses caused by non-compliance with applicable legal standards.
Mc ³•aremark •laim´Ú only a ³sustained or systematic failure´ of the board to exercise
oversight²such as a complete failure to assure a reasonable information and
reporting system exists²will establish the lack of good faith necessary to have
liability.

  (pg. 396)

Mc The lawsuit alleged that the directors of AmSouth had breached their duty to act in good faith because£ while
AmSouth maintained a program to monitor Bank Secrecy Act compliance£ the program was not adequate to
prevent the violations giving rise to the fines and civil penalties. The •hancery •ourt dismissed the
complaint on the basis that£ under &4£ directors can only be liable in situations involving a sustained
or systematic failure of the board to exercise oversight£ and the •ourt found that the complaint did not

39
 c

establish the requisite lack of good faith on which to base liability. Prior to &4*the duty of corporate
directors in instances of corporate wrongdoing was defined by the rule announced in   


•
9%
•
!!S  S$1S& /.
 -!!

Mc Plaintiff and Haley each owned 31Õ out of 1000 shares of ·efendant company£ Ringling Brothers-Barnum &
Bailey •ombined Shows£ with the remaining 370 shares owned by another defendant£ John Ringling ¯orth.
The company¶s board was comprised of seven members£ and if each shareholder voted independently the
most likely outcome would be for each shareholder electing two board members with ¯orth selecting the
extra member. However£ in 1941 Plaintiff and Healey contracted to pool their votes£ wherein each selected
two members and then used their remaining votes to select a fifth member of their choosing. The contract
called for an arbitrator£ Karl Loos£ to resolve any disputes. The contract was terminated a year later with the
parties still bound by the arbitrator provision that called for Loos to help decide how to vote. In 1946£ Haley
could not attend the meeting and sent her husband in her place£ and instead of following Loos¶ advice he
chose to move for adjournment. Plaintiff and ·efendant voted their shares£ and Plaintiff brought this action
to force Healey to vote according to Loos¶ decision. Healey argued that the agreement between her and
Plaintiff was invalid as it took the voting power away from the shareholders and gave it to a third party
(Loos).
½c IssueÚ The issue is whether the agreement between Healey and Plaintiff to pool their votes was valid.
½c RuleÚ Shareholders can agree to pool their votes and have a third party intercede when there is any
disagreement as to how to vote

&c % 
.&.
 
.&!
 
.&•
 

&c   & .$/  (..
Mc But you could be Widely held (by lots of people) but ¯OT be Publicly traded.
a.c You might want to do this to avoid the regulation that comes along with
being publicly traded.
Mc A lot of subsidiaries of Public corps are these Private and •losely held corps.

†F$.
 

Mc †cQuade (P) and †cGraw (·) each bought 70 shares of stock in the ¯Y Giants baseball team from
Stoneham (·) in exchange for an agreement an agreement to preserve themselves as directors and officers of
the company. The agreement also prohibited the amendment of salaries£ shares£ or bylaws of the corp except
the unanimous consent of †cQuade£ †cGraw£ and Stoneham. †cQuade was made Treasurer of the corp£
but later the Board of 7 men voted him out of office£ with †cGraw and Stoneham abstaining£ and in
contravention of their agreement.
Mc $ Whether a shareholder agreement that precludes a Board of ·irectors from changing officers£ salaries£
or retaining individuals in office is void and illegal?
Mc $ Yes£  .!! /S . !!** 
  !..$ */" $  
½c   †cQuade£ †cGraw£ and Stoneham entered into an agreement to make sure all three of them
stayed in office. After †cQuade was pushed out and the law suit ensued£ the ·¶s argued that any
contract that compels a director to vote to keep a particular person in office and at a stated salary is
illegal. P argues the opposite; an agreement amount directors to continue a man as an officer of a
corp is not to be broken as long as the officer remains loyal to the corp. The court said that ·irectors

40
 c

may not by agreements entered as stockholders abrogate their independent judgment. There is
nothing wrong with a majority (or minority) uniting to make their powers felt£ but this power to unite
is limited to the election of directors and is not extended to contracts whereby limitations are placed
on the power of directors to manage the business of the corporation by the selection of agents at
defined salaries. Basically the •ourt said that the contract in question (to keep †cQuade in power)
was not legal. Also£ the job of the court in this case is not to protect †cQuade from the possibly
immoral decision of Stoneham and †cGraw to push him out of the company. The job of the •ourt
is to protect the shareholders¶ investment. The courts do not enforce ³mere moral obligations.´

&4 .!

Mc ·efendant companies£ Bell & •ompany£ Inc. and Hollings-Smith •ompany£ Inc.£ were co-owned by Plaintiff
(2Õ% of shares) and ·efendant (the remaining 7Õ% of shares). The companies manufactured medicine£ the
formulae that were known only by Plaintiff. Plaintiff entered into an agreement with ·efendant wherein
Plaintiff agreed to disclose the formulae to the son of ·efendant in return for a promise that ·efendant
would keep Plaintiff as a director and would be entitled to 2Õ% of all net income providing that Plaintiff was
competent in his position. Afterwards£ ·efendant did not vote Plaintiff in as director£ stopped delivering 2Õ%
of the income to Plaintiff. Plaintiff sought reinstatement and money owed from the stopping of payments and
money wasted by ·efendant. ·efendant countered£ citing †cQuade v. Stoneham (263 ¯. Y. 323)£ that the
agreement was invalid because it required ·efendant as a shareholder to usurp the directors¶ judgment.
½c IssueÚ The issue is whether the agreement between Plaintiff and ·efendant was invalid as an over-
reaching agreement between shareholders to control powers of the directors.
½c RuleÚ An agreement between shareholders£ wherein the shareholders entering the agreement are the
only shareholders of the company£ is valid even if the agreement contemplates controlling
management decisions

41