Tuesday, November 15, 2011

Corporations Outline Law School


Corporations Outline

I.            General Rules of Corporations
A)             A corporation is a type of legal institution or process that defines relationships among people.
B)             A corporation provides
1.         limited liability for its owners
2.         perpetual existence independent of its owners
3.         centralization of management in persons who need not be owners
4.         free transferability of ownership interests.
C)            Constitutional Issues
1.         A corporation is viewed as a "person" entitled to some but not all of the constitutional protections available to individuals.
2.         For example:
(a)             a corporation is not a citizen of a state or of the United States for purposes of the privileges and immunities clause, but has constitutional rights of free speech
(b)             it does not have a privilege against self incrimination, but is protected against deprivations of property without due process of law and is entitled to equal protection of the law.
D)            Small vs. Large Corporations
1.         Closely held corporation
(a)             Has a few shareholders, all or most of whom are usually active in the management of the business
(b)             Has no public market for its shares  (most important difference)
(c)              Has never registered a public distribution of shares under the federal or state securities acts.
(d)             there are few disclosure obligations for closely held corporations
2.         Publicly held corporation
(a)             Its shares are held by members of the general public and there is a public market for its shares
(b)             It is subject to reporting and disclosure requirements under the securities acts and has made one or more registered public offerings under the Securities Act of 1933
(c)              Must operate in the "goldfish bowl" created by the disclosure obligations of the federal securities laws
E)             Ultra Vires Doctrine
1.         A transaction “beyond the powers” of the corporation that appears to be a party to the transaction.
2.         It used to be really pushed, saying that a corporation could only do those acts that it was formed to do.  This argument is not used anymore.
3.         pg. 67-74
F)             Delaware
1.         Why is Delaware so successful?
(a)             continued efforts by the bar of that state to provide an effective, flexible, and modern body of corporate law
(b)             familiarity of corporate lawyers around the country with the Delaware GCL.
(c)              existence of a sophisticated judiciary and sophisticated filing office that assures reasonable and knowledgeable decision making and dispute resolution.
(d)             "more" corporation case and statutory law in Delaware today than in any other state. ( fewer areas of uncertainty in Delaware corporation law )
(e)             The Delaware Chancery Court is a respected and sophisticated commercial court.
(f)               Delaware case law generally permits corporations to adopt defensive tactics to combat unwanted takeovers.


II.           Forming a Corporation
A)             Selecting the state to incorporate in
1.         If you’re going to be operating in a single jurisdiction, incorporate there (avoid different taxes, etc.)
2.         Multistate corporations have more to consider
B)             Writing the Articles of Incorporation (Certificate of Incorporation in Delaware)
1.         Mandatory Requirements
(a)             the name of the corporation
(b)             its duration (most choose “perpetual”)
(c)              its purpose or purposes (most choose “the conduct of any lawful business”)
(i)               The MBCA (1984) provides that every corporation automatically has a "perpetual" duration and a purpose to "conduct any lawful business" unless a narrower duration or purposes clause is inserted.
(d)             the securities it is authorized to issue
(e)             the name of its registered agent and the address of its registered office
(f)               the names and addresses of its initial board of directors
(g)             the name and address of the incorporator or incorporators.
2.         Discretionary Provisions
(a)             corporations may elect to eliminate or modify specified rules of fundamental corporate governance by specific provision in the articles of incorporation. Many other discretionary provisions may be placed in either the bylaws or the articles of incorporation.
C)            Filing your articles of corporation
1.         Most states require a single filing with a state official although some require county filing as well.
D)            Additional steps
1.         Prepare bylaws;
2.         Prepare minutes of the various organizational meetings, including waivers of notice or consents to action without formal meetings where appropriate;
3.         Obtain blank share certificates and make sure they are properly prepared and issued;
4.         Prepare shareholders' agreement, if any;
5.         Obtain taxpayer identification numbers;
6.         Open a bank account for the corporation;
7.         Determine whether the S corporation tax election should be made, and, if so, make that election;
8.         Make sure the directors and officers understand the nature of their duties and responsibilities.

III.         Defective Corporations
A)             Finding Personal Liability
1.         A number of cases hold that no personal liability is created so long as articles of incorporation have been properly filed. If personal liability is imposed despite the filing of articles of incorporation, the result is likely to be analyzed as a case involving:
(a)             Promoters' liability;
(b)             Piercing the corporate veil; or
(c)              The failure to comply with a mandatory condition subsequent.
2.         Personal liability is usually (but not invariably) imposed if business is commenced before articles of incorporation are filed.
B)             De Jure, De Facto and Estoppel Corporations
1.         De jure
(a)              the corporation has sufficiently complied with the incorporation requirements so that a corporation is legally in existence for all purposes.
2.         De facto
(a)              the corporation that is partially but defectively or incompletely formed.  When there has been a “colorable attempt” at incorporation AND some actual use of corporate privileges with respect to dealing with 3Ps (can’t use against state).  These corporations are immune from attack by everyone but the State.
(b)            Traditional test of de facto existence
(i)               there is a valid statute under which the corporation might incorporate
(ii)              there is a “good faith” or “colorable” attempt to comply with the statute and
(iii)            there has been actual use of the corporate privileges.
(c)            Modern, Objective Test of de facto existence (Bright Line Rule)
(i)               the acceptance of the articles of incorporation for filing is conclusive evidence that the corporate existence has begun.
(ii)              many states now follow the MBCA
(iii)            Most courts conclude that the filing of the articles is a “bright line” test, with personal liability before that date and corporate liability after.
(d)             Defendants who signed note on behalf of (defective) corporation were personally liable even though both parties thought they were dealing with a corporation. (Thompson)
3.         Corporation by Estoppel
(a)             A third party that relies on an innocent representation that the corporation is formed is “estopped” from denying the existence of the corporation.
(b)             If the two parties deal with each other, each assuming the existence of a corporation, they are both estopped from denying the existence of the corporation.
(i)               Plaintiff was estopped from denying existence of corporation because it had thought it was a corporation before.  (Walker)
(c)              Applies only to K claimants, not in tort
(d)             Defendants were personally liable for activities on behalf of defective corporation.  (Don Swann)
(e)             Defendant corporation was estopped from denying existence of corporation when only problem was oversight by lawyer and both parties thought there was a corporation.  (Cranson v. IBM)
(i)               reconciling Cranson with Don Swann – look at good faith of w/b incorporator
C)            Failure to Pay Enough Capital
1.         Another way to have a defective corp – min. of states require $$ as condition of incorp.
2.         Deliberate failure to pay may result in personal liability of for O&Ds.
3.         Unclear what the law is – no cap is big defect but many states allow it.
(a)             punitive effect – more justified result because capital is backbone of corp.
(b)             causal nexus between lack of capital and Pl’s harm/inability to collect lends support to holding individual shareholders liable.
(c)              Those who pursued activities before putting in the required capital are personally liable as required by the articles.  (Sulphur Export)
D)            Statutes
1.         Model Business Corporation Act
(a)             Individuals who assume to act as a corporation without the authority to do so are liable to creditors.  Section 139
(b)             All persons purporting to act as or on the behalf of a corporation knowing there was no incorporation under this act are jointly and severally liable for liability incurred.
(c)              BUT those who act as a corp without knowledge that there has been no incorporation are relieved from personal liability.  So, knowledge/good faith comes into play
E)             Discussion
1.         Policy Concerns
(a)             For = corps are getting the benefit of limited liability, they should abide by letter of law or pay consequences.
(b)             Contra = Ind’s assets were never part of bargain so award Pl a windfall.  But, a bright line rule promotes stability in the  market (can make more certain Ks)
2.         It may also be argued that where third persons deal on a corporate basis with an apparent corporation, they receive a "windfall" if they may subsequently hold individual investors or promoters liable. This is particularly clear when the failure to complete the formation of the corporation is discovered only after the litigation is commenced. Some courts therefore have refused to impose personal liability even in circumstances where no steps toward incorporation have been taken.
3.         What if the defendants knew the articles weren’t filed, signed documents as corporation and later filed?
4.         What if the defendants knew the articles weren’t filed, signed documents as corporation and never filed?
5.         What if the shareholders didn’t know they hadn’t been filed?
6.         Why do we want the articles filed at all?
7.         Why do we require corporations to have capital?


IV.        Piercing the Corporate Veil
A)             PCV = cases in which a court refuses to recognize the separate existence of a corporation despite its proper formation
1.         Traditional tests
(a)            “to prevent fraud” or to “achieve equity”
(b)             Plaintiff must show
(i)               some abuse of the corporate form
(ii)              that inequity or injustice will occur if the separate existence of the corporation is recognized
2.         Common Law DOCTRINE
(a)             Corp will be looked upon as a corp entity as a gen. rule and until sufficient reason to the contrary appears
(b)             PCV when:
(i)               legal entity is used to defeat public convenience
(ii)              justify wrong
(iii)            protect fraud or
(iv)            defend crime
(c)              Courts will look to spec. context of the case rather than inherent corp. characteristics.
(d)             Likelihood of piercing increases as number of shareholders increases. 
3.         FACTORS influencing decision to pierce:
(a)             Misrepresentation – most powerful. 
(i)               Bernardin v. Midland Oil : Subsidiary of parent closed up shop and sold off all assets, court held this was reason enough to pierce to get the assets of parent corp.
(b)             Co-mingling assets  
(c)              Domination and control by shareholder  - If corp can be said to have no separate mind, will or existence or its own because so greatly controlled by shareholder (ind. or parent corp.)
(i)               Plaintiff must prove that the corporation was under the actual control of the shareholder and that the Plaintiff’s inability to collect resulted from improper conduct on the part of the shareholder (AmFac)
(d)             Under capitalization (not usually dispositive unless start off with $0 capital).  Issue here is whether shs should reasonably have anticipated that the corp would be unable to pay the debts it is likely to incur.
(e)             Failure to follow corporate formalities. 
(i)               shares never formally issued
(ii)              shs and directors meeting not held
(iii)            shs don’t distinguish between corp. prop. & personal prop.
(iv)            proper corp. financial records are not maintained
(1)             Kinney Show Corp. v. Polan – Court holds D personally liable for a lease gone bad because he hadn’t “followed corporate formalities” – he had put no money in the corporation.
(f)               Rule of Thumb – Courts usually require 2 or more factors, most common combo is under capitalization and failure to follow corp. formalities. 
4.         Tort vs. Contract
(a)             Courts are more likely to pierce in tort case, where Pl is an involuntary creditor.
(b)             Michaelson – There must be wrongdoing on part of owners to pierce the veil.  Veil cannot be pierced when Plaintiffs didn’t prove that Ds used the corporate form to disguise wrongs.  Plaintiffs assumed the risk in dealing with them and it was foreseeable that the funds would go through the corporation to Defendants.
(c)              Walkowsky – Cab operator used 10 corps to operate business with minimal capitalization but court doesn’t allow tort creditor to pierce to attach assets of brother/sister corps as well.  It’s different to say there’s a larger corporation controlling or that there is an individual controlling things purely for personal reason.  In the first, only the larger corporate entity would be held liable, in the second the stockholder would be personally liable. 
B)             Rules
1.         Two / Three Prong Test to Pierce the Corporate Veil
(a)             Is the unity of interest and ownership such that the corporation and the individual are one and the same? 
(b)             Would an equitable result occur if the acts are treated as those of the corporation alone?
(c)              (sometimes) Is it reasonable for the wronged party to conduct a credit check on the corporate entity?
2.         In some states the corporate veil can be pierced in the absence of fraud or wrongdoing.
3.         Parent – Subsidiary Situation
(a)             Parent corp may  be held liable for debts of subsidiary
(b)             General Rule:  Parent will NOT be held liable so long as :
(i)               Proper corp. formalities are observed
(ii)              Public is NOT confused about whether it is dealing with P or S
(iii)            S is operated in a fair manner with some hope of making profit
(iv)            There is NO other manifest unfairness:
(1)             Bartle v. Home Owners – Veil could NOT be pierced to get to parent’s assets because 1) outward idicia of the 2 sep. corps were at all time maintained 2) creditors were not misled about whom they were doing business with 3) no fraud and 4) D did NOT deplete assets of S
4.         Deep Rock Doctrine
(a)             Concerns bankruptcy and reorganizations of corporations whose sole or controlling shareholder seeks to enforce claims against it as a general or secured creditor.
(b)             Instead of holding the shareholder liable for the bankrupt corporation’s debts, it allows subordination of the shareholder’s claim not only to claims of outside creditors but also to claims of preferred shareholders of the bankrupt.
C)            Issues
1.         Service of Process – Parent/Subsidiary Corporations
(a)             What happens when one corporation forms a subsidiary corporation?  Can you get jurisdiction over the parent by serving the subsidiary?   No, of course not, they are separate legal entities.
2.         Evading Statutes
(a)             Is preservation of the corporate entity going to used to justify wrong, protect fraud or defend crime?
3.         Parent – Subsidiary
(a)             Is there a difference between getting back to an individual or getting back to another corporation?
4.         Active v. Inactive shareholders
5.         Tort creditors v. Contract creditors
6.         Formalities
(a)             You’ve done everything you needed to to incorporate, but then didn’t observe the formalities.
(b)             Cases show us that this is very important, but RMBCA and various statutes tell us that it cannot be the sole reason for piercing the veil.
7.         Domination
(a)             To what effect does the sole shareholder dominate the corporation?  Does that make it easier to pierce?
8.         Under Capitalization
(a)             They’re all under-capitalized when they go bankrupt
9.         Insurance
(a)             What if there is no insurance?
(b)             What if there is $10,000 insurance?
(c)              What if there is $10,000,000 insurance?


V.          Promoters
A)             General Information
1.         Promoters are:  the person or people who form the corporations.  They are promoters for a certain period of time, then they become shareholders, officers, etc. They can continue in the business after incorporation or can get paid for their services and distance themselves from it (professional promoters, lawyers, etc.)
2.         Promoters may enter into contracts on behalf of the venture being promoted either before or after articles have been filed.  Most problems arise with pre-incorporation contracts.
3.         Contracts Entered Into in the Name of a Corporation “To Be Formed”
(a)             Traditional Analysis – Promoter is personally liable and will remain severally liable along with the corporation if it adopts the contract.  Promoter may be entitled to indemnification from the corporation.
(b)             2nd Analysis – “Automatic Novation”  Promoter is personally liable until the corporation adopts the contract.
(i)               It should be noted that under an "automatic novation" theory, promoters may form "shell corporations" solely to escape personal liability after it is clear that the promotion will fail
(c)              3rd Analysis – Promoter is not personally liable but has promised their best efforts to cause the corporation to be formed and adopt the contract.  Possible action for breach of contract.
(d)             4th Analysis – No one is liable on the contract until the corporation adopts it.
4.         Contracts Entered Into in the Corporate Name (when neither party knows it hasn’t been formed, defective incorporation)
(a)             General Agency Rule – If a promoter represents she is acting on behalf of a corporation and no one knows it, she is personally liable.
(b)             Finding of a De Jure or De Facto corporation absolves the promoter of liability.
B)             Rules
1.         Corporation
(a)             A corporation is not automatically liable on its promoters' contracts; the newly formed corporation may accept or reject all preincorporation contracts
(b)             Corp is only liable if it ratifies or adopts the K.  If it doesn’t take action to do so, it is simply NOT BOUND.
(c)              An acceptance of a preincorporation contract by a corporation is an "adoption" of that contract. Adoption may be express  (by resolution) or implied.
(i)               implicitly - when you take the benefits of the contract with knowledge of the existence of the contract itself
(d)             A corporation that is formed afterwards can bring an action on the contract formed prior to incorporation
(e)             Some different approaches
(i)               Sherwood v. Alexander – Promoter is not liable on a loan K that had to be made to a corp. due to usurious interest rate; court relies on fact that Pl only intended to rely on assets of to-be-formed corp all along.  è If someone presumes to act on behalf of a projected corporation and not for himself, he will be personally liable on the contract unless the other party agreed to look to some other person or fund for payment
(ii)              Howe v. Boss – Adoption of K by corp is NOT sufficient to relieve promoter of liability.  There must be a novation or agreement to that effect because it is unreasonable to believe that 3P would perform on K unless he believed someone other than w/b corp was going to be liable to pay him.  è  A person signing for a nonexistent corporation is normally to be personally liable
2.         Promoter
(a)             A promoter can sue on a contract.
(i)               Agency doctrine – when an agent enters into a contract without authority, the principal can subsequently ratify it.  Promoters contracts can be adopted by the corporation after it comes into being.
(b)             Promoters are liable when:
(i)               The corporation disaffirms the K
(ii)              The K is not made in the name of the corporation
(iii)            The promoter knows the corp is not formed and the other party doesn’t know.
(c)              Promoters are not personally liable on contracts made in the name of future corporations. (Stewart Realty)
(d)             But See :  Promoters are individually liable on their contracts whether or not their efforts result in a corporation being called into existence.  They are always and primarily liable. (Kridelbaugh)
C)            Discussion
1.         What can make a corporation liable on a contract?
2.         What if the corporation expressly disaffirms K?
3.         What if the shareholders disaffirm it and knew about the contract?
4.         What if the shareholders disaffirm it and didn’t know about the contract?  (they know someone is hired, but they don’t know about a bonus for them in the contract and try not to pay that.  receiving the benefit without knowledge of the full contract)
5.         What if the shareholders believe corporation paid the promoters and that the promoters were supposed to pay the plaintiff?
6.         What if it was the same three people as promoters and shareholders?
7.         Who ought to bear the risk of the promoters inability to pay the contracts?
8.         What does it mean to say that the corporation has knowledge
9.         What happens if there is no knowledge (no one knows anything) but the corporation does receive the benefit of the contract?

ATTACK PLAN
Was the K signed before the corp was formed?
No à not promoter’s liability problem
YES à Was the K in the name of the to-be-formed corp?
No à not promoter’s liability problem (promoter signed in his own name, he’s flat out liable)
YES à Did the other party (non-promoter) know corp.  not formed?
No à
IF Promoter knew, he’ll almost cert. be liable if corp not formed or defaults
IF neither party knew, analyze as a defective corp.; prom. might escape liability if ignorance reasonable
            YES à  Was the Corp. ever in fact formed?
                        No à Promoter will almost cert. be liable  (?)
                        YES à Question of Parties intent; promoter might be liable


VI.        Management of the Corporation
A)             Terms
1.         Authority
(a)             Actual – the power is specifically given in the bylaws.  As between the corporation and the officer.
(b)             Express -
(c)              Implied -
(d)             Apparent – exists between principal and the third party.  When the corporation acts as though the agent has authority and the third party believes the authority because of the corporations behavior.
(e)             Inherent – the corporation made the person an officer.  shouldn’t they bear responsibility for that person does?  unless the third party is put on notice in some way.
(f)               Ratif –
2.         Management Scheme
(a)             Shareholders
(i)                the ultimate owners of the corporation.  Because of separation of power and control, they only have limited power of management.  Their power is exercised indirectly through the election or removal of directors.
(ii)              The shs act through two mechanisms
(1)             primary duty = to elect the Board
(2)             secondary duty = approving fundamental or nonordinary changes (e.g. mergers)
(b)             Directors
(i)               Have general powers of management and control.  Can either oversee the management or directly manage.
(ii)              Directors must be individuals.
(iii)            Directors are not the agents of controlling shareholders.
(iv)            They cannot delegate their entire duties to third parties.
(v)              Owe a duty of care of ordinarily prudent & diligent persons in like positions under sim. circumstances.  (They are NOT liable for Bad Business Judgments!)
(vi)            Number of Directors
(1)             The number of directors may be increased or decreased by amendment to the bylaws.
(2)             RMBCA - Prohibits an increase or decrease of more than 30% except by action of the shareholders.
(vii)           Removal
(1)             Most states allow removal of directors with or without cause.
(viii)          Duties
(1)             Elect officers of the corp.
(2)             Set broad corporate operating policies
(3)             Delegate day to day operating authority to officers
(4)             RMBCA – “All corp. powers shall be exercised by or under the authority of, and the business and affairs managed under the direction or, its  board of directors…”
(c)             Officers
(i)               Officers carry out director’s decisions rather than make policy decisions.  However, they can have some decision making authority.
(ii)              Courts usually recognize that officers in close corporations have the power to bind the corporation under circumstances which would make a similar holding questionable in a publicly held corporation.
(1)             Each partner is an agent of the firm within the scope of business
(2)             Agent who acts beyond his authority is personally liable.
a.              Mohr v. State Bank of Stanley – Co-shareholders, one endorsed corp checks into personal account – while he did have authority to endorse checks, he didn’t have authority to steal money from corp. so bank is liable.  Bank should have investigated his authority to deposit the checks into his own account.
(iii)            Duties
(1)             run the day to day affairs
(d)             President
(i)               Different views about the scope of his authority
(ii)              NY rule – president has presumptive power to do any act the board could authorize or ratify.
(iii)            All jxds à law is that pres. has power to bind the corp. in transactions arising in the “usual & regular course of business”
B)             Authority
1.         To hold corporation liable, the corp must create impression that agent authorized to act
2.         Officer will not automatically have authority to bind corp to a transaction.
3.         If agent acts in a way contrary to the interests of the corp, he does not have the authority to do so.
4.         Four Doctrines commonly held that officer has bound the corp:
(a)             Express Actual = What a reasonable person in the officer’s position would believe had been conferred upon him by corp. – may be an explicit grant of authority to officer (by-laws or resolution) or may be acquiescence by board or officers in past pattern of conduct.)
(b)             Implied Actual = Power of Position.  Authority which is “inherent in the office” either by 1) common understandings of business people OR 2) board may have implicitly granted authority (allowed him to do it in the past)
(c)              Apparent = Actions of the corp. (the principal) give the appearance to reasonable persons that agent is authorized to act as he is acting; can rise from intentional or negligent misrepresentations by corp to 3P, or through permitting an officer or EE to assume certain powers & functions on a continuing basis with the 3P’s knowledge ==> corp may not avoid transaction. 
(i)               For the third part to successfully invoke the app. auth. doctrine, he will have to show:
(1)             The corporation, by acts other than those of the officer, indicated to the world, that the officer had authority to do the act in question
(2)             The plaintiff was aware of those corporation indications and relied on them. 
(ii)              American Union Financial v. University Nat’l Bank : Secretary of corp. fakes a corp. resolution to give her authority to pledge corp. assets; corp is liable since action was made with apparent authority (bank relied)
(d)             Ratification = If person with actual authority to enter into trans learns of the trans & either expressly affirms it or even fails to disavow the court may find that corp. is bound
(i)               Corp. has received benefits under K which it hasn’t returned OR
(ii)              3P has relied to his detriment on the K
C)            Rules
1.         The corporation has to bear the risk.  The bank was under no obligation to go behind the representation of the secretary to question that authority.  (American Union Financial)
2.         Court held that “one who deals with an agent does so at his peril, and must make the necessary effort to discover the actual scope of his authority.”  Third party bears the risk because it was such a strange situation (used corporation’s credit for a loan for a friend’s corporation)  (Anaconda)
3.         Close Corporations
(a)             often look like partnerships
(a)             Courts usually allow each partner of the firm to act with authority and bind the corporation.  Courts have held officers in a close corporation to possess powers to bind the corporation under circumstances that would normally be questionable for a publicly held corporation
D)            Statutes
E)             Discussion


VII.       Social Responsibilities of the Corp
A)             Issue è What is the basic purpose behind the existence of the corp?  Do managers only owe duties to their shs?  Or can the interests of shs be balanced against the broader social concerns?
B)             CL View
1.         Managers and directors typically owe a duty to shs ONLY
2.         Typically management responsibility will flow to four classes of Pls à
(a)             criminal liability for breaches of crim law
(b)             creditor’s liability – arises when the corp becomes insolvent
(c)              shareholder liability – different from liability to corp!  Major  ones have to do with actions by the mgrs, directors, officers that violate the shs rights (e.g. using insider ingo)
(d)             corporations liability – actions of mgrs, directors, officers may cause injury to the corp itself (and harm the shs indirectly) à usually see as derivative sutis
C)            Managers injur corp in two ways
1.         breach obligations to corp. by engaging in self-dealing
2.         exhibit a disinterest in corp – breach duty of care (lack of reasonable diligence / business judgment)
(a)             ALI notes that courts generally require  that managers act with reasonable care
D)            Social Responsibility and the Dodd v. Berle Debate
1.         Dodd
(a)             corp powers are held in trust for the entire community
(b)             this is consensus view today
(c)              Most agree that corp profit maximization can sometimes visit a greater harm to society than the gain it creates for shs
(d)             ALI
(i)               corp shall have as its objective the conduct of business activities with a view to enhancing corp. profit & shareholder gain, but corp can take into account ethical considerations that are reasonable regarded as appropriate to responsible conduct of business (even if corp. profits not enhanced) à also allows “reasonable amount of resources” to be given away for humanitarian causes
2.         Friedman / Berle
(a)             Purpose of corp is to make $$$ / law-and-economics types subscribe to this view
(b)             mangers are responsible to the share holders only
(c)              having them responsible to the community makes them un-elected civil servants
(d)             they’ll keep themselves in power by use of the proxy machine


VIII.      Manager’s Responsibilities – Disinterested Conduct
A)             Disinterested Conduct – when there is no direct benefit to the managers
B)             Issue à How must managers act with respect to the corp – what is reasonable care?
C)            CL Doctrine
1.         A director or officer must, in handling the corporation’s affairs, behave with the level of care that a reasonable person in similar circumstances would use.  (OBJECTIVE)  (??)
2.         Some states require that directors with special skills to go beyond what a normal director would do and use those skills
D)            Business Judgment Rule
1.         Courts will not second guess the wisdom of the directors and officers biz jdmnts, and will NOT impose liability even for stupid business judgments so long as the Director or Officer:
(a)             had NO conflict of interest when he made the decision AND
(b)             gathered a reasonable amount of information before deciding AND
(c)             did not act wholly irrational
2.         ALI
(a)             Essentially the same as Biz Judgment. 
(b)             As long as you do in good faith and you’re acting as a ordinary and prudent person would you are not liable. Good faith = disinterested, or is informed or rationally believes that the judgment is in the best interests of the corporation
3.         RMBCA
(a)             Does NOT attempt to codify the BJ rule.
(b)             Director must act in a manner that he “reasonably believes to be in the best interests of the corp”
(c)              footnotes, pg. 106-107
E)              Note:         Combining the duty of care with BJ Rule what emerges is a scheme that looks closely at the process by which the director or officer makes his decision, but gives VERY LITTLE scrutiny to the substantive wisdom of the decision itself. 
F)             When a Director BREACHES his duty of care:
1.         If he causes loss to corp, HE is liable for $$ damages!!
2.         Unless there is fraud, illegality or conflict of interest the business judgment rule prevails and there’s no liability.  Managers were not liable for not installing lights at park where there is no fraud, illegality or conflict of interest.   (Shlensky)
3.         Ford was liable for not charging more for cars (wanted to benefit the community generally) – keep in mind that this was not a suit for damages.  (Ford)
G)            EXCEPTIONS to the BJ Rule
1.         Illegality
(a)             The BJ Rule is inapplicable if the act taken or approved by the director is a violation of a criminal statute.
(b)             This is especially likely if court concludes that the shs are among the class meant to be protected by the criminal statute in question
(c)              Under NY law, allegation of a breach of statute (even federal statute) is insufficient to state a cause of action unless the breach caused independent damage to the corporation.
(d)             Cases
(i)               It is enough to state a cause of action if there are allegations of illegality (like illegal campaign contributions to the DNC, or bribing amusement park officials).  (AT&T and Roth)
(ii)              Corp closed plants and relocated them for primary purpose of screwing their EEs who were getting involved with labor unions.  Corp argued that the actions were actually good for the corp and that not illegal per se.  HELD à directors are liable for any losses resulting from their unlawful OR illegal conduct.  (Abrams)
2.         Nonfeasance (total failure to perform their duties)
(a)             A TOTAL failure to act as a director presupposes that a reasonable BJ has been made
(b)             Might be found grossly negligent if:
(i)               fails to attend meetings
(ii)              fails to learn anything of substance about co’s business
(iii)            fails to read reports, financial statements, etc. given to him by corp
(iv)            fails to obtain help (advice of counsel) when sees things are going wrong with corp.
(v)              otherwise neglects to go through standard motions of diligent behavior
(1)             Francis v. United Jersey Bank – Director let her two sons run corp. into ground & completely excluded her.  HELD à Mom is liable for breaching duty of care to corp.  Her failure to become familiar with fundamentals of business allowed her sons to ruin it.
(c)              There is NO duty to detect wrongdoing!
(i)               Directors do not need to go searching for misconduct
(ii)              Graham -  Corp was found guilty of price fixing in violation of anti-trust laws, shs sue directors for personal liability even though they didn’t direct the illegality.  HELD à  Directors are “entitled to rely on the honest and integrity of their subordinates until something occurs to put them on suspicion.”
(iii)            Joy – Board went along with dec. of pres. to extend loans to guy with bad credit.  HELD à Lack of knowledge is NO defense, directors who “willingly allow others to make majority decisions affecting the future of the corp. wholly without supervision or oversight may NOT defend on their lack of knowledge, for that ignorance itself is a breach of f.d.”
H)            Defining the “Informed Decision”
1.         In determining whether director made an inf. decision, consider all of the surrounding circumstances
2.         Gross negligence is the standard for determining whether a decision reached by a board of directors is an informed one.  (Von Gorkom, Caremark, Delaware)
(a)             Board should have made a reasonable inquiry into the situation and not just gone along with everything one director said without questioning it.  Board held liable to shareholders.  (Van Gorkom)
(b)             Good faith is all that matters. “Duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss apart from consideration of the good faith or rationality of the process employed.”  (Caremark)
(c)              But See:  Board accepted white-knight take-over bid imposed with a 3 hour time limit.  HELD à  Backs away from Van Gorkom and finds board NOT LIABLE, focuses on the board’s decision making process.  (Citron)
3.          Note:  These cases illustrate that takeover bids (and other major changes) may require additional attention from board, can’t rubber stamp management’s recommendations. 
I)               Limiting Damages
1.         DE – Allows certificate of incorp. to contain provisions eliminating or limiting personal liability of a director to the corp. or the shs, as long as doesn’t limit liability for acts NOT in good faith or which involve intentional wrongdoing or knowing violation of the law.
(a)             à can’t avoid liability for bad faith or intentional wrongdoing
2.         ALI – ALI has a provision that says the shareholders can approve a charter provision to limit damages either generally or to an amount not exceeding that person’s annual compensation
J)              Policy Considerations in Favor of the Business Judgment Rule
1.         Allows for risk-taking directors.  Certain amount of innovation is essential if business is to grow and prosper, and without the BJ Rule directors would be too conservative
2.         Courts are poor judges of business reality, judges acting from hindsight are not very good at making a risk/return calculus of a business decision
3.         Directors are poor cost avoiders, imposing greater liability would make directors a form of “cost spreaders” but is ineffective because each director can’t incorporate the cost of liability into what he charges for his services, shs can better spread risk of bad business judgments by diversifying portfolio.
K)             Discussion
1.         Under what circumstances should a corporate manager be held liable for uninterested conduct?
2.         What if managers made donation to university? From treasury?  From own pocket?
3.         What if managers installed anti-pollution equipment because law required it?  What if law didn’t require it?
4.         What if AT&T said it was better policy not to press collection because if they did, large groups wouldn’t use them?
5.         What are the motivations of the directors involved?  How does that matter?
6.         Why is liability any different from Torts?


IX.        Duty of Loyalty
A)             Interested Transactions
1.         transactions in which directors, officers and shareholders have a personal interest, conflict of interest
2.         Can be everyday business transactions
(a)             like contracts for compensation between the corporation and the interested director
(b)             transactions between parent and subsidiary corporations
(c)              corporate opportunities – where insiders in the corporations takes a business opportunity for him or herself that is in conflict with the interests of the corporation
B)             History
1.         Corporate contracts with a director was voidable by the corporation irrespective of fairness à
(a)             that was too great a prohibition on transactions that were valuable to the company
2.         Then, transactions with interested directors were not voidable if certain criteria were met
(a)             if the interested director was not necessary for a quorum
(b)             if the transaction was approved by a majority of the disinterested directors and the transaction was neither fraudulent nor unfair.
(c)              HOWEVER, the transaction could  be validated  by full disclosure to and ratification by a majority of the shareholders (in the absence of fraud or fairness)
C)            CL Doctrine
1.         RULE – Interest transactions should be evaluated on the basis of fairness with weight also given to ratification or approval of the transaction by disinterested directors or shareholders
2.         Generally applies that a self-dealing trx found by the court to be fair will be upheld whether approved by a disinterested board or not.
3.         No transaction of a corporation with any or all of its directors is automatically voidable whether there was a disinterested majority of board or not; but courts will review such a K and it is subject to rigid & careful scrutiny so that will be invalidated if K is found to be too unfair to corp.
D)            Statutes
1.         CA – requires that all material facts of transaction be fully disclosed to voting parties and that vote of interested shareholders be thrown out
2.         Three Elements
(a)             disclosure to directors
(b)             disclosure to shareholders
(c)             fairness and burden of proof
(i)               If any of the three criteria are met, that doesn’t mean the transaction is valid, it just means that it’s not automatically voidable by the corporation.
E)             ALI
1.         “Director or senior officer fulfills the duty of fair dealing IF
(a)             disclosure concerning conflict is made to corp. decisionmaker AND
(b)             either
(i)               transaction is fair to corp OR
(ii)              transaction is authorized in advance, following disc. of conflict, by disinterested directors OR
(iii)            transaction is ratified, following such disclosure, by disinterested directors who could reasonable have concluded that transaction is fair to corp OR
(iv)            transaction is authorized in advance or ratified by disinterested shs AND does not constitute waste of corp. assets at the time of shs action.
2.         Note:  Courts can still void a trx ratified by a disinterested board under ALI language if no reasonable person would have approved it – trx must be one that directors could reasonable have concluded was fair
F)             RMBCA
1.         covers trx with directors only
2.         A self dealing trx will be upheld if it either approved by disinterested directors OR ratified by shs OR found by court to have been fair.
3.         SPLIT – Some courts hold that a majority of the disinterested shs vote to ratify, while others hold that only the director vote need be disinterested
G)            Burden of Proof
1.         Initially placed on interested director
2.         He must show that
(a)             a disinterested & knowledgeable majority of board (w/o interested director) approved the transaction OR
(b)             a majority of shareholders, after full disclosure of relevant facts, approved the transaction
3.         When ratification occurs:
(a)             burden shifts to person attacking plan, and they must show that the deal is unfair
(b)             Disclosure alone isn’t enough, you also have to have fairness and good faith.  (Cookies)
H)            It’s all about FAIRNESS (in nearly all states, this alone causes trx to be upheld)
I)               Remedies – Recission or Restitution
J)              Discussion
1.         Policy
(a)             Courts are leery of these deal and will tolerate only if corp. really wants it.
(i)               Put a burden on director to show highly advantageous to corp.
(ii)              Approach deals with suspicion.  Often throw out deals approved by disinterested board by calling it WASTE
2.         Is there a difference between majority and controlling stockholder?
3.         How much is enough disclosure?
4.         Compare procedural and substantive fairness
5.         Where should the burden of proof lie?
6.         Vote of Disinterested Director - Where there is a majority shareholder / director engaging in conflicted trx, can this ever happen??  Arguably the maj. shs/dir controls the board!


X.          Conflict of Interest – Director’s Responsibility and Compensation
A)             Issues and thoughts
1.         Director’s have more to do nowadays (and they can be held liable for large amounts) so compensation had to be increased.
2.         Courts have been sympathetic to minority shareholders in closely held corporations where there is self-dealing and the minority shareholder can neither vote them out nor sell their shares on the open market
B)             CL Doctrine
1.         Directors by affirmative vote of a majority of those in office, and irrespective of any fin. or per int of any of them, shall have authority to establish reasonable compensation that may include pension, disability, and death benefits for services to corp. for directors & officers OR to delegate such authority to one or more officers or directors.
C)            Consideration
1.         Must have consideration for each element of the compensation plan
(a)             Can’t have unbargained for payments for past services (i.e. giving $$ when exec. retires – that amounts to a gift or waste)
(b)             The pension to the widow was without consideration so it was a gift.  The corporation cannot give gifts (Adams v. Smith)
2.         If a bonus payment has no relation to the value of the services for which it is given, it is in reality a gift in part and the maj. of stockholders have no power to give away corp. property against the protest of the minority.  (Rogers)
3.         Where past president agreed to be available for consultation and not to compete with the company, there was consideration for his pension and the court upheld the pension.  (Moore, Osborne v. Locke Steel Chain Co.)
4.         Excessive or Unreasonable Compensation
(a)             No court has yet held that pay by a large, publicly held corporation was so unreasonably high that its excess, by itself, constituted waste (because they can sell their shares and leave?)
(b)             Rule à If a comp plan has been approved by a majority of disint directors or ratified by shs, the court can still overturn if the level of comp is excessive or unfair.  (Rogers v. Hill)
(c)             IRC Factors for Considering Unreasonable Compensation
(i)               EE’s qualifications
(ii)              Nature, extent and scope of EEs work
(iii)            Size and complexities of business
(iv)            Amount of salary in comparison to dist to shs
(v)              Prevailing policy of TP as to all EEs
(i)               Small corps:  Amount of comp paid to particular EE in previous yr
B)             Stock Options
1.         Special case = option is exercisable immediately so recipient can just walk away with $$ as soon as price goes up
2.         Rule à  Where beneficiaries other than interested directors are concerned, burden of proving illegality or invalidity is on the challenger, BUT
(a)             Where a director has a personal interest in trx AND there has not been shs approval, the burden is on the director to completely justify the transaction AND
(b)             When stockholders have notice of the director’s interest AND they authorize the directors to enter into a K, the agreement will be unassailable in the absence of actual fraud or want or power.
(i)               Eliasberg – Burden was on complaining party to prove unfairness and failed to do so – directors did NOT have a duty to explain or interpret the tax effects of a prosposal the full terms of which are submitted to the shs.
3.         Representative Statute (New Mexico)
(a)             Stock options plans can be issued if approved by board of directors.
(b)             Plans can be issued to Ds, Os and EEs if approved by maj. of shs
(c)              In the absence of fraud, the judgment of the board as to the adequacy of the consideration shall be conclusive.
C)            Discussion
1.         Is a transaction that is approved by disinterested directors subject to the same approach as one that is done by interested directors and disinterested shareholders?
2.         Hypo :  Class 15
(a)             Who would win on these facts if the shareholders didn’t ratify it?
(i)               board of directors
(1)             if the board can prove that other corporations do the same, that’s its reasonable, etc. then they should win.
(2)             even though they can exercise them now, they would want to stay and have them worth even more.  so they do have an interest in the company’s wealth so there is consideration.
(3)             besides, why would they want to exercise it today?  it’s at market price!
(4)             but issuing stock options should fall under the business judgment rule.  we want board to take some risks, etc.  (but, they’re interested!)
(5)             what if we could show that other corps are doing the same, with disinterested boards or shareholder ratification
(ii)              minority shareholder  **
(1)             there’s no consideration.  they can exercise them immediately, even after they leave the corporation.  That doesn’t result in them staying with the company and working hard so there’s no consideration.  there’s no guarantee that they’re going to stay because they can exercise them now.  They should have put a waiting period in there first.
(2)             there would really be no consideration if they quit today, waited 6 months and then exercised it.  So, it’s invalid because they have both the option to do it now and to do it after they leave. They could offer one or the other but not both.
(3)             the corporation is not getting anything back.
(4)             we should have heightened scrutiny when it’s an interested board of directors, conflict of interest.  We can’t rely on business judgment rule when they’re interested, we have to look to fairness.
(iii)            Courts will not look to the adequacy of the consideration (so can we make them work a day or work ten years?)
(b)             What if the value of the shares increases ten fold?
(c)              What if the shareholders ratified it?
(i)               Then it should stand – it was ratified by a disinterested body
(ii)              That shouldn’t matter, shareholders are ignorant and indifferent.
(d)             What if it had been adopted by an interested board of directors?
(e)             The tobacco case is relevant to this.
5.         What differences are there between larger and smaller, more closely held corporations?

XI.        Conflict of Interest – Fiduciary Duty Between Parent and Subsidiary
A)             Rules
1.         If there is a clear advantage to the parent and a disadvantage to the subsidiary then there is self-dealing and the intrinsic fairness rule applies.  In the absence of that situation, the business judgment rule applies. 
(a)             Intrinsic Fairness Rule = high degree of fairness and a shift in the burden of proof to the parent to prove that its transaction were objectively fair
(b)             Business Judgment Rule = see above
(c)              Examples
(i)               While there was an advantage to the parent, there was no disadvantage to the sub.  Business judgment rule applies.  (Case)
(ii)              While there was a disadvantage to the sub., there was no advantage to the parent.  Business judgment rule applies.  (Getty)
2.         ALI
(a)             What does ALI say?
(i)               Such transactions have to be fair unless it’s authorized in advance or ratified by disinterested shareholders.
(ii)              If it was in the ordinary course of business (buying and selling), the party who challenges the transaction has the burden of coming forward with evidence that the transaction was unfair.
(iii)            Like the general approach to conflict of interest transactions – unless you have general approval by a disinterested board of directors

I.            Corporate Opportunities
A)             Issues
1.         Can a director directly compete with his corp. for certain opportunities?
2.         When is there truly a corp. opportunity?
3.         When can the director take the opportunity for himself?
B)             Definition of corporate opportunity - CEEL
1.         Expectancy – whether the corp. had an interest or expectancy in the opportunity
2.         Essential - looks at whether the opportunity is “essential to the corp’s well-being
3.         Line of business – Opp is corp IF it is “closely related to the corp’s existing or prospective activities.”
(a)             Some courts would also settle for int. or exp. test.  DE treats opp as corp if either #1 or #4 is satisfied
4.         Conflict – More amorphous.  Courts will measure the unfairness on the particular facts of a fiduciary taking advantage of an opp when the interests of the corp. justly call for protection.
C)            Factors to Consider  - CPREC
1.         Capacity – capacity in which offer was received (see Rapistan), offered to him as director or individual?
2.         Presentation – How did the insider learn of the opportunity?  acting in his role as corp’s agent?
3.         Essential – Is the opp essential to the corp?  the more important is it to the well-being of the corp the more likely it’s a corp. opp
4.         Reasonable Expectations of the Parties – Did shs have a reasonable expectation that such opps would be regard as corp ones?
(a)             The fact that defendants were involved in real estate before incorporation made it not a corporate opportunity if they continued to invest on their own, outside of the corporation.  (Burg v. Horn)
5.         Corp Resources – Where corp resources used to take advantage of the opp?
(a)             Rapistan court found that there was no corporate opportunity where 3 officers resigned their positions and went to work for other company, although many courts would have found this to be a corporate opportunity.  Ds learned of opp as individuals, the opp was not essential and they didn’t use corp. assets.  (Rapistan)
(b)             Guth Rule:  If there is presented to a corp officer a opp which:
(i)               the corp is financially able to undertake,
(ii)              is, from its nature, in the line of the corp’s biz AND
(iii)            is of practical advantage to it AND
(iv)            is one in which corp has an interest or a reasonable expectancy AND
(v)              by embracing the opp, the self-interested director will be brought into conflict with his corp.
(1)             è the law will not permit him to take it
(c)              Guth Individual Rule:  When an opp comes to him in his individual capacity, and the opp is one which:
(i)               is not essential to the corp because of the nature of the enterprise AND
(ii)              is one in which the corp has no interest or expectancy
(1)             è he is entitled to treat it as his own.  The corp has no interest in the opp if he did not wrongfully embark the corps resources. 
D)            Competition
1.         A director or senior exec may not compete with corporation where it is likely to harm the corp
2.         However you can make full disclosure and have the disinterested board (or maj. or shs) okay the competition to avoid a breach of duty of loyalty
3.         Cannot use corp. assets if this use either harms the corp. or gives the insider a financial benefit – including the benefit he receives as a stockholder that is not being received by similarly situated shs.
(a)             applies to tangible and intangible goods (information)
(b)               NOTE:  Trx will not be wrongful if insider pays full value for good (??)  à trx may also be immunized if ratified by disint. board or maj. of shs after full disclosure. 
E)             Taking of Corporate Opportunity
1.         General Rule – Manager may not pursue an opportunity as his own and must turn it over to the corporation if it is one “belongs” to the corp.
2.         Taking is per se wrongful – corp. may recover damages for the loss it suffered or the profits it would have made.
3.         Defenses
(a)             Can’t Afford It (Not really a defense)
(i)               It is NOT always a defense to say that corp. could not have afforded it for itself
(ii)              Irving Trust – There is a rigid rule prohibiting directors of solvent corporations from taking over for their own profit a corporate K, on the plea of the corp. financial inability to perform.
(1)             Policy – If directors are permitted to justify their conduct on such a theory, there will be a temptation to refrain from exerting their best efforts on behalf of the corporation since if the corp. can’t meet obligations, the directors will personally benefit.
(b)             Don’t Want It (a better defense)
(i)               ALI – “Director may take a corp. opp that is disclosed to and rejected by the board”
F)             Who is Bound?
1.         Generally applies to directors, full time EE and controlling shareholders.
2.         Outside director vs. Full Time Executive
(a)             Latter is commonly understood to owe his entire efforts and loyalty to the corp so he gets a more stringent standard.
(i)               There was no corporate opportunity where an employee broke off and formed a life insurance company for client because defendants didn’t offer life insurance.  It was not the employee’s duty to know whether or not the company wanted to expand into life insurance.  On the other hand, the employee was an executive of the corporation!  (Alexander v. Fritzen)
(b)             ALI
(i)               For EEs an opp is corp if it comes to a full time EE who knows that the opp is “closely related to a business in which corp is engaged or is expected to engage”;
(ii)              for Outside Director opp is NOT deemed corp UNLESS dir either (1) learned of opp in connection with performing duties for corp OR (2) learned of opp under circumstances where he should reasonably believed it was being offered to corp OR (3) learned of it through the use of info or pro belonging to corp
G)            Burden of Proof
1.         Many states say that burden starts out with challenger BUT if no approval by majority of disinterested shareholders then the burden shifts to the directors to show the deal is fair. 
H)            Remedies
1.         Director must account for profits and court may impose a constructive trust to transfer property back to corporation.
I)               Discussion
1.         Policy Issues
(a)             For rigid rule à may create a disincentive for people taking positions as directors of corps; also corp may otherwise lose an opp that could save it from destruction (e.g. directors can buy a patent for corp & grant them rights at a fair price à whereas if directors cannot do this the corp can’t get rights to patent & goes out of business)
(b)             Against rigid rule à  if allow financial inability defense, directors are more likely to engage in double dealing & not engage in “best efforts” to get the deal made for the corp
(c)              Offering opps to shs?  no modern case exists so holding would a logistical nightmare
2.         Burg – there was no way to get this ratified by a disinterested board because they had the majority (2-1). 


II.           1934  Act
A)             Deals with matters affecting the trade of securities and information about the corporation in an ongoing way (which is separate from distribution or sale of securities.)
B)             Periodic reporting requirements are set forth in the Securities Exchange Act of 1934 (1934 Act). The basic provision of federal law relating to proxy solicitation is section 14(a) of that Act. Corporations subject to these requirements are those registered under section 12 of that Act.
C)            Who is Subject to the Act
1.         Corporations that are required to register under section 12 of the 1934 Act are corporations (1) having securities that are registered on a national securities exchange, or (2) having assets in excess of $10,000,000 and a class of equity securities held of record by 500 persons or more.
2.         Corporations used to avoid this act by just having enough people show up for the meeting, then they didn’t have to use proxies.  But, they closed that loophole in 1964.  Corporations subject to Section 12 have to put out an information statement if they don’t solicit proxies.
D)            Exemptions
1.         Not everyone who solicits a proxy is subject to the federal proxy rules.
2.         If the soliciting person is not seeking proxy authority and does not have a “substantial interest” in the subject matter of the vote, they are exempt.
3.         pg. 642
E)             Preliminary Filings
1.         Have been eliminated except in the case of basic proxy statements and proxy card.
F)             Section 18 – False or Misleading Statements
1.         The person who did it is liable (yikes – potential liability for millions of dollars)
G)            Information Required to be Furnished in Proxy Solicitations
1.         date, time and place of the meeting
2.         revocability of the proxy
3.         the persons making the solicitation
4.         their interest in the matters being acted on
5.         voting rights and beneficial ownership interests of large shareholders or groups of such shareholders
6.         pg. 647
H)            Solicitation
1.         an action that is reasonably calculated to result in proxy authority
2.         What WASN’T solicitation:
(a)             soliciting other shs to get required 5% to look at shs list (Studebaker)
(b)             placing ad in paper extolling benefits of merger (Brown)
(c)              placing ad in paper asking for new power authority (Long Island)


III.         Voting Corporate Control
A)             Background information
1.         Basic concern is separation of ownership and control
B)             Stockholder Voting
1.         Problems with Stockholder Voting - FICM
(a)             Information costs and rational apathy
(i)               informational costs for shs to become informed about corp. going-ons can be high even when the gains are high.
(b)             Free Rider
(i)               shareholders either won’t vote or won’t bear their proportionate share of costs of protecting investment
(c)              Market Alternative
(i)               Shareholders may choose to sell rather than stick around and fight
(d)             Conflict of Interest
(i)               Big institutional investors have pressures from inside the corporation and must balance against their own interest in seeing stock do well
C)            Voting Procedures
1.         Definitions
(a)             Record Owner / Date
(i)               Have to be on record as the owner of the shares
(ii)              Record date - Have to be registered by a particular day to participate in voting. 
(b)             Proxies
(i)               Used to refer to any of the following:
(1)             legal relationship under which one party is appointed a fiduciary to vote another’s shares
(2)             nominee so appointed
(3)             physical document that evidences relationship
(4)             can even be a shareholder’s oral consent
a.              one year limitation
b.              these are always revocable; shareholders must deliver a new proxy card bearing a later date to renew
(ii)              Revocability
(1)             They are usually revocable, even if they say they aren’t.
(2)             A revocable appointment is revoked by any inconsistent act by the granter, such as appointing someone else or attending the meeting in person and voting.
a.              It is irrevocable only if it is stated to be so and is “coupled with an interest” which usually requires a property or financial investment in the shares or the corporation itself.
b.              A purchased vote is generally thought against public policy and unenforceable. 
(iii)            Formal Requirements
(1)             Proxy appointments must be in writing and are usually only valid for 11 months.
(2)             MBCA – it’s valid for whatever period is specified in the form
(c)              Street Name
(i)               Shares remain registered in name of bank or broker to simplify bookkeeping and to maintain lower costs.
(ii)              But then you don’t get the info sent to shareholders, Merrell Lynch got it.  Then ML had an obligation to forward it to you
(d)             Inspector of Elections
(i)               Inspector determines who’s entitled to vote and how those people are voting
(ii)              Corporate officials authorized on behalf of corporation to determine the validity of proxies and ballots – decision CAN be appealed to courts
(e)             Stockholder Consents
(i)               Shareholder voting occurs at annual or special meeting OR pursuant to a new procedure by which written consents can be solicited from shareholders without a meeting. 
(f)               Selling Shares Short
(i)               Selling shares that you don’t own.  You do that because you think they price is going down.
(ii)              You borrow the shares from someone who owns them (i.e. from your broker) and you pay a fee to borrow them.  The longer you hold them, the bigger the fee.
2.         Voting Rules
(a)             In most states
(i)               the general rule is that a majority of votes at a meeting at which a quorum is present is necessary to adopt a measure.
(ii)              Directors are elected by majority vote
(iii)            Fundamental changes may require a supermajority vote.
(iv)            Permit shareholders to act by unanimous or majority written consent without a meeting, binding the corporation.
(v)              One vote per share (although this has been challenged)
(b)             MBCA
(i)               An action is approved if the affirmative votes exceed the negative votes to eliminate the negative effect of abstentions.
(c)              Discussion
(i)               Must – May
(ii)              Amount of Expenses
(1)             reimburse management for the proxy statements because they’re required to do that.
(iii)            Management Win / Lose
(iv)            Shareholder Ratification
(v)              Size of corporation
(vi)            Burden of proof
(vii)           Other considerations
3.         Judicial Supervision of Election Contests
(a)             Schnell
(i)               In the absence of fraud or inequitable conduct, the date for a stockholders meeting (duly established in the by-laws) will not be enlarged by judicial interference at the request of dissent stockholders solely because of the circumstances of a proxy contest.
(ii)              However, management cannot move up the date solely to screw over the contestors.  They would have relied on the date in the  by-laws and that must stand.
D)            Proxies
1.         Proxy Expenses
(a)             Issue à  Who should pay for a proxy contest when insurgents want to challenge incumbent board?
(b)             Rules
(i)               Basic Expenses – All courts agree that corporation must pay for basic, barebones compliance by management with federal proxy regulations.  The corporation need not pay anything beyond that which is reasonable.
(ii)              Beyond the Basics (Both subject to scrutiny of the courts when challenged)
(1)             Contests Over Policies – Directors have the right to make reasonable and proper expenses from the treasury in order to persuade the stockholders that what they’re doing is in the best interests of the corporation.
a.              Umm…What isn’t policy?
(2)             Reimbursement – Stockholders have the right to reimburse successful contestants for reasonable expenses incurred.
(3)             Rosenfeld v. Fairchild – Plaintiff stockholder brings suit to get back $260K used to reimburse both sides of proxy contest.  HELD à Expenses were rightly paid out of treasury.
(iii)            Unsuccessful Insurgents have virtually no chance of getting any money back.
2.         Proxy Solicitation Rules
(a)             ISSUE à  What is proxy solicitation?
(b)             Fed. Sec. Rule 14
(i)               Applies to – all corps with 500+ shareholders AND who have assets totally $5 million.  ($10 million?)
(ii)              (a)(1) – Definition of “Solicitation”
(1)             Any request for a proxy whether or not accompanied by or included in a form of proxy OR
(2)             Any request to execute or not to execute or to revoke a proxy OR
(3)             The furnishing of a proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.
(4)             Solicitation by management – solicitation of even one person counts
(5)             Solicitation by non-management – solicitation only if more than ten people.
(6)             Public Media
a.              Commission says this is a communication with all the stockholders (But See:  Brown and Long Island)
(7)             (a)(1)-(1)(2)(iv) – Shareholders Communication
a.              A shareholders public announcement of how they intend to vote on any matter and reasons for it does not constitute a proxy solicitation.
(iii)            (a)(2) – Those Exempt from (a)(1)
(1)             Exemption from proxy statement delivery & disclosure requirement for communications with shareholders where the soliciting person is not seeking proxy authority AND does NOT have a substantial interest in the subject matter of the vote
(2)             substantial interest – those who because of a substantial interest in the subject matter of the vote are likely to receive a benefit from a successful solicitation that would not be shared pro rata by all other persons of the same class of securities (other than a benefit arising from the person’s employment with the registrant) 
(iv)            (a)(3) – Form of Disclosure
(1)             Prescribes disclosure of material information to shareholders with respect to proposals for shareholders’ action; prescribes the form and contents of the proxy statements and annual report that must precede it
(v)             (a)(8) – Shareholder Proposals
(1)             Certain proposals submitted by shareholders must be included in the corporation’s own proxy solicitation materials and placed on agenda of the meeting for a vote
(vi)            (c) – Information Statements
(1)             Corporations must prepare and distribute an information statement if they did not solicit proxies (meant to ensure annual correspondence with shareholders)
(c)              Preliminary filings – have  been eliminated, no longer need to have SEC review your filings except for the basic proxy statement and card.
3.         Policy Concerns
(a)             May chill communication between shareholders who want to talk about what is going on with the corporation. 
E)             Shareholder Proposals
1.         ISSUE à  When can shareholders force the corporation to include a prosposal in the corporation’s proxy statement?
2.         Basic Information
(a)             Low cost alternative to waging a proxy contest.  Costs virtually nothing. 
(b)             You have to hold at least 1% of shares for at least a year before you can propose anything (so you can’t just buy five shares and then submit a proposal)
(c)              Proposal can’t be more than 500 written words.
3.         Burden of Costs
(a)             Shareholder – Rule 14a-7 requires corporation to either mail the shareholders solicitation OR give the shareholder a stockholder list so that shareholders can do the mailing
(b)             Corporation – Rule 14a-8, see below
4.         Rule 14a-8
(a)             After notice by shareholders, corporation must set forth proposal in its proxy statement & identify it in its form of proxy & provide means by which sec. holders can make the specification required by 14a-4b.
(b)             Eligibility – Proponent must be record of beneficial owners of at least 1% or $1000 market value AND must have those shares for at least one year
(c)              Timeliness – Proposal must be received in a timely fashion (not less than 120 days in advance of date of registrant’s proxy statement released to sec. holders.
(d)             Word Limit – Proponent can make one proposal which is subject to a 500 word limit.
(e)             Deal BreakerCorporation may omit a proposal and any statement if:
(i)               Does not comply with the procedural requirements
(ii)              Improper under State Law
(1)             In certain states, this may include an issue which mandates action by the board.  Some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders.
(2)             Most requests for actions are proper under state law because they are cast as recommendations or requests.
(3)             Improper = those having to do with ordinary, day to day business
(4)             SEC v. Transamerica
a.              Case decided before this rule
b.              Holding – Court held that the proposals submitted by stockholder were ALL subjects for stockholder action within the purview of Proxy Rule 14a-7, since all were subjects in respect to which stockholders have right to act under Delaware law.
c.              Since the corporations charter did not prohibit stockholder actions, it was ok.
d.              Today – this case could have to come out different today because DE law is explicit in reserving right to change bylaws for boards only therefore the proposal about bylaw 47 was improper for shareholder consideration due to combo of DE law and the corporations own actions. 
(iii)            Violation of law
(1)             Don’t have to take any proposals which would make the company violate any federal, state or foreign law.
(2)             Federal or state laws take precedence over foreign law.
(iv)            Violation of proxy rules
(v)             Personal grievance, special interest
(vi)            Relevance
(1)             recent rule
(2)             operations which account for less than 5% of total assets and less than 5% of net earnings and is not otherwise significantly related to the company’s business
(3)             Medical Comm. for Human Rights v. SEC
a.              For Plaintiff - Court was concerned that corporate proxy rights could be employed as shield to isolate managerial decisions from shareholder control.  Found a clear and compelling distinction between management’s legitimate need for freedom to apply its expertise in matters of ordinary business and patently illegally claim of power to treat corporate as personal vehicle for implementing political or social predilections.
(vii)           Absence of power / authority
(1)             If the company would lack the power or authority to implement the proposal
(viii)         Management functions
(1)             If it relates to ordinary business functions
(2)             Roosevelt v. El DuPont
a.              The proposal to phase out CFCs even quicker related to ordinary business matters because it is related to how and when they should be phased out, not whether they should at all.
b.              Private Right of Action ?  see outline pg. 22
(ix)            Relates to election
(1)             If it relates to the election of people to the board or an analogous governing authority
(x)             Conflicts with company’s proposal
(1)             If it directly conflicts the company should specify the portions that conflict.
(xi)            Duplication
(1)             of another proposal already included
(xii)           Resubmissions
(1)             If the proposal deals with substantially the same material as another proposal that was previously included in the company’s proxy materials in the last 5 calendar years, the company can exclude it from any meeting held within 3 calendar years of the last time it was included.
(xiii)         Specific amount of dividends


IV.        Shareholder’s Right of Inspection
A)             Issue à  When may a shareholder gain access to corporation’s internal documents and what exactly is a shareholder entitled to see?  Does it matter if they have a non-corporate purpose in mind or can effect social goals?
B)             Common Law Doctrine
1.         Shareholders (including beneficial owners) have a right to inspect the corporation’s books and records when they exercise it for a “proper purpose”
2.         Proper purpose
(a)             to determine whether there has been improper management (to bring a suit against them)
(b)             to ascertain financial conditions to measure propriety of dividends or to decide how to vote at upcoming election
(c)              to determine value of shares for sale or other purposes (?)
(d)             to obtain a shareholder list to solicit proxies, influence voting, invite others to join in litigation or offer higher price for shares than is currently being offered by management
C)            Federal Law : SEC
1.         Rule 14a-7 – Management can choose to either:
(a)             mail material to shareholders once provided by soliciting shareholders OR provide a shareholder list so that soliciting shareholders can do their own mailing.
(b)             Requirements
(i)               solicitors proxy materials must relate to meeting in which corporation will be making its own solicitation
(ii)              stockholder must be entitled to vote on the matter
(iii)            shareholders must defray the expenses of the corporation for mailing (post and printing)  (??)
(iv)            BTW:  no length limitations on shareholder proposal and no censorship allowed
D)            Statutory Approaches (DE is typical, as always)
1.         Any stockholder has the right to look at shareholder lists, books and records so long as done for “proper purpose”
2.         Proper Purpose
(a)             purpose reasonably related to that shareholder’s interests as a stockholder
(b)             State ex. Rel. Pillsbury v. Honeywell
(i)               Plaintiff bought stocks in order to change company policy. 
(ii)              Holding – No right to inspect, his standing as a shareholder was tenuous because he bought the shares merely for the purpose of the suit.  He couldn’t show any individual gain as a result of requesting the shareholder list.
(c)              General Time v. Talley Industries
(i)               Shareholder said he wanted list to solicit proxies to oust the board, Corp. said he wanted it to acquire company stock (?)
(ii)              Holding – The desire to solicit proxies to oust directors is a proper purpose. 
(iii)            Rule – When a stockholder establishes his status as such, and seeks production of a list for a purpose germane to that status, he is entitled to production.
3.         Burden of Proof
(a)             Varies by state. 
(b)             Delaware
(i)               books & records – stockholder must first establish proper purpose
(ii)              shareholder list – corporation must establish improper purpose
4.         Inspection Process
(a)             Generally held that shareholders need not inspect in person, may have assistance of an expert and may make extracts of the information they see.


V.          Close Corporations
A)             Special Problems and Concerns
1.         Definition
(a)             There is no general definition.  Mass defines it as any corporation with:
(i)               small number of shares
(ii)              lack of any ready market for the corporations stock
(iii)            substantial participation by the majority stockholder in the management, direction and operation of the corporation
(b)             Alternative def
(iv)            Has a few shareholders, all or most of whom are usually active in the management of the business
(v)              Has no public market for its shares  (most important difference)
(vi)            Has never registered a public distribution of shares under the federal or state securities acts.
(vii)           there are few disclosure obligations for closely held corporations
2.         Alternatives
(a)             LP
(i)               shared ownership of assets of business
(ii)              personal liability for firm debts (sev. and joint)
(iii)            each general partner is an agent of the other and has authority to bind the firm,
(iv)            easily formed and often created on accident (lend $$ and ask for control)
(v)              pass-thru entity so no tax liability on firm
(vi)            agreement between partners will be honored as long as partners want them to be
(b)             LLP
(i)               general partnership where partners are exempt from liability for some or all of certain kinds of debts or obligations of partnership
(ii)              does not protect partner from liability for own tortious conduct
(iii)            liability for general debts and obligations will still flow to all partners (but some states extend protection to partners for these debts)
(c)              LLC
(i)               combines the flexibility and pass-thru taxation benefits of partnership form with limited liability and managerial control of corporate form
(ii)              management rights are not freely transferable
(iii)            in general dissolution is treated as similar to dissolution of partnership
(iv)            can elect to be taxed as partnership or corporation
B)             Restrictions on Transfer of Shares
1.         Allowed so that owners of CCs can better control who they’ll be working with.  Also prevents entry of people who may be hostile to the corporations’ best interests (competitors)
2.         Four General Types
(a)             Absolute Prohibition of Transfer
(i)               Law does condemn an effective prohibition against transferability
(1)             Rafe v.Hindin
a.              Shareholder got stuck with his shares because he could only sell them to his co-shareholder and they didn’t want them.
b.              Restriction invalid because it was an unreasonable restraint on alienation.
c.              Note:  Delaware statute seems to conflict because it allows for the unreasonable refusal to buy shares.
(b)             Consent Provision
(c)             Right of First Refusal
(i)               upheld as long as its not unreasonable
(d)             Buy Out Provision
(i)               Right to sell back stock to corporation
(ii)              Modern judicial trend has been to favor these
(iii)            Allen v. Biltmore Tissue co.
(1)             Corporation had right to buy back shares at issue price (offered 2x that).  Heirs of shareholder refused.
C)            Cumulative Voting
1.         A system of voting for the election of directors that is intended to give minority shareholders representation on the board.  Success depends on the % of shares owned and the # of directors elected.
2.         Formulas (where fractional shares are not voted:
3.         % of votes needed +1 vote    =                                  1                                
4.                                                                         # of Directors to be elected +1

·                     or

5.         Number of votes required   >                      Number of Shares Voting           .
6.                                                                        Number of Directors to Be Elected + 1
7.         Straight voting
(a)             number of directors to be elected x the number of shares = number of votes you get to vote
8.         Evading Cumulative Voting
(a)             Staggered voting
(i)               Staggering the number of directors that come up for election each year
(ii)              Generally states permit no more than 3 classes of directors, thus requiring that at least 1/3 come up for re-election each year
(iii)            Bohannan v. Corp. Commission
(1)             Commission had initially rejected proposal for staggered terms, saying that it frustrated the purpose of cumulative voting
(2)             HELD – Statutory provision allowing for cumulative voting AND staggering the board elections were upheld.  (??)
(b)             Have provision requiring majority of votes to remove directors
(c)              Reduce the number of directors (to increase the size of the minority block needed to vote a director in)
(d)             Use nonvoting stock or stock with limited voting rights
9.         Removal
(a)             A number of statutes permit the removal of directors by a vote of the shareholders with or without cause
(b)             Often, c.v. statutes say that a director elected by c.v. can’t be removed if the votes cast against his removal would be sufficient to elect him if voted cumulatively at an election at which the same total number of votes were cast and the entire board were then being elected.  (NY corp law)
(c)              RMBCA
(i)               authorizes removal of directors without cause unless the Aolnc provide that directors may be removed only for cause.
10.      C.V. is optional in most jurisdictions.  Some may make it mandatory unless corporation expressly cancels it in certificate of incorporation.
11.      Discussion
(a)             What’s the benefit of minority representation?  They’re still the minority
(b)             Can you just amend c.v. away?
(c)              Do minority shareholders always have the right to a number of directors that allow them to vote at least one director in?
D)            Shareholder Agreements Respecting Voting / Election of Directors
1.         Issue à Shareholders in close corporations may try to set up voting agreements with others to preserve a certain amount of control, to what extent should they be allowed to do this?
2.         Informal Ways that Offer Common Protection for Minority Shareholders
(a)             SuperMajority Voting (not just CCs)
(i)               numerous variations exist (more than 50% required)
(ii)              gives minority shareholders effective veto power
(iii)            Virtually all states allow (including RMBCA) even where unanimity is required.
(iv)            E.K. Buck Retail Stores v. Harkert
(1)             party agreed to buy additional shares of the company if the other party would agree to cast his votes so that the new guy could pick some people on the board.
(2)             This has nothing to do with how the board of directors is governed (so it doesn’t violate the statutory requirements of management)
(3)             There was no transfer of control to outsiders.
(4)             Rule – Stockholders’ control agreements are valid where it is for the benefit of the corporation, where it works no fraud upon creditors or other stockholders and where it violates no statute or recognized public policy.
(5)             It’s all about personal consideration
(b)            Vote Selling Agreements
(i)               per se prohibited
(ii)              Would allow for people to vote in ways that are not in the best interests of the corporation
(iii)            allows shareholder to externalize risk of owning stock for the amount of money he received for selling his vote
(iv)            Discussion
(1)             What’s so wrong about vote selling?  What if the votes are just sold to another shareholder?  What’s so wrong with that?  What’s the different between selling your votes and cashing out your stocks to the highest bidder?
(c)            Pooling Agreements
(i)               Shareholders agree to vote together or as a unit on all matters.
(ii)              Generally held valid (including RMBCA)
(1)             RMBCA – two or  more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose
(iii)            Usually remain in effect for an indefinite period of time.
(1)             Does the law want to encourage perpetual, binding contracts?
(iv)            Problems with enforcement often arise
(1)             Ringling v. Ringling Bros.
a.              3 shareholders sign a vote pooling agreement.  when they can’t agree, their lawyer will act as arbitrator
b.              Holding à  Agreement is valid, but it did not create an implied, irrevocable proxy (which would allow arbitrator to cast votes of non-complying votes), result is that non-complying votes will not be counted.
(v)             Delaware law (after Ringling)
(1)             An agreement between 2 or more shareholders, if in writing & signed by the parties, may provide that in exercising any voting rights, the shares held by them shall be voted as provided by the agreement, or as the parties may agree, or as determined in accordance with the procedure agreed upon by the parties.
3.         Voting Trusts
(a)             Specialized devices established by formal transfer of voting shares, usually for a designated period, from the owners to the transferees.
(b)             Voting Trust Certificates
(i)               Transferable
(ii)              Real owners have all the rights and benefits but don’t have legal title
(iii)            Can only be created by stockholders
(iv)            Used to be limited to 10 years.  Limit now differs by jurisdiction (??)
(c)              Why have a Voting Trust
(i)               It can be used to achieve the same results as vote selling and pooling agreements.
(ii)              Often used to protect lenders who infuse fresh capital in failing corporation
(d)             Scope of Power
(i)               Trustees can’t favor one class of stock over another, even if they were able to amend their charter however they wanted.  (Brown, 4th Cir.)
(ii)              Trustees can vote to sell land that is corporation’s only asset, even when they can’t terminate or dissolve the corporation.  (College, DE)
(iii)            Should they be able to:
(1)             adopt basic corporate changes?
(2)             elect themselves directors?
(3)             extend the duration of the trust?
(4)             attend and speak at shareholder meetings?
(5)             institute derivative suits?
(6)             inspect the corporate books?
(7)             exercise preemptive rights?
(e)             Almost all states authorize and govern voting trusts
(i)               DE
(1)             Must
a.              be in writing
b.              filed in the registered office (so that it’s open to inspection by other stockholders)
c.              have a certificate of voting trust issue
(2)             No
a.              limitation on time limit
b.              “proper purpose” requirement
(ii)              RMBCA (same basic 3 requirements as other states)
(1)             maximum term of 10 years
(2)             requires public disclosure (file copy with corp’s office)
(3)             trust must be in writing and have a formal transfer of shares on records of corporation
a.              Abercrombie
i.               shareholders created informal, nondisclosed voting trust
ii.              Holding – Agreement was invalid because intent of the parties was controlling.  Court determines that they intended to create a voting trust but failed to comply with statutory requirements (which made it secret trust)
(f)               TEST OF VOTING TRUST
(i)               Voting rights of pooled stock have  been divorced from the beneficial ownership which is retained by shareholders
(ii)              Voting rights have been transferred to fiduciaries denominated Agents
(iii)            Transfer of rights is through medium of irrevocable proxies (sometimes effective for set period / 10 years)
(iv)            All voting rights in respect of stock are pooled in the Agents as a group through the device of proxies running to the Agents jointly and severally and NO stockholder retains the right to vote his or its shares
(v)              On its face the agreement has for its principal objective voting control of the corporation
(g)             Discussion
(i)               Why does an agreement between two shareholders that one will have first right of refusal need not be public even though this is similar to a voting agreement?
(1)             Lehrman v. Cohen
a.              Created a third class of stock that could only vote (didn’t get dividends, etc.).  Additionally, it could only vote when the other two disagreed.
b.              Holding:  This wasn’t a trust – the creation of the stock merely diluted the power of the other stock, it did not divorce the stock from control.
(ii)              Is the key policy consideration the secrecy of the agreement?
E)             Agreements Regarding Actions of Directors
1.         Express Agreements
(a)             Orthodox Corporate Rule
(i)               The business and affairs of a corporation shall be managed by (or by the authority of) the board of directors.
(ii)              Older cases held that agreements which substantially fetter the discretion of the board of directors are unenforceable.
(b)             New York Case Law
(i)               McQuade
(1)             Majority and 2 minority shareholders agreed that they would use their best efforts to keep one another in office as directors and officers at specific salaries, then 2 decided to drop McQuade
(2)             Holding – Shareholder agreement was INVALID because shareholders may not place limitations on the power of directors to manage the business of the corporation by the selection of agents at defined salaries
(3)             Rule – An agreement among stockholders where they attempt to divest the directors of the power to discharge an unfaithful EE of the corporation is illegal as against  public policy.  Stockholders may not agree to control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries.
(ii)              Clark v. Dodge (2 years later)
(1)             Plaintiff and D made agreement to elect P as director and to pay him as long as he remained “faithful, efficient and competent”
(2)             Holding – Agreement was VALID because
a.              all the shareholders had signed the agreement and there was no sign that anyone would be injured by contract and
b.              impairment of board’s powers were negligible since plaintiff could be discharged for cause and board could pay him his income after deciding corporations other needs.
(3)             Rule – If the enforcement of a particular contract damages nobody, not even in any perceptible degree the public, one sees no reason for holding it illegal even though it impinges slightly upon the broad provision of section 27.  Where directors are sole stockholders, there seems no objection to enforcing an agreement among them to vote for certain people as officers.
(iii)            Long Park v. Trenton Theaters
(1)             All 3 shareholders signed agreement that one of them would manage the corporation for the next 19 years
(2)             Holding – Agreement INVALID because clearly violated statutory rule that “the business of the corporation shall be managed by its board of directors.”  Directors may neither select nor discharge the manager to whom the supervision and direction of the theaters was delegated.  The board was completely sterilized. 
(iv)            CONCLUSION
(1)             In order to be valid the agreement must:
a.              not harm creditors, the public or non-consenting shareholders AND
b.             involve only an “innocuous variance” from the rule that the corporation’s business should be managed by the board
(2)             There may be a requirement that all shareholders consent
(c)              Other Jurisdictions
(i)               Galler v. Galler  (Modern Liberal Trend) - CC
(1)             2 principal owners of corp. signed agreement where they agreed to pay dividends and pension to each other’s widows.
(2)             Holding – Agreement VALID even though limited discretion of board of directors.  Court stressed importance of broad & enforceable shareholder agreements in CCs
(3)             Test – Agreement Must:
a.              show that there is no minority interest that is injured by it AND
b.             no injury to public or creditors AND
c.              agreement must not violate a clear statutory prohibition
(ii)              Glazer v. Glazer    
(1)             Court upheld agreements were it could (given different laws or states) that were unanimously signed by all shareholders AND which did not prejudice the rights of minority interests
(iii)            Modern Statutory Approach
(1)             Must be a closely held corporation and must be a unanimous agreement
(d)             Discussion
(i)               Was McQuade correctly decided? 
(ii)              Excerpt from other outline:
(1)             When control a director à you own enough shares to vote a director in so if don’t like how one is voting, can be sure that will want to vote someone else next year
(2)             Pretty much only thing a majority director can’t do is to defraud his fellow shareholders, or to violate his fiduciary duty of care to corporation
(3)             Tension between concept of corporate democracy and the reality of majority rules.  The majority shareholder can control his elected directors only so much – they are still free actors and can run the risk of not getting elected next year, but if the majority shareholder enters into this type of agreement where he is promising someone an office and a salary then he is locked into this decision as are his minority shareholders, so there is less chance for any one breaking with his decisions
(4)             Minority shareholder may be harmed by these types of agreements because, although the majority shareholders run the corporation (unless there is a breach of fiduciary duty) the minority always has an opportunity through the power of persuasion to get the majority to line up with him and vote differently.  But where the agreement is already signed, this chance is taken away from them and they are forced to abide by an agreement they didn’t agree to.
(5)             If minority object to McQuade’s discharge, then implies they would have agreed to the contract in the first instance and it would have been unanimous so would have passed – the problem with t his is that the minority is now controlling the corporation against the wishes of the majority shareholder
(6)             Can enforce long term supply contract against the corporation, but why not enforce a long term personnel contract?  If it a business judgment and satisfies the duty of care, then uphold whatever the majority says
2.         Implied Agreements
(a)             Issue à Majority owners concededly have rights to “selfish ownership” – how is it to be balanced against the fiduciary duty they owe to the minority shareholders, especially where there is a legitimate business objective?
(b)             Freeze Outs
(i)               majority owners in a CC can effectively cut out shareholders out of corporation decision making by depriving them of corporate offices and employment with the corporation
(c)              Donahue
(i)               Shareholders of a CC owe other substantially the same duty in the operation of the enterprise as partners in a partnership (utmost good faith and loyalty)
(d)             Problem – Untempered application of good faith standard would result in imposition of limitation on legitimate action by the controlling group in a CC which would unduly hamper its effectiveness in managing the corporation in the best interests of all concerned,.
(i)               Wilkes
(1)             4 men investing in a nursing home.  They had an understanding that each man would invest their money, each would be elected a director and each would receive money from the corporation as long as they remained active in their duties.
(2)             Wilkes did not sue for breach of an agreement, unlike the express agreement cases. 
(3)             Holding
a.              Directors owe each other a fiduciary duty (shareholder normally do not)
b.              controlling shareholders in a close corporation are equal to partners, owing each other fiduciary duty.
c.              The other 3 directors didn’t show that they had a legitimate business purpose for kicking out Wilkes so they did breach their f.d.
(ii)              Merola
(1)             Issue – If you have an at-will employee who owns stock in the corporation, what is their status?
(2)             Holding – The corporation had no legitimate business purpose for the termination, but the termination was also not for the financial gain of the corporation and was not against public policy so they upheld it.
(iii)            Ingle
(1)             A minority shareholder in a close corporation, by that status alone, who contractually agrees to the repurchase of his shares on his termination for any reason, has no right against the corporation for his discharge.
(2)             There was no evidence he wasn’t paid a fair price for his shares.
(iv)            Zidell
(1)             One shareholder bought out another minority and got the majority.  The other guy brought an action for breach of fiduciary duty because they were supposed to be equal
(2)             Holding:  No breach of fiduciary duty.  There is no evidence that the corporation has made a practice of purchasing its own stock, and no agreement.  (This is not corporate opportunity, it’s a Wilkes kind of case)
(v)              Cressy
(1)             Holding:  there was evidence that they intended to be equal partners so there was a breach of fiduciary duty.
(vi)            Johns
(1)             No breach of fiduciary duty because there was no agreement that they would be equal partners.


VI.        Director’s Delegation of Management Authority
A)             Director’s can’t delegate control and/or management of the corporation to others.
1.         Merely having the delegate report and account to the board does not satisfy the rule.  – Kennerson
2.         A corporation can’t delegate the right to completely manage all the theaters, the principal business of the corporation.  – Long Park
3.         A casualty company was not allowed to delegate the “underwriting and executive management” of the company for 20 years.  – Sherman
B)             A company could allow an editor to supply the “editorial policy” for 5 years.   – Jones
C)            President could get damages for the remaining of the one year term to which he was elected, but not to the term year term he was promised employment.  - Pioneer
1.         Dissent wouldn’t even give damages for the remainder of one year.


VII.       Resolution of Disputes and Deadlocks
A)             Arbitration
1.         Quicker than litigation, more private than litigation, results in more workable decisions (more flexible than litigation)
2.         But courts aren’t always quick to uphold arbitration clauses in contracts.
(a)             It used to be that the clauses were always revocable by either party, although statutes have negated this now.
(b)             Before arb. were only for conflicts that could be lawsuits, then courts would say that that wasn’t appropriate for arb.  Now it’s enforceable without regard to that. 
(c)              The aversion to separation of ownership has had courts construe then narrowly or refuse to at all. 
(d)             Also, can’t sterilize the board.
B)             Receivers, Provisional Directors, or Custodians
1.         Courts of equity have long been able to appoint a receiver, custodian or provisional director for dissention wracked corporations.
2.         Delaware Law
(a)             pg. 773
(b)             custodian is allowed where directors are deadlocked
(c)              Giuricich
(i)               receiver – all the powers of a receiver and the power to continue the corporate business until ordered by the court
(ii)              custodian – standby powers of a receiver, can’t liquidate its affairs
(iii)            A custodian can be appointed when the shareholders are deadlocked, not just when the directors are deadlocked.
C)            Dissolution
1.         A specified percentage of shareholders can voluntarily dissolve the corporation. 
2.         Some statutes authorize courts to order the involuntarily dissolution under specified conditions.
3.         CL : In the absence of statutory authority, courts were powerless to order the liquidation of a solvent corporation, irrespective of the danger of abuse, dissension, or deadlock.
4.         Today : Most courts allow involuntary dissolution now under certain circumstances.
(a)             majority shareholder, officers or directors are guilty of fraud
(b)             m.s., o or d have grossly mismanaged the corporation.
(c)              deadlock among shareholders that have stopped business activity
(d)             it’s impossible for the corporation to carry on business
5.         Nelkin
(a)             There is no wrongdoing alleged or present so they can’t dissolve the corporation. 
6.         Kruger
(a)             The majority shareholder was looting the corporate assets nor was he maintaining the corporation for his own benefit so it could not be dissolved.
7.         Meiselman
(a)             Close corporation
(b)             Reality doesn’t allow a minority shareholder to bargain for greater protection before accepting his position as a minority shareholder in the corporation.
(c)              Some states allow dissolution when the company is oppressive, or unfair, or when dissolution is reasonable necessary.
(d)             A complaining shareholders rights or interests in a close corporation include the reasonable expectations he or she has.

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