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1. Agency-Agent Relationship
a. Rule: Fiduciary/agent must deal with the principal in total candor, account for all
profits flowing from the information the agent receives from the principal; the agent
must not disclose principals trade secrets; may not carry on a competing business
until after the relationship is terminated. Can set up logistically while at the
company, but cant compete- seek clients until leave. The agent must prefer the
principals interest over its own.
2. Non-competing agreement
a. Courts will enforce it if its reasonable in scope, geographic area, and duration
b. Remedy:
Disgorging of the profits earned in competition
A constructive trust on the competitors property; or
Damages for injury to the corporation
3. Fiduciary duties
a. Total candor
b. Counting for total profits
c. Not use of principals trade secrets
d. Can compete after relation is terminated
4. Actual authority a principal manifests assent either expressly or implicitly to do the act
in question directly to the agent; e.g., expressly if a writing tells the scope of the agents
authority or the principal tells the agent to go negotiate a contract; impliedly if the
principal does not expressly authorize an agent to offer more than a 10% discount but the
agent does it repeatedly without objection by the principal, then the agent may be
impliedly authorized to make such offers in the future.
5. Apparent authority a principal manifests assent directly to a third party who is dealing
with the agent; a principal represents that a party is his agent, and a third party actually
and reasonably relies on this representation; third party must reasonably believe agent is
authorized to do the act in question.
6. Inherent authority an agent can bind a principal based on the agents role or position
as an agent even if the particular action has been forbidden by the principal if his intention
was to do the act on behalf of the principal and the act was usual or necessary for this
type of agent.
7. Ratification an agent does the act in question without the principal's approval, but later
the principal approves the agent's act in question

1. General Partnership- Its a business association where there are two or more persons
with the intent to carry on as co-owners a business for profit; they share decision making.
a. Requirement- parties have intent
b. Subjective intent is irrelevant.
c. Need unanimous consent to make decisions outside of scope- extraordinary of
d. Partners are residual claimants, risk bearers, oversee business affairs
e. Majority vote for ordinary decisions.

2. Formation of GP
a. Doesnt require written agreement or governmental action, just statutorily specified
mutual manifestation of consent.
b. All is required is that the parties have the intent to carry on as co-owners a business
for profit.
3. Liability
a. Unlimited personal liability- all partners are jointly and severally liable for all
obligations of the partnership and there is no limit on potential personal liability.
Liable for liabilities incurred by the partnership itself; and
For acts of other partners acting as agents of the partnership.
b. Default rule- share profits and losses equally.
4. Fiduciary duties - Each partner owes a fiduciary duty to other partners.
a. Total candor- cant lie.
b. Duty of loyalty- cant get rid of it but can change it.
Punctilio of an honor the most sensitive, is then the standard of behavior.
c. Due care gross negligence or reckless conduct, intentionally misconduct
d. Good Faith and Fair Dealing- have an implied duty of this in every K.
5. Dissolution
a. If partnership wishes to terminate its associations w/a partner, it does so by
dissolving the partnership and paying the expelled member the value of their
interest in cash
b. Partners need to liquidate their assets sell everything
c. Pay the creditors first
d. Pay back capital investments
e. Split profits and loses equally
Default rule- losses follow the profits, unless its otherwise stipulated in the

P1 puts in 25%- hes 25% liable for losses.

Partner is not entitled to receive compensation for services or interest on
capital unless he gives a loan.
f. Sweat equity when a partner contributes in services
Default rule: partner is not going to get paid back when there is a dissolution
can change if the agreement stipulates otherwise.
6. Tax
a. Pass thru entities- tax passes thru the entity and goes straight to the partners
income, only taxed once.
b. Partners can claim losses on their individual tax returns.
7. Characteristics to figure out if there is a partnership?
a. Did they agree to share profits?
b. Was there an expression of intent to carry on as co-owners
c. Are they participating in the control of business together?
d. Contribute money or sweat equity in the business.
e. Share loses.
f. Dont need subjective intent
8. TX
a. Only requires a statutorily specified mutual manifestation of consent.
9. At will when a partnership is formed w/o agreeing how long it will last, but has a specified
task, and once its done the partnership is terminated.
a. Any partner may dissociate and thereby cause a dissolution of the partnership.
b. Once dissolution occurs, the P must wind up its business to pay its debts
c. Any partner normally has the right to require that the partnerships assets be
liquidated via a judicially supervised auction

10.A partner cant compel another to come to any particular decision regarding partnership
business even if decision would benefit the partnership.
11.A partner violates the duty of loyalty and implied covenant of GF and FD when he unfairly
determines another partners profit share.
12.GP -> LLP
a. created to shield general partners in GPs from personal liability.

Limited Partnership
1. Formation
a. Its a business association that is composed of at least one general partner and one
limited partner.
b. Its formed by filing a certificate of LP with the secretary of state.
2. General Partners
a. Are agents of the partnership (in GP and LP)
b. Make management decisions
c. Share in profits of the firm
d. Have unlimited personally liability
e. Have pass thru taxations
3. Limited Partners
a. Liable for what they put into the company
b. Share in profits but can lose in their profits.
c. They are passive investors
d. Do not have management power
e. Can withdraw at will. Withdrawal doesnt trigger dissolution and liquidation of the
f. Do not have any obligation or duty of a GP
g. Protected from personal liability for the partnerships obligations or torts or
malpractice committed by other partners.
4. Tax
a. Enjoy pass through taxation taxed at the individual level not entity level.
a. A LP can become a LLP/LLLP- Created to shield general partners in LPs from
personal liability.
b. In an LLP, general partners and limited partners have limited liability.
c. Is comprised of general partners who are not personally liable for the partnerships
obligations or torts committed by other partners.
d. Partners are only personally liable for their own tortious conduct
e. Can only lose whatever investment they contributed.
f. A Partner is not liable for claims against the other partner by third parties.
g. Enjoys pass through taxation, or no taxation at the entity level, just at the individual
6. Loses follow the profits, unless K says otherwise.
7. Indemnification- the certificate of formation or P K may restrict the circumstances which
the LP indemnifies or advances expenses to a partner.
Look at practice problem #1

1. When the company dissolves
2. 801- when does dissolution occur
a. in at-will partnership, when one partner says he/she is leaving


all partners agree to dissolution

the completion of the undertaking
some agreed-upon event written in the partnership agreement occurs
on application by a partner, a judicial determination that the economic purpose of
the P is likely to be reasonable frustrated or it is not reasonably practicable to carry
on the partnership
3. If there is dissolution
a. Liquidate all assets
b. Pay creditors
c. Repay capital contributions of partners
d. Distribute profits or losses accordingly
A partner is not entitled to receive compensation for services or interest on
his contributed capital, unless its in the K.

If there was a loan, then partner can get interest.

sweat equity- dont get compensated for it, unless its in the
contract (Partnership K)
4. Dissolution = liquidation

1. Allows the Partner to leave, but the partnership continues.
2. It occurs when:
a. A P gives notice of express will to withdraw;
b. An event agreed to in K as causing Ps dissociation
c. Ps expulsion pursuant to P K
d. On application by judicial determination bc the partner engaged in wrongful conduct
that adversely and materially affected the business, the partner materially breached
the K or duty owed to the P, or the Ps conduct makes it not reasonably practicable
to carry on the P with the partner
e. Partners death
3. Dissociation typically = buyout
4. Firm may expel a partner:
a. For purely business reasons
b. To protect relationships both within the firm and with clients; or
c. Without breaching any duty in order to resolve a fundamental schism.
5. Wrongful Dissociation
a. Partner breaches express provision of the K
b. P withdraws or is expelled by judicial determination before the expiration of the
term or the completion of the undertaking.
c. Dissociation by means other than a partners express will to withdraw in an at-will
partnership typically results in a buy-out of that dissociating partners partnership
interest, and the buy-out price is based on the greater of the partnerships
liquidating or going-concern value

1. Formation
a. Need AOC according to the requirements of state law.
b. Singing the AOI by one or more incorporators
c. Submitting the signed AOI to the states secretary of state for filing
2. Three Specialized Roles
a. Shareholders
Risk bearers and residual claimants


Provide capital and elect directors

Have limited liability- lose what they put in
Personally liable if pierce the corporate veil.
Do 3 things:

On fundamental corporate changes mergers, amending AOI,
Remove or select members of BOD

Sell their shares

Derivative action suing BOD or officers on behalf of the
company for doing something improper
Direct action- want to get something for them- dividends Dodge
Problem 3-2 initiating amend to the AOR and bylaws

SH cant initiate amendments to AOF

Can initiate amendments to bylaws

b. Directors
Make major policy decisions
Inside directors- key management employees. They are an invaluable source
of information for company
Outside directors- have expertise and knowledge

Possess detail information necessary to determine an appropriate

cause of action

Familiar with the dynamics of the type of transaction being

contemplated by company.
c. Officers
Oversee day to day operations
Carry out whatever the BOD says
Responsibilities are laid out in the bylaws
Can bind liability to the corporation
3. Articles of Incorporation
a. Need to include business purpose Model Act
Purpose of corporation cant change the bylaw but can restrict management
b. Specify the shares the company will have authority to issue.
Include various classes of authorized shares, # of shares in each class, and
the privileges, rights, and limitations, and preferences of each class.
c. Who makes management decisions, runs the company.
Include power of directors can only change the powers in the initial AOF.
After this, the only place that can be changed in within the BOD- typically
wont happen.
d. Limit powers of the board
e. Include the name of the company
Corporation, incorporated, company, or limited
f. Whether can have annual election of all corporate officers write this on the exam
DL allows to state how officers will be elected
Model Act doesnt say, so the power resides within the BOD.
4. Amending the AOI
a. SH cant initiate amendments to AOI- Rule 14(a)(8)
Can make suggestions to BOD to do X

b. BOD can exclude proposals under 14(a)(8) that are not proper subject for SH action
under state law, unless theyre cast precatory/suggestion:
Economic relevance test: proposals can be omitted that that relate to
operations accounting for less than 5% of the corporations total assets, gross
sales, and net sales if the proposal is not otherwise significantly related to the
companys business.
Ordinary business exclusion- proposals significantly relating to the ordinary
business of the company.
(dont need both? If it deals with a matter relating to the companys ordinary
business operations.
c. Argue for SH proposal
Its an ethical and social significant and its related to the business
A lot of what the company does is charitable contributions they have a list
of donors
5. Bylaws
a. Lay out the procedures and process how the BOD decides substantive decisions.
Dont say who makes decisions
Fixed # of directors on the board
# required for quorum
voting requirements for board action
b. SH or BOD have to confirm power to initiate changes to the bylaws
6. Amending the Bylaws
a. Only BOD can initiate amendments to the AOF DL and Model Act
b. Operational decisions for the corporation cannot be made by SH, only by BOD
c. SH can initiate amendments to bylaws

Closed Corporations
1. Characteristics:
a. Small business
b. The stocks are not publicly traded
c. If SH do not like what is going on they cant sell their interest
d. No separation of roles roles are merged into SH, directors, and officers
2. Tax elect to be taxed as C corps or S corps
a. S Corp- use the pass thru taxation, like a partnership, avoid double tax
b. C Corp- taxed on income made in the company, and tax on dividends issued.
Can avoid double taxation by not giving dividends and giving a salary to the
3. Agreement freedom of K
a. Its used to put someone on notice- what parties can or cant do.
b. has to be approved by all SH
c. can eliminate BOD, restrict or limit their power
d. how authority is exercised
e. can say that SH can include restrictions, conditions, or anything they want in the
4. Negative factors for SH
a. Can become minority SH and be removed from the board or frozen out
b. The shares are hard to value since theyre not publicly traded
Hard to transfer them to someone
Shares may have restrictions, (i.e. only pass on to family)
5. Benefit- can become a public held corporation
6. Oppressive Conduct definition - Hodge
a. A burdensome, harsh and wrongful conduct;

b. Lack of probity and fair dealing in the affairs of a company to the prejudice of some
of its members; or
c. A visible departure from the standards of fair dealing, and a violating of fair play on
which every SH who entrusts his money to a company is entitled to rely.

Limited Liability Company

1. Formation must be filed with the secretary of state. Is comprised of at least one member
to create it.
a. DL- says that an LLC is a person
b. Are enduring business life- live forever.
2. Rights and Duties
a. Same fiduciary duties as partners in a GP
b. DL- allows to eliminate every single duty except the duty of GF and FD in contract.
c. Attorneys cant eliminate their duties of professional conduct
d. TX- allows to eliminate all duties except managers limited liability on:
Breach of duty of loyalty
Receipt of an improper benefit
Intentional misconduct or
Knowing violation of the law.
3. Characteristics
a. Members are residual claimants.
b. Member-managed LLC the company is run by members
c. Manager-managed LLC is the default (in TX) but can be changed
d. Have limited liability
e. Main featurei.
Combines corporate limited liability with the partnership type of flexibility in
structuring the organization
Have pass-thru taxation
Can set up a board if they want to, but they dont have to.
4. Liabilities
a. A P is not personally liable to any person, including another partner.
b. P is liable of its own tortious acts
5. Tax
a. Check the box taxation- taxed as:
Sole proprietors
S Corps avoid double taxation as pass thru
C Corps
Pass thru tax
a. Members can own stock in LLC, if set up this way.
7. Voting
a. Distributions are company agreement default.
8. An LLC can become an LLLC
a. A limited partnership
9. Dissolution TX
a. Test
Whether it is reasonably practicable to carry on the business of a LLC, and
not whether it is impossible.

Courts look at the business of the partnership and the Gral partners
ability to achieve that purpose in conformity with the partnership
agreement. It considers:
Members vote is deadlock at board level is it futile?
The operating K gives no means of navigating around deadlock

Due to the financial condition of the company, there is

effectively no business to operate.

Dont need to show the purpose has been frustrated.

b. The court may decree judicial dissolution of a LLC whenever it is not reasonably
practicable to carry on the business in conformity with a LLC agreement
c. When the company is making profits and there is not deadlock, then it would be
reasonably practicable to carry on the business in conformity with a LLC agreement.

Professional Limited Liability Company

1. TX
a. Is a limited liability company for professionals.
b. Members are not personally liable on the companys obligations
c. Enjoy limited liability
2. Formation
a. Can only create a PLLC if all members practice the same profession.

Fiduciary Duties
1. Punctilio of an honor standard
2. Duty of Total Candor
a. Just bc stockholders voted for it, doesnt completely protect the directors. It must be
b. Gross negligence is the standard in the BJR
SH ratification of the K is not enough to cure the directors vote.
3. Duty of Care
a. Decision making (BJR) need to be reasonably informed [gross negligence standard] Van Gorkom
Van Gorkom- The presumption of the business judgment rule is based on the
directors acting on an informed basis in good faith, and in honest belief that
the action taken was in the best interest of the company. Directors are fully
protected in relying in good faith on reports made by other officers, but not
blind reliance.
b. Director oversight liability - Caremark
Conditions predicate for director oversight liability:

The directors utterly failed to implement any reporting or

information system or controls: OR

Having implemented such a system or controls, consciously failed to

monitor or oversee its operations, thus disabling themselves from
being informed of risks or problems requiring their attention.
To show that director breached duty of care by failing adequately to control
employees, plaintiff would have to show either

That the directors knew or should have known that violations of law
were occurring, and

The director failed to take steps in GF effort to prevent or remedy

that situation, and

Such failure proximately resulted in the losses complained of may

be an affirmative defense.
4. Duty of Loyalty
a. Taking of a Corporate Opportunity? Northeast Harbor- ALI test
Whether this is a corporate opportunity?

Corporate opportunity- opportunity closely related to a business in

which the corporation is engaged.

Encompasses any opportunities that accrue to the fiduciary as a

result of her position within the corporation
This means that the opp came to her bc of her position within
the company.

If it is, the opportunity must be disclose the fiduciary has to offer

it to the company first.
Disclosure has to be in GF, but defective disclosure can be
remedied/cured by a proper
i. Doing this may insulate officer through prompt and
complete disclosure from the possibility of a legal
Whether the opportunity was offered to the SH/corporation?

Can be to the BOD or SH.- have to be disinterested have no

personal stake in it

Have to reject the opportunity or later ratify it.

Rejection cannot be waste

Decision to reject an opportunity would constitute a waste of
corporate assets only if the opportunity was of such obvious
importance and value of the corporation that no person of
ordinary sound business judgment would have rejected the
If theres waste, need unanimous vote of the SH.
If the opportunity is not properly rejected, then Defendant may defend her
actions on the basis that the taking of the opportunity was fair to the
company, however if the company was never officered the opportunity at all,
may not defend on the basis that the failure to offer was fair.

Intrinsically Fair- is there fair dealing and fair price?

Is this an arms-length transaction had there been a 3 rd party
b. Conflicting Interest Transactions Model Act 8.60
Means a transaction effected or proposed to be effected by corporation

When the director is a party [of the transaction]; or

At the relevant time director had knowledge and a material financial

interest known to the director; or
Material financial interest means a financial interest in a
transaction that would reasonably be expected to impair the
objectivity of the directors judgement when participating in the
The concern is that the director doesnt fulfill his duties- want
directors to prefer the interest of the company over their own,
and their votes are not swayed bc of personal interest in the

At the relevant time, a related person was a party or had a material

financial interest
Is this entity control by an individual- need power to control,
power to make decision.
Related person
i. Directors spouse
ii. Child, stepchild, grandchild, parent, stepparent, sibling,
step sibling, half sibling, aunt, uncle, niece, nephew (or
spouse) of the director or the directors spouse.

iii. Individual living in the same house.

Transaction is ok if majority disinterested directors approve or majority of SH
approve or transaction is fair at the time.

Fair price- same type of deal that individual would have negotiated
at arms-length?

Fair dealing- ask:

Disclosed to directors, and how approval of BOD/SH was
obtained undue influence?
i. Fully disclosure?
ii. What reports were disclosed to SH
When the transaction was timed
How it was initiated, structured, negotiated
what was discussed
how the deal go thru?
c. Remedy
The court may:

Hold the director to be constructive trustee for the corporation, and

order him to convey any property, income, or profits derived through
his misappropriation to the corporation; or

Assess any damages suffered by the corporation.

d. After VG- DL limited Duty of care
Reports dont have to be in writing
Allowed BOD to include exculpatory clause
5. Good Faith (part of duty of care and duty of loyalty)- (Disney) a fiduciary breaches this
duty when he/she:
a. Gross Negligence: intentionally acts with a purpose other than that of advancing the
best interests of the corporation do harm;
b. Subjective Bath Faith: Acts with the intent to violate applicable positive law; or
c. Conduct motivated by SBF and resulting from GN: Intentionally fails to act in the
face of a known duty to act, demonstrating a conscious disregard for his duties.
d. DGCL 102(b)(7)
Allows a company, by a provision in the AOI, to exculpate their directors from
monetary damage liability for a breach of the duty of care.

Exception- liability for acts or omissions not in GF or which involved

intentional misconduct or a knowing violation of law subjective bad
6. Fair Dealing
7. Can enforce duties in two ways
a. Action brought by the corporation at the ehest and under the direction of its director
b. A derivative action brought on behalf of the corporation by one or more of its

Business Judgement Rule

1. Operates as a shield to protect directors from liability for their decisions when their
decisions are made:
a. In GF and without self-dealing;
b. After being reasonably informed (gross negligence standard); AND Van Gorkom
c. Because they rationally believed that the decision was in the best interest of the
2. A party challenging a BODs decision bears the burden of rebutting the presumption that
the decision was a proper exercise of the BJ of the board.
3. The SH that one or more of these elements are not present


a. If does that, then the BOD loses the protection of the BJR, and
Then the burden shifts to the BOD to show intrinsic fairness

Fair price and fair dealing as it relates to the decision at issue.

4. BJR does not protect decisions that amount to corporate waste
a. an exchange that is so one-sided that no business person of ordinary, sound
judgment could conclude the corporation has received adequate consideration.
require a showing that the transactions in question either served no
corporate purpose or were so completely deprived of consideration that they
effectively constituted a gift.
Allows courts to ding directors liable where direct proof of lack of care or
loyalty is lacking.
5. Courts should not second-guess directors business decisions
6. A director or officer who makes a business judgment in good faith fulfills her duty
establishing the duty of care if
a. (1) she is not interested in the subject of her business judgment (i.e., no selfdealing);
b. (2) she is informed with respect to the subject of her business judgment to the
extent she reasonably believes to be appropriate under the circumstances [gross
negligence standard here]; and
c. (3) she rationally believes that her business judgment is in the best interests of the
7. The business judgment rule is inapplicable if the decision is illegal or fraud is involved.
8. Doesnt apply when there is an inexcusable lack of attention, diligence, or GF, or if the
decision was illegal, egregious, or fraudulent.
9. A director or officer is entitled to rely, in GF and with ordinary care, on information,
opinions, reports, or statements including financial statements and other financial data,
presented by or prepared by
a. An officer or employee
b. Legal counsel, public accountant, investment banker, or person with professional
expertise in the matter; or
c. In the case of a director, a committee of the board upon which he does not serve.
10.Burden of Proof
a. In a suit for breach of duty of care, the has the burden of proving that the director
was negligent.
11.Dodge- the objective of the company is to maximize SH wealth
a. Look at negative impact is this maximizing SH wealth
b. Nike problem example.

Shareholder Actions
1. Derivative Suit breach of fiduciary duty and loyalty, self-dealing, recovering excessive
compensation, suits to recover economic benefit taken by a company director. MBCA 7.42:
a. SH must make a demand on the corporation before filing a derivative suit
Have to make a demand on the board explaining the claims that SH wish be
investigated and remedied, before filing suit, unless you can show it would be
futile (DL)
To determine futility, the court will decide whether under the particularized
facts a reasonable doubt is created that

The directors are disinterested and independent; or

The challenged transaction was otherwise the product of a valid

exercise of business judgment
The demand must use particularized facts to create a reasonable doubt
showing directors had a financial interest in the challenged transaction,
that they were motivated by a desire to retain their positions on the board


with the company, or that they were dominated or controlled by a person

interested in the transaction.
b. SH must wait 90 days after the demand has been made before filing lawsuit
c. The SH must plead with particularity the subject matter of the suit TX
Plead with particularity facts [tending to show that a reasonable business
person would NOT have made the decision that the new board under these

Meeting all the elements of the cause of action

Difficult for SH to retrieve the docs needed to provide the court the
particularity it demands
d. Once filed, the company has three options
Go along with the suit- dont fight it
Seek stay (60 days) to conduct investigation; or

continue to negotiate with s suit

Court holds the action from litigation

Move to dismiss if suit is not in the best interest of the corporation whether
to dismiss:

Determination made by majority of disinterested directors who

constitute a quorum where interested directors are not present;

A committee of 2+ disinterested and independent directors that are

appointed by a majority of disinterested and independent directors,
regardless of whether independent and disinterested constitute a
quorum; OR

1 or more independent disinterested director appointed by the court

A person is independent and disinterested if the person is not alleged to have
participated in the harmful act or omission (via the taking of a corporate
opportunity or a conflicting interest transaction) or decision now being
questioned by the SHs.
The court must dismiss the lawsuit on the corporations motion to dismiss the
derivative action if the court finds that the corp:

Determined in GF

After conducting a reasonable inquiry upon which its conclusions are


That the lawsuit is not in the best interests of the corporation

** the burden is on the if one of three groups mentioned above

made the decision that the derivative action is not in the best interests
of the corporation

the burden is on the in any other case

look for Duty of Loyalty:

is this a taking of a corporate opportunity?

Conflicting interest transaction

Look at was the director involved in decision or inaction that is at the heart of
the complaint?
Was the decision to move to dismiss the product of the BJR
2. Direct Suita. Voting rights, to pay dividend, oppression of minority SH, freeze-out, compelling
inspection of books and records.
b. SH suffered a special injury that is separate and distinct from that suffered by other
SHs or is based on contractual right

Piercing Corporate Veil


1. Piercing the Corp. Veil

a. Active SHs can be held liable if the corp. veil is pierced
b. Rule: Piercing occurs to prevent fraud or achieve equity for wrongful conduct that
caused injury to the plaintiff
Liability Factors to Consider (just need one of them):

Alter Ego- when the entity is person, not the corporation. The
individual is dominating, has total control, and uses the control. Courts
look at:
Ignoring corporate goals and formalities (mere sloppiness is not
enough) mere sloppiness is not enough
i. SH treats corp. assets as their own or pay private debts
using corp. assets
ii. Commingling of funds and assets
iii. Fails to hold SH meetings
iv. Fails to issue stocks
v. Has control (complete domination)

Under Capitalization (Equity Cushion)

Its measured at time of formation of company, or
Measured when the nature of business changes - fundamental
change in business occurs (change in nature or magnitude)

Avoiding Existing Obligations or Committing Fraud

c. Waiver and Estoppel
Estoppel- comes up when fails to exercise right to ascertain the capital
structure of company
Waiver- a party will be consider to have waived its right to ascertain a claim
against a company to pierce the veil, when there is an intentional
relinquishment of its right by continue to advancing the company credit while
it had the right to demand a financial statement to determine capital
2. Piercing the Veil to reach Real Persons
a. Contract Cases
Consumers Co-Op v. Olsen

Rule: Exceptions to the general rule of limited SH liability includes

circumstances where applying the rule would accomplish some
fraudulent purpose, operate as a constructive fraud, or defeat an
equitable claim (Pierce the Corp. Veil in these instances)

Background: ECO was incorporated by Olsen. Initial capitalization

was $7,018, provided by 3 shareholders: Olsen and his parents. Olsen
opened personal account with Consumers Co-Op but switched it to a
corporate acct. No personal charges were made on the acct. In 1981
ECO has negative equity and it reached $189K by 1984. When ECO fell
behind in payments to Co-Op, Co-Op continued extending credit
despite its policy to terminate.

Purpose was to attempt to achieve equity
Alter Ego? No
i. Corp. formalities were not egregiously ignored
1. passive SHs
2. no commingling of accounts
3. not sing corp. assets for personal use
4. SH meetings occurred, even if informal


5. SHs were not in control

Under Capitalization? No
i. based on time of incorporation or when there is a change
in the nature or magnitude of business
Fraud? No
Waiver? Yes Consumers knew that Olsen couldnt pay debt, but
continued to extend credit
KC Roofing Case (Needs Fresh Start)

Background: Every time Nugents business started to fail he would

start a new one, using similar names and same location.

Purpose was to prevent fraud and/or achieve equity
Alter Ego? Yes
i. Control
ii. Used same location repeatedly
iii. Used corps assets for personal gain
iv. Commingling used house as collateral for secured
interest loan)
Under Capitalization? N/A
Using Corp. to commit fraud & avoid existing obligations?
i. used name & location to convince business to continue
doing business with him.
Piercing the veil is not necessary when an individual is directly responsible for
committing a tortious act, even when acting as an officer or in the name of
the corp. It is necessary when directors or officers of SHs are not directly
involved in the tortious conduct
Western Rock v. Davis (Texas Law)

Rule: When an officer or director has control of, permitted or

directed negligent or tortious conduct through a corp. and used that
corp. as a shield from liability they can still be held liable for the torts
of the corp.

Background: Negligent blasting caused damage to homes. Director

knew about damage being caused but continued with the blasting.
Fuller owned 1/2 interest in Western Rock (the interest was owned by a
corp. owned by Fuller). The corp. would lease equipment to Western
Rock. He was the man behind the scenes, furnishing money, visiting
the job site, and attending BOD meetings. He was in contact with
supervisor and was informed about the complaints, financial troubles
of company, and that insurance would not cover the lawsuits.
Continued blasting anyways. Fullers corp. repod the equipment
leased to Western Rock and then he ceased blasting.
Used company as a shield for liability
Purpose of piercing the veil was to prevent wrongful conduct
Baatz v. Arrow Bar (No Piercing)

Rule: Piercing the corp. veil is necessary when individuals are

treating the corporation as a shield, and limited liability for the
individual would produce injustices and inequitable consequences.
Factors that indicate injustices and inequitable consequences:
i. fraudulent representation by directors
ii. undercapitalization
iii. failure to observe corp. formalities


b. Tort




iv. absence of corp. records

v. payment by the corp. for individual obligation
vi. use of corp. to promote fraud or illegalities
Tort for a corporations officers to be reached for liability for
tortious they had to have been the ones performing the conduct
i. The owners of the bar were not the ones to serve the
Background: Owners of bar did not have dram shop liability
insurance and one of the bars employees served alcohol to an already
intoxicated person who later left the bar and killed plaintiffs family
member in a car accident. Plaintiffs wanted corp. veil to be pierced to
go after owners.
Analysis for Veil:
Plaintiffs failed to prove alter ego
i. Corp. was treated as a separate entity by individuals
when they personally guaranteed payments and it was a
contractual agreement, cant impose tort liability.
ii. Was not conducting personal business using corp.
Plaintiffs failed to show undercapitalization
i. They took out a loan for $155k with a down payment of
$5k didnt show how the $5k was inadequate to start
the bar
A mere failure upon occasion to follow all the forms prescribed
by law does not justify piercing the veil using abbreviation of
incorporated instead of spelling it out wasnt enough

3. Piercing Corp. Veil to Reach Incorporated Shareholders

a. Basic Rule: Corporate shareholder cannot be held liable unless
corp. veil is pierced (indirect liability)

may be pierced and parent held liable for subs conduct when the
corp. form would otherwise be misused to accomplish wrongful
purposes, such as fraud, on the shareholders behalf

focuses parents interaction with the subsidiary

parent actively participated and exercised control over the operations (direct

focuses on parents participation, not the subsidiarys

b. Craig v. Lake Asbestos
Rule: The Corp. Veil of Parent may be pierced only where

the parent so dominated the subsidiary that it had no separate

existence, but was merely a conduit of the parent (alter ego) AND
no only control of finances, but of policy and business practices
so that the entity had no separate mind or existence of its own
as to the transaction at issue must at least be constantly

The parent has abused the privilege of the corp. by using the
subsidiary to perpetuate a fraud or injustice or to otherwise
circumvent the law (illegality)

Caused harm
Burden of Proof- must demonstrate (1) control by one corporation of
another, which is (2) used in a way that results in fraud or injustice; and
which (3) is the proximate cause of s alleged injury.



Factors to piercing the veil:

gross undercapitalization

failure to observe corp. formalities

insolvency non-payment of dividends

siphoning (transfer) of funds by dominant shareholder

absence of corp. records

corp. is merely a faade of operations of dominant shareholder

Background: The Parent company was Charter. The Sub. was Cape. They are
UK companies. There was a policy allowing default judgments against Cape in
the US for supplying asbestos products because they couldnt be enforced in
the UK.
Analysis: No dominance shown: (1) Intent to obtain majority ownership to
have control is not considered dominance needs to show evidence of actual
control once power is obtained (2) Involvement in financial & management
decisions was not enough to show alter ego not even day-to-day
involvement is enough to show dominance and the corps. had separate
bookkeeping and advisors
c. United States v. Bestfoods
Rule: A parent can be held directly liable when:

The parent operates the facility instead of or alongside the

subsidiary in a joint venture

Officers or directors depart so far from the norms of parental

influence through dual offices as to serve the parent
Having dual officer position in both sub. and parent corp. is not
enough to expose parent to liability, so long as the interests of
the officer are not contrary to the subsidiary and advantageous
to the parent.
Agent of the parent as no hat to wear other than the parents
and manages ore directs the activities
Background: Companies were involved in cleaning up a site with industrial
waste, but despite planning on cleaning it up the purchasing company did
not. The parent company created a sub. to purchase the prop. and another to
manufacturer chemicals on the site. Since one of the directors of the parent
played a conspicuous part in dealing with the toxic risks being taken at the
facility, he was actively involved and exerted control over the matters so it
was possible that there could be liable - Remanded

Mergers & Other Friendly Control Transactions

1. Traditional Merger

a. a transaction whereby two or more corporations are combined into one of the corps,
usually referred to as the surviving corporation
b. Dissenters Rights associated with voting for a merger. Only in closely held
corporations not publicly traded corporations- sell shares in the market.
right of dissenting SH to have their shares purchased for cash at fair value
Can receive market value of their shares
Two approaches:

TX/DL- SH will receive judicially determined fair value, plus interest,

even if that amount is less than what the corporation offered to SH as
part of the terms of the merger.


MBCA- requires corp. to make pmnt to the SH as soon as the corp

action is consummated. The SH will get the higher amount offered,
even if the court said fair value is lower.
TX- get dissenters rights as long as its not publicly traded and has less than
2K SH.
c. Requirements for a Merger:
Plan or agreement

which corp. will be Surviving


SHs usually receive shares of surviving corp. in exchange for

disappearing shares
BOD (of Ea. Corp.) Adopts Plan or Agreement
SH Approval

majority vote (absolute majority of all SHs entitled to vote)

Exception to this requirement:

De minimus change- if voting shares dont increase a lot, the
acquiring company doesnt need to get that SH approval, thus
no dissenters rights. A company has a de minimus effect on
voting and equity rights if the merger increases the number of
outstanding common shares of the surviving corporation by not
more than 20%. The acquired companys SH must approve.
Short-form merger- minority SH dont have to vote. If a parent
owns 90% then they can perform a short-form merger wo SH
minority approval, but the minority SH still get their dissenters
rights. Provides efficiency, avoid going thru the voting steps
since the majority is comprised of 90%.
Market out- if a company is publicly traded or has more than 2K
SH, then there are no dissenters rights, bc value of stock is
already valued in a public co.- Rule in TX

In TX- need 2/3 of SH approval

Plan Must be Filed with State Official
Sometimes SHs have a right to Judicial Appraisal

Dissenters can have an evaluation of their stock.

d. Characteristics:
Companies are equals
Both Boards and SHs must approve
SHs can take shares of new company or value of their own stock
e. Hewlett Packard Case
Background: Plaintiffs challenged the validity of the SH vote approving
merger: (1) Buy-Vote Claim, (2) Disclosure Claim. (1) There was not enough to
show evidence of coercion (that HP would no longer do business with
Duetsche) and no indication that voting SH believed its discretion was
limited. (2) Argued against the Value Capture Updates as not reporting all of
the available figures (Clean Room figures vs. the VCU figures). Issue was
whether HP knowingly & intentionally made misrepresentations about
progress of integration process were the SHs informed materials did not
omit material information

2. Short-Form Merger

Parent owns 90% of subsidiary

Only board of parent needs to approve
Minority SHs get appraisal rights (exclusive remedy unless a showing of fraud)
Duty of Candor required



3. Sale of Substantially All Assets

a. Trying to circumvent SH acquiring corp. from have appraisal and voting rights for
b. Rule: If less than all assets are sold, corp. planners must determine whether the
transaction is quantitatively & qualitatively significant enough to require approval
not of ordinary purpose of business (no need for approval of sale of assets if done in
ordinary course of business)
c. Characteristics:
Both boards must approve
SH votes:

No SH vote of acquiring company needed

SH vote for selling company is needed (no appraisal rights)

If not all assets, the test is whether the transaction is quantitatively &
qualitatively significant enough to require approval?
d. Differences with Merger
corp. selling assets does not automatically go out of existence upon
selling corp. need not transfer all of its assets
liabilities of selling corp. will not necessarily pass to purchasing corp.

4. De Factor Merger

a. The SHs who are denied voting or appraisal rights cause ask a court to intervene
and characterize the transaction as a merger
b. Characteristics:
Set up different from, but appears to be, a merger
Both boards and sets of SHs must approve
Delaware independent legal significance theory
c. Applestein v. United Board (MBCA)
Rule: It is proper for a court to disregard the form of a sale or purchase of
assets transaction when its characteristics are virtually identical to those of a
merger in order to order appraisal rights
Background: Acquiring company was United Board. Interstate was the
target company. Epstein owned all the shares of Interstate. The plan involved
a stock exchange Epstein would own 40% of Uniteds shares for his
Interstate stock the assets & liabilities of Interstate would be acquired by
United, Interstate would dissolve, and none of Interstates officers and
directors would remain. United advised SHs that those who voted against the
plan would not be entitled to appraisal of their stock.
Analysis: The transaction between United and Interstate was considered a
de facto merger because factors present in a merger were found in the plan:

transfer of all shares and assets from Interstate to United

Uniteds assumption of Interstates liabilities

Pooling of interests

absorption of Interstate and its dissolution

joinder of officers and directors

present executive and operating personnel of Interstate retained by


SH surrendered stock for newly issued shares in United

d. Hariton v. Acro Electronics (Delaware)
Rule: It is permitted for corporations to use methods that appear to be a
merger when each is a separate action



Background: Used Sale of Assets (Acro to Loral) and Dissolution (of Acro
after sale)

5. Cash-Out Merger

a. Controlling SH cashes out the minority

Weinberger Approach

If self-dealing or beach of duty of candor, then go to the entire
fairness review. Challenger alleges specific acts of fraud,
misrepresentation, or other items of misconduct to demonstrate
unfairness. BOP is originally on majority SH to show that
transaction is fair. (Weinberger v. UOP)
i. Fair Dealing (duty of candor / cannot mislead)
1. Factors:
a. timing of transaction
b. how it was initiated
c. hot it was structured
d. how it was negotiated
e. how it was disclosed to directors
f. how approvals of BODs & SHs were obtained
ii. Fair Price
1. Take into account all relative factors
a. assets
b. market value
c. earnings
d. future prospects
e. other elements that affect value of stock
2. Should not take into account speculative elements
that may arise from expectation of merger
BOP shifts to minority SH if corp. action has been approved by
an informed vote to show that transaction was unfair

Background: UOP (subsidiary) wanted to eliminated minority

shareholders by a cash-out merger. Signal companies (majority SH of
UOP) proposed an acquisition of UOP at $21/share. The stock was
trading at $14. Signal acquired a majority share and elected 6 of 13
directors. Signal decided to acquire the remaining shares and directors
(also directors of UOP) reported that it would be a good investment,
suggesting a price of $24. A price between 20-21 was agreed on
instead. Lehman Bros. quickly compiled a 2 pg. report on whether the
price was fair. Both boards approved the proposal within 4 days.
Minority SHs were not told about the hurried method of the Lehman
report. The vote was close and the acquisition was approved. If the
price was $24 instead the SHs could have received $17 million.
There was no fair dealing
i. time constraints were placed on the report
ii. the structure of and initiation of acquisition was Signals
iii. BODs were on both sides of transaction not an arms
length transaction
iv. Flaws in plans were not disclosed to SHs nor were they
informed about the possible $24 amount
No fair price
i. Court used the wrong method in calculating fair price


ii. Should take into account all relevant factors, except for
speculative elements of value that may arise from
accomplishment and expectation of merger
b. Appraisal Remedy & Cash-Out Mergers
Long-Form Mergers (Second Tier = Cash-Out Merger)

Going Concern assumption that an entity will remain in business

for the foreseeable future

In a two-step merger, to the extent that value has been added

following a change in majority control before cash-out, it is still value
attributable to the going concern

TX rule- Exclusive Appraisal Remedy

Unless there is fraud, the only remedy when have a dissenter, is
Fundamental changes (short, long term mergers, triangular
mergers, sale of substantive assets, etc) requires 2/3 of majority
vote approval.

DL- dont get appraisal rights

Technicolor Case
Rule: Appraisal value is as of the date of the merger: the value
added to the going concern by the acquiring company during
the transient period of a two-step merger accrues to the benefit
of all SHs and must be included in the appraisal process on the
date of the merger
Background: MAF was going to acquire Technicolor using a twostep merger (cash-tender followed by a cash-out). MAFs
controlling SH had a plan to dismember some of Technicolor
businesses after the tender offer, including its failing One Hour
Photo businesses. The two-step takeover included an all-cash
tender offer of $23/share. The plan was operative on the date of
the merger. By not including the plan the court understated the
fair value in the appraisal action.
Short-Form Mergers

Short-form mergers occur when the acquiring company owns 90% of

the target companys shares. The acquiring company/parent can then
unilaterally act to absorb the subsidiary.

Glassman v. Unocal
Rule: Entire fairness standard is not applicable in short-form
mergers; appraisal is the only remedy unless there is a showing
of fraud or illegality. Duty of Disclosure is required minority
shareholders must be given all information that is material to
their decision on whether to accept or seek appraisal.
Background: Unocal owned 96% of UXCs shares and decided
to eliminate the minority shareholders. Both companys hired
committees to consider a merger and a plan was announced: .54
shares of Unocal for each UXC share. Minority SHs argued that
Unocal breached fiduciary duties of fairness and full disclosure.
Stringer Case:

Rule: Where allegations show only a disagreement as to price and

no inference of self-dealing, fraud, deliberate waste, misrepresentation,
or other unlawful conduct, appraisal is exclusive remedy. Where there
is unlawful conduct, rescission is the remedy


Background: Stringer owned 43% of shares in CDS. The Directors

decided to squeeze out the minority SHs by offering a nominal sum for
their stock which was below fair market value. The Directors
transferred their stock to Car Data then voted to merge with CDS.
Under the merger terms CDS shareholders would receive $.002/share.
The plan was approved. Plaintiff shareholders argument was based on
the low price of the offer, stating it should have been $.10.
6. Compulsory Share Exchange
a. one corp. acquires all the shares
b. leaves acquired in existence
c. only needs acquiring BOD approval
d. SHs of acquiring company have no appraisal rights

Hostile Takeovers
1. Hostile Takeovers Occur when/thru tender offer or proxy fight
a. Acquiring company seeks control without the BOD of target companys approval
theyd possible be removed (conflict of interest), or
it could completely change company
b. Two-tier Tender-Offer
Seeks control by offering too low of a price in initial offer, coercing
shareholders to accept initial offer or risk having to tender shares for an even
lower price or junk bonds in the second tier
Creates a prisoners dilemma- lack of information given to shareholders is
biggest problem
c. Proxy Fight
Seeks authority to vote sufficient shares to gain control of board
2. Vocab
a. Bidder/ Raider: acquiring company
b. Bust-up: seeking to break up target and sell it off in pieces
c. Junk Bonds: bonds that are higher risk and bear a higher interest rate
d. Target: company sought to be acquired by raider
e. White Knight: a second bidder, friendly to the target, who makes an offer to rescue
the target from a hostile bidder does not acquire control but acquires a large block
of stock
f. Front-end loaded tender offer: the consideration in the tender offer is worth more
than the consideration in the second-step so that shareholders who do not tender in
the first step will be forced to accept less for the untendered shares
g. Golden Parachutes: a means of keeping executives when a company is in play
lucrative compensation and benefits
h. Greenmail: a targets repurchase of its own shares from a raider where the target
pays a premium for the shares to induce the unwanted suitor to go away (Cheffs
i. Lock-ups: (action by the crown jewels) gives the white knight a right to purchase the
corp.s move valuable assets
Increase dividends to make a take-over less attractive
Buy off a bidder by paying green mail
Run off debt to make company less attractive
Poison pill
j. Crown jewels: companys most valuable assets
k. Poison Pills: stock rights or warrants issued to a potential target shareholders,
triggered by some event, prior to takeover get the right to redeem shares in target


for a price above market price or right to purchase shares of acquiring company at a
reduced price after merger
Flip-In Plan: rights are given to shareholders to purchase additional shares of
stock in the corporation, at a discount. The raider cannot purchase.
Flip-Over Plan: rights are given to target shareholders to purchase shares in
any company into which the target company is merged at a discounted share
Poison pills dilute shares, forcing Raider to buy more
3. Unocal
a. Applies to target companys BODs defensive measures
b. Rule:
Before the BJR can be applied, the Directors have the burden of proof to show

they had reasonable grounds for believing a danger/threat to corp.

policy and effectiveness existed.
Satisfy the burden by showing a good faith and reasonable
investigation (Cheff)
Judgment has to appear reasonable at the time it was made
i. Ask: was this a way to perpetuate themselves on the
Proof is materially enhanced where a majority of the board
favoring the proposal consisted of outside independent directors
who acted in accordance with standards

the defensive mechanism was reasonable in relation to the threat

posed (Unocal)
Clear identification of nature of threat
i. evaluation of the important of corp. objective threatened
ii. alternative methods of protecting that objective
iii. impacts of the defensive action
iv. other relevant factors
Management actions that are coercive in nature of force upon
SHs a management-sponsored alternative to a hostile offer may
be struck down as unreasonable (The Time Case)
The BOP shifts back to plaintiffs to show a breach of directors fiduciary duties
c. Proportionality test- the BOD must show that defensive mechanism was reasonable.
I: whether the directors breached their duties under Unocal
R: the rules would be definitions of whichever defensive mechanisms arose in
the fact pattern- lock-up, termination fee, crown jewels, etc
A: discuss the application of the facts to the Unocal rule, including both
prongs of Unocal. The 2nd prong of Unocal would require you to discuss the
defensive mechanisms employed by the board and whether those were
proportional to the threat posed.
C: brief- i.e. the court would likely find the board did not breach its suties
under Unocal.
e. Threats to Corp. Policy and Effectiveness:
Two-tier, highly coercive tender offers = SHs are compelled to tender to avoid
being treated adversely in second stage

inadequacy of the price offered

nature and timing of the offer

questions of illegality

impact on constituencies other than SH

risk of non-consummation


quality of securities being offered in the exchange
Not a threat: an all-cash, all-shares offer, failing within a range of values that
a SH might reasonably prefer
f. Directors are not obliged to abandon a deliberately conceived corp. plan for shortterm shareholder profit unless there is clearly no basis to sustain the corp. strategy.
Responsive action enacted as corps goal of carrying out a pre-existing transaction
may be reasonably related to a threat. (The Time Case)
g. Unocal v. Mesa
Background: Unocal held a BOD meeting to discuss an offer from Mesa (a
two-tier tender offer for $54/share with junk bond securities in the second
tier). Took 9 1/2 hrs, majority were independent outside directors, discussed a
minimum $60, and discussed defensive strategies (self-tender at $70-75
/share). At the second meeting they rejected the offer. Held another meeting
to approve the self-tender. Took 2 hours, had a detailed presentation, decided
on $72/share, and would go in affect in Mesa acquired 64 million shares
(Mesa already owned 13%). Did not allow Mesa to participate in self-tender.
Analysis: Court found that the measure was reasonably related to the threat
by Mesa (raider), a company with a national reputation as a greenmailer
(presumptively coercive). The exclusion of Mesa from the self-tender was
justified reasonably related to threat posed. If the raider could participate it
would have meant Unocal was funding Mesas own takeover.
h. Cheff Case (reasonable grounds & good faith)
Rule: Where there is a conflict of interest the BOP is on the BOD to show the
action was in good faith with reasonable investigation. There is no penalty for
honest mistakes of judgment if it was reasonable at the time.
Background: A deritvative suit was filed against Hollan corp. for losses
resulting from improper use of corp. funds to purchase shares of the
company. Hollan was owned by P.T Cheff, Wife (12k shares together), and
Nephew (24k shares) and a few other officers. The companys marketing
methods were currently under FTC investigation and sales were down.
Hazelbank corp. owned a large number of Holland shares. Cheffs wife and
nephew owned a majority of Hazelbank shares. Maremot, president of
Maremot Auto, had an interest in merging his company with Holland.
Maremot said he had no interest once it wasnt going to be feasible but he
owned 55k shares, increasing to 100k after several months. He demanded to
be put on the BOD, but Cheff refused. Maremot had plans that were different
from the current structure of the business and the idea of Maremot taking
over created unrest amongst employees. Maremot also had experience with
liquidating companies. Mrs, Cheff personal bought Hollan stock. Maremot
attempted a buy-sell offer with Hazelbank. To keep Maremot from getting a
hold of more stock, there was an agreement to purchase Maremots stock
(greenmail) at $14 per share and had to borrow a large sum to do so. Court
found that Hollands BOD showed that they reasonably believed there was a
threat and performed with good faith and reasonable investigation.
i. Moran v. Household (Unocal applied to defensive mechanism)
Background: Household was concerned it was vulnerable to a takeover due
to the current environment of bust-up takeovers occurring in the financial
industry. One of its directors, Moran, also a chairman of D-M-K, suggested a
leveraged buy-out of Households stock, which never progressed. Instead the
BOD approved a Rights Plan with two Poison Pill options (one flip-in and one
flip-over). The trigger was 20% of shares being acquired by anyone. The
Shareholders would then have the right to purchase 1/100 of a share of
preferred stock. If no merger occurred then the holder of the shares can



purchase $200 worth of common stock for only $100. The BOD met with two
firms (Goldman & Sachs and Watchell, Lipton) to go over the plan. It involved
extended conversations and Moran voiced his concerns at that time.
Analysis: BOD were authorized to adopt the plan. 1) BOD showed good faith
in adopting the plan because it was in reaction to what it perceived to be a
viable threat and not to protect themselves. They were reasonably informed
since they met with the two firms to discuss it, therefore not grossly
negligent. 2) And the plan was reasonably related to the threat.

4. Revlon
a. Applies to target companys BODs actions and whether they breached their duty to
b. Revlon Duties:
maximize immediate shareholder value, and
auction company fairly
c. Two instances that triggers Revlon Duties (but not only):
Change of Control

When a corp. initiates an active bidding process seeking to sell itself

or to effect a business reorganization involving a clear break-up of the
company, or

When, in response to a bidders offer, a target abandons its longterm strategy and seeks an alternative transaction involving the breakup of the company
if Boards reaction to a hostile tender-offer is only a defensive
response and not an abandonment of corp.s continued
existence, then no Revlon duties attachonly Unocal duties
Use of lock-up agreements, no-shop clauses, and dry-up
agreements that prevent shareholders from obtaining a
premium and making the sale of a company inevitable is
insufficient evidencesubject to Unocal
d. Revlon Rule: When there is a pending sale of control, the BODs role changes from
defenders of the corp. to auctioneers and their fiduciary duty is to get the best price
for the stockholders at a sale of the company
inevitable dissolution or break-up is not necessary
See The Time Case: No change of control the company would be owned by
a fluid aggregation of unaffiliated SHs both before and after the merger so
that neither corp. could be said to be acquiring the other
e. Obligations:
act diligently and vigilantly in examining transactions and offers
act in good faith
to obtain and act with due care on all material information to determine
which action could provide best reasonable value available to SHs
to negotiate actively and in good faith with both bidders
f. No-Shop provisions cannot define or limit fiduciary duties
g. Sale of control implicated enhanced scrutiny:
threatened diminution of the current SHs voting power,
the fact that an asset belonging to the public SHs is being sold and may
never be available against, and
actions which impair or impede SH voting rights
h. Competing Bidders not treated equally:
whether the BODs properly perceived that SH interests were enhanced, and
action must be reasonable in relation to the advantage sought to be
achieved, or


to the threat which a particular bid allegedly poses to SH interests
i. Revlon Case
Background: Revlon was the target company, had 14 board members,
majority of which were interested. Pantry pride was the raider, made an offer
beginning at $46 and continued to raise during the bidding war to $56.
Forstman was the white knight that offered $57 upon several conditions
(Lock-up option to purchase Revlons crown jewels, no-shop provision, and
$25 million cancelation fee). Revlon created poison pills plans.
Analysis: The initial defensive tactics (poison pill and repurchase) were
permitted. Once Pantry Prides offer was $50 a takeover was inevitable and
Revlon Duties kicked in. Therefore, the agreements with the White Knight
breached Revlon BODs fiduciary duties because they allowed considerations
other than the maximization of the SHs profit to affect their judgment.
j. Paramount v. Time (The Time Case)- no Revlon Duties triggered
Rule: Two triggers for Revlon Duties: selling of the corp. or change of corp.
Background: Time prepared a tender-offer for 51% of Warner shares after
Paramount offered an all-cash purchase of Time shares for $175/share.
Paramount and Time filed suit to enjoin the tender offer claiming it breached
Revlon & Unocal duties. Discussions about a joint venture between Time and
Warner had been going on for some time. Eventually Negotiations led to a
plan that there would 24 BODs (1/2 of each corp.), with the president of Time
taking over once Warners retired, and the exchange rate for shares. Time
also adopted several defensive tactics: stock exchange, no-shop clause, dryup agreements with banks. Once the plan was announced, and before SH
mtg, Paramount announced an all-cash offer for $175/share subject to
conditions: terminate merger with Warner, stock-exchange, and defensive
measures. Time believed its value was worth more than $175 and concluded
the offer was inadequate. The merger was recast as an acquisition: 51%
acquired for $70/share for Warner shares with remaining for securities and
cash. Time would have to take on debt to do so. Paramount then raised its
offer to $200. The BOD still found the amount to be inadequate because the
acquisition with Warner would have a greater benefit.
Analysis: (1) Abandoning an existing plan will not trigger Revlon duties, but
may trigger Unocal duties. Also, Time was going to maintain control of the
corp. and it would not break up. shareholders, unless there is clearly no basis
for sustaining the strategy. No Revlon triggers were triggered. (2) Directors
were not obligated to abandon a plan for a short-term profit for The Board to
meet its Unocal duties:

There was a threat tender-offer is coercive, offer was inadequate.

Good Faith & Informed (reasonable investigation and judgment

appeared reasonable at the time) met with financial advisors for offer
and analysis of merger, was done to protect culture of corp. and not to
disregard duties. Despite taking on a debt it was reasonable at the
time because it was to meet a long-term goal

Material Enhanced because 12 of 16 BOD were outside indep.


The measures were reasonably related to the threat because its goal
was to carry out a pre-existing plan, which did not preclude Paramount
from making an offer
k. The QVC Case Fiduciary Duties under Revlon
Ruled: Obligations

Reasonably Informed




Diligent and Vigilant

Act in Good Faith
Act with Due Care in obtaining and acting on material

Negotiate Activity with both bidders

Background: Paramount has 11 outside directors out of 15. Viacome began
negotiating a transaction between the two corps, but an original merger
agreement was not approved until a few years later. Under the Agreement (1)
Paramount shares would be exchanged for Viacoms (.10 share of one class
and .90 of another class) and cash. (2) Paramount would amend its Poison Pill
to exempt proposed merger. (3) It included defensive tactics: no-shop
provision, termination fee, and stock option agreement. After the merger was
announced QVC proposed an offer of $80/share and the remaining 49% would
be converted to QVC stock. After this Paramount approved Viacom merger
and with an amendment to the price but not the defensive measures.
Paramount raised its price to $84. QVC raised its price to $90. Without much
information provided to board, Paramount rejected QVCs offer.
Analysis: Revlon was triggered because Viacom would have gained control
under the agreement. Paramount did not meet the obligations once QVC
provided Paramount to seek a higher value for its SHs and to modify its
defensive measures. Paramount had opportunity to modify to reach best
value but didnt. (1) Diligent and Vigilant did not give attention to potential
consequences, (2) Act in Good Faith, (3) Obtain & Act with Due Care on all
material info was not informed in their process (4) negotiate actively and in
good faith with both bidders did not actively negotiate with QVC

Insider Trading
1. Classic Insider Trading:
a. Corporate Insider
i. Classic Insider
1. corporate officer, director or employee
ii. Constructive Insider
1. attorney, accountant, consultants, etc.
b. who has material nonpublic information about the enterprise
i. material information a reasonable person would attach importance in
determining choice of action, including any fact that may affect value of stock
c. has Duty to either
i. abstain from trading, or
ii. disclose the nonpublic information
1. requires giving public enough time to react
2. Violation of 10(b)
a. Chargeable conduct involves
i. a deceptive device or contrivance used
ii. in connection with the purchase or sale of securities
3. Liability Based on Classic Insider Trading
a. Rule: Corporate insider must abstain from trading in the shares of his corporation
unless he has first disclosed all material insider information known to him (Cady,
Roberts & Co.)
b. Insider particularly officers, directors, or controlling stockholders
c. Duty arises when:


i. the existence of a relationship affording access to inside information intended to

be available only for a corporate purpose, and
ii. the unfairness of allowing a corporate insider to take advantage of that
information by trading without disclosure
iii. situation is essentially extraordinary in nature and which is reasonably certain to
have substantial effect on the market price of the security if situation is
d. The Rule (Rule 10b-5)
i. Anyone who, trading for his own account in the securities of a corp. has access,
directly or indirectly, to information intended to be available only for a corporate
purpose and not for the personal benefit of anyone may not take advantage of
such information knowing it is unavailable to those with whom he is dealing
1. applies to anyone in possession of material information (Texas Gulf
a. Test: whether a reasonable person would attach importance in
determining their choice of action in the transaction
b. Encompasses any fact that might affect the value:
i. information disclosing the earnings and distributions
ii. facts which affect the probable future of the company
iii. facts which may affect desire of investors to sell, buy or hold
c. Depends on balancing the probability that the event will occur and
the anticipated magnitude of the event in light of the totality of the
company activity
e. Must either
i. disclose it to the investing public
1. A duty to disclose material information arises from a relationship of trust
and confidence between parties (Chiarella)
a. Rule 10b5-2: trust or confidence exists whenever a person
i. agrees to maintain information in confidence
ii. has a history, pattern, or practice of sharing confidences,
such that the recipient of the information knows or
reasonably should know that the person communicating the
material information expects the recipient to maintain
confidence, or
1. confidentiality agreement
2. relationshiphistory or pattern of prior dealings
iii. receives or obtains material nonpublic information from his or
her spouse, parent, child, or sibling
1. may rebut this with a showing of no history, pattern or
b. Chiarella v. United States (no need to focus on this)
i. Rule: There can be no duty to disclose where the person who
has traded on inside information was not:
1. the corps agent
2. a fiduciary, or
3. a person in whom the sellers of the securities had
placed their trust and confidence
ii. Issue: Whether a person who learns from confidential
documents that one corp. is planning to secure control of
another corp. and fails to disclose the impending takeover
before trading in the target corp.s securities is in violation of


iii. Background: Petitioner who was found to have violated 10b

by trial court did not have a duty to disclose had no prior
dealings with the target company that was going to be
ii. abstain from trading in or recommending the securities which information
remains undisclosed
1. no justification if corp. forbade disclosure
f. SEC v. Texas Gulf Sulphur(Drilling Results)
i. Rule: Anyone with material nonpublic information must either abstain from
trading or disclose the nonpublic information. Information must be disclosed in a
manner sufficient to insure availability to investing public.
1. at minimum this means they should wait until news can reasonably be
expected to appear over the media of widest circulation
ii. Background: Complained that several TGS officers, directors and employees
purchased TGS stocks or call on the basis of material nonpublic information
concerning results of TGS drilling, and two disclosed the information to others
(were tippers). TGS began drilling and the company decided to keep the results
from first exploration confidential. The results were unusually good. During this
time officers began purchasing stock in TGS, at a time when the price was
between $17 & $25. When drilling resumed progress reports were sent to some
officers and directors. Rumors got out and the Directors decided to quash the
rumors by producing a press release saying that the findings were inconclusive
and rumors exaggerated everything. The next day they had a reporter come and
print a story about the major discovery TGS had made. The story was published
on April 16th. The story hit the media at 10:10 am, Merrill Lynch at 10:29 am,
and Dow Jones at 10:54 am. One employee purchased stock the day before.
Another employee purchased at midnight on the 15th and then more at 8:30 am
on 16th. Another ordered shares at 10:20 am. By closing on the 16th stock
prices were $36 and a month later stocks were trading at $58.
iii. Analysis: (1) were insiders. (2) had material info. (3) Acted upon such
g. Arguments for insider trading
i. Its good its a form of compensation
ii. Insider trading affects efficient market- permits smoother changes in stock prices
so it reflects a more accurate price of the share bc of insider trading
iii. Loss of public confidence in the markets- whatever is told to the public has to be
4. Liability Based on Tipper/Tippee
a. Tipper
i. One is a tipper is s/he is an insider (classic/constructive) that passes along
material nonpublic information in breach of a duty to her corporation and receive
some personal benefit from doing so.
1. Ways in which an insider/tipper benefits directly or indirectly
a. pecuniary gain (tipper gets $, there has to be a selling or buying of
b. reputational gain, or
c. giving a gift to a trading relative or friend
ii. An insider is a director, officer, or employee of a corporation.
iii. Material nonpublic information is information not available to the public that a
reasonable investor would consider important in deciding whether to buy or sell
a stock.
b. Tippee
i. A tippee assumes a fiduciary duty to shareholders of a corp. not to trade on
material nonpublic information only when


1. the insider has breached his fiduciary duty by wrongfully providing

information to the tippee (disclosure to tippee is improper)
a. An insider wrongfully provides info when insider/tipper benefits
directly or indirectly
i. pecuniary gain
ii. reputational gain, or
iii. giving a gift to a trading relative or friend
b. no personal gain = no breach
2. and the tippee knows or should have known that there has been a breach
a. no breach by insider = no derivative breach (Dirks)
b. actual vs constructive knowledge
c. Dirks v. SEC (financial advisor received tip of fraud)
i. Rule: Whether a tippee is under an obligation to disclose material information or
abstain from trading depends on whether the tipper breached their Cady,
Roberts duty by disclosing the information, and the tippee knew of or should
have known of the breach. The tipper breaches their duty if they would
personally benefit, directly or indirectly, from the disclosure.
ii. Background: Dirks received info from a former Director of Equity Funding that
assets were overstated due to fraudulent practices. He decided to investigate by
speaking to employees. He didnt own stock in Equity Funding. He discussed the
information with some of his clients who were investors, and they sold their
shares. He attempted to disclose the fraud by having a newspaper report a
story, but they refused on such little facts. With the drop in share prices the SEC
began investigating and discovered the fraud.
iii. Analysis: The purpose of Dirks disclosure to investors was to disclose the fraud,
not for personal benefit. He also didnt misappropriate the information (obtain it
illegally or in breach of a confidential relationship). No liability as a tipper.
iv. Holding: a duty to disclose arises from the relationship bw parties and not merely
from ones ability to acquire information bc of his position in the market.
1. Information theory rejected- everybody, including gral public, should have
the information at the same time so they are at the equal playing field in
terms of investment.
v. Analysis: Dirks, the tippee, did not violate because there was no fiduciary duty
to shareholders.
1. No actions that induced shareholders or officers of Corporation to repose
trust or confidence in him
2. No expectation by tipper that Dirks would keep info confidential (meant
for him to bring fraud to light)
3. Did not obtain information illegally
4. The tipper did not violate his Cady, Roberts duty by passing on info about
fraudulent activity
a. received no benefit by revealing information
b. the purpose of giving info was not to make a gift of valuable info to
5. Liability Based on Misappropriation
a. Misappropriation Theory
i. Purpose- to ensure honest securities markets and promote investor confidencehave people to invest in the market.
ii. Rule: A person (a corp. outsider) commits fraud in connection with a securities
transaction when he misappropriates confidential information for securities
trading purposes, in breach of a duty owed to the source of the information.
1. A duty of trust or confidence exists whenever a person


a. agrees to maintain information in confidence have confidentiality

agreement (written or spoken)
b. person communicating the material has a history, pattern, or
practice of sharing confidences, such that the recipient of the
information knows or reasonably should know that the person
communicating the material information expects the recipient to
maintain confidence, or
c. receives or obtains material nonpublic information from his or her
spouse, parent, child, or sibling default rule
i. may rebut this with a showing of no history, pattern or
b. Satisfies 10:
i. a deceptive device or contrivance
1. deception through nondisclosure of material information
2. full disclosure forecloses liability, but may be liable under state law for
breach of duty of loyalty
ii. used in connection with the purchase or sale of securities
1. fraud is consummated when the fiduciary uses the information to
purchase or sell securities, without disclosure to the principal
c. United States v. OHagan (obtained info from law firm)
i. Rule: A corp. outsider commits fraud in connection with a securities transaction
when he misappropriates confidential information for securities trading
purposes, in breach of a duty owed to the source of the information and is in
violation of 10(b).
ii. Background: OHagan was a partner in a law firm, Dorsey, which was hired by
Grand Met to orchestrate a tender offer of Pillsbury common stock. Both took
precautions to protect the confidentiality of the offer. OHagan was not directly
involved in the project. He purchased $2500 in options and 5,000 shares of
Pillsbury common stock for $39/share. Then after the tender offer was
announced he sold, profiting $4.3 million (to cover his embezzling).
iii. Analysis: OHagan would have had a confidential relationship with his law firm
(the source of the information) either because there existed a history or practice
of sharing confidences (the firm actually took precautions to keep this info
confidential), or because as an attorney he probably signed an agreement of
confidentiality regarding clients information. He then used this information that
he obtained in breach of that duty to buy and sell stocks.