BA II Outline

Tyler Tarney | Wood

Limited Liability Companies_________________________________________________________ I.
Limited liability for all obligations of the venture, even if members participate in the control of the business
Flow through tax treatment
Freedom to contractually arrange the internal operations of the business though the operating agreement
Can have only one member, foreign ownership, more than 100 members, and more than one class of stock
Members make subsequent contributions in order to raise more capital for the LLC
Benefits
Generally A.
ULLCA is the law of our jurisdiction
101(1)
Articles of organization - filed with Secretary of State and serves as public notice 1.
101(13)
(a) Need not be in writing, unless otherwise stated this act governs
103 - Effect of Operating Agreement
103(b) lists non-waiveable provisions in the operating agreement
Operating agreement (most important) 2.
Two documents
Formation
202(a) - May be created by just one person
203(c)(1) - Internally operating agreement prevails, externally the articles of organization prevail
Organization
Describes how one becomes a member/owner
401. FORM OF CONTRIBUTION. A contribution of a member of a limited liability company may consist of tangible or intangible property or other
benefit to the company, including money, promissory notes, services performed, or other agreements to contribute cash or property, or contracts
for services to be performed.

Contribution
The choice between member-managed and manager managed is required to be in the articles of organization
Voting is per capita in a member-managed company with majority decision
Many states use a per capita method to determine rights to management
In a member managed firm, 404(a)(1) requires only a majority of the members
See page 119 problem
(1) each member has equal rights in the management and conduct of the company's business; and
(2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a majority
of the members.
(a) In a member-managed company:
Voting in per capita with majority decision, but voting only applies to managers
(1) each manager has equal rights in the management and conduct of the company's business;
(2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be exclusively decided by
the manager or, if there is more than one manager, by a majority of the managers; and

(i) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the members;
and
(ii) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed.
(3) a manager:
(b) In a manager-managed company:
(1) the amendment of the operating agreement under Section 103;
(2) the authorization or ratification of acts or transactions under Section 103(b)(2)(ii) which would otherwise violate the duty of
loyalty;
(3) an amendment to the articles of organization under Section 204;
(4) the compromise of an obligation to make a contribution under Section 402(b);
(5) the compromise, as among members, of an obligation of a member to make a contribution or return money or other property paid
or distributed in violation of this [Act];
(6) the making of interim distributions under Section 405(a), including the redemption of an interest;
(7) the admission of a new member;
(8) the use of the company's property to redeem an interest subject to a charging order;
(9) the consent to dissolve the company under Section 801(b)(2);
(10) a waiver of the right to have the company's business wound up and the company terminated under Section 802(b);
(11) the consent of members to merge with another entity under Section 904(c)(1); and
(12) the sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill.
(c) The only matters of a member or manager-managed company's business requiring the consent of all of the members are:
(d) Action requiring the consent of members or managers under this [Act] may be taken without a meeting.
(e) A member or manager may appoint a proxy to vote or otherwise act for the member or manager by signing an appointment instrument,
404. MANAGEMENT OF LIMITED LIABILITY COMPANY.
Management
Analysis B.
Outline
BA II Page 1
(e) A member or manager may appoint a proxy to vote or otherwise act for the member or manager by signing an appointment instrument,
either personally or by the member's or manager's attorney-in-fact.
As a manager, did Jerez have authority to make the loan on behalf of the LLC without knowledge of the other members and contrary
to the operating agreement? 301(c), 301(b)(1)

Taghipour v. Jerez - Taghipour, Rahemi, and Jerez formed an LLC and the articles of organization designated Jerez as the LLC's manager. The
operating agreement prevented him from entering into loans. Without verifying his authority, Mt. Olympus entered into a loan with Jerez.
They knew he was manager but didn't know he lacked authority. He absconded the money without knowledge by the others and they went
into default.

Examples
301(a) - apparent authority of members in member-managed LLC
Taghipour - Operating agreement said "no loans may be contracted on behalf of the LLC unless authorized by a resolution of the
members"

Taghipour - The lack of authority was contained in the operating agreement, rather than the articles of organization
301(b) - apparent authority of managers in manager-managed LLC
In member-managed LLC, manager is an agent and can transfer real property unless power is limited by articles of organization
In a manager-managed LLC, manager is an agent and can transfer real property unless power is limited by articles of organization
Taghipour - the restriction was in the operating of agreement rather than the articles of organization
301(c) The instrument is conclusive in favor of a person who gives value without knowledge of the lack of authority of the person signing
and delivering the instrument

301. AGENCY OF MEMBERS AND MANAGERS.

Authority
Does an LLC's member's rights of inspection extend to the right to inspect emails and document drafts?
Kasten v. Doral Dental USA, LLC - LLC created for creating and administering dental programs. During negotiations Marie made numerous
requests to check the books, but only some were granted. The LLC was subsequently sold for $95 million. The operating agreement
permitted inspection of company documents. Sought to compel production of emails, drafts of documents, etc.

Examples
Kasten considered whether an email was a "record," and determined that an email is a record if it relates to the business of the
LLC

Whether the request is restricted by date or subject matter 1.

Look at the connection
The reason given (if any) for the request, and whether the request is related to that reason 2.
The importance of the information to the member's interest in the company, and 3.
Whether the information may be obtained from another source 4.
Kasten said "upon reasonable request" is to protect the company from member inspection requests that impose undue burden
on the company. The court must consider the following factors:

While the ULLCA was not applied in the case, Kasten did have a reasonableness requirement like 408(b)(2) (get (b)(2)?)
(a) A limited liability company shall provide members and their agents and attorneys access to its records, if any, at the company's principal
office or other reasonable locations specified in the operating agreement. The company shall provide former members and their agents and
attorneys access for proper purposes to records pertaining to the period during which they were members. The right of access provides the
opportunity to inspect and copy records during ordinary business hours. The company may impose a reasonable charge, limited to the costs
of labor and material, for copies of records furnished.

SECTION 408. MEMBER'S RIGHT TO INFORMATION.

Inspection and information
CORPORATIONS
7.32(a)(1) - allows a corporation to eliminate board of directors in certain instances (aka treated like a partnership)
Closely-held corporations (7.32) 1.
Publicly traded corporations (1.40 (18(a)) 2.
Two basic types of corporations
Generally A.
7.32(a)(1) - Shareholders can agree to eliminate the board of directors
Corporate name must contain the words: corporation, incorporated, company, or limited, or their abbreviations a.
A corporate name must be distinguished upon the records of the secretary of state b.
4.01
A corporate name for the corporation that satisfies the requirements of section 4.01 1.
The number of shares the corporation is authorized to issue (2.02(a)(2) 2.
Corporation's registered address; and 3.
Incorporator's address 4.
Articles of incorporation must set forth:
2.02 - Articles of Incorporation
4.01 - Name
3.02 - Powers and duration - MBCA assumes perpetual duration, but permits limitations on duration
3.01 - Purpose - of engage in any lawful business (may be limited)
Minutes - Record used to reference how a decision has been made
8.01
General Powers. The business and affairs of the corporation shall be managed by its board of directors. 1.
Board of directors in a closely held corporation
Formation of a Closely Held Corporation B.
Formation _________________________________________________________
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8.01
Unless under 7.32 you eliminate the board and comply with the requirements
OH requires 3, unless the number of shareholders is fewer
Number - 8.03(a) - Board must consist of one or more individuals
Number, Tenure, and Qualifications - 1.43 2.
Regular Meetings - 8.20 3.
Special Meetings- 8.20 4.
Notice - unless proscribed otherwise, special meetings must be preceded by at least two days notice of the date, time, and place- 8.22(b) 5.
Default is 1/2 of the directors - (a)(1)
Cannot be less than 1/3 - (a)(2)
Other quorums are required for different groups other than the board of directors
Quorum for board of directors - 8.24 6.
Board decisions - 8.24(c) - "A majority of those present" 7.
(a)(3) - if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy if it is filled by the
shareholders, and only the directors elected by that voting group are entitled to fill the vacancy if it is filled by the directors

Vacancies - 8.10 Vacancy on Board 8.

3.02(11) - to elect directors and appoint officers, employees, and agents of the corporation, define their duties,, fix their
compensation, and lend them money and credit

8.01(b) -
Compensation - 3.02(11), 801(b) 9.
Presumption of Assent - 8.24(d) - "a director present at a meeting of the board of directors . . .is deemed to have assented to the action"
unless an exception exists
10.
(a) Except as provided in subsection (b), the validity of corporation action may not be challenged on the ground that the corporation lacks or
lacked power to act
Strong power, but subject to limitations in (c)
(1) In a proceeding by a shareholder against the corporation to enjoin the act;
A corporation may pursue a wrongful action against officers
Actions by shareholder may fall under here if acting as an agent of the corporation
(2) in a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, against an
incumbent or former director, employee, or agent of the corporation; or
(3) in a proceeding by the attorney general under section 14.30
(b) A corporation's power to act may be challenged:
The Comment to 3.04 states that an injunction is equitable only if the third party knew about the corporate incapacity.
"if equitable" (clean hands)
(c) In a shareholder's proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, the court may enjoin or set aside the act,
if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profits)
suffered by the corporation or another party because of enjoining the unauthorized act
3.04 - Ultra Vires
711 Kings Highway Corp v. F.I.M.'s Marine Repair Serv., Inc. - D entered into a contract that called for a 15 year lease of premises which
were to be used as a movie theater, however a corporation was formed to marine activities. P alleges K is invalid.

"[U]ltra vires may not be invoked as a sword in support of a cause of action any more than it can be utilized as a defense"
If corporation enlists a shareholder to bring an action on its behalf, then shareholder is an agent and action is a 3.04(b)(2) action (which does not
permit an injunction)

Ultra Vires C.
2.02(a)(4) - Name of each incorporator must be in the articles of incorporation
2.01 - One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to the
secretary of state for filing

Must faithfully make known all facts what might have influenced prospective members in determining whether to pursue
memberships

Duty to refrain from misrepresenting material facts

Duty to make known any personal interest the D's had in any transaction relating to the corporation
An incorporator owes a fiduciary duty to prospective members to disclose material information.
Incorporators/Promoters
Can the president of an association which filed its articles of incorporation, which were first rejected but later accepted, can be
held personally liable on an obligation entered into by the association before the certificate of incorporation had been issued?

Robertson v. Levy - Robertson and Levy entered into an agreement where Levy was to form a corporation which was to purchase
Robertson's business. Levy submitted the articles of incorporation, the articles were rejected, but Levy began to operate it. Just prior
to when the certificate of incorporation was issued, Robertson sold his business to the corporation receiving a note for installment
payments. One payment was made after the certificate of incorporation was issued.

"knowing there was no incorporation" - not jointly and severally liable under 2.04
In Cranson, the court found a corporation by estoppel because IBM dealt with the Bureau as if it were a corporation and relied
on its credit rather than that of Cranson, it was "estopped to deny the corporate existence of the Bureau."

Cranson v. International Business Machines Corp. - Cranson was not personally liable for the debts of his defectively incorporated
association, the Real Estate Burea. He had agreed to invest in the Bureau and to become an officer and a director of the new
company. Cranson and others hired a lawyer to incorporate but there was a defective filing. Cranson paid for and received stock, set
up bank accounts, and maintained corporate records. It incurred a debt to IBM.

Examples
Defective incorporation
Premature Commencement of Business D.
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on its credit rather than that of Cranson, it was "estopped to deny the corporate existence of the Bureau."
They didn't know that Kunkel had failed to incorporate.
Frontier was content to look only to Kunkel for performance of its agreements
"Frontier with full knowledge that a corporation had not yet been formed chose to transact its business with Kunkel as an
individual"

In Frontier, the court said "[n]either Fairfield nor Beach, expressly or impliedly, authorized Kunkel to make such
representations or to enter into contracts with Frontier in the name of 'Kunkel's, Inc.'"

Individual liability could not be imposed upon Fairfield and Beach because they were creditors, not partners.
Frontier Refining Company v. Kunkel's, Inc. - P is suing D for over $6,000 in gas. Kunkle went to Fairfield for a loan. Fairfield objected
but did talk with Kunkle about the formation of a corporation. Kunkle was to start it and Fairfield and Beach would purchase it from
Griffit (the previous owner of the lease). There is conflicting testimony regarding an alleged conversation between Fairfield and
Frontier. A financial statement was obtained from Kunkel, but not from Fairfield or Beach. Frontier then entered into an agreement
with "CLIFFORD D. KUNKEL DBA KUNKEL'S INC." Soon after, Kunkel took over and started doing business. Fairfield and Beach invested
$11k after Kunkle started doing business.

Solely contributing money is not purporting to act (Frontier)

"Purporting to act"
The court in Robertson said "[t]he corporation comes into existence only when the certificate has been issued."
All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and
severally liable for all liabilities created while so acting

Estoppel exception where a third person knows that no corporation has been formed, but insists that his contract be
immediately entered into in the name of the corporation (Quaker Hill)

Exception where a transaction is entered into after the articles have been mailed or delivered to the filing office but have not
been received in the filing office through no fault of the filer

Exception where a corporate organizer enters into a transaction in the name of the corporation when he reasonably and
honestly believes that articles have been filed but they have not been due to attorney neglect or other cause

The comments provide for three exceptions

2.04 - Liability for Preincorporation transactions
Disregard of the Corporate Entity ____________________________________________
Identify a coherent set of factors that every court thinks is important in deciding whether to disregard the corporate entity (test comes from
Radaszewski)

The fact that a corporation is created for limited liability is not, in and of itself, unfair
Generally
Baatz v. Arrow Bar - Baatz alleges hat Arrow Bar served alcoholic beverages to McBride prior to an accident while he was already intoxicated. A couple
owned the corporation and financed it on a loan in which they personally guaranteed => What counts as capitalization?

The law permits the incorporation of a business for the very purpose of escaping personal liability when there is no evidence of fraud,
misrepresentation, nor illegality; Dissent - not a piercing case, the subsidiary is the agent.

Bartle v. Home Owners Co-OP - bankruptcy trustee trying to hold D corporation liable for the debts of its subsidiary corporation
DeWitt Truck Brokers v. W. Ray Flemming Fruit Co. - corporation sold produce as agent for growers
Fletcher v. Atex, Inc. - Kodak's subsidiary, Atex, is being sued over keyboards it manufactured
Telecom wanted to reduce the influence of the Teamsters unit in their business so they created a subsidiary, and they obtained insurance. The
insurance agent was another subsidiary of Telecom and had gone bankrupt.

Radaszewski v. Telecom Corp. - man seriously injured in car accident, struck by a car driven by an employee of Contrux, with Telecom as the parent
company

Examples
The issue is whether the court should disregard the corporate entity and hold the stockholder personally liable for the debts of the corporation
Corporation being formed is not, of itself, unfair
Disregard of the corporate entity involves the question whether a specific shareholder is personally liable for a specific corporate obligation
6.22 - Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the
corporation except by reason of his own conduct

In the case, a cash management system did not show siphoning of funds when "a strict accounting [was] kept of each
subsidiary's funds," and was "a function of administrative convenience."

Exertion of control over major expenditures or interlocking directors does not meet the standard.
As shown in Fletcher v. Atex, "complete domination" can be shown if the parent corporation and the subsidiary "operated as a single
economic entity."

The court may consider if dividends were paid, corporate records kept, officers and directors functioned properly, board held
meetings and minutes were kept, stock records

Failure to observe corporate formalities weighs toward control,, but Dewitt shows this factor may be given little weight
Parent and corporation must be reported on the same tax return (but a charge is usually imposed)
Legal services; central financing of capital improvements; transferring employees from one subsidiary to another or to or from
the parent

Areas of control may be justified

"Complete domination"
"in connection with the transaction attacked" - the P must show "complete domination" over the transaction in question
Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its
own; and
1.
In determining whether there was "disregard of the corporate entity," one must show (Radaszewski and OH)
Analysis
BA II Page 4
"in connection with the transaction attacked" - the P must show "complete domination" over the transaction in question
To be adequately capitalized, a corporation must have enough unencumbered assets to meet reasonably expected debts of the
corporation

Loans are not contributions because the debt is encumbered

In Dewitt, the court said "[n]o stockholder or officer of the corporation . . . received any salary, dividend, or fee from the
corporation.

The dissent in Bartle noted there was no way the business could profit b/c the setup didn't offer dividends, and the
benefits that would otherwise inure to the corporation would go to the parent corporation

Non payment of dividends

In DeWitt, the D "was withdrawing funds from the corporation at the rate of $15,000 per year."
Siphoning of funds
As shown in the case, meeting the statutory minimum standards for insurance shows adequate capitalization with respect
to claims on that insurance.

If the claim is tort, Baatz shows liability insurance is a contribution when the insurance will cover the type of claim and the
insurance is sufficient

As discussed in DeWitt, "[t]he obligation to provide adequate capital begins with incorporation and is a continuing obligation
thereafter"

Undercapitalization provides an inference that the parent either deliberately or recklessly created a business that will not be able to
pay its bills or satisfy judgments against it

Undercapitalization is the most important factor in determining if control was used to commit a wrong
Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and
2.
Injury is damages that go unpaid.
Control and breach of duty must proximately cause the injury or unjust loss complained of. 3.
Financial Matters and the Corporation______ ____________________________________________
Authorized - the maximum number of shares a corporation may issue in any class or series
Issued - the corporation itself has traded the shares in exchange for value
Outstanding - shares that have been authorized, issued, and remain in the hands of shareholders
Treasury shares - shares that have been authorized, issued, and repurchased by the corporation
Conversion rights may allow a preferred stockholder to convert preferred shares into common shares
Types of shares
Par value - provides a fund for paying creditors at issuance (outdated)
Stated capital - amount not distributable, reserved for debtors
Par stock has automatic stated capital calculated by the number or shares times the stated par value
OH offers low value par or no par. If stating par is necessary, par should be stated as low as possible.
In the secondary market, par value is meaningless
Par Value and stated capital
Taxes - "S" corp. status, taxable income, taxable income
Piercing - undercapitalizing with debt rather than equity "deep rock"
Risk - what level of risk is client willing to take, whether client desires an income stream
Debt and Equity considerations
Generally
Hanewald v. Bryan's Inc. - retail store issued 100 shares of stock at $1000 par value per share and issued shares for no consideration => stated
capital $100k => liable for the amount they said they had contributed

Page 301(1) - see the question, too long to write out

Examples
1.40(22) - "Shares" means the units in which the proprietary interest of the corporation are divided
Par value only applies to the original issue of stock, not the secondary market (Torres)
2.02(b)(2)(iv) - Par value is optional [par value is value stock cannot be issued below]
(a) The articles of incorporation must set forth any classes of shares and series of shares within a class, and the number of shares of each class
and series, that the corporation is authorized to issue. If more than one class or series of shares is authorized, the articles of incorporation must
prescribe a distinguishing designation for each class or series and must describe, prior to the issuance of shares of a class or series, the terms,
including the preferences, rights, and limitations, of that class or series. Except to the extent varied as permitted by this section, all shares of a
class or series must have terms, including preferences, rights and limitations, that are identical with those of other shares of the same class or
series

Voting on board of directors, bylaws

(1) one or more classes of shares that together have unlimited voting rights, and
Preferred shareholders often have preferred status in liquidation
Residual claimants get what is left of a corporation after the debts of the corporation have been paid
(2) one or more classes of share (which may be the same class or classes as those with voting rights) that together are entitled to receive the
net assets of the corporation upon dissolution

(b) The articles of incorporation must authorize:

(1) have special, conditional, or limited voting rights, or no right to vote, except to the extent otherwise provided by this Act;
(i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a specied event;
(2) are redeemable or convertible as specied in the articles of incorporation:
(c) The articles of incorporation may authorize one or more classes or series of shares that:
6.01 - Authorized Shares
Debt and Equity Capital A.
BA II Page 5
(i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a specied event;
(ii) for cash, indebtedness, securities, or other property; and
(iii) at prices and in amounts specied, or determined in accordance with a formula;
(3) entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially
cumulative; or
(4) have preference over any other class or series of shares with respect to distributions, including distributions upon the dissolution of the
corporation
(a) The powers granted in this section to the board of directors may be reserved to the shareholders by the articles of incorporation.
Shares can be issued for future services
Identical shares can be issued for different prices
However, in OH, ORC 17.01.18(b)(c) provides that promissory notes and future service contracts are not permitted for consideration
(b) The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benet to the
corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation.
This section leaves open an opportunity for shareholders to contest inadequacy of consideration, fraud, or breach of fiduciary duty
(c) Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be
issued is adequate. That determination by the board of directors is conclusive insofar as the adequacy of consideration for the issuance of shares
relates to whether the shares are validly issued, fully paid, and nonassessable.
6.21 - Issuance of Shares (After incorporation)
Hanewald shows that a shareholder's loan is a debt not an asset of the corporation
(a) A purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares except to pay the
consideration for which the shares were authorized to be issued (section 6.21) or specied in the subscription agreement (section 6.20).
In Hanewald, K & J issued 100 shares at $1000/share and did not pay. K & J was liable to corporation creditors to pay for the shares issued.
(b) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the
corporation except that he may become personally liable by reason of his own acts or conduct
6.22 - Liability of Shareholders
"[T]he power of the individual stockholder to vote in proportion to the number of his shares is vital, and cannot be cut off or curtailed
by the action of all the other stockholders, even with the cooperation of the directors and officers."

The court in Stokes stated "a stockholder has an inherent right to a proportionate share of new stock issued for money only . . . and
while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price not less
than par and he is given the right to take at that price in proportion to his holding, or in some other equitable way that will enable him
to protect his interest by acting on his own judgment and using his own resources."

Stokes v. Continental Trust Co. of City of New York - Stockholder has a 4.42% interest and wants to maintain proportionality after a
transaction to issue twice as much stock. He wants to protect his voting power and equity/distributions.

Book value is a corporation's liquidation value, and does not take into account going concern.
Katzowitz v. Sidler - P and D's owed several corporations. Corporation held by P and D's owed each $2500. D's wanted to invest money in
other corporations, P objected. In order to freeze P out, the D's sold stock at 1/18th of its book value which caused an immediate dilution
of the book value of the outstanding securities. Was the sale of stock in violation of P's preemptive rights?

Lacos - D was officer, director, and shareholder. Although already majority shareholder, D pushed to introduce a new class of stock with 10x
voting rights for more control. In his role as officer/director he made a threat that he would not give his support to future transactions =>
b/c of the breach, the vote to recapitalization was void

Examples
Policy - Provides proportionality in voting and distributions by preserving a stockholder's percentage ownership in the corporation
Preemptive rights apply to shares that are authorized, but not yet issued.
"opt in" clause - no right unless granted by articles of incorporation
(a) The shareholders of a corporation do not have a preemptive right to acquire the corporations unissued shares except to the extent the
articles of incorporation so provide.
As shown in Stokes, if a corporation has preemptive rights, a shareholder has the right to preserve their % share in the
corporation, rather than the number of shares

The issue price is markedly below book/fair value; and

In Katzowitz, shares were offered at $100/share and book value was $1800/share
Remaining shareholders directorly benefit from the issuance
Even if offered, preemptive rights may be insufficient if, as shown in Kasowitz:
"The corollary of a stockholder's right to maintain his proportionate equity in a corporation by purchasing additional shares is
the right not to purchase additional shares without being confronted with dilution of his existing equity if no valid business
justification exists for the dilution."

(1) The shareholders of the corporation have a preemptive right, granted on uniform terms and conditions prescribed by the board of
directors to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporations
unissued shares upon the decision of the board of directors to issue them.
(2) A shareholder may waive his preemptive right. A waiver evidenced by a writing is irrevocable even though it is not supported by
consideration.
(i) shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affiliates:
(ii) shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, or
employees of the corporation, its subsidiaries or affiliates;
(3) There is no preemptive right with respect to:
(b) A statement included in the articles of incorporation that the corporation elects to have preemptive rights (or words of similar import)
means that the following principles apply except to the extent the articles of incorporation expressly provide otherwise:
6.30. SHAREHOLDERS PREEMPTIVE RIGHTS
Preemptive Rights
Issuance of Shares by a Going Concern: Preemptive Rights, Dilution, and Recapitalizations B.
BA II Page 6
employees of the corporation, its subsidiaries or affiliates;
(iii) shares authorized in articles of incorporation that are issued within six months from the effective date of incorporation;
(iv) shares sold otherwise than for money.
(4) Holders of shares of any class without general voting rights but with preferential rights to distributions or assets haveno
preemptive rights with respect to shares of any class.
(5) Holders of shares of any class with general voting rights but without preferential rights to distributions or assets haveno
preemptive rights with respect to shares of any class with preferential rights to distributions or assets unless the shares with
preferential rights are convertible into or carry a right to subscribe for or acquire shares without preferential rights.
(6) Shares subject to preemptive rights that are not acquired by shareholders may be issued to any person for a period of oneyear
after being offered to shareholders at a consideration set by the board of directors that is not lower than the considerationset for the
exercise of preemptive rights. An offer at a lower consideration or after the expiration of one year is subject to the shareholders
preemptive rights.
(c) For purposes of this section, shares includes a security convertible into or carrying a right to subscribe for or acquire shares
Recapitalization involves changing the stock structure of a corporation.
Shareholders do not owe a fiduciary duty to the corporation, but directors and officers do.
In recapitalization, Lacos shows directors owe a duty of loyalty to the corporation and must act in the best interest of the corporation even if that
means acting against his personal interests.

Recapitalization
Distributions only concern the "original issue"
Cumulative dividends ensure payment of proffered dividends before distributions are made to common shareholders
A noncumulative dividend is not carried over from one year to the next. If no dividend is issued, the preferred shareholder loses the
right to that dividend

A partially cumulative dividend typically is cumulative to the extent there are earnings in the year, and noncumulative with respect to
any excess dividend preference

Dividend rights can be cumulative, noncumulative, or partially cumulative

Dodge v. Ford Motor Co. - Ford had its best year ever with an expected profit of $60 million and shareholders wanted dividends, but
Henry Ford wanted a quasi-charitable organization and to use the surplus to sell cheaper cars

Corporate benefits/distributions must be provided to shareholders, rather than society at large.

The remedy for a breach is repayment back to corporation
As shown in Wilderman, when considering whether a salary payment is reasonable, the court may consider (1) whether the salary
bears a reasonable relation to the success of the corporation, (2) the amount previously received as salary, (3) whether increases in
salary are geared to increases in the value of services rendered, and (4) the amount of the challenged salary compared to other
salaries paid by the employer

Wilderman v. Wilderman - D and P each half shareholders in corporation before they divorced. D does most of the labor and P does
the bookkeeping. After the divorce D greatly increased his salary and kept P's the same
Dividends may be disguised in the form of salary in order to exclude it from the corporation's taxable income.
Generally
Can shareholders compel a board of directors to issue a dividend on common stock?
Gottfried v. Gottfried - P own common stock and haven't been paid dividend in 14 years. Closely held corporation w/ no market for this
stock. Dividends had been paid on the other classes of stock. P's allege "bitter animosity."

Examples
1.40(6) - Distribution means a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedness by a
corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or payment
of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; or otherwise.

Note - Proportionate redemption of outstanding shares is a distribution (Gottfried)

Ability to make a distribution is not tied to earnings
(a) A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles
of incorporation and the limitation in subsection (c).

(b) If the board of directors does not x the record date for determining shareholders entitled to a distribution (other than one involving a
purchase, redemption, or other acquisition of the corporations shares), it is the date the board of directors authorizes the distribution.

6.40. DISTRIBUTIONS TO SHAREHOLDERS

The "equity/insolvency test" determines whether a corporation can pay its debts as they become due.
(1) the corporation would not be able to pay its debts as they become due in the usual course of business; or
The "balance sheet/insolvency test" guarantees those with superior rights will receive their distributions before holders of
common stock.

(2) the corporations total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit
otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution

(c) No distribution may be made if, after giving it effect:

(restrictions on distributions that always apply)
Employment from company (if shareholder is excluded from employment)
Compensation equity (if some have high compensation)
Loans (if some receive loans, or loans with favorable terms)
Freeze-out (if someone is pushed out of the corporation for insufficient consideration)
Evidence of bad faith can be shown by considering:
To compel a dividend, P must show dividend was withheld in bad faith
Generally
Redemptions
Distributions by a Closely Held Corporation
BA II Page 7
A redemption is a purchase by the corporation and is a type of distribution. The rules for redemptions require compliance with the
rules for distributions.

Generally
If a corporation redeems stock in the hands of its shareholders it is a redemption.
Proportionate redemption of outstanding shares is a distribution (Gottfried)
Generally, shareholders do not owe a fiduciary duty to other shareholders.
1.40(18A) defines "public corporation" as "a corporation that has shares listed on a national securities exchange or regularly traded in
a market maintained by one or more members of a national securities association."

There is an exception for non-public corporations when there is a shareholder agreement under 7.32(a)(1) that eliminates the board of
directors or restricts the discretion or powers of the board of directors.

If a majority of shareholders take control of a non-public corporation, the director's fiduciary duty shifts and majority shareholder has a
fiduciary duty to the minority shareholder

Meinhard shows that once a fiduciary duty attaches "[n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the
standard of behavior."

Donahue v. Rodd Electrotype - (Wood loves this case) P's husband and Harry Rodd became owners of Rodd Electrotype after it
split off from its parent company. Rodd owned 80% of the stock and P owned 20%, and before Harry Rodd transferred
management and stock to his sons. P was unaware of the transfer and a few weeks later tried to sell their shares for the same
price received by Harry Rodd.

"If the close corporation purchases shares only from a member of the controlling group, the controlling stockholder can convert his
shares into cash at a time when none of the other stockholders can," thereby operating "as a preferential distribution of assets."

Donahue v. Rodd shows the controlling stockholders must offer each stockholder an equal opportunity to sell a ratable number of his shares
to the corporation at an identical price

Once this breach is found, the remedy is repayment to the corporation.

Management and Control of the Corporation___________________________________________________
7.32 - shareholder agreements in closely held corporations (OH 17.08(591)), and does not cut off until the corporation becomes public (7.32(d)
MBCA Chapter 8 addresses directors and officers
Generally the duty of directors runs to the corporation and not to the shareholders. A contract is illegal and void so far as it precludes the
board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies, ore retaining individuals in office, except
by consent of the consenting parties

McQuade v. Stoneham- P was treasurer of the Giants and D was the president. P was removed as treasurer despite an agreement for D to use his
best efforts to keep him as treasurer.

Where the directors are the sole stockholders, there seems to be no objection to enforcing an agreement among them to vote for certain
people as officers; there was no injury suffered by or threatened to any party

Clark v. Dodge - written agreement where it was agreed that P would continue to manage and in connection would disclose a secret formula to
Doge's son that was necessary for the successful operation of the business was NOT not illegal against public policy

Upheld - (1) no apparent public injury, (2) no objecting minority interest, (3) no apparent prejudice to creditors
Court examined the duration (now in 7.32(d) and default of 10 yrs) - operative while parties are living, purpose - salary continuation
Galler v. Galler - shareholders made internal agreement with specific instructions addressing who was to manage the corporation
Traditional Roles of Shareholders and Directors - (historical development of the general rule)
Starting point: 8.01. You can have an exception to 8.01, if you follow the requirements of 7.32.
8.05 - Terms of directors generally
8.08 - Removal of directors by shareholders and whether there needs to be cause for removal (internal)
8.09 - Removal of directors in a judicial proceeding (external)
8.33 - Directors Liability for Unlawful distribution, then go to 6.40, so 6.40 and 8.33 require reference to each other
8.40 - Officers
MBCA Chapter 8 - Directors
7.07 - Record date for shareholders
7.22 - Proxies
7.23 - Nominees
MBCA Chapter 7 - Shareholders
Generally
The general rule is that directors owe a fiduciary duty to the corporation
Under 8.01(a), "except as provided in section 7.32, each corporation must have a board of directors.
(a) A corporation has the ofcers described in its bylaws or appointed by the board of directors in accordance with the bylaws.
(b) The board of directors may elect individuals to ll one or more ofces of the corporation. An ofcer may appoint one or more ofcers if
authorized by the bylaws or the board of directors.
(c) The bylaws or the board of directors shall assign to one of the ofcers responsibility for preparing the minutes of the directors and
shareholders meetings and for maintaining and authenticating the records of the corporation required to be kept under sections 16.01(a) and
16.01(e).
(d) The same individual may simultaneously hold more than one ofce in a corporation.
8.40. OFFICERS
Under 8.09(a)(1), cause may be found if the director engaged in fraudulent conduct with respect to the corporation or its shareholders,
grossly abused the position of director, or intentionally inicted harm on the corporation.

(a) The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be
removed only for cause.
(b) If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him.
8.08. REMOVAL OF DIRECTORS BY SHAREHOLDERS
Board of Directors
BA II Page 8
(b) If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him.
(c) If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is
voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him
exceeds the number of votes cast not to remove him.
(d) A director may be removed by the shareholders only at a meeting called for the purpose of removing him and the meeting notice must state
that the purpose, or one of the purposes, of the meeting is removal of the director
Removal by judicial proceeding can be simpler and less expensive than calling a shareholders meetings to remove a director
(a) The [name or describe] court of the county where a corporations principal ofce (or, if none in this state, its registered ofce) is located may
remove a director of the corporation from ofce in a proceeding commenced by or in the right of the corporation if the court nds that (1) the
director engaged in fraudulent conduct with respect to the corporation or its shareholders, grossly abused the position of director, or intentionally
inicted harm on the corporation; and (2) considering the directors course of conduct and the inadequacy of other available remedies, removal
would be in the best interest of the corporation.
(b) A shareholder proceeding on behalf of the corporation under subsection (a) shall comply with all of the requirements of sub-chapter 7D,
except section 7.41(1).
(c) The court, in addition to removing the director, may bar the director from reelection for a period prescribed by the court.
(d) Nothing in this section limits the equitable powers of the court to order other relief
8.09. REMOVAL OF DIRECTORS BY JUDICIAL PROCEEDING
Enforceable, agreement allows nothing not permitted by statute. Not against public policy, no intervening rights of third parties, all
the stockholders agreed

Zion v. Kurtz - agreement said "no business or activities shall be conducted without the consent of a minority stockholder" and not in
compliance with DE's close corporation statute.

Shareholders may remove director unless articles of incorporation provides otherwisestockholders cannot force a meeting if the
board cannot legally do what the meeting is calling for, there must be some legal purpose for meeting

Standard by which directors can be removed: MBCA 8.08 (internally), 8.09 (externally)
Shareholders meetings: 7.01; 7.02-.05 = notification requirements for mtgs
Note: Shareholders cannot elect officers
If its allowed in their articles of incorporation, then shareholders can remove a director without cause. If there is a director who has
violated a duty of care or a duty of loyalty, then cause for removal exists.

Matter of Auer v. Dressel - bylaws obligated President to hold a special meeting upon majority stockholder request but President failed to
do so

Historical development of shareholder agreements

Generally
(1) eliminates the board of directors or restricts the discretion or powers of the board of directors;
(2) governs the authorization or making of distributions whether or not in proportion to ownership of shares, subject to the limitations in
section 6.40;
(3) establishes who shall be directors or ofcers of the corporation, or their terms of ofce or manner of selection of removal;
(4) governs, in general or in regard to specic matters, the exercise or division of voting power by or between the shareholders and
directors or by or among any of them, including use of weighted voting rights or director proxies;
(5) establishes the terms and conditions of any agreement for the transfer or use of property or the provision of services between the
corporation and any shareholder, director, ofcer or employee of the corporation or among any of them;
(6) transfers to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manage the
business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or
shareholders;
(7) requires dissolution of the corporation at the request of one or more of the shareholders or upon the occurrence of a specied event or
contingency; or
(8) otherwise governs the exercise of the corporate powers or the management of the business and affairs of the corporation or the
relationship among the shareholders, the directors and the corporation, or among any of them, and is not contrary to public policy.
(a) An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the
corporation even though it is inconsistent with one or more other provisions of this Act in that it:
(A) in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement or
(B) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the
corporation;
(1) set forth
(b)(1,2) require unanimous agreement among shareholders for agreement or amendment to agreement
(2) subject to amendment only by all persons who are shareholders at the time of the amendment, unless the agreement provides
otherwise; and
(3) valid for 10 years, unless the agreement provides otherwise.
(b) An agreement authorized by this section shall be:
(c) The existence of an agreement authorized by this section shall be noted conspicuously on the front or back of each certicate for outstanding
shares or on the information statement required by section 6.26(b). If at the time of the agreement the corporation has shares outstanding
represented by certicates, the corporation shall recall the outstanding certicates and issue substitute certicates that comply with this
subsection. The failure to note the existence of the agreement on the certicate or information statement shall not affect the validity of the
agreement or any action taken pursuant to it. Any purchaser of shares who, at the time of purchase, did not have knowledge of the existence of
the agreement shall be entitled to rescission of the purchase. A purchaser shall be deemed to have knowledge of the existence of the agreement
if its existence is noted on the certicate or information statement for the shares in compliance with this subsection and, if the shares are not
represented by a certicate, the information statement is delivered to the purchaser at or prior to the time of purchase of the shares. An action to
enforce the right of rescission authorized by this subsection must be commenced within the earlier of 90 days after discovery of the existence of
7.32. SHAREHOLDER AGREEMENTS
Shareholder Agreements
BA II Page 9
Requires the existence of an agreement to be noted on each certificate
enforce the right of rescission authorized by this subsection must be commenced within the earlier of 90 days after discovery of the existence of
the agreement or two years after the time of purchase of the shares.
Concerns duration
(d) An agreement authorized by this section shall cease to be effective when the corporation becomes a public corporation. If the agreement
ceases to be effective for any reason, the board of directors may, if the agreement is contained or referred to in the corporations articles of
incorporation or bylaws, adopt an amendment to the articles of incorporation or bylaws, without shareholder action, to delete the agreement and
any references to it.
(e) An agreement authorized by this section that limits the discretion or powers of the board of directors shall relieve the directors of, and impose
upon the person or persons in whom such discretion or powers are vested, liability for acts or omissions imposed by law on directors to the extent
that the discretion or powers of the directors are limited by the agreement.
Proxy - One who is authorized to act as a substitute for another; esp., in corporate law, a person who is authorized to vote another's
stock shares

Proxies
Generally
Registered owner - Pioneer (bankrupt), beneficial owner = Shepard (bankrupt)
Protections for beneficial owners - Beneficiary can (1) order a transfer on the books to the beneficial owner, (2) have a proxy from the
registered owner to the beneficial owner, (3) action

Salgo - record owner was a person different from the beneficial owner; the corporation must determine who had been authorized to vote
the shares by the record owner.

Examples
(a) Except as provided in subsections (b) and (d) or unless the articles of incorporation provide otherwise, each outstanding share,
regardless of class, is entitled to one vote on each matter voted on at a shareholders meeting. Only shares are entitled to vote

7.21. VOTING ENTITLEMENT OF SHARES

7.22. PROXIES - (a) A shareholder may vote his shares in person or by proxy.
1.40(21) - Beneficial owner is the one with equitable title to the stock, the registered owner is the one who votes (even if in
bankruptcy)

7.24(a) - Corpration has to accept proxy if name signed on proxy is name of a shareholder
(d)(1) a pledgee (if you use stock as security)
(d)(2) a person who purchased or agreed to purchase the shares (ex. If I sell you stock today but it doesn't transfer for 7 days, you
could demand an irrevocable proxy to vote the shares until transferred)

7.22(d) - proxies are revocable unless

Proxy separates voting power from beneficial ownership
Proxies
(a) The bylaws may x or provide the manner of xing the record date for one or more voting groups in order to determine the shareholders
entitled to notice of a shareholders meeting, to demand a special meeting, to vote, or to take any other action. If the bylaws do not x or
provide for xing a record date, the board of directors of the corporation may x a future date as the record date.

(b) A record date xed under this section may not be more than 70 days before the meeting or action requiring a determination of
shareholders

7.07. RECORD DATE

If the articles of incorporation authorize dividing the shares into classes, the articles may also authorize the election of all or a specied
number of directors by the holders of one or more authorized classes of shares. A class (or classes) of shares entitled to elect one or more
directors is a separate voting group for purposes of the election of directors

8.04. ELECTION OF DIRECTORS BY CERTAIN CLASSES OF SHAREHOLDERS

8.05(e) - director continues to serve until the director's successor is elected and qualifies or there is a decrease in the number of directors
Shareholder Voting and Agreements
Advantageous for majority
Straight Voting can cast as many votes as you have shares of stock for each director spot
7.28(b) - straight voting is default
Advantageous for minority
A decision to classify the board in this way may be attacked as a breach of fiduciary duty
Staggered board can limit the effect of cumulative voting (8.06)
Cumulative Voting means that the shareholders designated are entitled to multiply the number of votes they are entitled to cast by the
number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or
more candidates (7.28(c))

7.28(b) - Corporation can opt-in to cumulative voting if stated in articles of incorporation

NS = # of shares needed to elect the number of desired directors
ND = # of directors desired to elect
TS = Total shares
TD = Total directors
NS = ((ND x TS) / (TD + 1)) + 1
Fractions should be ignored, round down to the nearest whole #
Formula
[(200x1)/(5+1)]+1 = 34 shares needed to elect one director
Total number of votes you have = 34 x 5 = 170
Total votes being case = 200 x 5 = 1,000
How many shares do you need to elect one director? 200 voting shares; 5 directors being elected
Examples
Cumulative vs. straight voting
BA II Page 10
Total votes being case = 200 x 5 = 1,000
Total votes you don't have = 1000 - 170 = 830
[(200x3)/(5+1)]+1 = 101 shares needed to elect one director
Total number of votes you have = 101 x 5 = 505
Total votes being case = 200 x 5 = 1,000
Total votes you don't have = 1000 - 505 = 495
How many shares do you need to elect 3 directors? 200 voting shares; 5 directors being elected
7.30 - Concerns property law, and transferring legal title to a trustee and the trustee votes, 7.31 - contract about how to vote
Not a voting trust, voting not separated from equitable title, trust rules didn't apply and agreement is enforceable
Under the MBA, the result would be different, they would be cast according to how the arbitrator said
Ringling Brothers -3 stockholders; 2/3 entered voting agreement that they will act jointly in voting; arbitrator cast votes contrary to
the terms of the agreement => Court said votes did not count

Stricter rules for trusts than agreements - worried about trustees not voting in the best interest of the corporation
Generally, voting buying is discourage and can be voided at the insistence of the corporation
Only illegal to sell a vote if it amounts to a fraud on the corporation
Generally
Humphry's v. Winous Co - the affect of cumulative voting can be diminished by breaking directors into classifications
Examples
Trustee = record owner
Voting trusts give trustee legal title to shares and you keep equitable title
(a) One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by signing
an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring their
shares to the trustee. When a voting trust agreement is signed, the trustee shall prepare a list of the names and addresses of all
owners of benecial interests in the trust, together with the number and class of shares each transferred to the trust, and deliver
copies of the list and agreement to the corporations principal ofce.
(b) A voting trust becomes effective on the date the rst shares subject to the trust are registered in the trustees name. A voting trust
is valid for not more than 10 years after its effective date unless extended under subsection (c).
(c) duration is 10 years
7.30. VOTING TRUSTS
7.22(d) - in a voting trust, the trustee can appoint a proxy
Cannot favor one class at the expense of another such an exercise of power is in derogation of the trust and may not be
upheld, even though the thing done be within the scope of the powers granted to the trustees in general terms

A power may not be exercised if it constitutes a breach of fiduciary duty

A voting trust may arise when a corporation is in bankruptcy
Brown v. McLanahan -trustees made amendment that favored debentures and disfavored preferred stockholders
Trustee can't favor one class at the expense of another when he is trustee of both classes
Trustee has a fiduciary duty to vote in beneficial interest of shareholders
Creditors make shareholders put shares into a voting trust (at the threat of forcing bankruptcy) as a way to get company to change
management

Voting trusts
Voting agreements are contracts between parties about how they will vote
(a) Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that
purpose. A voting agreement created under this section is not subject to the provisions of section 7.30.
Comment states this section "avoids the result reached in the Ringling case."
(b) A voting agreement created under this section is specically enforceable
7.31. VOTING AGREEMENTS
(a) The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the
corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. A restriction does not
affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or
voted in favor of the restriction.
(1) to maintain the corporations status when it is dependent on the number or identity of its shareholders;
(2) to preserve exemptions under federal or state securities law;
Includes provisions designed to enable owners in closely held corporation to remain close (ex. To select the
persons with whom they will be associated in business, to permit withdrawing participants to liquidate on
some reasonable basis)

(3) for any other reasonable purpose.

6.27(c)
Restrictions authorized by the section 1.
Ling and Co. v. Trinity Sav. And Loan Ass'n - corporation may impose restrictions on the transfer of its stock if they
1.40(3) - "Conspicuous" means so written that a reasonable person against whom the writing is to operate should have
noticed it. For example, printing in italics or boldface or contrasting color, or typing capitals or underlined, is conspicuous.

"Noted conspicuously on the front or back of the certificate" 2.

(b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the
holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certicate or
is contained in the information statement required by section 6.26(b). Unless so noted, a restriction is not enforceable against a
person without knowledge of the restriction.
6.27. RESTRICTION ON TRANSFER OF SHARES AND OTHER SECURITIES
Voting agreements
Voting trusts and voting agreements
BA II Page 11
Ling and Co. v. Trinity Sav. And Loan Ass'n - corporation may impose restrictions on the transfer of its stock if they
are expressly set forth on the articles of incorporation and copied at length or in summary form on the face of each
certificate, the articles of incorporation by reference on the face or back of the certificate of the provision of the
articles of incorporation which restricts the transfer of stock

"Not enforceable against a person without knowledge of the restriction." 3.

Buy/sell agreements
(1) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an
opportunity to acquire the restricted shares;
Right of first refusal
(2) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares;
Cross-purchase agreements between shareholders
(3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted
shares, if the requirement is not manifestly unreasonable;
Stock-redemption agreements
(4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly
unreasonable.
(d) A restriction on the transfer or registration of transfer of shares may:
(e) For purposes of this section, shares includes a security convertible into or carrying a right to subscribe for or acquire shares
In creating the corporation important to draft triggers for buyouts
OH does not have a buyout provision
Buyout - 14.32 indicates who has rights to buyout
Client desires dissolution followed by buyout, he can petition for judicial dissolution if "oppressive conduct is shown"
Generally
14.34 election to purchase in lieu of dissolution (see next case)
Majority - Courts are reluctant to dissolve a corporation and will only do so when competing interests "are so discordant as to prevent
efficient management" and the "object of its corporate existence cannot be attained." This is not met when there is no stalemate or
impasse as to corporate policies, the corporation is flourishing, dissolution is not necessary for the corporation or for either
shareholders, and the only grievance is non payment of salary.

Dissent - issue is whether there is a deadlock as to the management of the corporation, not whether business is being conducted at a
profit or loss

In Re Radom & Neirdoff - brother and sister had equal shares and there was a deadlock in whether to dissolve the corporation
Oppressive does not carry an essential inference of imminent disaster, it can contemplate a continues course of conduct
The Davis court considered the absence of "malicious suppression of dividends or excessive salaries,"
Davis - fraud is not necessary to dissolve, but oppressive conduct may be enough to require a remedy. The court defines oppressive conduct
as "burdensome, harsh and wrongful conduct," "lack of probity and fair dealing in the affairs of a company to the prejudice of some of its
members," "a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his
money to a company is entitled to rely."

Majority - Yes "associated stockholder could frustrate corporate action until all of their joint demands were met."
Dissent - Would force new election
Can the remaining directors elect a replacement director when one of them purposely abstains in order to avoid a quorum?
Gearing v. Kelly - 4 directors, 1 resigns and needs to be replaced, bylaws required majority (3) for a quorum w/ straight voting, director
intentionally refused to attend a meeting in order to avoid a quorum necessary to elect a new director, 2 directors elect a replacement
anyway

Examples
7.28(a) - directors are elected by a plurality
Cumulative voting can cure a deadlock by electing a new director, but straight voting cannot cure a deadlock and may result
dissolution or buyout

(e) Despite the expiration of a directors term, he continues to serve until his successor is elected and qualies or until there is a
decrease in the number of directors

8.05. TERMS OF DIRECTORS GENERALLY

7.25 - Quorum requirements
(1) the shareholders may ll the vacancy;
(2) the board of directors may ll the vacancy; or
(3) if the directors remaining in ofce constitute fewer than a quorum of the board, they may ll the vacancy by the
afrmative vote of a majority of all the directors remaining in ofce.
(a) Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including a vacancy
resulting from an increase in the number of directors:
(b) If the vacant ofce was held by a director elected by a voting group of shareholders, only the holders of shares of that voting
group are entitled to vote to ll the vacancy if it is lled by the shareholders.
(c) A vacancy that will occur at a specic later date (by reason of a resignation effective at a later date under section 8.07(b) or
otherwise) may be lled before the vacancy occurs but the new director may not take ofce until the vacancy occurs
8.10. VACANCY ON BOARD.
Quorum
Deadlocks as to director vacancies
A majority of the incorporators or initial directors of a corporation that has not issued shares or has not commenced business may
dissolve the corporation by delivering to the secretary of state of state for ling articles of dissolution that set forth:

14.01. DISSOLUTION BY INCORPORATORS OR INITIAL DIRECTORS

Deadlocks as to dissolution
Deadlocks
BA II Page 12
(1) the name of the corporation;
(2) the date of its incorporation;
(3) either (i) that none of the corporations shares has been issued or (ii) that the corporation has not commenced business;
(4) that no debt of the corporation remains unpaid;
(5) that the net assets of the corporation remaining after winding up have been distributed to the shareholders, if shares were
issued; and

(6) that a majority of the incorporators or initial directors authorized the dissolution
dissolve the corporation by delivering to the secretary of state of state for ling articles of dissolution that set forth:
The secretary of state may commence a proceeding under section 14.21 to administratively dissolve a corporation if:
(1) the corporation does not pay within 60 days after they are due any franchise taxes or penalties imposed by this Act or other law;
(2) the corporation does not deliver its annual report to the secretary of state within 60 days after it is due;
(3) the corporation is without a registered agent or registered ofce in this state for 60 days or more;
(4) the corporation does not notify the secretary of state within 60 days that its registered agent or registered ofce has been
changed, that its registered agent has resigned, or that its registered ofce has been discontinued; or
(5) the corporations period of duration stated in its articles of incorporation expires
14.20. GROUNDS FOR ADMINISTRATIVE DISSOLUTION
Note - Comment states "may" preserves court's discretion as to whether dissolution is appropriate even though grounds
exist under the specific circumstances

(i) the corporation obtained its articles of incorporation through fraud; or

(ii) the corporation has continued to exceed or abuse the authority conferred upon it by law;
(1) in a proceeding by the attorney general if it is established that:
In Re Redom shows dissolution is permissive, not mandatory, and the court will only do so when competing
interests "are so discordant as to prevent efficient management" and the "object of its corporate existence cannot
be attained."

"Can't show irreparable injury" was added to address situations such as In Re Redomwhen the business is
flourishing

(i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the
deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the
corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock;

Davis defined oppressive conduct as "burdensome, harsh and wrongful conduct," "lack of probity and fair dealing in
the affairs of a company to the prejudice of some of its members," "a visible departure from the standards of fair
dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to
rely."

Conspiring to deprive someone of stock ownership 1.

Payment of fees on behalf of one shareholder and not another 2.
Converting someone's stock 3.
Malicious suppression of dividends 4.
Excessive salaries 5.
Corporation buying things from a shareholder at greater than FMV 6.
Corporation investing in a shareholder's business 7.
The Davis court listed types of conduct that may be oppressive:
(ii) the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal,
oppressive, or fraudulent;

Gearing v. Kelly
(iii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive
annual meeting dates, to elect successors to directors whose terms have expired; or

(iv) the corporate assets are being misapplied or wasted;

(2) in a proceeding by a shareholder if it is established that:
(i) the creditors claim has been reduced to judgment, the execution on the judgment returned unsatised, and the
corporation is insolvent; or

A corporation is insolvent if its assets are less than its liabilities

(ii) the corporation has admitted in writing that the creditors claim is due and owing and the corporation is insolvent; or
(3) in a proceeding by a creditor if it is established that:
(4) in a proceeding by the corporation to have its voluntary dissolution continued under court supervision
(a) The [name or describe court or courts] may dissolve a corporation:
14.30. GROUNDS FOR JUDICIAL DISSOLUTION
Specifically provides for a buyout
(a) In a proceeding under section 14.30(a)(2) to dissolve a corporation that is not a public corporation, the corporation mayelect or, if
it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of
the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set aside or
modify the election.
Comments indicate that a court should consider all relevant facts and circumstances of the particular case in determining
fair value

Fair value is intended to be fluid

Under 13.01(4) "Fair value" means the value of the corporation's shares determined:
(c) If, within 60 days of the ling of the rst election, the parties reach agreement as to the fair value and terms of purchase of the
petitioners shares, the court shall enter an order directing the purchase of petitioners shares upon the terms and conditions agreed
to by the parties.
14.34. ELECTION TO PURCHASE IN LIEU OF DISSOLUTION - (Buyouts)
BA II Page 13
(i) immediately before the effectuation of the corporate action to which the shareholder objects;
(ii) using customary and current valuation concepts and techniques generally employed for similar businesses in the
context of the transaction requiring appraisal; and
(iii) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles
pursuant to section 13.02(a)(5).
Under 13.01(4) "Fair value" means the value of the corporation's shares determined:
The 13.01(4) definition of fair value doesn't say whether good will is included
(d) If the parties are unable to reach an agreement as provided for in subsection (c), the court, upon application of any party, shall
stay the section 14.30(2) proceedings and determine the fair value of the petitioners shares as of the day before the date on which
the petition under section 14.30(2) was led or as of such other date as the court deems appropriate under the circumstances.
When the person authorized by the corporation, usually the secretary, on questions of authorization, that authority will not be
questioned.

"Statements made by an officer or agent in the course of a transaction in which the corporation is engaged and which are within the
scope of his authority are binding upon the corporation"

In the Matter of Drive-In Development Corp. - subsidiary guaranteed the debt of its parent, nothing in bylaws or resolutions that gave actual
authority secretary certified authority

"Employment contracts for life or on a 'permanent basis' are generally regarded as 'extraordinary' and beyond the authority of any
corporate executive if the only consideration for the promise is the employee's promise to work for that period."

Lee v. Jenkins Bro's - P was allegedly orally promised by D to pay his former pension in exchange for coming to work for D. No actual
authority, but apparent?

Examples
8.01(b) - All corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the business and
affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any
limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32.

(a) The board of directors may hold regular or special meetings in or out of this state.
(b) Unless the articles of incorporation or bylaws provide otherwise, the board of directors may permit any or all directors to participate in a
regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating
may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in
person at the meeting

8.20. MEETINGS
8.21 - Action without meeting
Articles of incorporation
By-laws
Resolution of the board
Officers have to have authority to act according to:
As shown in Lee v. Jenkins, the President has authority to bind his company by acts arising in the usual and regular course of business, but
not for contracts of an "extraordinary" nature. "Apparent authority . . . depends not only on the nature of the contract involved, but the
officer negotiating it, the corporation's usual manner of conducting business, the size of the corporation and the number of its stockholders,
the circumstances that give rise to the contract, the reasonableness of the contact, the amounts involved, and who the contracting third
party."

1.40(2) defines "secretary"

8.41 - Functions of officers - Each officer has the authority and shall perform the functions set forth in the bylaws or, to the extent consistent
with the bylaws, the functions proscribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe
the functions of other officers.

Action by directors and officers

Modern Corporate Governance_____________________________________________________________
Ex. Stock options granted for compensation
Regulation G requires disclosure of non-GAPP financial info
Each registered agency should have a financial expert or explain why they don't
Majority of each board must be independent of management
Independent from management and 1.
Has financial expertise 2.
Audit committee that is:
CEO has to certify financial reports (quarterly and annually)
Internal controls and procedure for financial disclosure
Prohibition against loans to many officers
Changed audit procedures
Mandates electronic filing and posting of stock ownership
Sarbanes Oxley
Note - Housing crisis was from securitization of asset backed securities and credit-default swaps (insurance on loans)
Proxy Regulation_________________________________________________________________________
Whether, and to what extent, a corporation must allow a shareholder to use corporation resources to solicit proxies 1.
What must a proxy statement contain to comply with Section 14 - concerned with adequate disclosure to make sure shareholders are not
mislead and whether they have enough information

Standards appropriate for proxy statements 2.

Major Issues
Generally
BA II Page 14
mislead and whether they have enough information
10k - Required annual report of all registered corporations
Anything material to shareholder in deciding whether to buy or sell(resignation of a director, election of new director, resignation of
auditor)

8k - Report of any significant change throughout the year

10q - Quarterly reports from the corporation
Reports
(a) Company A sells securities under Section 4(2) of the Securities Act of 1933 every year for 3 years. It eventually has total assets of $11
million and 450 shareholders. Does company A have to register under Section 12? => No. Has over $10,000, but less than 500 shareholders.

(b) Company B sells securities under Section 4(2) every year for three years. Eventually it has total assets of $9.8 million and 700
shareholders. Does Company B have to register under Section 12? => No. Sufficient shareholders, but insufficient assets.

(c) Company C has been registered under 12(g) for four years, and has consistently had $9.8 million in total assets and 450 shareholders.
May its registration under Section 12 be terminated? => Yes. Reg. 12 g-4(a)(1).

(p. 569 #2 - Wood said would be good MC test question) - Under 12g-1 and 12g-4, how should the following problems be resolved:
Examples
It shall be unlawful for any member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a national
securities exchange unless a registration is effective as to such security for such exchange in accordance with the provisions of this title and the
rules and regulations thereunder. The provisions of this subsection shall not apply in respect of a security futures product traded on a national
securities exchange.

12(a) - General requirement of registration

Difference between (A) and (B) effected the initial rolling out of the rule: 750 and larger first, then 500 and more => now we use (B)
within one hundred and twenty days after the last day of its first fiscal year ended after July 1, 1964, on which the issuer has total assets
exceeding $1,000,000 and a class of equity security (other than an exempted security) held of record by seven hundred and fifty or more
persons; and
A.
Applies to 500 or more shareholders and assets exceeding $10,000,000 if they engage in interstate commerce or a business affecting
interstate commerce

within one hundred and twenty days after the last day of its first fiscal year ended after two years from July 1, 1964, on which the issuer has
total assets exceeding $1,000,000 and a class of equity security (other than an exempted security) held of record by five hundred or more
but less than seven hundred and fifty persons, register such security by filing with the Commission a registration statement (and such copies
thereof as the Commission may require) with respect to such security containing such information and documents as the Commission may
specify comparable to that which is required in an application to register a security pursuant to subsection (b) of this section. Each such
registration statement shall become effective sixty days after filing with the Commission or within such shorter period as the Commission
may direct. Until such registration statement becomes effective it shall not be deemed filed for the purposes of section 18. Any issuer may
register any class of equity security not required to be registered by filing a registration statement pursuant to the provisions of this
paragraph. The Commission is authorized to extend the date upon which any issuer or class of issuers is required to register a security
pursuant to the provisions of this paragraph.
B.
Every issuer which is engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by use of the
mails or any means or instrumentality of interstate commerce shall--
1.
any security listed and registered on a national securities exchange. A.
any security issued by an investment company registered pursuant to section 8 of the Investment Company Act of 1940. B.
any security, other than permanent stock, guaranty stock, permanent reserve stock, or any similar certificate evidencing nonwithdrawable
capital, issued by a savings and loan association, building and loan association, cooperative bank, homestead association, or similar
institution, which is supervised and examined by State or Federal authority having supervision over any such institution.
C.
any security of an issuer organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory
purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any private shareholder or
individual; or any security of a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the
Investment Company Act of 1940.
D.
any security of an issuer which is a "cooperative association" as defined in the Agricultural Marketing Act, approved June 15, 1929, as
amended, [12 U.S.C.A. 1141 et seq.], or a federation of such cooperative associations, if such federation possesses no greater powers or
purposes than cooperative associations so defined.
E.
any security issued by a mutual or cooperative organization which supplies a commodity or service primarily for the benefit of its members
and operates not for pecuniary profit, but only if the security is part of a class issuable only to persons who purchase commodities or
services from the issuer, the security is transferable only to a successor in interest or occupancy of premises serviced or to be served by the
issuer, and no dividends are payable to the holder of the security.
F.
Such insurance company is required to and does file an annual statement with the Commissioner of Insurance (or other officer or
agency performing a similar function) of its domiciliary State, and such annual statement conforms to that prescribed by the National
Association of Insurance Commissioners or in the determination of such State commissioner, officer or agency substantially conforms
to that so prescribed.
i.
Such insurance company is subject to regulation by its domiciliary State of proxies, consents, or authorizations in respect of securities
issued by such company and such regulation conforms to that prescribed by the National Association of Insurance Commissioners.
ii.
After July 1, 1966, the purchase and sales of securities issued by such insurance company by beneficial owners, directors, or officers of
such company are subject to regulation (including reporting) by its domiciliary State substantially in the manner provided insection
16.
iii.
any security issued by an insurance company if all of the following conditions are met: G.
any interest or participation in any collective trust funds maintained by a bank or in a separate account maintained by an insurance
company which interest or participation is issued in connection with (i) a stock bonus, pension, or profit-sharing plan which meets the
H.
The provisions of this subsection shall not apply in respect of-- 2.
12(g) - Registration of securities by issuer; exemptions
Registration
BA II Page 15
company which interest or participation is issued in connection with (i) a stock bonus, pension, or profit-sharing plan which meets the
requirements for qualification under section 401 of Title 26, or (ii) an annuity plan which meets the requirements for deduction of the
employer's contribution under section 404(a)(2) of Title 26.
The Commission may by rules or regulations or, on its own motion, after notice and opportunity for hearing, by order, exempt from this
subsection any security of a foreign issuer, including any certificate of deposit for such a security, if the Commission finds that such exemption is
in the public interest and is consistent with the protection of investors.
3.
500 shareholders are needed for registration, but if you dip below the corporation will stay registered until under 300
Registration of any class of security pursuant to this subsection shall be terminated ninety days, or such shorter period as the Commission may
determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is reduced to
less than three hundred persons. The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the
certification is untrue. Termination of registration shall be deferred pending final determination on the question of denial.
4.
For the purposes of this subsection the term "class" shall include all securities of an issuer which are of substantially similar character and the
holders of which enjoy substantially similar rights and privileges. The Commission may for the purpose of this subsection define by rules and
regulations the terms "total assets" and "held of record" as it deems necessary or appropriate in the public interest or for the protection of
investors in order to prevent circumvention of the provisions of this subsection. For purposes of this subsection, a security futures product shall
not be considered a class of equity security of the issuer of the securities underlying the security futures product.
5.
(i) Less than 300 persons; or
(ii) By less than 500 persons, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer's
most recent three fiscal years
(1) Such class of securities is held of record by:
(a) Termination of registration of a class of securities shall take effect 90 days, or such shorter period as the Commission may determine, after the
issuer certifies to the Commission on Form 15 that:
240.12g-4 Certifications of termination of registration under section 12(g).
In the Matter of Caterpillar, Inc. - Caterpillar's Brazilian subsidy profited greatly from arbitrage through hyperinflation in Brazil, the
corporation knew subsequent reform gov't was going to have a huge negative impact and exceptionally difficult to predict, but nothing in
their 10-k described this anticipated effect

Examples
Under 10b-5, a misleading statement may subject those involved to criminal liability
Discusses registrant's financial condition, changes in financial condition and results of operations
A misleading statement can lead to criminal penalties under 10b-5
Regulation S-K Item 303 requires corporations to make forward looking statements under certain conditions 1.
A modest likelihood such as 30% may be sufficient
Is the known trend, demand, commitment, event or uncertainty likely to come into fruition? If management determines that it is
reasonably likely to occur, disclosure is required. (Likelihood)
1.
Most situations fall here
The magnitude was deemed high in Caterpillar when a subsidiary accounted for 23% of profits, but represented only 5% of
revenue

If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand,
commitment, event or uncertainty, on the assumption that it will come into fruition. (Magnitude)
2.
As shown in Caterpillar, investors should be provided the opportunity to "see the company through the eyes of management."
Caterpillar states "[w]here a trend, demand, commitment, event, or uncertainty is known, management must make two assessments: 2.
Under the safe-harbor rule, forward looking statements are not deemed false or misleading unless they were made or reaffirmed
without a reasonable basis or were disclosed other than in good faith

Made without actual knowledge that the statements were false or misleading, OR 1.
Statement is identified as forward looking, is accompanied by meaningful cautionary language identifying important facts that
could prevent the statement from becoming accurate
2.
There is no personal liability if the statement was
Safe Harbor Rule 3.
Management's Discussion of Financial Condition and Results of Operations (MD&A)
Note - most courts have not treated scienter, or intention to deceive, as a necessary element of proxy fraud
General
J.I. Case v. Borak - a shareholder is bringing suit, arguing that merger between Case and ATC resulted from a false and misleading proxy
statement. He argues that a merger would not have been approved but for the false and misleading statements in the proxy solicitation
material.

Santa Fe Indus., Inc. v. Green - P owned 95% of Kirby Lumber who was merged into P without a need for giving minority shareholders a vote
(no essential link) with an alleged dramatic undervaluation; however, there is a remedy in state court

"Given the magnitude of CBSA's contribution to Caterpillar's overall earnings, disclosure of the extent of that contribution was
required under the MD & A provisions of Regulation S-K since CBSA's earnings materially affected Caterpillar's reported income from
continuing operations."

In the Matter of Caterpillar, Inc. - Caterpillar's Brazilian subsidy profited greatly from arbitrage through hyperinflation in Brazil, the
corporation knew subsequent reform gov't was going to have a huge negative impact and exceptionally difficult to predict, but nothing in
their 10-k described this anticipated effect

Too low of a standard would unnecessarily expose management to liability - "might" is too low
To high of a standard would result in a "blizzard" of info making the important info harder to find
TSC Indus., Inc. v. Northway, Inc. - National Industries sought to merge with TSC. Northway is a shareholder of TSC, and shareholders allege
that TSC omitted from the proxy statement information relating to National's control over TSC

Examples
False and Misleading Proxy Statements
Proxy Regulation and Disclosure
BA II Page 16
To high of a standard would result in a "blizzard" of info making the important info harder to find
Note - as long as contains false or misleading info, not necessary to show individual shareholders relied on it
Mills Electric - involved a proxy statement relating to a proposed merger where the misstatement did not go to the value of the transaction
itself but to the manner of approval. The proxy statement dislcosed that that other board had recommended approval of the merger but did
not disclose that fact that the board had in fact been selected by the other party to the merger => statement true on its face, but omits fact
that board represents party on other side of the merger

A "sue fact" is "a fact which is material to a sue decision."

A "sue decision" is a decision by a shareholder whether or not to institute a representative or derivative suit alleging a state-law cause
of action

Virginia Bankshares, Inc. v. Sandberg - FABI merged into its Virginia, its subsidiary. A 3rd party firm priced the value of the minority
shareholders who were to be frozen out at $42/share. FABI's proxy statement described the price as "high" and "fair." P argues that
directors did not believe the price was fair and that the only way to remain on board was to recommend the merger. Are statements of
reasons, opinions, or belief statements with respect to material facts within the meaning of Rule 14A?

No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other
communication, written or oral, containing any statement which, at the time and in the light of the circumstances under whichit is made, is
false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a
proxy for the same meeting or subject matter which has become false or misleading.
a.
The fact that a proxy statement, form of proxy or other soliciting material has been filed with or examined by the Commission shall not be
deemed a finding by the Commission that such material is accurate or complete or not false or misleading, or that the Commission has
passed upon the merits of or approved any statement contained therein or any matter to be acted upon by security holders. No
representation contrary to the foregoing shall be made.
b.
Predictions as to specific future market values. 1.
Material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges
concerning improper, illegal or immoral conduct or associations, without factual foundation.
2.
Failure to so identify a proxy statement, form of proxy and other soliciting material as to clearly distinguish it from the soliciting
material of any other person or persons soliciting for the same meeting or subject matter.
3.
Claims made prior to a meeting regarding the results of a solicitation. 4.
Note - The following are some examples of what, depending upon particular facts and circumstances, may be misleading within the
meaning of this section.

Regulation 14A. Solicitation of Proxies. - (Note - use 14a-8 for shareholder proposals)
Must pick one or the other, cross out inapplicable part of rule, then explain with particularity why it is a misstatement or
omission

Ex - Virginia Bankshares - Proxy said $42 price was "high" and "fair," when it was not high based on current value of assets is
misleading with respect to any material fact; (misleading on its face)

Ex - Caterpillar - Properly reported profits, but failed to discuss the impact inflation in Brazil had on operations => omission
which makes it misleading

The statement must be false or misleading. Rule 14a-9 applies to any statement in a proxy solicitation (that is "false or misleading"/
"which omits to state any material fact necessary in order to make the statements therein not false or misleading.")

False or misleading 1.
Need not show a reasonable investor would have changed his vote, but that he would have considered it important
This may proven by expert testimony or by showing trading history of people who knew the truth
The statement must be material. The Supreme Court established the objective materiality standard in TSC Indus., stating that "[a]n
omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how
to vote."

However, "[i]f it would take a financial analyst to spot the tension," liability should follow.
Book value is an example of an accurate fact that can be provided to help insulate liability from misleading propositions
"Since liability under 14(a) must rest not only on deceptiveness but materiality as well . . . publishing accurate facts in aproxy
statement can render a misleading proposition too unimportant to ground liability."

Virginia Bankshares shows that under 14A, a plaintiff is permitted to prove a specific statement of reason knowingly false or
misleadingly incomplete, even when stated in conclusory terms.

Assess probability by looking at indicia of interest in the transaction by the highest corporate levels, considering (1)
board resolutions, (2) instructions to investment bankers, and (3) actual negotiations between principals and their
intermediaries

Probability 1.
The Basic court considered "such facts as the size of the two corporate entities and of the potential premiums over
market value"

Magnitude 2.
Here, materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and
the anticipated magnitude of the event" (Texas Gulf Sulphur).

In uncertain events, such as mergers, Basic shows heightened specificity is required

Materiality 2.
A plaintiff must show causation. The "essential link" standard promulgated in Mills states "[w]here there has been a finding of
materiality, a shareholder has made a sufficient showing of causal relationship . . . if . . . he proves that the proxy solicitation itself . . .
was an essential link in the accomplishment of the transaction."

Virginia Bankshares shows that, in order to be an essential link, there can be no recovery if the transaction did not depend on the
Causation 3.
Rule 14a-9 prohibits any proxy solicitation "containing any statement which . . . is false or misleading with respect to any material fact." Borak,
which remains good law, is the authority which provides a private federal cause of action for violations of Regulation 14a-9 and courts have
interpreted 14a-9 to include four elements to prevail. The elements will be discussed in turn.

BA II Page 17
Virginia Bankshares shows that, in order to be an essential link, there can be no recovery if the transaction did not depend on the
vote

Finally, the plaintiff must show damages. Mills said "damages should be recoverable only to the extent that they can be shown."
Damages 4.
14(a) - Solicitation of proxies in violation of rules and regulations => removed 14(a) b/c COA is under 14a-8
Generally
Studebaker Corp. v. Gittlin - shareholder challenge to an order enjoining him from the use of other stockholders' authorizations in a NY state
court proceeding to inspect the shareholder list. Among other large shareholders constituting over 5% seeking to change the board of
directors, and after getting list intend to solicit proxies. Are the authorizations requests solicitations within the meeting of 14(a)?

Examples
The issue is who pays for the solicitations, and what shareholders can include in proposals
Rule 14a-8(a)(1) imposes minimum ownership requirements and holder period qualifications upon shareholders who seek inclusion of a proposal
under Rule 14a-8

(1) improper under state law

(2) Violation of law
(3) Violation of proxy law (ex. not misleading, no omissions, etc.)
Cracker Barrel - proposal to stop compensation discrimination against gays
If there is a public debate on the topic, then it is not a personal grievance or related to ordinary business
(4) Personal Grievance; special interest
(5) Relevance
(6) Absence of power/authority
Ex. Executive compensation, Cracker Barrel denying gays to work for their company, producing land mines, producing napalm
A shareholder proposal concerning a company's employment policies and practices for the general workforce is tied to a social issue
will no longer be viewed as removing the proposal from the realm of ordinary business operations of the registrant

(7) Management functions - If the proposal deals with a matter relating to the company's ordinary business operations
A Mobil shareholder proposal was properly rejected in Rauchman that sought to disallow a Saudi Arabian citizen from becoming a
member of Mobil's board of directors

(8) Relates to Election: If the proposal relates to a nomination or an election for membership on the company's board of directors or
analogous governing body or a procedure for such nomination or election

Rauchman - corp could exclude proposal to prohibit Saudi Arabians from being on the board b/c a Saudi was up for re-election and
adoption of the proposal would have precluded his re-election

(9) Conflicts with company's proposal

14a-8(i) -Company may exclude shareholder proposals, even if procedural requirements are met, if:
Shareholder proposals
Regulation FD provides that a company disclosing material, non public information to specified types of securities market professionals must
thereafter publicly disclose that information (aka "selective disclosure)

Ex. Material public info - "we have not changed the guidance given in our most recent earnings report"
Innocently providing a "snippet" of info that is not itself material to a securities professional is not a violation of FD enough though it
may enable the professional to infer material non-public information

Ex. Non material public info - "in our most recent earnings report we have given the following guidance"
The Supreme Court established the objective materiality standard in TSC Indus., stating that "[a]n omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how to vote."

If the selective disclosure is "intentional" the company must simultaneously make public disclosure
If "unintentional" the disclosure must be made "promptly" thereafter
SOX makes it unlawful for accounting firms that audit public companies to simultaneously provide the company with a variety of non-audit
services

Regulation FD ("Fair Disclosure")

Transactions in Shares; Rule 10b-5, Insider Trading, and Securities Fraud___________________________
Causes of action under 14 and 10b-5 are not mutually exclusive
To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so
registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive
device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.

Under Rule 10(b), it is unlawful

Secondary parties includes banks, law firms, and accounting firms
The court stated "a person can be a primary violator if he or she writes misrepresentations for inclusion in a document to be given to
investors, even if the idea for those misrepresentations came from someone else."

Writing misrepresentations for inclusion in a document to be given to investors

Disguising large loans and doing sale/buy back agreements
Issuing clean audit reports knowing they were false
Lawyer creating a knowingly false report on an employee or creating false companies
Examples include
In Re Enron shows a secondary party "can be found liable as a primary violator if he acts with the requisite scienter."
Primary liability of a secondary party - If someone, other than a primary party, meets all the elements of the rule, then they can be found liable under
the rule. (Applies to both COA's)

PSLRA requires class actions to be brought by the "most adequate plaintiff"

SLUSA requires 10b-5 claims to be brought in federal court, unless the claim the claim also alleges a fiduciary breach under state law (Securities Act
Generally
BA II Page 18
SLUSA requires 10b-5 claims to be brought in federal court, unless the claim the claim also alleges a fiduciary breach under state law (Securities Act
16(d))

"Tippees" can also be liable, and that the tippers may also be liable on their behalf (check) (Texas Gulf)
In Texas Gulf, a nine-minute gap was sufficient to impose civil and criminal penalties
"Before insiders may act upon material information, such information must have been effectively disclosed in a manner sufficient to insure
its availability to the investing public" (Texas Gulf)

SEC v. Texas Gulf Sulphur Co. - geographical survey found largest ore strike in history; meant to be kept confidential; one group acquired an
additional 7k shares and 12k calls before the board found out, another group of directors buy options and know about the strike but fail to show
supervisors; trades are made before info gets to NYSE => Are the groups liable under 10b or 10b-5 for insider trading?

(a) Person would be liable under 10b-5. There is a duty (Texas Gulf).
(b) Person would not be liable under 10b-5. No duty.
(p. 861, #1)
Ernst & Ernst- claim against an accounting firm for failing to discover a major fraud in a securities firm; mail was only allowed to opened by a
particular individual, which was negligent and didn't show an intent to deceive

The dissent in Chiarella promulgated the misappropriation theory (standard will later be developed in Hagan)
Chiarella v. United States - printer received info about takeover bid before hit market, but had no connection to the other company and therefore
not under a duty

O'Hagan - D worked for law firm who represented Grand Met in a merger w/ Pillsbury, O'Hagan bought call options and common stock of
Pillsbury stock and made $4.3 million

Mere possession of material non public info is not enough. There must also be a relationship and a breach (below for tippee duty and
breach)

Dirks - D a "tippee" received material non public inf from "a tipper" with which he had no connection, he investigated the claims and passed the
info on to other analysts but did not purchase or sell any securities himself

Basic Inc. v. Levinson - Combustion was interested in acquiring Basic. Basic denied the merger negotiations 3 times, but eventually made the
negotiations public and eventually sold for $46/share.

Blue Chip Stamps - provided incentives to customers to induce them to shop in their stores, issued a misleading prospectus and overly pessimistic
statements to discourage purchases => must show reliance

SEC v. Cuban - SEC alleges after Cuban verbally agreed to maintain the confidentiality of material, non-public information concerned a planned
private investment in public equity, he sold his stock in the company without first disclosing to Mamma.com that he intended to trade on this
information, and avoiding substantial losses.

Is the conduct by the lawyers, accountants, and banks sufficient to meet the scienter standard required by an action under 10b-5?
In Re Enron Corp Securities Derivative & ERISA Litigation - Enron shareholders bring a class action against various banks and accounting firms
handling Enron matters for false and misleading statements and a failure to disclose adverse facts

Examples
Examples
Kardon created a private cause of action for violations of Rule 10b-5 and courts have interpreted 10b-5 to include eight elements to prevail
on a private cause of action.

Private
To prevail on a 10b-5 action, the SEC must show scienter, a misstatement or omission, materiality, and duty.
SEC
The elements will be discussed in turn.
Rule 10b-5 states "[i]t shall be unlawful for any person . . . (to make any untrue statement of a material fact/to omit to state a material fact necessary in
order to make the statements made . . . not misleading) . . . in connection with the purchase or sale of any security."

Applies to sale of options to purchase securities (Wharf United Int'l)

Blue Chip Stamps shows that purchasers or sellers of securities have standing for private causes of action
Standing (SEC always has standing for a 10b-5 action, Private - Yes) 1.
Ernst & Ernst shows 10b-5 applies only to activities that involve scienter
The words "manipulative or deceptive" used in conjunction with "device or contrivance" suggests 10(b) was intended to proscribe knowing
or intentional misconduct

Negligence or aiding and abetting (ex. Accountants) does not rise to this standard (Ernst)
Scienter will be found if the defendant knew or was reckless in not knowing of the misrepresentation and intended that the plaintiff rely on
the misinformation

Scienter (SEC - Yes, Private - Yes) 2.

In the case, the Supreme Court stated a "breach of fiduciary duty . . . without any deception, misrepresentation, or nondisclosure" is
insufficient for a 10b-5 violation.

Santa Fe shows a misstatement or omission is necessary in a private cause of action.

Here, the company said _____
False 1.
Misleading on its face 2.
Under the PSLRA, a 10b-5 complaint that alleges half-truths must specify which statements are misleading and why they are
misleading

Caterpillar - properly reported profits, but failed to discuss the impact inflation in Brazil had on operations
Basic - court looks to whether the statements are misleading or omissions - both, contains an omission that makes it misleading
True, but with omitted facts that make it misleading 3.
NOTE - silence, absent a duty to disclose, is not misleading (avoid 10b-5 liability by saying "no comment," but if you lie on MD&A
Because _________, the statements is
Misstatement or Omission (SEC - Yes, Private - Yes) 3.
Elements
Rule 10b-5
BA II Page 19
NOTE - silence, absent a duty to disclose, is not misleading (avoid 10b-5 liability by saying "no comment," but if you lie on MD&A
10b-5 liability can result)

Need not show a reasonable investor would have changed his vote, but that he would have considered it important
Proven by expert testimony or by showing trading history of people who knew the truth
Texas Gulf shows that objective evidence such as "the time and . . . purchases of short termcallspurchases in some case by
individuals who had never before purchased calls or even TGS stockvirtually compels" an inference of materiality.

But, if it takes a financial expert to determine if a statement is false, then it is still material
Note - Board can insulate themselves from liability when they make opinions if the accurate facts made to form the opinion are in the
proxy

The Supreme Court established the objective materiality standard in TSC Indus., stating that "[a]n omitted fact is material if there is a
substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."

Assess probability by looking at indicia of interest in the transaction by the highest corporate levels, considering (1) board
resolutions, (2) instructions to investment bankers, and (3) actual negotiations between principals and their
intermediaries

Probability 1.
The Basic court considered "such facts as the size of the two corporate entities and of the potential premiums over
market value"

Magnitude 2.
Here, materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the
anticipated magnitude of the event" (Texas Gulf Sulphur).

In uncertain events, such as mergers, Basic shows heightened specificity is required

Materiality (SEC - Yes, Private - Yes) 4.
As shown in Basic, the private investor must show reliance on the misstatement or omission
However, Hamilton shows that this presumption does not exist if there is not a market
Once materiality is shown, under the fraud-on-the-market theory the court will accept a presumption of reliance (Basic)
Ex. If news of true information entered the market and dissipated the effect of the misstatement
The misrepresentation did not lead to a distortion of price 1.
Ex. If he had to sell for medical bills
An individual P traded or would have traded despite his knowing the statement was false 2.
Any showing by the corporation that severs the link will rebut the presumption, such as
Reliance (Reliance is not an element for the SEC b/c the SEC did not buy or sell, Private - Yes) 5.
The Private Securities Litigation Reform Act (21(D)(b)(4)), places the burden on plaintiff to prove that the alleged act or omission caused the
loss for which the plaintiff seeks to recover damages (the decline in value was caused by the statement).

Loss Causation (SEC - No, Private - Yes) 6.

The person who made the (misstatement/omission) must have been under a duty
A corporation is under a duty to speak truthfully to its shareholders
Duty to shareholders
Ex. Employer/employee, A/C
Under the classical approach from O'Hagan, duty is satisfied if the person who made misstatement or omission owed a duty to the
corporation in which the stock is traded

Duty to entity
Anything meeting classical will meet misappropriation (employer/employee, A/C)
In O'Hagan, the Supreme Court expanded 10b-5 liability by recognizing the "misappropriation theory" which applies to determine if a
duty is owed to someone other than the corporation in which the stock is traded

Any person in possession of material, nonpublic information has a duty to disclose the information, or abstain from trading, if the
person obtains the information in a relation of trust and confidence.

The Cuban court stated "[t]he agreement . . . must consist of more than an express or implied promise merely to keep
information confidential. It must also impose on the party who receives the information the legal duty to refrain from
trading on or otherwise using the information for personal gain."

Whenever a person agrees to maintain information in confidence; 1.

Whenever the person communicating the material nonpublic information and the person to whom it is communicated have 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 nonpublic information expects that the recipient will maintain its confidentiality; or
2.
Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling;
provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence
existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the
person who was the source of the information expected that the person would keep the information confidential, because of
the parties' history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or
understanding to maintain the confidentiality of the information.
3.
Under 10b-5-2(b) enumerated "duties of trust or confidence" exist
Note - 10b-5 liability can be avoided if insider discloses to corporation that he will trade on nonpublic information
In Carpenter, the Supreme Court upheld a fraud conviction for a D who received his information from a Wall Street Journal journalist
in advance of his "Heard on the Street Column," rather than from the company itself.

Duty to anyone else

Duty (SEC - Yes, Private - Yes) 7.
Mills also shows that "damages should be recoverable only to the extent that they can be shown."
Damages (SEC - No, Private - Yes) 8.
Sarbanes-Oxley extended the statue of limitations for private securities fraud claims to the earlier of two years after discovery of the facts
constituting the violation or five years after the violation

SOL - There is a Statute of Limitations for private 10b-5 actions

BA II Page 20
constituting the violation or five years after the violation
Here, there is no indication that the statutes of limitations was not complied with
Contribution - D's have an implied right of contribution for a D who becomes liable for more than his share to compel other responsible persons
to pay their share of the total liability

Note - 10b-5(b) does not apply to insider trading

16(a)(1) - who it applies to directors, officers, or shareholders who have 10% share in company
The exercise of an option is not a purchase, so you can exercise an option and sell it without a 16(b) violation
Acquisition of an option is a 16(b) purchase
Need a sale then a purchase, or a purchase then a sale
All purchases after that increases the holding to above 10% continue to be subject to 16(b)
The transaction by which a person becomes a 10% shareholder is not itself a purchase that may be matched with subsequent sales
(Foremost-McKesson v. Provident Sec. Co.)

Profit is calculated by matching the lowest purchase price and highest sale price
6 months go both ways
16(b) If a purchase and sale (or sale and purchase) by an officer, director, or 10% shareholder takes place within a 6 month period (before or
after any trade), the profit is automatically recoverable by the corporation (regardless of intent)

If part of an employee benefit plan 1.

If part of a long term options exercise 2.
Officer includes - President, principal financial officer, principal accounting officer, VP in charge of a principal business unit, persons
performing policy-making functions
3.
Exceptions
Insider trading - if director, officer, or 10% shareholder, can be liable both under 10b-5 fraud and 16(b)
Securities and Exchange Act of 1934 - Short swing sales
Provides heightened pleading standards, required courts to stay discovery pending resolution of motion to dismiss, limited discovery
Required lost causation (whether misstatement caused change in price) as necessary element under 10b-5
PSLRA requires class actions to be brought by the "most adequate plaintiff"
(1) Is a "covered class action," (2) Based on state law, (3) in which the P has alleged either a "misrepresentation or omission of a
material fact" or "any manipulative or deceptive device or contrivance," (4) in connection with the purchase or sale of a covered
security

Federal preemption of any claim that:

SLUSA requires 10b-5 claims to be brought in federal court, unless the claim the claim also alleges a fiduciary breach under state law (Securities
Act 16(d))

Generally
Loeb must have breached duty to Waldbaum's 1.
Chestman knew Loeb breached his duty 2.
For Chestman to be convicted:
Chestman is the precursor of 10b-5-2(b)
A familial relationship, standing alone, does not impose a duty of trust or confidence for purposes of the misappropriation theory
United States v. Chestman - Waldbaum was being sold to A & P at a substantially higher price, the controlling shareholder told his sister, three
children, and nephew about the impending sale. The sister told her daughter and son in law, who told their broker, Chestman. Daughter told her
husband, Loeb, who told Chestman. Chestman knew the info came from the granddaughter of the company, made several purchases both for the
granddaughter on his own account and for his customers.

Examples
Private - Courts have interpreted 10b-5 to include six elements for a private insider trading cause of action.
SEC - Courts have interpreted 10b-5 to include five elements for a SEC insider trading cause of action.
Each element will be discussed in turn.
Rule 10b-5 states "[i]t shall be unlawful for any person . . . to engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person . . . in connection with the (purchase . . ./ . . . sale) of any security."

A contemporaneous trade is one within 7 days (before or after) the trade that is subject of the action
Under Section 20A, any person who trades contemporaneously with the purchase/sale of securities that is the subject of the violation has
standing to bring a private cause of action

Standing (SEC - Yes, Private - Yes) 1.

Ernst & Ernst shows 10b-5 applies only to activities that involve scienter
The words "manipulative or deceptive" used in conjunction with "device or contrivance" suggests 10(b) was intended to proscribe knowing
or intentional misconduct

Negligence or abetting and abetting (ex. Accountants) does not rise to this standard.
Scienter will be found if the defendant knew of the inside information when he or she traded
Scienter (SEC - Yes, Private - Yes) 2.
The person trading must have had material non-public information
Proven by expert testimony or by showing trading history of people who knew the truth
Texas Gulf shows that objective evidence such as "the time and . . . purchases of short termcallspurchases in some cases by
individuals who had never before purchased calls or even TGS stockvirtually compels" an inference of materiality.

The Supreme Court established the objective materiality standard in TSC Indus., stating that information is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how to vote.

NOTE - if a tippee trades, tipper can be liable if he received a benefit (giving info to a friend/spouse/parent is like the insider trading and
giving proceeds to outsider)

Person trading had Material Non-Public Information (SEC - Yes, Private - Yes) 3.
Duty (SEC - Yes, Private - Yes) 4.
Elements
Insider Trading
BA II Page 21
The person making the trade must have been under a duty when he or she traded.
Ex. Employer/employee, A/C
A person owes a duty to the corporation even if they are a merely a "temporary insider" (a member of a company being
acquired can be a temporary insider of the acquiring company)

Under the classical approach from O'Hagan, duty is satisfied if the person who acted upon the material inside information owed a
duty to the corporation in which the stock is traded

Corporate insider
Anything meeting classical will meet misappropriation (employer/employee, A/C)
In O'Hagan, the Supreme Court expanded the scope of insider trading liability by recognizing the "misappropriation theory" which
applies to determine if a duty is owed to someone other than the corporation in which the stock is traded

Any person in possession of material, nonpublic information has a duty to disclose the information, or abstain from trading, if the
person obtains the information in a relation of trust and confidence.

The Cuban court stated "[t]he agreement . . . must consist of more than an express or implied promise merely to keep
information confidential. It must also impose on the party who receives the information the legal duty to refrain from
trading on or otherwise using the information for personal gain."

Whenever a person agrees to maintain information in confidence; 1.

Whenever the person communicating the material nonpublic information and the person to whom it is communicated have 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 nonpublic information expects that the recipient will maintain its confidentiality; or
2.
Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling;
provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence
existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the
person who was the source of the information expected that the person would keep the information confidential, because of
the parties' history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or
understanding to maintain the confidentiality of the information.
3.
Under 10b-5-2(b) enumerated "duties of trust or confidence" exist
Tipper had a duty (employer/employee, A/C) 1.
The court will look to objective criteria, "such as pecuniary gain or reputational benefit that will translate into
future earnings," or a relationship that suggests a quid pro quo" (Dirks)

Note - disclosure of info itself is not a breach of duty

In determining whether the tipper duty is breached, Dirks states "the test is whether the insider personally will
benefit, directly or indirectly, from his disclosure"

Tipper breached duty 2.

Tippee knew or should have known of the breach 3.
"[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only
when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee
knows or should know that there has been a breach" (Dirks)

NOTE - 10b-5 liability can be avoided if insider discloses to corp that he will trade on nonpublic information
A tippee's duty to disclose or abstain is derivative from that of the insider's duty
Corporate outsider
Duty (SEC - Yes, Private - Yes) 4.
The trade must have been on the basis of material inside information
Generally, if a person has inside info, then the trades are based on it
Trades made pursuant to a qualified pre-planned program 1.
Trade make pursuant to a contract, plan entered into prior to obtaining inside information 2.
However, safe harbors under 10b-5-1 include
Under 10b5-1 (b) "on the basis of" is satisfied "if the person making the purchase or sale was aware of the material nonpublic information
when the person made the purchase or sale."

Anyone in possession of material inside information must either disclose it or abstain from trading
Before insiders may act upon material information, such information must have been effectively disclosed in a manner sufficient to insure
its availability to the investing public

Trade on the Basis of Inside Info (SEC - Yes, Private - Yes) 5.

The P must show loss causation.
Note - Can only show loss causation if he sold the stock and then it went up or if he bought the stock and then it went down (Can't
show loss causation if bought stock before it went up)

SLUSA requires a P to show the inside information caused the price change. Here, when the market received the inside information the
price changed from __ to ___. Therefore, under SLUSA, because the P has suffered a loss of __, the P has shown loss causation.

Loss Causation (SEC - No, Private - Yes) 6.

The rule prohibits, during the course of a tender offer, trading by anybody who has material, nonpublic information about theoffer that he
knows (or has reason to know) was obtained from either the bidder or the target.

There is no need under 14e-3 to prove that a tipper breached a fiduciary duty for personal benefit
Under Rule 14e-3, the SEC prohibited trading by those with inside information about a tender offer
14e-3
Duty of Care & The Business Judgment Rule___________________________________________________
Duty of care is about process
A direct action involves a shareholder alleging injury to his shares as a shareholder
Derivative actions vs. direct actions
Generally
BA II Page 22
A direct action involves a shareholder alleging injury to his shares as a shareholder
A derivative action is a suit asserted by a shareholder on the corporation's behalf against a third party because of the corporation's failure to take
action against the third party.

8.30 is effectively the job description of the directors and is an objective standard of conduct
Subjective standard - intentional recklessness
Higher level of culpability than 8.30
8.31 is used to get damages resulting from conduct
8.30 & 8.31 together are MBCA's corollary to the BJR
Is not interested in the subject of the business judgment
Is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate
under the circumstances; and

Rationally believes that the business judgment is in the best interests of the corporation
A director or officer who makes a business judgment in good faith fulfills his duty if he:
Under the ALI's version of the business judgment rule,
The minimal calculations and valuation opinions sought by the board in deciding to sell constituted gross negligence => In DE, gross negligence is
the standard

Van Gorkom - RR car leasing business with insufficient taxable income to exercise tax credits, sought a leveraged buyout and offered to finance its own
purchase; CFO ran numbers and preliminarily determined purchaser (Prinsker) could retire debt with a cash out merger @ $50-60/share; however, no
analysis was ran to calculate value of company as a whole. Opened company for bidding an agreement but an agreement with Prinsker (1) could not
actively solicit bids, (2) couldn't release proprietary information. Prinsker gives 3 days to accept offer and determine value of company

Limited damages to 6 month period of repurchase agreement, no damages available after that point
Was there a breach of duty of care? Analyzed under negligence standard => over time began to require more stringent requirements
Litwin v. Allen - Alleghany sold bonds to trust company, which allows Alleghany to repurchase the bonds at the end of 6 months
Shlensky v. Wrigley - stockholders derivative suit for negligence and mismanagement for not installing lights enabling the team to play night games.
Cubs are the only team who doesn't play night games, and lose a lot of $ doing so. D alleges baseball is a daytime sport and night games would have an
adverse effect on the surrounding neighborhood => absent an allegation of fraud, no breach of fiduciary duty

In Re Caremark - Caremark was a health care company who was involved in some shady Medicare kickbacks in violation of federal law. Caremark was
criminally indicted and ended up settling for $250 million with various gov't agencies, and shareholders filed a derivative suit. Motion to approve a
proposed settlement by shareholders as fair and reasonable

Francis v. United Jersey Bank - sons of the founder of a corp, an "insurance reinsurance" business, siphoned large sums of money from the corp in the
form of shareholder loans and other improper payments to family members. Widow of founder literally did nothing in her role as a director and instead
drank heavily. => She was held liable for her children's actions for failure to monitor, a director "can not merely be an ornament"

Audit report shows Board enacted written policies and procedures designed to ensure compliance with the regulations => no basis for an
oversight claim seeking to hold the directors personally liable for such failures by the employees

Stone v. Ritter - P's suing D corporation for $40 million in fines and $10 million in civil penalties arising from failure to comply with the Bank Secrecy Act
and Anti Money Laundering Regulations

Malone - complaint alleges corp breached their duty of disclosure and that KPMG aided and abetted the breaches for intentionally overstating the
financial condition of Mercury for 4 years. Is there a cause of action in DE for making a material misstatement?

Examples
The issue is whether there was a breach of fiduciary duty. The law of our jurisdiction is the MBCA.
Analysis
Reasons: (1) close corporations are less likely to have directors, (2) injury is likely to be more direct
Note - Derivative actions usually occur in public corporations, not close corporations
Generally
Absent allegations of fraud, collusion, self-interest, dishonesty or other misconduct of a breach of trust nature, and absent allegations that
the business judgment exercised was grossly unsound, the court should not at the instigation of a single shareholder interfere with the
judgment of the corporate officers

Held - The decision of (disinterested?) corporate directors whether to assert a cause of action held by the corporation rests within the
sound business judgment of the management

Gall v. Exxon Corp. - P's allege over $59 million in illegal political payments by Exxon. Exxon established a Special Committee and decided not to
file a suit against the directors. Should a decision by the board of directors not to bring a derivative suit be respected?

P must show state facts with particularity that create a reasonable doubt of whether directors breached duty of loyalty or duty of care
Aronson v. Lewis - (DE 1984) (demand excused case) - Shareholder of a subsidiary alleges that a board improperly entered into transactions (for
employment contracts w/ Fink) and these would not have been entered into without Fink's director selection. Shareholders initiate derivative suit.
Are facts sufficient to excuse demand?

Within the independent business judgment of the court

Not 7.44 - Court used two-part test (1) inquire into independence and goof faith of the committee and bases of conclusions, (2) the
challenged transaction was otherwise the product of a valid exercise of business judgment

Directors have management authority and their decision to terminate a derivative action will only be overturned when they do not exercise
this authority in accordance with their fiduciary duties

Zapata Corp. v. Maldonado - (DE 1981) (demand excused case) - Directors offered stock options and decided to exercise them by accelerating the
date they were able to buy before a tender offer in order to avoid taxes before prices rose. Shareholders initiated derivative action. Corp hired 2
new directors to launch investigation, and they elect to dismiss. Does committee have the power to dismiss an action that was properly brought?

Cukar v. Mikalauskas - minority shareholder institutes derivative action for mismanagement of collections. Soon after, another complaint was
filed. Does the BJR allow directors to terminate a derivative action? Yes.

In Re Oracle Corp. Derivative Litigation - P's bring derivative suit alleging insider trading (based on state law) by 4 of Oracle's directors. Committee
was formed and it was decided that no action should be taken. The Special Litigation Committee members were Stanford law professors who had

Examples
Derivative actions
BA II Page 23
was formed and it was decided that no action should be taken. The Special Litigation Committee members were Stanford law professors who had
significant ties to the company, and who under-reported ties.
7.40 - "'Derivative proceeding' means a civil suit in the right of a domestic corporation."
Was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by
operation of law from one who was a shareholder at the time (Operation of law - divorce or inheritance)
1.
Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation 2.
A shareholder may not commence or maintain a derivative proceeding unless the shareholder:
7.41 - Standing
Although some states allow demand excused, the MBCA requires a written demand in all cases
A written demand has been made upon the corporation to take suitable action; and 1.
90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by
the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period
2.
7.42 - No shareholder may commence a derivative proceeding until:
Comment states the word "inquiry" rather than "investigation" has been used to make it clear that the scope of the inquiry will depend
upon the issues raised and the knowledge of the group making the determination with respect to the issues. In some cases, the issues may
be so simple or the knowledge of the group so extensive that little additional inquiry is required. In other cases, the group may need to
engage counsel and other professionals to make an investigation and assist the group in its evaluation of the issues.

(a) A derivative proceeding shall be dismissed by the court on motion by the corporation if one of the groups specied in subsection (b) or
subsection (e) has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of
the derivative proceeding is not in the best interests of the corporation.

7.44(b)(1) material relationship means a familial, nancial, professional, employment or other relationship that would
reasonably be expected to impair the objectivity of the directors judgment when participating in the action to be taken;
and

7.44(b)(2) material interest means an actual or potential benet or detriment (other than one which would devolve on
the corporation or the shareholders generally) that would reasonably be expected to impair the objectivity of the
directors judgment when participating in the action to be taken.

(1) section 7.44, does not have (i) a material interest in the outcome of the proceeding, or (ii) a material relationship with a
person who has such an interest;
Under 1.43(a), a qualied director is a director who, at the time action is to be taken under:
(1) a majority vote of qualied directors present at a meeting of the board of directors if the qualied directors constitute a quorum; or
Material interest
Material relationship
1.43 - qualified director
(2) a majority vote of a committee consisting of two or more qualied directors appointed by majority vote of qualied directors present at
a meeting of the board of directors, regardless of whether such qualied directors constitute a quorum.
(b) Unless a panel is appointed pursuant to subsection (e), the determination in subsection (a) shall be made by:
(e) Upon motion by the corporation, the court may appoint a panel of one or more individuals to make a determination whether the maintenance
of the derivative proceeding is in the best interests of the corporation. In such case, the plaintiff shall have the burden of proving that the
requirements of subsection (a) have not been met
7.44 - Dismissal of derivative actions
7.45 - Discontinuance or Settlement
7.46 - Payment of Expenses
If a derivative suit is not dismissed under 7.44, go to 8.31 (damages) or 8.30 (equitable relief) and evaluate the conduct of the director on the
substantive claim.

(A) the amount of a financial benefit received by a director to which he is not entitled."
(B) an intentional infliction of harm of the corporation of the shareholders."
8.33 - liability for unlawful distributions
(C) a violation of section 8.33."
(D) an intentional violation of criminal law."
2.02(b)(4) states "[t]he articles of incorporation may set forth a provisions eliminating or limiting the liability of a director to the
corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director,
exception liability for

If articles of incorporation limit liability of directors, P must show why his or her cause of action is not limited by the articles
(i) any provision in the articles of incorporation authorized by section 2.02(b)(4) or, (EXCULPATION CLAUSES)
8.62(a) - after disclosure, transaction was authorized by majority of qualified directors
(1) directors' action respecting the transaction was taken in compliance with section 8.62 at any time."; or
8.63 - mechanism for shareholders to ratify a conflicting interest transaction to avoid liability
(2) shareholders' action respecting the transaction was taken in compliance with section 8.63 at any time."; or
(3) the transaction, judged according to the circumstances at the relevant time, is established to have been fair to
(b) A director's conflicting interest transaction may not . . . give rise to an award of damages . . . in a proceeding by a
shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the
transaction, if:

8.61(b) - (three primary defenses directors have for breaches of duty of care and loyalty)
(ii) the protection afforded by section 8.61 (for action taken in compliance with section 8.62 or section 8.63), or
(1) no defense interposed by the director based on
(a) A director shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any
action, as a director, unless the party asserting liability in a proceeding establishes that:
Damages - 8.31 STANDARDS OF LIABILITY FOR DIRECTORS
Direct Actions
BA II Page 24
(i) the time at which directors' action respecting the transaction is taken in compliance with section
8.62, or (ii) if the transaction is not brought before the board of directors or the corporation (or its
committee) for action under section 8.62, at the time the corporation (or an entity controlled by the
corporation) becomes legally obligated to consummate the transaction

"Relevant time" is defined in 8.60(3) as

Fair dealing
(i) fair in terms of the director's dealings with the corporation, and
(ii) comparable to what might have been obtainable in an arm's length transaction, given the
consideration paid or received by the corporation."

"Fair to the corporation," as defined in 8.60(6), means "the transaction as a whole was beneficial to the
corporation, taking into appropriate account whether it was

(3) the transaction, judged according to the circumstances at the relevant time, is established to have been fair to
the corporation

(iii) the protection afforded by section 8.70, precludes liability; and

A lack of good faith requires a conscious or intentional disregard for a known duty or responsibility
As shown in the comments, a lack of good faith is presented where a board "lacked an actual intention to advance corporate
welfare."

Fraud - As shown in Malone, directors who knowingly disseminate false information that results in corporate injury or damage
to an individual stockholder violate their fiduciary duty and may be held accountable in a manner appropriate in the
circumstances.

(i) action not in good faith; or

(A) which the director did not reasonably believe to be in the best interests of the corporation, or
Van Gorkom shows directors may be liable if grossly negligent in failing to act with informed reasonable deliberation. In
the case, directors were liable when they approved a sale of a company in less than three days without reading
documents, getting reports, or verifying numbers.

Note - if directors know consequences of their decision, then there is no breach of duty of care
(B) as to which the director was not informed to an extent the director reasonably believed appropriate in the circumstances; or
(ii) a decision
As shown in Caremark, "it is important that the board exercise a good faith judgment that the corporation's information and
reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention
in a timely manner as a matter of ordinary operations."

(iv) a sustained failure of the director to devote attention to ongoing oversight of the business and affairs of the corporation, or a
failure to devote timely attention, by making (or causing to be made) appropriate inquiry, when particular facts and circumstances of
signicant concern materialize that would alert a reasonably attentive director to the need therefore; or
(2) the challenged conduct consisted or was the result of:
8.30(d),(e),(f) - Directors defenses to care - entitled to rely on the performance or information of . . .
(1) If money damages are sought, causation between the breach and damages must be shown
(b)
If derivative action - 7.40, 7.41, 7.42, 7.44
A lack of good faith requires a conscious or intentional disregard for a known duty or responsibility
As shown in the comments, a lack of good faith is presented where a board "lacked an actual intention to advance corporate welfare."
Fraud - As shown in Malone, directors who knowingly disseminate false information that results in corporate injury or damage to an individual
stockholder violate their fiduciary duty and may be held accountable in a manner appropriate in the circumstances.

8.30(a)
Negligence does not rise to this standard
8.30 (b) - The members of the board of directors or a committee of a board, when becoming informed in connection with their decision-making function
or devoting attention to their oversight function, shall discharge their duties with the care that a person in a like position would reasonably believe
appropriate under similar circumstances

8.30(d), (e), and (f) - Directors defenses to care

(a) the directors did not in fact rely on the expert;
(b)their reliance was not in good faith;
(c) they did not reasonably believe that the expert's advice was within the expert's professional competence;
(d) the expert was not selected with reasonable care by or on behalf of the corporation, and the faulty selection process was attributable to the
directors;

(e) the subject matter that was material and reasonably available was so obvious that the board's failure to consider it was grossly negligent
regardless of the experts advice or lack of advice; or

Court may compare compensation packages of similarly situated companies (Menard's)

As shown in Heller, the court may inquire whether the compensation is for services rendered, or a gift. "If a bonus payment has no
relation to the value of services for which it is given, it is in reality a gift in part, and the majority stockholders have no power to give
away corporate property against the protest of the minority."

Waste is "an exchange that is so one sided that no business person or ordinary, sound judgment could conclude that the corporation has
received adequate consideration." This was not found in Eisner after the President received extraordinary compensation in order to lure
him from his previous company.

(f) that the decision of the Board was so unconscionable as to constitute waste or fraud
As shown in Brehm v. Eisner, the plaintiff can rebut by showing
NOTE - DO NOT GO TO 8.61!
Equitable relief
Duty of Loyalty__________________________________________________________________________
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Marciano v. Nakash - Two groups of directors own stock during liquidation. One side argues a loan made to the other group, involved conflicting
interests so is therefore voidable. Although self-dealing/loyalty claim, there is no breach if it is fair => court determines the transaction is within the CL
safe harbors

Is excessive executive compensation fair to the corporation?

Heller v. Boylan - 7 shareholders of American Tobacco Company seeks recovery for allegedly improper enormous payments to officers
"Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent
receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary"

Not analyzed under MBCA, but applies Self Dealing test

Under MBCA would be: 7.40, 8.61(a), 8.60(1), 8.60(5), 8.61(b)(3), 8.60(3), 8.60(6)
Sinclair Oil Corp. v. Levien - derivative action sought to require Sinclair to pay damages incurred by its subsidiary. The P argues that the parent caused
the subsidiary to breach a contract entered into by the subsidiary.

Weinberger v. UOP, Inc. - Class action of shareholders challenge a merger between UOP and Signal. Two companies had overlapping directors. Two of
the directors who were on the board on both boards analyzed UOP data for the benefit of Signal and calculating up to what price would be deemed a
good investment for Signal in a "feasibility study." Signal made a very fair deal to UOP but never disclosed the price range in the "feasibility study" to the
outside directors in UOP.

Corporate opportunity case => MBCA 8.31(a)(2)(v)

Northeast harbor- President of golf course was contacted in her capacity as President about purchasing abutting property to the course. The board had
discussed developing property casually, but not seriously. Without disclosing to the Club she immediately bought for $45k. She told the board at the
annual meeting. 5 years later while playing golf at the course she found out about another abutting property which was landlocked and bought it. She
told the board she had no present plans to develop the property. She soon bought the property that made it un-landlocked

The issue is whether there was a breach of fiduciary duty? Wood says this case stands mostly for good faith
Brehm v. Eisner - Ovitz lured from other company with very lucrative employment offer and severance package; no job description established.
Derivative suit brings two claims: (1) Old BOD failure to calculate his potentially excessive employment agreement and severance, and (2) New Board's
agreement to terminate the contract "without cause" which amounted to waste of assets

Examples
The issue is whether there is a breach of fiduciary duty
Analysis
If derivative action - 7.40, 7.41, 7.42, 7.44, 7.45, 7.46
8.60(1) defines director's conflicting interest transaction
8.61(b) - Three situations where directors conflicting interest transaction is not subject to award of damages
(1) No defenses good authorized in articles under 2.02(b)(4), no protection afforded by 8.61(b)
Good faith is a conscious or intentional disregard for a known duty or responsibility
As shown in the comments, a lack of good faith is presented where a board "lacked an actual intention to advance corporate
welfare."

Fraud - As shown in Malone, directors who knowingly disseminate false information that results in corporate injury or damage
to an individual stockholder violate their fiduciary duty and may be held accountable in a manner appropriate in the
circumstances.

(i) action not in good faith; or

(A) which relationship or which domination or control could reasonably be expected to have affected the directors judgment
respecting the challenged conduct in a manner adverse to the corporation, and
Duty of loyalty
8.61(a) - limits 8.31(a)(2)(iii) to directors conflicting interest transaction
(B) after a reasonable expectation to such effect has been established, the director shall not have established that the
challenged conduct was reasonably believed by the director to be in the best interests of the corporation; or
(iii) a lack of objectivity due to the directors familial, nancial or business relationship with, or a lack of independence due to the
directors domination or control by, another person having a material interest in the challenged conduct
Northeast Harbor
Since there is ambiguity within the MBCA as to the meaning of "benefit to which the director was not entitled," the court
may look to the ALI Principles of Corporate Governance.

(1) The director . . . first offers the corporate opportunity to the corporation and makes disclosure concerning
the conflict of interest and the corporate opportunity;

(2) The corporate opportunity is rejected by the corporation

(a) A director . . . may not take advantage of a corporate opportunity unless:
(A) In connection with the performance of functions as a director or senior executive, or under
circumstances that should reasonably lead the director or senior executive to believe that the person
offering the opportunity expects it to be offered to the corporation; or

(B) Through the use of corporate information or property, if the resulting opportunity is one that the
(1)Any opportunity to engage in a business activity of which a director or senior executive becomes aware,
either:

Subsection (b) defines a corporate opportunity as

Section 5.05 of the ALI states
Corporate opportunities
(v) receipt of a financial benefit to which the director was not entitled or any other breach of the director's duties to deal fairly with
the corporation and its shareholders that is actionable under applicable law

(2) the challenged conduct consisted of or was the result of:

(a) A director shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any
action, as a director, unless the party asserting liability in a proceeding establishes that:
8.31 - if damages are sought , go here
Damages
BA II Page 26
(B) Through the use of corporate information or property, if the resulting opportunity is one that the
director or senior executive should reasonably be expected to believe would be of interest to the
corporation; or

(2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is
closely related to a business in which the corporation is engaged or expects to engage

(1) for money damages must show (i) harm to corporation has been suffered, and (ii) the harm was proximately caused by directors challenged
conduct

8.31(b) - party seeking to hold the director liable

If derivative action - 7.40, 7.41, 7.42, 7.44
Good faith is a conscious or intentional disregard for a known duty or responsibility
As shown in the comments, a lack of good faith is presented where a board "lacked an actual intention to advance corporate welfare."
Fraud - As shown in Malone, directors who knowingly disseminate false information that results in corporate injury or damage to an
individual stockholder violate their fiduciary duty and may be held accountable in a manner appropriate in the circumstances.

(1) in good faith, and

(2) in a manner the director reasonably believes to be in the best interests of the corporation
8.30(a) - Each member of the board, when discharging duties, shall act:
Relevant time is defined in 8.60(3)
(i) to which, at the relevant time, the director is a party; or
Material financial interest is defined in 8.60(4) as a "a financial interest in a transaction that would reasonably be expected to
impair the objectivity of the director's judgment when participating in action on the authorization of the transaction."

(ii) respecting which, at the relevant time, the director had knowledge and a material financial interest known to the director; or
Sinclair, UOP
Related person is defined in 8.60(5)
(iii) respecting which, at the relevant time, the director knew that a related person was a party or had a material financial interest
Director's conflicting interest transaction is defined in 8.60(1) as "a transaction effected or proposed to be effected by the corporation (or
by an entity controlled by the corporation)

(a) a transaction effected or proposed to be effected by the corporation (or by an entity controlled by the corporation) may not be the subject of
equitable relief, or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or
by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if it is not a director's conflicting
interest transaction.

(Note - shareholders has burden of proving the process was flawed under (1) or (2), and if so, (3) burden shifts to the directors to
show that it was fair)

Here, the qualified directors were ____.

1.43(a)(3) defines qualified directors. (essentially means disinterested)
8.60(7) "Required disclosures" - describes what disclosures are required
8.62(a)
Comment states that if the board's approval complies with this provision, the court's only inquiry is whether the contract was
"manifestly unreasonable"

(1) Under 8.61(b)(1), a directors conflicting interest transaction cannot be the subject to (equitable relief/damages) if the "directors' action
respecting the transaction was taken in compliance with section 8.62 at any time."; or

8.63(c)(2) defines qualified shares as "all shares entitled to be voted with respect to the transaction except for shares . . . held
by (A) a director who had a conflicting interest respecting the transaction or (B) a related person of the director."

8.60(7) defines required disclosure.

8.63(a) - (mechanism for shareholders to ratify a conflicting interest transaction to avoid liability)
(2) Under 8.61(b)(2), a directors conflicting interest transaction cannot be the subject to (equitable relief/damages) if the "shareholders'
action respecting the transaction was taken in compliance with section 8.63 at any time."

"Relevant time" is defined in 8.60(3)

Ex. Director fails to disclose hidden defects known to him regarding the transaction
As shown in Weinberger, fair dealing involves timing, structure, negotiation, disclosure, how approval is obtained, and
how the transaction is initiated.

Look at how quickly the transaction took place (Van Gorkham)

(i) fair dealing
Court may look at the market interest rate
(ii)Fair price
"Fair to the corporation," as defined in MBCA 8.60(6), means "the transaction as a whole was beneficial to the corporation, taking into
appropriate account whether it was (i) fair in terms of the director's dealings with the corporation, and (ii) comparable to what might
have been obtainable in an arm's length transaction, given the consideration paid or received by the corporation."

(3) Under 8.61(b)(3), a directors conflicting interest transaction cannot be the subject to (equitable relief/damages) if "the transaction,
judged according to the circumstances at the relevant time, is established to have been fair to the corporation."

(b) - conflicting interest transaction may not be the subject to (equitable relief/damages) in three instances. Each will be discussed in turn.
8.61 - Judicial Action
Equitable
Good faith is a conscious or intentional disregard for a known duty or responsibility
As shown in the comments, a lack of good faith is presented where a board "lacked an actual intention to advance corporate welfare."
Fraud - As shown in Malone, directors who knowingly disseminate false information that results in corporate injury or damage to an individual
stockholder violate their fiduciary duty and may be held accountable in a manner appropriate in the circumstances.

8.30(a)
8.30(b) - Board is not required to be informed of every fact, but is required to be reasonably informed
8.30(d) - board is entitled to rely on the performance of those in (f)(1) or (f)(3) in delegating duties
Executive compensation - (Note - Same analysis as care w/ equitable relief)
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8.30(d) - board is entitled to rely on the performance of those in (f)(1) or (f)(3) in delegating duties
8.30(e) - board is entitled to rely on the information of those in (f)(1), (f)(2), or (f)(3)
8.30(f)
(a) the directors did not in fact rely on the expert;
(b)their reliance was not in good faith;
(c) they did not reasonably believe that the expert's advice was within the expert's professional competence;
(d) the expert was not selected with reasonable care by or on behalf of the corporation, and the faulty selection process was attributable to the
directors;

(e) the subject matter that was material and reasonably available was so obvious that the board's to consider it was grossly negligent regardless of
the experts advice or lack of advice; or

Court may compare compensation packages of similarly situated companies (Menard's)

As shown in Heller, the court may inquire whether the compensation is for services rendered, or a gift. "If a bonus payment has no
relation to the value of services for which it is given, it is in reality a gift in part, and the majority stockholders have no power to give
away corporate property against the protest of the minority."

Waste is "an exchange that is so one side that no business person or ordinary, sound judgment could conclude that the corporation has
received adequate consideration." This was not found in Eisner after the President received extraordinary compensation in order to lure
him from his previous company.

(f) that the decision of the Board was so unconscionable as to constitute waste or fraud
As shown in Brehm v. Eisner, the plaintiff can rebut by showing
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