I.

THE CORPORATION

A.

INTRODUCTION
1.

COMPARING THE PARTNERSHIP AND THE CORPORATION

a) Entity Status
i) A corporation is an entity distinct from its owners in all jurisdictions
b) Continuity of Existence
i) Dissolution requires approval by the corporations board of directors and
shareholders.
ii) Perpetual existence increases the danger that a majority shareholder or group may
oppress a minority; however, the minority may protect itself through contractual
methods
c) Centralized management
i) The ultimate decision-making power in a corporation traditionally resides in the
board of directors.
ii) Shareholders elect the directors, but the shareholders otherwise vote only on
fundamental transactions (i.e., mergers or dissolutions)
d) Limited Liability
i) Shareholders of a corporation enjoy limited liabilityi.e., a shareholders losses are
limited to the value of his investment.
ii) If the corporations assets are insufficient to satisfy its obligations, creditors usually
have no recourse against shareholders individually
e) Free Transferability of Ownership Interests
i) Shares are freely transferable.
ii) Shareholders in many closely held corporations prefer to limit the ability to admit
new shareholders into the venture.
f) Tax status
i) A corporation is taxed as a separate legal person
ii) Corporation pays its own taxes based on its income for the year
iii) When a corporation pays dividends to shareholders, the shareholders are taxed on
the income they receive from the corporation.
iv) When shareholders sell their shares, they pay capital gains tax on the income
derived from the sales
v) Double taxation
vi) Shareholders in a closely held corporation may elect to be taxed in a partnershiplike manner as a Subchapter S.
(1) To qualify, must not have:
(a) More than 100 shareholders;
(b) Any non-individual shareholders;
(c) Any nonresident alien shareholders; or
(d) More than one class of stock

2.

CHOOSING A STATE OF INCORPORATION

1) Internal affairs of a corporation are governed by the jurisdiction of incorporation

2) A publically held corporation chooses to incorporate, or reincorporate, in the jurisdiction
whose laws best fit the corporations needs.

B.

FORMATION
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1.

INCORPORATION AND ITS AFTERMATH

DGCL 102-103, 107-109, 141, 151, 165, 211

MCBA 2.01-2.07, 6.01-6.02, 6.20, 7.03, 8.06
1) First step is to file a certificate of incorporation. The corporations existence commences
upon filing the certificate.
a) Certificate must contain the number of shares that the corporation is authorized to
issue. If the corporation is authorized to issue more than one class or series of shares,
the certificate must contain the number of shares of each class that the corporation is
authorized to issue, along w/ the terms of each class
b) Illegal for the corporation to issue shares that are not authorized by the certificate.
2) After certificate of incorporation is filed, the incorporators call an organization meeting. If
the incorporators call the meeting, they elect the initial board of directors.
a) The initial directors typically approve:
i) The certificate of incorporation
ii) The corporations minute book;
iii) The form of stock certificate that will represent ownership of the corporations
shares;
iv) The corporate seal
b) Initial directors often elect officers and fix their salaries, accept offers to purchase
shares for consideration, and authorize the opening of a corporate bank account.
3) Initial directors usually adopt bylaws, which address matters such as:
a) The rules for calling and conducting shareholders meetings;
b) The number of directors;
c) The methods of electing and removing directors;
d) The manner in which board vacancies are filled;
e) Committees of the board;
f) The rules for calling and conducting directors meetings
g) The identification of officers and the duties of each officer
h) The methods of electing and removing officers
i) The indemnification of directors and officers to the extent permitted by statute
j) The advancement of expenses to directors and officers who are used as a consequence
of their positions
k) The purchaser of directors and officers insurance
l) Share certificates
m) The corporations fiscal year; and
n) The manner in which the bylaws may be amended.

2.

FINANCING THE CORPORATION

1) The only statutory requirement for the issuance of shares is that their authorized number
and terms appear in the certificate of incorporation.
2) Public corporations usually have common shares, preferred shares, and debt.
3) Closely held corporations usually just have one class of common shares
4) Common shares
a) Represent the residual or ultimate ownership of a corporation
b) After all others (creditors, preferred shareholders, etc.) receive their contract rights,
whatever value is left belongs to the common shares.
c) Typically common shareholders possess voting rights and elect the board of directors
5) Preferred shares
a) Typically have a preference over common shares with respect to dividends
i) Board of directors has the option to declare dividend
ii) Dividends can be mandatory or discretionary
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(1) Mandatory: must declare a dividend on the preferred shares each quarter if it is
financially and legally able to do so
(2) Discretionary: may choose whether to declare a dividend on the preferred
shares.
(3) If the board does not pay the preferred dividend, it may not declare any dividend
on the common shares
b) Have a preference on liquidation
c) Often convertible into common shares at some predetermined ration
d) Usually carry no voting rights unless some number of dividend payments is missed
6) Bonds & Debentures
a) Corporation may borrow money from a bank or directly from investors
b) If a loan is secured by the corporations assets, the investors purchased a bond.
c) If the loan is unsecured, they have purchased a debenture
i) Both are often convertible into common shares
d) Bonds and debentures are long-term obligations that are sold in accordance with an
indenturea contract between the corporation and an indenture trustee (usually a
bank) that represents the bondholders or debentureholders.
e) Debtholders have an absolute contract right to receive principal and interest payments
7) Preferred shares are riskier investments than debt

3.

PREEMPTIVE RIGHTS

DGCL 102(b)(3)
MCBA 6.30
1) Preemptive Rights give existing shareholders the ability to subscribe proportionately to
any new issuance of shares.
2) Enable shareholders to preserve their proportionate stake in the corporations assets,
earnings and voting power.
3) Publically held corporation: May restrict the freedom of the corporation in arranging new
financing or in making acquisitions.
4) Closely held corporation: Protects the rights of minority shareholders

4.

PROMOTERS CONTRACTS

Restatement (Second) of Agency 84, 86, 326

Restatement (Third) of Agency 4.04, 6.04
(A)

JACOBSON V. STERN

RULE: A contract with the promoter is not one with the corporation, absent some subsequent
agreement with a corporation. A corporation may expressly or impliedly ratify the contract
and, thus, make it a valid obligation. Where there is a valid express or implied novation, the
corporation is substituted for the promoter as a party to the contract, and the promoter is
divested of his liability.

5.

DEFECTIVE INCORPORATION

DGCL 105-106, 329

MCBA 2.03-2.04
(A)

CANTOR V. SUNSHINE GREENERY, INC.

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RULE: A party who deals w/a de facto corp. as if it is a corp. is estopped to deny its corp.
existence so as to hold the individuals w/whom he dealt personally liable on any Ks thus
entered into. In this case, a de facto corp. clearly existed b/c the 3 necessary elements were
present: (1) the existence of a law authorizing incorporation, (2) actual exercise of corp.
powers, and (3) a bona fide (good faith) effort to satisfy all conditions precedent to
incorporation under the existing law. Since Cantor dealt w/Sunshine as if it were in fact a
corporation, he is now estopped from denying its corp. existence so that he might hold
Brunetti personally liable on the lease K.
(B)

ROBERTSON V. LEVY

RULE: Under the Model Business Corporation Act, a corporation only exists after the
certificate of incorporation is issued, and individuals who act as a corporation before then are
jointly and severally liable.

6.

THE ULTRA VIRES DOCTRINE

DGCL 102, 122, 124

MCBA 2.02, 3.02, 3.04
1) In the 19th century, every certificate of incorporation was required to include the specific
purpose of purposes for which the corporation was organized. A transaction beyond the
purpose specified in the corporations certificate was ultra vires.
2) Modern statutes permit a corporation to state that it is created to perform any lawful act,
or make a declaration of purposes optional.
a) The ultra vires doctrine tends to be an issue only when conduct does not benefit the
corporation in any manner.
b) Modern law has sharply restricted the ability to challenge ultra vires doctrine
(A)

GOODMAN V. LADD ESTATE CO.

RULE: If one purchases shares with knowledge of outstanding guarantees, debts, etc., he
cannot clatter claim ultra vires because he purchased the shares knowing of the ultra vires
issue and cannot challenge it.
(B)

DODGE V. FORD MOTOR CO.

RULE: A company cannot take actions that harm its shareholders and are motivated solely by
humanitarian concerns, not by business concerns.

C.

MANAGEMENT AND OPERATION

1.

ALLOCATION OF POWER

DGCL 109, 141-142, 211, 220, 223, 225, 228, 242

MCBA 7.02-7.04, 8.01, 8.06, 8.08-8.10, 8.4, 10.03, 10.20, 16.05
1) The board of directors appoints the officers and supervises the management of the
corporations business.
2) The officers run the day-to-day affairs
3) The shareholders elect the board and vote on extraordinary matters.
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a) Otherwise, shareholders have little role in running the corporations business.

b) In closely held corporations, shareholders will often prefer to have a more active role in
the management of the corporations business.
(A)

CHARLESTOWN BOOT & SHOE CO V. DUNSMORE

RULE: Once elected, the directors of a corporation manage the corporations affairs, and the
shareholders cannot compel them to act in a particular manner.
4) Notes on removal of directors:
a) Unless the certificate or bylaws provide to the contrary, any director, or the entire
board, may be removed by the shareholders with or without cause.
b) Three restrictions on removing directors without cause:
i) If the corporation has a classified or staggered board, directors may be removed
only for cause
(1) A classified board is usually divided into three groups, with one group of
directors standing for election each year
ii) In a corporation that permits cumulative voting, if less than the entire board is to be
removed, no single director may be removed if the votes cast against his removal
would be sufficient to elect him.
iii) Only the shareholders eligible to vote for such director are permitted to vote on the
removal of such directors.
c) When directors may be removed only for cause:
i) A director threatened with removal for cause is entitled to notice of the charges
against him, an opportunity to be heard, and a hearing
ii) In the absence of a statute authorizing judicial removal of directors, there is a split
of authority on whether a court has the power to remove a director for cause.
iii) It is generally settled that the board itself lacks the power to remove a director.

2.

INTERFERENCE WITH THE SHAREHOLDER FRANCHISE

DGCL 102, 109, 141, 212, 228 242

MCBA 2.02, 7.21, 8.02, 10.03, 10.20
(A)

STROUD V. GRACE

RULE: Where the directors own a majority of the outstanding shares, measures affecting the
election of directors cannot be considered defensive and do not warrant strict judicial scrutiny.

3.

FORMALITIES REQUIRED FOR BOARD ACTION

DGCL 141, 229

MCBA 8.20-8.25, 14.30
1) A board of directors may exercise its power only as a body at a meeting duly assembled.
a) The independent approval of an act by each of the individual directors is not effective
board action
b) Directors may not vote by proxy
c) Formalities as to notice, quorum, and voting must be fully adhered to.
2) Three statutory provisions ameliorate these rules:
a) Directors may act by unanimous written consent in lieu of having a meeting
b) Directors may participate in a board meeting by any method that allows all of the
participants to hear each other, such as a conference telephone call
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c) The board may delegate most matters to committees.

i) A committee may be comprised of one or more directors.
3) A quorum of directors is a majority of the total number of authorized directorsi.e., if a
board has 9 authorized seats and 2 are vacant, 5 directors constitute a quorum.
a) May not be less than 1/3 of the total number of authorized directors
b) If a quorum exists, it takes a majority vote of the directors present to approve a matter.
The certificate or bylaws may specify that a supermajority board vote is required.
4) Closely held corporation
a) When all of the shareholders are directors and participate in the management of a
business, the requirement of a directors meeting is often considered a meaningless
formality.
b) Unanimous assent or acquiescence by directors is normally viewed as the equivalent of
formal board action.
5)
(A)

GEARING V. KELLY

RULE: A court may order a new election for corporate directors as justice may require.

4.

THE AUTHORITY OF OFFICERS

DGCL 142
MCBA 8.40-8.44
1) A corporation has such offices as are stated in its bylaws or in a board resolution that is
not inconsistent with its bylaws. Officers are chosen in a manner prescribed by the bylaws
or the board of directors.
(A)

LEE V. JENKINS BROTHERS

RULE: A corporations president has authority to bind the company by acts that arise in the
usual course of business, but not for contracts that are extraordinary in nature.

5.

SHAREHOLDER ACTION
A)

FORMALITIES REQUIRED FOR SHAREHOLDER ACTION

DGCL 211, 213, 216, 219, 228-229

MCBA 7.01-7.02, 7.04-7.07, 7.20, 7.25, 7.27-7.28
1) The corporation is required to hold an annual meeting of shareholders at which directors
are elected.
2) Unless provided in the certificate or bylaws, only the board of directors may call a special
meeting of shareholders.
a) Shareholders must be sent notice of an annual or special meeting that specifies the
date, time, and place of the meeting
b) Must also specify the purpose or purposes for which the meeting is called.
c) Notice of meeting must be mailed at least 10 days and not more than 60 days before
the meeting
d) Board must establish a record date at least 10 and not more than 60 days before the
meetingif the board does not establish a record date, the record date is the day

before notice is given. If no notice is given, the record date is the day prior to the
meeting
i) Those purchasing shares after the record date do not have the right to vote at the
meeting.
e) To constitute a quorum, a majority of shares entitled to vote on a matter must be
represented in person or by proxy at the meeting.
i) Delaware: For ordinary matters other than the election of directors, it takes a
majority of shares present at the meeting and entitled to vote to approve the
matter.
ii) Model Act: For ordinary matters other than the election of directors, the matter is
approved if the yes votes exceed the no votes
3) Delaware
a) Meeting may be held by remote communication. 3 caveats:
i) The corporation must be able to verify that each person deemed present and
desiring to vote is a shareholder or proxyholder;
ii) Shareholders and proxyholders must have a reasonable opportunity to participate in
the meeting, including the opportunity to read or hear the proceedings substantially
as they occur;
iii) The corporation must maintain a record of actions taken at the meeting by
shareholders or proxyholders.
b) Those owning enough shares to approve a particular matter may act by written
consent in lieu of a meeting
B)

STRAIGHT VS. CUMULATIVE VOTING

DGCL 214
MCBA 7.28
1) In a straight voting election of directors, every shareholder votes the entire number of
shares that he owns for as many directors as there are seats up for election. (1 share = 1
vote)
a) Anyone owning 51% of the shares elects 100% of the board.
2) In a cumulative voting election of directors, every shareholder has a number of votes
equal to the number of shares he owns multiplied by the number of board seats up for
election. He may distribute these votes among the candidates in any manner that he
chooses. (1 share x # of directors = number of votes)
a) Provides minority shareholders with roughly proportional board representation.
b) Practical impact:
i) (Shares (S) x certain number of directors (N)) / (number of directors up for election
(D) + 1) = maximum number of votes that would be insufficient to elect a certain
number of directors (X)

X=

SXN
D+1

+ 1 (Vote)

ii) Number of directors (N) that a shareholder has the power to elect at the same
election, given the total number of shares owned by that shareholder (X):
X (D+1)
S

N=
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iii) Unless the entire board is removed, shareholders may not remove a director elected
by cumulative voting without cause if the votes cast against his removal would be
sufficient to elect him.
iv) Most states have straight voting for the election of directors unless the certificate of
incorporation provides for cumulative voting.
C)

INFORMATIONAL RIGHTS

DGCL 220
MCBA 16.02
(A)

SKOURAS V. ADMIRALTY ENTERPRISES, INC.

RULE: The mere prospect of harm to a corporate defendant is insufficient to deny relief

D.

ALTERING CORPORATE NORMS BY CONTRACT

1) Shareholders in closely held corporations often chose the corporate form to enjoy the
benefits of limited liability. Otherwise, they usually expect to run their business like
partnerships.
2) Most shareholders in small corporations expect to be actively involved in running the
business.

1.

VOTING AGREEMENTS

DGCL 141, 151, 212, 218

MCBA 6.01, 7.22, 7.30-7.31, 8.08
(A)
RINGLING BROS.-BARNUM & BAILEY COMBINED
SHOWS, INC. V. RINGLING
RULE: An agreement between two shareholders in a closely held corporation to vote jointly
is binding and enforceable as a contract.

2.

CONTROLLING MATTERS WITHIN THE BOARDS DISCRETION

DGCL 141
MCBA 8.01
(A)

MCQUADE V. STONEHAM

RULE: A contract is void if it requires directors of a corporation to refrain from changing

officers, salaries, or policies or retaining individuals in office without consent of the
contracting parties.
(B)

CLARK V. DODGE

RULE: If the enforcement of a contract between directors that are the sole stockholders in a
corporation damages no one, not even the public, it is not illegal.
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3.

SUPERMAJROITY QUORUM AND VOTING REQUIREMENTS

DGCL 109, 141(b), 216, 242

MCBA 7.25, 7.27, 8.24, 10.20
1) Historically, there was concern that providing veto power to minority shareholders would
increase the danger of deadlocks and the likelihood that litigation would be necessary to
resolve disputes.
2) Supermajority quorum and voting requirements (up to and including unanimity) are legal
at the board and shareholder levels.
(A)

FRANKINO V. GLEASON

RULE: A corporation is accountable to the provisions in its very own bylaws.

4.

SHARE TRANSFER RESTRICTIONS

DGCL 202
MCBA 6.27
(A)

ALLEN V. BILTMORE TISSUE CORP.

RULE: Even if stock certificates are considered personal property rather than contractual
action, reasonable restraints on alienation are enforceable. Therefore, a restriction imposed
on the transfer of stock is enforceable. It set forth a price formula agreed upon by the parties
and did not attempt to preclude sale of the shares but only to postpone sale for a fixed time
while Biltmore decided whether to exercise its option.

5.

STATUTORY CLOSE CORPORATIONS

DGCL 141(a), 342-343, 350-351, 346, 355

MCBA 7.32
1) Delaware: A corporation is eligible to elect statutory close corporation status in its original
certificate of incorporation if three conditions are met:
a) The corporation does not have more than thirty shareholders
b) The corporations shares are subject to some restriction on transferability;
c) The corporation does not make any public offering of its shares.
2) Model act contains no eligibility requirements for electing statutory close corporation
status in the original articles of incorporation.
3) Delaware & Model Act: An existing corporation that meets the eligibility requirements may
elect stator close corporation status by amending its certificate of incorporation to include
a statement that the corporation is a close corporation.
4) Delaware: Once statutory close corporation status is elected, the shareholders have
greater power to vary corporate norms by contract than would exist in a normal
corporation. Written shareholder agreements involving shareholders with a majority of the
voting power may restrict the authority of the board of directors.
5) A corporation may vote to terminate statutory close corporation status by eliminating from
its certificate the statement that the corporation is a close corporation.
(A)

ZION V. KURTZ
9

RULE: Under Delaware corporation law, in a close corporation a written agreement between a
majority of the stockholders is valid even if it restricts or interferes with the board of directors
powers.

E.

LIMITED LIABILITY AND PIERCING THE CORPORATE VEIL

DGCL 102(b)(6)
MCBA 6.22(b)
1.

POLICY JUSTIFICATIONS FOR LIMITED LIABILITY

1) Limited liability decreases the need to monitor.

a) All investors risk losing wealth because of the actions of agents. The price
shareholders are willing to pay for shares will reflect the risk.
2) Limited liability reduces the costs of monitoring other shareholders.
3) By promoting free transfer of shares, limited liability gives managers incentives to act
efficiently.
a) Limited liability reduces the cost of purchasing shares.
b) Allows a person to buy a large bloc of shares without taking any risk of being
surcharged, and thus facilitates beneficial control transactions.
4) Limited liability makes it possible for market prices to impound additional information
about the value of firms.
5) Allows more efficient diversification
6) Facilitates optimal investment decisions.
7) Almost every case in which a court has allowed creditors to reach the assets of
shareholders has involved a close corporation.

2.

TORT CASES
(A)

WALKOVSZKY V. CARLTON

RULE: A creditor cannot pierce the corporate veil without a showing that there is a
substantial unity of interest between the corporation and its shareholders.
(B)

MINTON V. CAVANEY

RULE: Owners of a corporation may be held liable for corporate debts if the business is
inadequately capitalized and the owners actively participated in the business.

3.

CONTRACT CASES
(A)
PERPETUAL REAL ESTATE SERVICES, INC. V.
MICHAELSON PROPERTIES, INC.

RULE: Where a sole shareholder exercises undue domination and control over the
corporation, the corporate veil will be pierced if the sole shareholder also used the corporate
form to obscure fraud or conceal crime.

4.

PARENT-SUBSIDIARY CASES

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1) Totality of circumstances must be evaluated to determine whether a subsidiary may be the

alter ego or instrumentality of the parent corporation. There must be substantial
domination. Factors include:
a) Common directors/officers between P & S
b) Common business departments between P & S
c) P & S file consolidated financial statements and tax returns
d) P finances the S
e) P caused the incorporation of S
f) S operates with grossly inadequate capital
g) P pays salaries and other expenses of S
h) S receives no business except that given to it by P
i) P uses the Ss property as its own
j) Daily operations of P & S are not kept separate
k) S does not observe basic corporate formalities, such as keeping separate books and
records and holding shareholder/board meetings.

5.

REVERSE PIERCING

1) In a reverse veil-piercing case, a creditor of a shareholder seeks to hold the corporation

liable for the shareholders debts.
2) A court may reverse pierce the corporate veil and obtain the assets of a corporation for
the obligations of a controlling shareholder or other corporate insider only upon a clear
showing that
a) The controlling insider and the corporation are alter egos of each other
b) Justice requires recognizing the substance of the relationship over the form because
the corporation fiction is utilized to perpetuate a fraud or defeat a rightful claim; and
c) An equitable result is achieved by piercing.
Only when a claimant makes a clear showing of each factor may the corporate form be
disregarded.
3) Reverse veil piercing should not occur unless required by justice to receive an equitable
result.

6.

EMPIRICAL EVIDENCE

1) As a general principle, corporations are recognized as legal entities separate from their
shareholders, officers, and directors. Corporate obligations remain the liability of the
entity and not of the shareholders, directors, or officers who own and/or act for the entity.

7.

EQUITABLE SUBORDINATION

1) If a shareholder-creditor of a corporation engages in inequitable conduct, a bankruptcy

court has the power to subordinate his claim to those of other creditors.
(A)

COSTELLO V. FAZIO

RULE: Under the doctrine of equitable subordination, a corporate insiders claims against a
bankrupt corporation may be subordinated to those of the companys other creditors if the
insiders claims cannot be justified within the bounds of reason and fairness.

F.

THE TRADITIONAL ROLE OF FIDUCIARY DUTY

1.

THE DUTY OF CARE

11

1) Directors and officers owe fiduciary duties to the corporations they serve. These duties
primarily take two forms:
a) A duty to exercise care in the management and operation of the corporation
b) Duty to exercise loyalty by putting the corporations interests before personal interests
A)

THE OVERSIGHT CONTEXT

MCBA 8.30, 8.31, 8.42

1) A primary responsibility of a director is to monitor the business of the corporation by
remaining knowledgeable about, and attentive to, the operation of the company.
(A)

FRANCIS V. UNITED JERSEY BANK

RULE: A director has a duty to know generally the business affairs of the corporation.
B)

THE DECISION-MAKING CONTEXT

ALI Principles 4.01

MCBA 8.31
1) In the decision-making context, directors and officers consider whether to authorize a
particular transaction or activity.
(1)

SUBSTANCE: THE BUSINESS JUDGMENT RULE

(A)

SHLENSKY V. WRIGLEY

RULE: As long as a corporations directors can show a valid business purpose for their
decision, that decision will be given great deference by the courts.
(2)

PROCESS

DGCL 141(e)
MCBA 8.30(d), (e), (f)
(A)

SMITH V. VAN GORKOM

RULE: There is a rebuttable presumption that a business determination made by a

corporations board of directors is fully informed and made in good faith and in the best
interests of the corporation.

2.

THE DUTY OF LOYALTY

1) The duty of loyalty requires directors and officers to put the corporations interests ahead
of their personal interests.
2) Duty of loyalty arise when:
a) Directors or officers enter into contracts or other transactions with the corporation,
including contracts for compensation or other remuneration.
i) Claims typically allege that the interests of the fiduciary and the corporation
conflicted and the corporation was disadvantaged as a result
b) Directors or officers take potential corporate opportunities for themselves.
12

i) Claims usually allege that a fiduciary learned of a business opportunity that could
have benefited the corporation, and that the fiduciary concealed the opportunity in
order to personally pursue it.
3) Traditional remedies are restitutionary in nature
a) In an unfair conflict of interest transaction, remedy is usually rescission.
b) In the corporate opportunity context, the usual remedy is to turn the opportunity over
to the corporation and to hold the fiduciary liable for any profits that were made.
4) Courts have sometimes imposed additional sanctions, including:
a) Awarding punitive damages
b) Ordering the fiduciary to repay any salary received from the corporation during the
time of the breach of duty; and
c) Ordering the fiduciary to pay the corporations attorneys fees and other expenses that
were incurred in establishing the breach of duty.
A)

CONFLICT OF INTEREST TRANSACTIONS

DGCL 144
MCBA 8.60-8.63
1) Director enters into a transaction with the corporation
(A)
COOKIES FOOD PRODUCTS, INC. V. LAKES
WAREHOUSE DISTRIBUTING, INC.
RULE: A corporate directors self-dealing transaction will not be void or voidable if she can
show that she acted in good faith, honesty, and fairness, and that the transaction was fair and
reasonable to the corporation.
(B)

MARCIANO V. NAKASH

RULE: Interested director transactions are valid if they are intrinsically fair.
B)

THE CORPORATE OPPORTUNITY DOCTRINE

ALI Principles 5.05

(A)

NORTHEAST HARBOR GOLF CLUB, INC.

RULE: When the director of a corporation is presented with a business opportunity closely
related to a business in which the corporation is engaged, the director must fully disclose the
opportunity to the corporation prior to taking advantage of it himself.
(B)

OSTROWSKI V. AVERY

RULE: The Connecticut Supreme Court has adopted a "safe harbor" rule for directors and
officers of corporations considering pursuit of an activity that may be a corporate opportunity.
(1) In Ostrowski v. Avery, the court held that adequate disclosure of a corporate opportunity is
an absolute defense to fiduciary liability. Absent such disclosure, the fiduciary still can
succeed in defending his or her conduct by proving that the conduct did not harm the
corporation. The fiduciary must prove this defense, however, by clear and convincing
evidence. The court further held that usurpation of a corporate opportunity can be an unfair
or deceptive trade practice under Connecticut's Unfair Trade Practices Act, or CUTPA.
13

3.

DUTIES OF CONTROLLING SHAREHOLDERS

1) Absent a contractual obligation, a shareholder normally has no duty to the corporation or

other shareholders.
2) However, shareholders of closely held corporations may have fiduciary duties.
3) Controlling shareholders in any corporation, closely held or publically held, have certain
duties to the corporation and the minority investors. Typically arises in two contexts:
conflict of interest and sales of the controlling interest.
a) A controlling shareholders power to direct corporate affairs generally stems from its
ability to elect (and remove) a majority of the board of directors.
b) When a true majority shareholder is absent, the test for control is a functional one that
focuses on the shareholders ability to control the conduct of the corporation.
4) Under the traditional corporate model, fiduciary obligations are imposed on directors
because they are the persons with the power to direct corporate affairs.
5) The controlling shareholder has the ultimate power to direct the businessthere is always
a danger that the controlling shareholder will exercise its control in a manner that allows it
to gain disproportionate benefits at the expense of the corporation or the minority
shareholders.
6) Any shareholder, including a controlling shareholding, has legitimate selfish interests as an
owner of the business. The duties owed by a controlling shareholder focus on fairness
rather than selflessness.
A)

CONFLICT OF INTEREST TRANSACTIONS

(A)

SINCLAIR OIL CORP. V. LEVIEN

RULE: A parent corporation must pass the intrinsic fairness test only when its transactions
with its subsidiary constitute self-dealing.
B)

SALES OF CONTROL

1) The person who possesses control has the power to direct the corporations affairs.
2) Sales of control can also harm a corporation and its minority shareholders.
3) Sales of control pose a tension between the desire to facilitate value-creating transactions
and the need to protect minority shareholders from abusive conduct.
(1)

THE GENERAL RULE

(A)

ZETLIN V. HANSON HOLDINGS, INC.

RULE: Minority stockholders are generally not entitled to share equally in a premium paid for
a controlling interest in a corporation.
(2)

THE LOOTING EXCEPTION

ALI Principles 5.16

(A)

GERDES V. REYNOLDS

RULE: The controlling shareholders had an obligation to investigate the buyer. The sale price
reflected payment for the appointment of the buyers de-signees to the board
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(3)

OTHER EXCEPTIONS

1) Absent egregious circumstances, a controlling shareholder may, without judicial

interference, sell his ownership stake and keep any premium for himself.
2) A controlling shareholder may not sell to a party likely to loot the corporation
3) A stock sale that requires the board of directors to immediately turn over control is subject
to attack if the sale does not involve a true controlling interest.
4) Courts may intervene when they perceive that a sale of the controlling interest involves a
conversion of a corporate opportunity.

4.

EXCULPATION STATUTES

DGCL 102(b)(7)
MCBA 2.02(b)(4)
1) The effect of the Van Gorkom decision and certain other cases has been to erode
confidence in gross negligence as a standard for imposition of money damages against
corporate directors.
2) Charter Optionauthorizes a corporation to adopt a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director with certain exceptions:
a) Breach of the directors duty of loyalty to the corporation or its stockholders;
b) Acts or omissions not in good faith;
c) Intentional misconduct;
d) Knowing violation of law;
e) Improper distributions;
f) Any transaction from which the director derived an improper personal benefit.

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