My Buss Ass Outline

AGENCY, SCOPE OF AUTHORITY

• Agency is the fiduciary relation which results from the manifestation of

consent by one person to another that the other shall act on his behalf and
subject to his control, and consent by the other so to act.
• Party alleging agency and resulting authority has the burden of proving the
agency relationship.
o Principal-Agent relationship: an agent acts for and in the place of his
principal in conducting transaction;
o Master-Servant relationship: A servant is an agent who not only acts on
behalf of his principal but whose physical conduct is under the control of
his P;
o Independent Contractor: employed by a principal, but is not authorized to
act in place of the principal to conduct business and is not under control of
the P in how to perform the work.
• RULE: Creditor assuming control of his debtor’s business – a creditor becomes a
principal when he assumes de facto control over the conduct of his debtor,
whatever the terms of the formal contract with his debtor may be.
• Liability of Principal to 3rd parties in Contract:
o Types of authority: Actual, Apparent, Inherent
 Actual Authority – can be expressly conferred on the agent or
reasonably implied by custom, usage, or the conduct of the
principal to the agent.
• Express Authority: actual authority contained within the
agency agreement (expressly granted by the P)
• Implied Authority: comes from the words or conduct
between the principal and agent.
o Incidental to express authority
o Implied from conduct
o Implied from custom and usage
o Implied b/c of emergency
• RULE (for Implied Authority) – in determining whether implied authority exists,
it must be determined whether the agent reasonably believes, because of a present
or past conduct of the principal, that the principal wishes him to act in a certain
way or to have a certain authority.
 Apparent Authority: results when a principal manifests to a 3rd
party that an agent is authorized and the 3rd party reasonably relies
on the manifestation. There must be some holding out by the
principal that causes the 3rd party to reasonably believe that the
agent has the authority, and the 3rd party must reasonably rely on
the principal’s manifestation.
 Inherent Authority: when it is typical for an agent in a similar
position to enter into such a K (as long as such action is usual or
 necessary)…Principal is liable for acts that usually accompany
transaction which the agent is authorized to conduct even if
forbidden by P, when the other part (a) reasonably believed that the
agent is authorized, and (b) has no notice that he is not authorized.

• Undisclosed Principal Rule: when P is undisclosed to 3rd parties, the actions taken
by an agent in furtherance of P’s usual and ordinary business binds P.
• Ratification:
o Acceptance to ratify
o Intent to ratify
o Full knowledge of all the material circumstances
• Estoppel: Proprietor is estopped from claiming lack of authority if reasonable
diligence could have prevented the acts of the imposter.
o 3 Showings:
 principal created through intentional or negligent words, acts or
omission, appearance of authority,
 reasonable and good faith reliance by 3rd party, and
 3rd party changes position in reliance upon that appearnce of
authority.

AGENT’S EMPLOYEES & PRINCIPAL’S TORT LIABILITY

* Respondent Superior: An employer is liable for all torts committed by an employee

acting within the scope if his employment.

• RULE on master-servant Torts: Master is not liable for his servant’s intentional
acts if they occurred beyond the servant’s scope of employment.
• Factors to determine servant’s scope of employment:
o Time, place, and purpose of act
o Similarity to acts which authorized to perform
o Commonly performed by servants
o departure from normal methods
o Master would reasonably expect such act would be performed
* Independent contractor: P is not liable for acts of IC.

FIDUCIARY OBLIGATIONS

• Duty of Agents:
o Bound to the terms of K
o Be loyal to P on all matters connected to the agency
• Examples of Duty of Loyalty =
o Duty not to use confidential information – acquired during relationship
either during or after the relationship
o Duty to account for profits – no secret profits
o Duty not to act as an adverse party – w/o knowledge of P
 o Duty not to compete
o A servant must surrender illegal bribes received b/c of his employment
position
o Agents are owed reasonable compensation
o Former employees may not target a competeing business exclusively at
their former employer’s established customers.

PARTNERSHIP

• Partnership is an association of two or more persons to carry on a business as co-

owners for profit.
• Each partner is the agent of her co-partners, and when any partner acts within the
scope of the partnership, her acts will bind the other partners.
• A partnership is an entity distinct from its partners…RUPA 201.
• The burden of establishing a partnership is on the one alleging it to exist.
• RULE: A partnership is created by an express or implied K between two persons
with the intent to form a partnership.
• Partners are allowed to shape their partnership, but they must do so with a
contract by writing a partnership agreement. If this is not done, then UPA
controls.
• Hallmark Characteristics:
o Shared ownership
o Shared control
o Shared liability
o Profit sharing (key element)
o RULE: Sharing profits is Prima Facie evidence of a partnership. (can be
rebutted by evidence sufficiently demonstrating that the parties did not
intend to create a partnership).
• Types of partnerships:
o General partnership
o Limited Liability partnership, LLP
o Limited partnership
• Partnership by Estoppel: A person who represents himself, or permits another
to represent him, to anyone as a partner in an existing partnership or with
others not actually partners, is liable to any such person to whom such a
representation is made who has given credit to actual or apparent partnership.
• Fiduciary Obligations of Partners:
o Partners owe to one another a duty of loyalty.
o Duty of care = each party has a duty to refrain from gross negligence,
recklessness, intentional misconduct, and knowingly unlawful conduct
while working on behalf of the partnership.
o Duty of Care: You must conduct yourself in the affairs as an agent
with the degree of care that a ordinary prudent person would under
the circumstances.
 o DUTY of LOYALTY - Partners must act in good faith and not lie,
cheat, steal, etc.
o RULE – a Partner is a fiduciary of his partners, but not of his former
partners; withdrawal of partners terminates partnership as to him.
o RULE – (Grabbing & Leaving) Partnership agreement contemplated that
partners may leave and take clients with them, but the current firm must be
given an opportunity to compete for such clients.
• Partnership Property:
o RULE: a Partners interest is an undivided interest as cotenant in all
partnership property.
o The property rights of an individual partner in partnership property are:
 Her rights in specific partnership property
 Her interest in the partnership
 Her right to participate in the management of the partnership.
• A partner’s interest in the partnership is her share of the profits and surplus, which
is personal property.
• RULE: All partners have equal rights in the management and conduct of the
partnership, anydifference arising as to ordinary matters connected with the
partnership business may be decided by a majority vote…UPA Sec. 18
• DISSOLUTION
o UPA § 29 tells us that the dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be associated
in the carrying on as distinguished from the winding up of the
business.
• In other words ⇒ When one or more partners ceases to be associated with the
others as a co-owner. A partnership cannot technically survive a partner’s
withdrawal

o Does not immediately terminate partnership, it continues until all of its

affairs are wound up.
o Causes:
 Expiration of the partnership term
 Choice of a partner – any partner can terminate any time at will
 Assignment
 Death of a partner
 Withdrawal or admission of a partner
 Illegality
 Death or bankruptcy
 Court Decree – usually if a partner is insane, incapacity, improper
conduct, inevitable loss or equitable.

- RULE on an Abusive Partner: mutual disharmony and disrespect are bases for a
judicial dissolution of a partnership…UPA Sec. 38 = non-breaching partners can
continue the partnership and deduct damage from breach from partners share.
- RULE on Partner’s Interference: P may not obtain judicial dissolution of
 partnership if his own interference causes the Partnership to be unprofitable.
o Power of dissolution of a partnership always exists, but right of dissolution
does not.

- RULE: Upon dissolution, former Partner may bid on the partnership assets ata
judicial sale.
- RULE: Absent bad faith, a partnership may be dissolved by the express will of
any partner if P agreement specifies no definite term or particular undertaking.
- Distrubution of Assets:
o If the dissolution does not violate the Partenrship Agreement, then the
partnership assets are distributed as follows:
 Partnership debts are paid.
 Capital accounts (capital contributions + accumulated earnings –
accumulated losses)
 Current earnings
 Distributions in kind
 Partnership losses (where liabilities exceed assets, the partners
must contribute their agreed shares to make u the difference.
• If the dissolution VIOLATES the Partnership Agreement, then the innocent
partners have additional rights, including:
o Right to damages
o Right to continue the partnership by purchasing the offending partner’s
interest in the partnership.

PARTNERSHIP MANAGEMENT

PARTNERSHIP DISAGREEMENT AND DISSLOUTION

BUY-OUTS, LIMITED PARTNERSHIPS & THE CORPORATE FORM

* A buy-out or buy-sell agreement is an agreement that allows a partner to end her

relationship with the other partners and receive a cash payment, or series of
payments, or some assets of the firm, in return for her interest in the firm. It must
be tailored to the need and circumstances of each firm
o Note ⇒ It is relevant to any kind of business if there is more than one person.
o Insurance ⇒ You can also buy insurance that will pay off the deceased’s share of
interest.
o Book value ⇒ usually gives the departing partner less than fair market value.
However, it allows the surviving partner to continue the business when buying out the
departing partner’s interest; as such, it is good to use book value in drafting an
 agreement.
o Brief Outline of Issues in B/S Agreement:
I. Trigger Events (include all three unless client doesn’t want it)
a. Death
b. Disability
c. Will of any partner
II. Obligation to buy vs. option (if either one departs then each have option to buy
or are required to buy)
a. Firm
b. Other investors
c. Consequences of refusal to buy
i. If there is an obligation
ii. If there is no obligation
III.Price
a. Book Value (probably lowest and includes any
value of undistributed profits)
b. Appraisal
c. Formula (e.g. five times earnings)
d. Set price each year
e. Relation to duration (e.g. lower price in first 5
years)
IV. Method of payment
a. Cash
b. Installments
V. Protection against debts of partnership
VI. Procedure for offering either to buy or sell
a. First mover sets price to buy or sell
First mover forces others to set price

Limited Partnerships:
• They were developed to facilitate commercial investments by
those who want a financial interest in a business but do not
want all the responsibilities or liabilities of partners.
• Definition – LP is formed by two or more persons and having
as its members one or more general partners and one or more
limited partners,
• General Partner: assumes management responsibilities and full
personal responsibility for the debts of the partnership.
• Limited partner: makes a contribution of cash, other property
or services rendered to the partnership and obtains an interest
in the partnership in return, but is not active in management
and has limited liability for partnership debts.
• Exception: when a limited partner takes part in the
management and control of the business, she becomes liable as
a general partner.
CORPORATIONS AND LIMITED LIABILITY

* Incorporating the Corporation

• A corporation is an ENTITY and is created by STATUTE, it is a creature of
the state, it has 1st amendment rights it is taxed independently. It can file suit
as the entity. The great benefit of the Corporation is the Limited Liability of
its shareholders (stockholders), those who own the entity. Their limited
liability is the amount of money they invested in that corporation.
• UNLESS certain things happen…then PCV
• Directors are the statutory managers of the corporation; they are elected by the
shareholders and are usually shareholders themselves, but not always.
Directors also have limited liability.
• There can also be officers, employees of the corporation, usually paid a salary.

Incorporation – the process

• Meet with the client to determine the entity type
• Telephone an agent (can now us the web)
o Obtain articles of incorporaion form for the state
o Arrange for payment of filing fees, agent’s fees
• Fill out articles: send to secretary of state & wait
o Once certified by the state, hold a meeting of incorporators
o Adopt by-laws, elect directors, they appoint officers
o Sell stock to third parties (if permitted), elect S (tax status)

Corps DE FACTO and by Estoppel

• Invalid corps may be treated as de facto corps IF incorporators:

o Tried to form in good faith
o Had a legal right to do so, AND
o Acted as a corporation

• Corporation by Estoppel if Principals:

o Thought it was a corp all along
o Would now get a windfall if corp status denied
o In order to have “estoppel,” there must be reliance and a change in
position.
• RULE on SH Liability: SH is not personally responsible for the acts or debts
of the corporation, except that he may become personally liable by reason of
his own acts or conduct.
• Separate Legal entity: a Corporation is a separate legal entity, (created by the
laws of the specific state), apart from the individuals that may own it (SH), or
manage it (directors, officers, etc.). Thus, the Corp has legal rights and duties
as a separate legal entity.

Piercing the Corporate Veil

 • RULE: Courts will disregard the corporate form or “pierce the corporate veil”
whenever necessary to prevent fraud or to achieve equity.
• In certain situations, the court is said to dissolve the distinction between the
corporate entity and its SH so that the SH’s may be held liable as individuals
despite the existence of the corporation.
• Exceptional situation:
o Fraud or injustice – if maintenance of the corporation would result in
fraud or injustice to outside parties (such as creditors).
o Disregard of corporate requirements – where the SH do not maintain
the corporation as a separate entity but use it for personal purposes.
(alter ego)
o Undercapitalization – when the corp is undercapitalized given the
liabilities, debts, and risks it reasonably expected to incur.
• Van Dorn Test: (when courts can pierce)
o There must be such a unity of interest and ownership that the separate
personalities of the corporation and the individual no longer exist, and
o Adherence to the fiction of separate corporate existence would
“sanction a fraud” or “promote injustice.”

SHAREHOLDER DERIVATIVE ACTIONS

• A shareholder suit in equity against a corporation ( and on behalf of the

corporation) to compel it to sue a 3rd party. (suit, on behalf of the
corporation, against a 3rd party, most often concerning careless managers or
managers acting in bad faith)
o Because SH cannot sue 3rd party directly
o Because SH suffers a derivative loss b/c of 3rd party
o Your injury must be “derived” from injury to the corporation
o Injury in derivative suits are measured by $$$
o SH made whole if corporation recoups loss (- legal fees)
• What can SH sue for?
o Breach of fiduciary duty by officer or director
o Injury must be to the corp as a whole, not just indivivdual SH.
o Beware of the “business Judgment Rule”

RULE on (posting) Bonds: it is okay to require a security of payment of reasonable

expenses if a litigation of this character is adjudged to be unsustainable.

* Direct Suits v. Derivative Suits

In the most general sense, the distinction lies in who has been directly injured; if the
injury is an injury to the corporation, the suit to redress it is a derivative action, if the
injury is to some or all of the shareholders, then the suit is a direct one.
o Which is Better? ⇒ because of the procedural rules imposed in derivative suits,
 direct suits are preferred
o Examples of Derivative suits:
o Due care in acquisition
o Self dealing by officer
o Excessive compensation by an officer
o Usurpation of corporate opportunity
• Universal Demand requirement = SH generally must demand the board of
directors bring an action before he or she brings a derivative suit.
• Demand is procedural hurdle. The POLICY behind it is:
o Relieve courts from deciding matters of internal governance by
providing corporate directors with opportunities to correct alleged
abuses
o Provide corp boards with reasonable protection from harassment by
litigation on matters clearly within the discretion of the directors, and
o To discourage “strike suits” commenced by SH for personal gain
rather than for benefit of corp.
• Delaware RULE on Aronson Test of Demand excused:(3 ways to get
reasonable doubt)
o Majority of BOD has material financial or familial interest
o Majority of BOD incapable of acting independently for other reason
o Underlying transaction is not the product of valid exercise of business
judgment.
o A.K.A, the “corporate finger”, the business judgment rule is
essentially a very high level of deference to corporate decision makers.

• NY RULE on Barr Test for Demand Futility: must plead with particularity
 Board is self-interested or controlled by self interested director
 Board did not fully inform themselves to the extent reasonably
necessary under the circumstances
 So egregious on its face that not the product of sound business
judgment.
• The Role of Special committees:
o Business Judgment Rule ⇒ Doctrine relieving corporate directors
and/or officers from liability for decisions honestly and rationally
made in the corporation’s best interests. The business judgment
doctrine recognizes that courts are ill-equipped to evaluate what
are and essentially must be business judgments. However, the rule
shields the deliberations and conclusions of a special committee only if
its members possess disinterested independence and do not stand in
dual relation that would prevent an un prejudicial exercise of
judgment. BJR is a defense to everything that the directors do.
o Limitation ⇒ This rule doesn’t work when the conduct is sufficiently
egregious. It if the deference that should be paid to the Board to run a
corporation. Whenever there is a breach of the duty of loyalty (a sub-
category of the duty of care) the BJR won’t work—best example is
 embezzlement.
o Basically this is only the 1st step of the DE approach

PUROSES OF CORPORATION; LIMITED LIABILITY COMPANIES

• The purpose fo a corporation is clearly to make profit for its shareholders.

• A corporation may not engage in activities outside the scope of the purposes
for which the corporation was formed; however current laws state that
anything legal is within the power of the corporation.
• RULE on charitable contributions: as long as a donation is reasonably limited
with respect to amounts and purpose, a corporation can make a charitable
contribution. However, a corp must do so in accordance with its director’s
fiduciary duty.
• RULE on BJR: the court will not enter a contested situation based solely on
poor business judgment. There must be:
o Fraud
o Illegality
o COI – conflict of interest

LIMITED LIABILITY CORPORATIONS:

* The owners of an LLC are called members, and enjoy limited liability similar to
shareholders of a corporation in that no member is personally liable for its obligations.
No member is exposed to vicarious liability for torts of other members or of employees
of the LLC. Only liability of personal misconduct or on personal guaranties exist.
• Taxes ⇒ Limited Liability Companies are treated like partnerships for taxation
purposes. Avoids the double taxation issues facing the corporation. Also you get
pass through taxation, meaning if you lose money in the company, you can claim
it on your tax form
• Limited Liability ⇒ If you properly form it limited liability applies. Members of the
LLC can exercise control without the risk of personal liability for the debts of the
business. With an LLC there is generally a “security” issue and this stems around
whether members rely upon the efforts of others to generate profits.
RULE on Piercing the LLC Veil: In the absence of fraud, a claim to pierce the veil of a
LLC is treated in the same manner as a court would pierce the corporate veil.
• Fiduciary duty is also relevant to an LLC.
• DISSOLUTION
 ⇒ A member or manager of an LLC is not personally
liable for any debt, obligation or liability of the
company only if the member or manager follows the
statutorily proscribed formalities of incorporation,
dissolution, and creditor notice.
DUTY OF CARE

• 3 Types of Duties – violation of any one will make the director liable
 Duty of loyalty (DOL)
 Duty of care (DOC)
 Business Judgment Rule (BJR) – a.k.a. corporate finger
• Decision-making process:
 If the directors have avoided any conflict of interest (DOL), and if they
have gathered information and thought about the problem they face
(DOC), then courts will not second-guess them (BJR).

• BJR – No breach of duty when

 No conflicting self-ineterst
 Reasonably informed
 Rational decision

• RULE on Better Course of Action: a complaint that alleges merely that some other
course of action other than that taken by the board would have been more
advantageous does not give rise to a claim for damages against those directors.
• Rationale: risk taking directors are essential to grow business, courts are poor judges
of business reality, and directors are poor cost avoiders.
• Smith v. Van Gorkom
• RULE of DOC in Takeover: in specific context of a takeover, director has a duty,
along with his fellow directors, to act informed and deliberate manner in determining
whether to approve agreement of merger before submitting it to the SH.
• RULE on BJR & Informed Decision: Determined by wthere r not directors informed
themselves, prior to making business decision, of all material information reasonably
available to them.
• RULE on Corporate Waste: Exchange must be so one-sided that no peson of a
reasonable mind would have enetered into it...”irrationality is the outer limit of the
BJR, but still within its limit.”
• FORM over SUBSTANCE: due care by directors in decision making context is
“process due care” only, it is not substantive due care. (suggesting that even irrational
decisions that go through the right decision making process are protected from SH
suit.)
• Brehm v. Eisner
• RULE on Rudimentary knowledge of Biz Dir: Director should acquire at least a
rudimentary understanding f the nusiness of the corporation. Does not require detailed
inspection of day-today activities, but rather a general monitoring of corporate affairs
and policies. If one feels insufficient business experience to qualify him to perform
the duties of a director, he should either acquire the knowledge through inquiry or
refuse to act.
• Examples of failure to act as a director = fails to attend meetings, fails to learn about
nusiness, fails to read reports, fails obtain help, neglects to use diligent behavior.
  Francis v. United Jersey Bank
• Directors & Managers
 Bayer v. Beran
• RULE on DOL and Prima Facie COI P must Show: once the p
shows prima facie COI, the BJR no longer applies. The test
becomes one of good faith and fairness. Burden is with director
and BOD to prove unfairness/fairness. Director not only to
prove good faith of transaction but also fairness.
• NOTE: BJR presupposes that the corporate directors have no
conflict of interest.
• Lewis v. S.L & E, Inc.

• Corporate Opportunities
• Broz v. Cellular information Systems
• RULE on Corporarte opportunity: cannot take for himself an oppourtunity presented
to an officer/director which the corporation
 Is financially able to undertake
 Is, from its nature, in the line of the corp’s business (Line of Biz Test)
 Has an interest or reasonable expectancy in the opportunity
 Creates a conflict between self-interest and interest of the corporation.

DUTY OF LOYALTY

DOMINANT SHAREHOLDERS, RATIFICATION, SECURITIES

Zahn v. Transamerica
• RULE on Dominant SH and ficducairy duty to Minority SH: if a SH who is also a
director is voting a a director, he or she rpesents all SHs in the capacity of a trustee
and cannot use the director’s position for his personal benefit to the SHs detriment.
• RULE on Dominant SH and duty of disclosure to minority SH: when dealing with
minority SHs, dominant SH owes a duty of complete disclosure invlduing all the
information reasonably necessary to protect their own inetersts.
o Sinclair Oil Corp. v. Levien

• Securities
 3 ways to register a security
• a security may not be offered for sale through the mail or other
means of interstate commerce unless a registration has been
filed with the SEC
• securities may not be sold until the registration statement
becomes effective
• a prospectus must be delivered to the purchaser before a sale.

33 ACT REGISTRATION AND DUE DILIGENCE

Escot v. BarChris Construction
• Standard of Condcut: Isuer’s liability is absolute, like strict liability; all others can
raise “due diligence” defense: Do who shows he exrcised due diligence with
registration statement can escape liability.
• Who can sue: anyone who buys the stock, including secondary buyer. Reliance on
registration statement need not be shown.
• Affirmative defense: Actual knowledge of buyer of untruth or omission, or release
of subsequent earnings report covering first 12 months.
• 4 ways of liability:
 Expert on expertised
 Expert on non-expertised
 Non expert on non exprtised
 Non expert on expertised
• Expertised portions = financial statements – by the accountants, any engineering
reports, and appraisal of property.
• SHORT RULE on sec. 11(a): if registration is materially misleading error/omission –
any person who acquired such security may sue those who sign the registration
statement, directors, experts, and underwriters…sec. 10b requires scienter but Sec. 11
does not.
• RULE on Test for Materiality: Matters to which an average prudent investor ought
reasonably to be informed before purchasing.
• RULE on test for reasonable investigation and belief: level of care of prudent person
if own money was at stake. Not enough just to make an inquiry – have to make a
reasonable investigation personally of corporate affairs; and no excuse that you were
only recently hired.
• RULE on measure of Damages: difference between (1) price Plaintiff paid for the
stock limited to the public offering, and (2) value of the stock at the time of the suit…
P gets out of pocket loss.
• RULE on affirmative D on Damages: can be reduced by a showing that factors other
than the error in the registration statement caused decline in value.

RULE 10b-5 DISCLOURE, OPTIONS

• The rule applies in different ways, to DISCLOSURE & INSIDER TRADING

• Disclosure = something was or was not said that was material info that caused
someone to buy (stock price too high) or sell (stock price too low) at loss of $$.
• 10b-5 REQUIREMENTS:
 Statements or omissions
 In connection with orchase or sale of any security
 Provided the information is
• Material
• Scienter present
• Causation
 • Reliance
o Basic, Inc. v. Levinson
• Materiality RULE: an omitted dfact is material if there is a substantial likelihood that
the average, reasonable SH would have considered it important knowledge to have
before deciding.
• Note: SH’s determine which facts are material.
• Scienter RULE: knowledge P must show that D had intent to decive, manipulate or
defraud (negligence is not enough)
• Causation RULE: P has to show that statement or omission caused the damage.
• Reliance RULE: (most subjective) P must show that he relied on the statement, such
that, had they not made the statement P would not have bought or sold.
• Fraud on the market:
• Face to face transaction:
• Fraud on the Market – how to rebut presumed reliance:
 Transactional causation: did the material misleading statement cause
the transaction to occur? (i.e. “but for” the fraudulent
misrepresentation, the investor would not have bought or sold the
security.
 Loss Causation: did the material misleading statement cause the loss to
occur? (did violation cause P’s loss?) a.k.a “proximate causation”
 FOM does not apply to non-public statements…West v. Prudential
Securities…Hoffman’s statements were only made to a handful of
investors, didn’t affect the market, was not public.
• RULE on 10b, Standing and Options: Standing requires having either bought or sold
stock. Plaintiff must deal in a security to have standing, includes an options trader’s
purchases or sales…Deutschman v. Beneficial Corp.
• Short RULE on Options: 10b-5 applies to option K’s
• Options are K’s that give holders the right to:
 Sell stock at a set price on a set date (the “put”)
 Purchase stock at set price on a set date (the “call”)
 Not really investing in the company

INSIDER TRADING, RULE 10b-5

• Involves insiders (officers, directors, employee, major SH) who trade on material,
non-public information. Rule 10b-5 requirements apply.
• RULE on Insiders and silent trading: The insider who buys silently on the exchange
has no common law liability to the other party to the trade…directors owe a fiduciary
duty to the corporation, but not the individual SH.
• SEC v. Texas Gulf Sulphur Co.
• RULE on disclose or abstain: Unless you disclose you must abstain.
• Insider = one who obtains information by virtue of his employment with the company
 whose stock he trades in
• Constructive insider = someone who does not work for the issuing company, but who
are entrusted by it with confidential information…lawyers, accountants, bankers
• Temporary insiders = people like lawyer or accountant become a fiduciary to the corp
and can be just as liable as other insider.
• Tippee = a person who is not himself an insider, but to whom an insider consciously
gives information.
• Dirks v. SEC
• U.S v. O’Hagan
• RULE on “Misappropriation theory”: if a person misappropriates confidential
information for securities trading purposes, in breach of a duty owed to the source of
information, Must have- (1) a personal benefit and (2) didn’t disclose it to the source.
• Misappropriation theory does not require that buyer or seller of securities be
defrauded.

SHORT SWING PROFITS, INDEMNIFICATION

• * PURPOSE: Bright-line Automatic Prophylactic rule with strict liability with No defenses - if you fall
under the statute, you are disgorged ...even if you had absolutely no insider knowledge.
WHO IS COVERED: Applies only to officers, directors and sh with 10% stock of any class: (a) Officers or
directors at either purchase or sale - either end of the swing; and (b) SH must have 10% at both purchase
and sale - at both ends of the swing
• Any
SH may sue
• App
lies only to publicly traded companies
• As
soon as you make a sale and a purchase within 6 months you will be liable if they can
construct a profit.
• Re
medy = disgorgement to corp.
• How Calculated: : Lowest Purchase Price mat ched against Highest Sale Price, ignoring any losses
• May have 16 (b) "profit" despite overall lossCan pick and choose to find the biggest differential and if
there is a profit, it is dis -engorged. Even if only a paper profit. …16b does not care if take a bath within
the same 6 months period ...Must be within 6 mo period. If wait 6 mo and a day, okay
• Irrelevant if trading in good faith.
• RU
LE on swing profits and Sequencing: in a purchase-sale sequence, the beneficial owner
must account for the profits only if he was a beneficial owner before the purchase.

INDEMNIFICATION: where a corporation reimburses the director or officer for

expenses and or judgments he incurs relating to action on behalf of the corporation.
• Ge
neral RULE of indemnification requires:
• Act
ed in Good Faith
• Wa
 s pursuing what he reasonably believed to be the best interests of the corp
• Ha
d no reason to believe his conduct was unlawful

- Del. G.Corp Law s. 145

o (a) covers expenses, judgmenets, settlements in 3rd party suits
o (b) covers only expenses with derivative or corporation’s suits
 why is court approval necessary if dir/off liable?
• (c) expenses must be reimbursed if D is successful
• (e) Corp has option to advance expenses, (g) allows insurance
• 145(f) can corp offer more protection than statute?
• How does Court apply s. 145 in Waltuch?
o RULE = Section 145 DE requires that the individual acted in good
faith to be indemnified if successful on the merits,
o 145(f) trumps 145(e), but not 145(a) and its GF requirement
• Citadel v. Roven….
o RULE = normally advancement is permissive but an agreement can
require corp to advance to officer or director all reasonable costs
incurred in defending himself.

PROXY FIGHTS

• What is a proxy? Why use them?

o An agent of a stockholder
o Person one designates to represent them/do business at corporate
(annual) meetings
o The mailing that goes out to the SH (proxy solicitation)
o Issue of controlling SH votes at meetings
o Can be a way to oust current management
o Subject to statutes (Cal Corp Code 602)
• Recouping proxy costs
o Rosenfeld v. Fairchild
o Rules of Proxy reimbursement:
 Corp may not reimburse anyone unless it’s a policy dispute
 Only for reasonable and proper expenses
 Corp can reimburse incumbents win or lose
 May reimburse if they win & SH ratify

• Levin v. MGM
• RULE on proxy fights and use of corporate assets: Incumbent management
may make reasonable use of corp assets to inform SHs of its position in proxy
contest involving corp. policy issues, but not personal issues.
 •
• J.J Case Co. v. Borak
• RULE on proxy statements and misrepresentations: Unlawful to solicit a
proxy consent authorization using false and misleading statements (14a-9) and
in such an event, a court may enforce a private right of action for rescission or
damages.
• Mills v. Electric Auto-lite Co.
• RULE on proxy statements and materiality: a false or omitted fact is
material when there is a substantial likelihood that a reasonable SH would
consider it important in deciding how to vote. TSC Industries
• RULE on Causation: Injury presumed when:
o P shows falsehood/omission was material
o Proxy solicitation itself was an essential link in the accomplishment of
the transaction.

SHAREHOLDER PROPOSALS AND INSPECTIONS

• Inspection rights:
o General Rule - State law generally gives SHs the right to inspect
corporation’s books and records…Requirements:
 Who may inspect: (i) benefical holders, and (ii) holders of
record
 Proper purpose: must advance corp’s business purpose
• RULE on proper purpose and Tender Offers: A corporation must grant SH’s
request for access to SH’s list to enable tender-offer discussions… Crane co.
v. Anaconda Co.
• RULE

SHAREHOLDER VOTING CONTROL

How do SH allocate voting power in Corp?

* Shareholders can control the organization through voting, depending on how the
corporation is set up.
• stock classes(each with different voting rights),
• voting trusts (gives trustee the power to vote)
• pooling arrangements( where SHs agree to vote together), irrevocable proxies

* Voting Methods: (i) Cumulative Voting (ii) Straight Voting

1: Cumulative Voting: Allows you to multiply the number of votes by the number of open directors
seats…. each SH determines the aggregate number of votes she may cast in an election by multiplying the
number of shares she holds by the number of positions to be filled. Each SH may cast that number of votes
for one or more candidates. Purpose of cumulative voting is to enhance the possibility that a minority share
interest can obtain board representation …disfavored by large publicly traded corporations.
Straight Voting:
2: SHs may cast the number of votes equal to the number of shares he holds for candidates for each
position to be filled on the board of directors. The SH holding the majority of the voting shares will elect
the entire board of directors.

Strohm v. Blackhawk Holding

- Why did the Corp have such a strange class B stock?

o Money, capital
- are there easier ways to achieve the same result?
o The idea is, bring $$$ to us and we’ll make you rich, but don’t tell us
how to run our business.

Peerless Systems procedural maneuver?

- D urges Ct. to use the Business Judgment Rule
- P urges Ct. to use the “Blasius standard”
o P must establish that the board acted for the primary purpose of
thwarting the SH vote.
o Then, the Board has the burden of proving a compelling justification
for its action.
o If both prongs not met…then, Ct. will use BJR

Ringling Bros v. Ringling

• RULE on SH voting agreements: a group of SH may lawfully contract to vote

in any manner they determine…reasonable provisions for cases of failure of
the group to reach a determination because of an even division in their ranks
are unobjectionable.

McQuade v. Stoneham

• RULE on SH agreement to Limit Directors: agreements between SH cannot

limit the authority of the directors to run the corporation; Directors must
exercise their independent business judgment on behalf of all SH.
• NY RULE: allows decision to be made on the SH level if (i) all SHs have
authorized, and (ii) any subsequent SHs have knowledge or notice or
consented in writing…McQuade could be protected.
•
Clark v. Dodge

• Why does the court enforce the agreement?

o All the SH agreed.
* RULE on SH Agreement Limiting Power of Directors: Shareholder agreement prohibiting the board of
directors from changing officers, salaries, or policies, or retaining individuals in office, is illegal and void
absent express contractual consent between all SHs; as long as there are no parties that were not party to
the agreement then it is valid.

RULE on SH agreement and Employment: SH agreement is okay regarding employment of certain

individuals as officers is enforceable if the directors are the sole SHs b/c (i) enforcement of K damages
nobody; and (ii) inclusion of the language, "as long as faithful, efficient, and competent," provides a way
out if P doesn't live up to his duty.

CONTROL ON CLOSELY HELD CORPORATIONS; ABUSE OF CONTROL

•
Characteristics of close corporations:
o Small number of stockholders (DE is 30 max)
o No ready market for stock
o Substantial participation by majority SH in management
• Employment K’s: (used as a practical alternative to SH agreements) isues
negotiated include duration, compensation, duties/status, competition and
trade secrets, termination, mergers.
• Abuse of Control:
o There is an implied-in-law fiduciary duty of SH to each other in a
close corporation (similar to partners in a partnership).
o Freeze out – a situation in which a majority Sh prevents minority SHs
from recieveing any monetary benefit frm their investment in the
corporation in an attempt to force the minority to sell their shares to
the majority.
 Wilkes v. Springside Nursing Home, Inc.
* RULE on Wilkes Doctrine:
RULE on Wilkes Doctrine: (i) SHs in close corps. owe each other a duty of strict good faith; (ii) if
challenged by a minority SH, a controlling group must show a legitimate business objective for its action;
and (iii) minority SH can nonetheless prevail if he can show that the controlling group could have
accomplished its business objective in a manner that harmed his interests less. ...….BJR applies and can be
trumped by an argument that less oppressive (to the minority) means were available. ...SHORT RULE:
Majority SHs acting to "freeze-out" minority SH by terminating his employment w/out a valid business
purpose have breached their duty to act as fiduciaries
• Rationale: without fiduciary duty between SHs, majority SHs could abuse or freeze out the
minority SHs.

Ingle v. Glamore Motor Sales, Inc. , 538 N.Y.S.2d 771

Key Points

RULE on Minority SH who is also an Employee: A minority shareholder in a closely-held corporation,

who is also employed by the corporation, is not afforded a fiduciary duty on the part of the majority
against the termination of his employment. A court must distinguish between the fiduciary duties owed by
the corporation to a minority shareholder as a shareholder, in contrast to its duties owed to him as an
employee.

SOLUTION: Draft a better employment agreement.

Sugarman v. Sugarman , 797 F.2d 3

Key Points

RULE on Freeze-out: To show freeze out there can be action that shows steps by majority shareholder to
ensure that minority shareholder does not receive financial benefits from corporation
RULE on Factors in a Freeze-out: (i) pay excess compensation if part of scheme to freeze out; (ii) Paying
lower then market price if part of scheme to freeze out; (iii) Failure to pay dividend if part of scheme to
freeze out. Each alone is not enough. However, in the aggregate, combined act as a freeze out.

Smith v. Atlantic Properties, Inc. , 12 Mass.App.Ct. 201

Key Points

RULE on "Golden Rule" of Mass: A minority SH has fiduciary duty to his co-stockholders, if minority
holder has been given a veto power over corporate actions.

RULE on "You made you bed; now lie in it" Rule of Delaware

Jordan v. Duff & Phelps

• Combines abuse with 10b-5

• Why is J’s work a K problem?
• Why should J collect anything?
o Is there a materiality issue?
o Damages calculation is complicated?

Easterbrook-Posner debate
• Opinion per Easterbrook:
o Abstain or disclose applies when SH can respond to material info
o J might have wished to stay and keep stock if he knew of the merger
o If J stayed, Wilkes-like duties would prevent other Sh’s from firing J;
o Accordingly, 10b-5 required Hansen to disclose merger talks
• Posner’s Response
o Ab-or-disclose rule does not apply if SH cannot use the info he
receives
o J’s K expressly denies added employment rights, K trumps any
Wilkes-like duties;
o D & P could thus have fired J’
o J has no right under 10b-5

STATUTORY DISSOLUTION

• Involves state laws that allow a company to dissolve.

• Statutory dissolution: when minority SH of a closely held corporation have
been treated unfairly by the majority and the minority SH have invoed special
statutory provisions allowing the court to order dissolution in certain
circumstances and the general equitable powers of the court.
 Alaska Plastics, Inc v. Coppock
• 4 Options for dissolution:
o Articles or by-laws (requiring firm to buy SH out)
 o Involuntary dissolution by statute – only if Ct. finds fraud or
oppression
o Significant change – in corp structure, such as a merger
o Breach of duty – used as an equitable remedy
 Pedro v. Pedro
• SH in a closely held corporation have a fiduciary duty to deal openly,
honestly and fairly with each other. In a closely held corp, the nature of
employment of an SH may create a reasonable expectation by the
employee-owner that is not terminable at will.
• Can K around the statute as long as price/terms not unreasonable
 Stuparich v. Harbor furniture Mfg, Inc.
• Dissolution must be reasonably necessary for the protection of the rights or
interests of the complaining SH, but absent abuse in the corp. or breach of
fiduciary duty, court not going to get into the business decisions.
•
TRANSFER OF CONTROL

• Control is something of value – since a person purchasing “control” can

dictate the affairs of the corporation.
• RULE on Transfer of control and sale of principal assets: a minority SH’s
right of first refusal that is trigerred by the majority SH’s sale of their stock
does not apply to a transaction in which an acquiring entity purchases the
corporation’s principal assets, after which the corporation is liquidated.
• Zetlin v. Hanson Holdings, Inc – RULE on selling control block for a
premium: a controlling SH may sell his stock at a premium without being
obliged to share the premium with the minority, absent “looting,” fraud, or
conversion of corp opportunity.
 Perlman v. Feldman
 Essex Universal v. Yates

DE FACTO MERGERS, FREEZE OUT MERGERS, NON-MERGERS

• Sale of Assets: Acquirer pays Target, gets their assets, target pays liquidating
dividend to its SH and then typically disappears, then the acquirer usually
reemerges as the Target corp.
• MERGER: when one or more corporations are absorbed into another existing
corporation. Consolidation involves the formation of a new corporation that
takes over the assets and liabilities of one or more existing corporations. The
surviving corporation issues its stock for the stock of the absorbed
corporations and has the assets of all the combined companies.
• SH Consent: SH of all the corporations involved must consent. (most states
require a 2/3 majority)
• Directors’ approval: majority approvl of all the directors of all companies is
required.
• De Facto Merger doctrine: When a company acquires all of the stock or
 assets of a company (acquisition) and then collapses the company into one
organization.
• SH of surviving or acquiring corp lose:
o Substantial part of the investment value of the shares
o Voting control such that corp is fundamentally changed by the
transaction.
• Appraisal rights: statutory rights by SHs opposing merger to demand the corp.
buy back their shares for cash at the fair value set by either the agreement, o
absent an agreement by judicial proceeding.
• Most states don’t give appraisal rights when the Corp is publicly traded,
because they can sell their shares on the market for FMV.
• DE – a sale of assets involving dissolution of the selling corporation and
distribution of the shares to its SH is legal.
 Farris v. Glen Alden Corp.
• Test on whether merger or sale of assets: Transaction is a de facto merger if
the agreement is will so change the corporate character that to refuse to allow
the SH to dissent will, in effect, force him to give up his shares in one
corporation and accept shares in an entirely different corporation.

“Freeze-Out” mergers:
 Weingerger v. UOP, Inc.
• RULE on Entire Fairness: (i) fair dealing, (adequate disclosure and fair
procedures) and (ii) fair price.
• RULE on Fair Dealing: Majority SH must act not only for his own personal
benefit but fr the benefit of the corporation as a whole it must serve a business
purpose, if the majority SH acts solely for his own benefit, then fair dealing is
not present.
• Burden of Proof of Fairness: 1) Burden to show fairness is on the majority shareholder;
but if merger is approved by minority shareholders then (2) burden shifts to plaintiff to show
the transaction was unfair to the minority SHs; if burden met then (3) burden shifts back to
majority SHs - however, 3 exceptions: (i) if the majority shareholder dictates the terms of the
merger, the burden does not shift regardless; (ii) if corporation uses Independent Committee,
burden shifts to the P - still have to deal with fairness; (iii) if get ratification - burden shifts
back to the P but the committee has to have real bargaining power that it can deal with
dominate SH at arms length.
RULE on Fairness is More Than Just Price: Majority SHs owe a fiduciary duty that goes beyond
refraining from illegal activity: Majority SHs owe a fiduciary duty to minority SHs and may not unfairly
manipulate the timing of a merger to avoid paying the minority SHs the price agreed upon as part of an
earlier transaction.

In cases of fraud, self-dealing, manipulation, and the like, any remedy that will make the aggrieved
shareholder whole may be considered: Appropriate remedy - a contractual remedy may trump a fair
appraisal right under Weinberger
B. Business Purpose

Topic Key Points

Business Purpose Test: Doctrine relieving corporate directors and/or officers from liability for decisions
honestly and rationally made in the corporation's best interests.

Coggins v. New England Patriots Football Club, Inc. , 397 Mass. 525

Key Points

RULE on Business Purpose Test: (i) Is there a legitimate business purpose?; (ii) If yes, then is it fair to
minority SHs by TOC?

RULE on What is a Proper Business Purpose: The majority shareholder must act not only for his own
benefit, but for the benefit of the corporation as a whole.

RULE on TOC: includes (i) purpose of merger; (ii) accuracy and adequacy of disclosure in connection
with merger; (iii) fairness of price; (iv) timing; (v) structure; and (vi) negotiation

Mass. Voids a merger if business purpose test is not met but Majority rule is going toward Delaware but
there are enough states that business purpose.

3. De Facto Non-Merger

Rauch v. RCA Corporation , 861 f.2d 29

Key Points

De facto Non-Merger: takes the form of a merger but was in substance a de facto sale of assets followed by
a redemption - okay in DE where form over substance matters.

RULE on Form over Substance in DE: SH is a corporation undertaking to convert shares into cash as
part of merger is not entitled to rights provided SHs under a distinct provision of the corporate law
addressing the redemption. [Equal Dignity Doctrine].

4. LLC Mergers

VGS, Inc. v. Castiel , 2000 WL 1277372

Key Points

RULE on DOL in a Merger: Board members violate their DOL to each other by withholding notice of a
meeting from another director or seek consent to a written resolution of a merger even though they
believed it was in the best interest of the LLC. Case is good law under the unique circumstances of this
case - such as majority owner had the power to hire and fire 2 of the 3; only majority vote needed to
effectuate merger.

•
CORPORATE TAKEOVERS

TAKEOVERS

• 2 ways: Hostile & Friendly

o Friendly: Negotiate deal with management – BOD is cooperative
o Hostile: buy stock from SHs directly, a Tender Offer, because either
 they are asking SH to tender shares for cash or some other type of
consideration.
 BOD is opposed to takeover, but you can buy control
block(enough shares to control the company).
• BOD Defenses:
o Stock Buy Back – leaves less stock for the acquirer, less cash available
for the company to take over, drives up debt and makes the
corporation less attractive as a target.
o Crown Jewel defense – sell off the crown jewels of the target
corporation
o Cancellation Fee
o White knight – when a company is facing a hostile acquirer, they can
go out and find a friendly company to take them over
o Golden Parachute – forces the acquiring company to pay incumbent
directors to retire, usually a high payment. s
• Greenmail:
o When a party is paid a premium to turn over shares so that they wont
takeover the company.
o When is it bad?
 Directors have a COI so there is a DOL problem at the heart
o When is it good?
 Good cause it would drive prices of stock higher, prevents
takeover,
• Inside Directors – have the burden to justify the purchase was primarily in the
corp’s best interest
• Outside directors – need only show good faith and reasonable investigation
• General RULE – you cannot purchase shares just to perpetuate yourself in
office.
• Cheff v. Mathes
RULE on director’s COI in a takeover: Directors of target company violate their duty of
oyalty if they manipulate corporate procedures to obstruct a takeover attempt primarily
for the purpose of perpetuating themselves in office, as opposed to a proper business
purpose.

• Two-Tiered Tender Offers:

o That takeover artist offers some premium price per share for a ceratin
amount of shares, then offers less for the shares received after that %

 UnoCal Corp. v. Mesa Petroleum
• RULE on Directors threat evaluation: Conclusion that such a threat existed
must have been made (i) after reasonable investigation, (ii) in Good Faith, and
(iii) the defensive measure must be in proportion (reasonable) to the threat
posed.
• A corprations’ decision to respond to corp. threat and deny the dissident SH
the right to participate in the self tender offer is subject to the BJR if D can
 show:
o Director was reasonable in believing that a danger to corp policy
existed and he acted in the best interest of the corp (requires good faith
and reasonable investigation
o Proposed defensive measures were reasonable in relation to the threat
posed.

 Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc

Key Points

SHORT RULES ON UNOCAL AND REVLON DUTIES:

Unocal Duty = Protecting SHs
Revlon Duty = Maximizing Share Price or Revlon Duties

RULE on Unocal Duties and First Way to Trigger Revlon Duties: Although a board's initial defensive
measure to prevent hostile takeover is (i) in good faith, (ii) on an informed basis w/ reasonable grounds to
believe that a harmful threat to corp. existed; and (iii) defensive measure was reasonable in relation to
threat posed (Unocal), when it becomes apparent that the break-up of the corp. was inevitable; the
directors' role change from defenders of the corp. to auctioneers charged w/ getting the best price for SHs
at a sale of the co. (Revlon)

NOTE: Must no longer use defensive measures.

NOTE: Level Playing Filed Rule - Insiders must treat all bidders equally; invoked when company puts
itself into play.90

EXAMPLE: Directors breached their duty of loyalty when they entered into a lock-up agreement w/ the 3rd
party b/c it had a destructive effect on auction and no-shop provision is impermissible when a board's
primary duty becomes that of an auctioneer responsible for selling the co. to highest bidder. Merger
agreement w/ 3rd party unreasonable in relation to threat posed = board not entitled to BJR.

RULE on Burden of Proof: Board has burden of proof.

• Poison Pills are Shareholder right plans by amendment to articles of incorporation that if
someone buys stock over a certain amount, the current SHs get additional stock, which
minimizes the amount of stock the person who just bought the stock, really got.
• Most poison pills are roughly divided into "call" and "put" plans:
• "Call" Plans give SHs the right to buy cheap stock in certain circumstances:
• "Flip over" Provision triggered by a threshold event when outsider buys 20% of stock. Once
the right has flipped then (i) rights become separately tradeable; (ii) no longer redeemable by
target's mgmt; and (iii) if outsider gets control and causes merger with outsider then right
entitles holder to acquire shares of the bidder at half-price
• EFFECT: Right to buy cheap stock (the "call") is an obligation of the target, by law, becomes
obligation of the surviving corporation following merger. ....Only works where bidder merges
with target
• "Flip in" Provision triggered by a threshold events like outsider buys 20% of stock or self-
dealing including purchases of assets from target at below-market prices or loans to the
bidder, etc. Works the same way as the "Flip over".
• "Put" Plans calculate a price that target's directors think is fair for their stock. If bidder buys
some but not all shares, put gives each target SH right to sell back his remaining shares in
the target at the fair price - can be formula or fixed.
 • EFFECTIVE: Against two-tier offers' coercive effect to miss the boat

• Revlon has another tactic up its sleeve: a Management Buy-Out (MBO)

• What are the terms? (i) Lock-up: right to get assets at fire sale price -Another way to look at
is that it is a $100 MM gift since $100 MM below market value; (ii) No-Shop Provision; and
(iii) Cancellation fee to Forstmann $25 Mil
• Lock-up: option enticing bidders to enter a contest for control of the corp., creating an
auction for the co. and maximizing SH profit.
• Here, the lock-up provision, granting 3rd party to purchase certain assets, ended an active
auction and foreclosed further bidding to SHs' detriment.
• No-shop: promise by a corp. to deal exclusively w/ one in the face of a takeover-
impermissible when a board's duty becomes that of an auctioneer.
• Lockups and related defensive measures (i.e., cancellation agreements) are permitted where
their adoption is untainted by director interest or other breaches of fiduciary duty.

Paramount Communications, Inc. v. Time Incorporated , 571 A.2d 1140

Key Points

RULE on a Second Way to Trigger Revlon: 2 ways to trigger Revlon duties to maximize immediate SH
value and auction the co. fairly: break up of corp becomes inevitable: One When corp. initiates an active
bidding process to sell itself or to effect a business reorganization involving a break-up of the co.; or Two
Where, in response to a bidder's offer, a target abandons its long-term strategy and seeks another
transaction involving breakup of the co. But if the board's reaction to a hostile tender offer is found to be a
defensive response only and not abandonment of corp. existence à Unocal duties (not Revlon).

• What's the court's holding? It is about an inevitable change of control then Revlon Duty is
triggered. How is this different from Time? Adds change of control to break-up as triggering
Revlon duties.
• ANALYSIS: (i) Original Time-Warner agreement subject to BJR b/c sufficient E to conclude
that it was a proper exercise of business judgment. (ii) Revised Time-Warner agreement =
reasonably determined to be defensive so Unocal analysis: (i) Time directors reasonably
believed that Paramount's offer posed a threat to corp. policy and effectiveness; and (ii)
Response reasonably related to threat.
• NOTE: Revlon duties don't apply to corp. transactions simply b/c they may be construed as
putting a corp. "in play" or "up for sale."
• CONTRAST: Unocal applies to all director actions taken, following receipt of a hostile
tender offer, that are reasonably determined to be defensive.

Paramount Communications, Inc. v. QVC Network, Inc. , 637 A.2d 34

Key Points

RULE on Third Way to Trigger Revlon Duties triggered if (i) Put the company up for sale; (ii) if in
response to hostile bid the company abandons its long time strategy and looks for a white knight to buy and
break up the company; or (iii) when approval of a transaction leads to a change in control

RULE on What is Best Vakue for SHs: When a corp. undertakes a transaction which will cause a change
in corp. control or break-up of the corp., directors obligation is to seek the best value reasonably
available to the SHs (Revlon). In determining the best value, directors aren't limited to considering only
the amount of cash involved but also Macmillan factors: (i) Offer's fairness and feasibility; (ii) Proposed
or actual financing for the offer and its consequences; (iii) Risk of non-consummation; and (iv) Bidder's
identity, prior background and business experience; and plans for corp. and its effects on SHs.
RULE on Triggering of Enhanced Scrutiny: Enhanced Scrutiny triggered by (i) diminution of voting
power; (ii) sale of a control premium; or an action to impede a SHs voting rights. Directors have burden
of proving they (Unocal): (i) Were adequately informed; and (ii) Acted reasonably

Rule on K Provisions Inconsistent with Director's Duties: Invalid.

• Distinguish Time and QVC: Unlike what Paramount urged the Time directors to do,
Paramount refused to consider the QVC deal's price and long-term debt. Paramount could
not justify that the merger represented a chance for the company to improve its long-range
market objectives
• Sale of control implicates judicial scrutiny of Paramount directors' actions under Unocal
(directors' process and result ≠ reasonable b/c board didn't inform themselves of the
consequences of defensive measures demanded by Viacom under the Original Merger
Agreement) and Revlon.
• WHEN FLUID AGGREGATION CONINUES: Held that there was no change of control in
the original stock-for-stock merger between Time and Warner because Time would be owned
by a fluid aggregation of unaffiliated stockholders both before and after the merger: Neither
corporation could be said to be acquiring the other. Control of both remained in a large,
fluid, changeable and changing market.
• WHEN FLUID AGGREGATION DOES NOT CONINUE: Control of the corporation is not
vested in a single person, entity, or group, but vested in the fluid aggregation of unaffiliated
stockholders. In the event the Paramount-Viacom transaction is consummated, the public
stockholders will receive cash and a minority equity voting position in the surviving
corporation. Following such consummation, there will be a controlling stockholder who will
have the voting power to: (a) elect directors; (b) cause a break-up of the corporation; (c)
merge it with another company; (d) cash-out the public stockholders; (e) amend the
certificate of incorporation; (f) sell all or substantially all of the corporate assets; or (g)
otherwise alter materially the nature of the corporation and the public stockholders' interests.
Irrespective of the present Paramount Board's vision of a long-term strategic alliance with
Viacom, the proposed sale of control would provide the new controlling stockholder with the
power to alter that vision.
• ENHANCED SCUTINY RESULTS: Because of the intended sale of control, the Paramount-
Viacom transaction has economic consequences of considerable significance to the
Paramount stockholders. Once control has shifted, the current Paramount stockholders will
have no leverage in the future to demand another control premium. As a result, the
Paramount stockholders are entitled to receive, and should receive, a control premium
and/or protective devices of significant value.
• Subsequent Devleopments in DE: Unitrin: Defensive measure approved by independent
board is permissible if not draconian which means it is not coercive or preclusive; Board has
discretion to choose in the range of reasonableness of measures. QVC.
• Williams Act:
Williamson Act Regulates Process
• Anyone who (singly or part of a group) acquires 5% of must register w/SEC.
s. 13 (d)(1)
o But has 10 days to give ntice and can continue to buy shares
• Tender offer must file elaborate disclosure docs
• Acquirer who raises price during term of tender offer must raise it for any
stock already tendered
• Acquirer must hold tender offer open for 20 business days and tenderer may
withdraw tendered Sh’s during first 15 days. 14 (e)(1)
• State law ok: “Internal Affairs Doctrine”
 o Gives rise to preemption and commerce clause issues

Takeover Review

• Cheffs intermediate standard of review

• Unocal’s two-part test:
o In applying this enhanced scrutiny, the actions of the board in resisting
a takeover are judged under, the Unocal test:
 Part 1 – adequate process and full information (good faith and
reasonable investigation), decisions must be within a range of
reasonableness.
 Part 2 –
• Sale of Control or breakup - - maximum duty
o Under these circumstances the court must hold an option for directors
to seek the best/highest price for its SH…SH price maximization duty,
Revlon Duties
• Unenforceable K obligations – such provisions must be within the range of
reasonableness. Omnicare case (negotiated acquisition)
• Even in Delaware – those making acquisitions must comply with the Williams
Act (federal law)

Williams Act Hypo

* You represent a horror movie fan named Jason. He plans a series of movies that will
outdo Friday the 13th for the number of sequels. To do so, he needs a large inventory of
chainsaws. Jason figures that the easiest way to acquire the machines is to takeover Texas
Chainsaw, Inc. He asks for your advice…
- Can he secretly buy shares at market price? - yes, but then has 10 days to
disclose.
- Can he and 3 pals each agree to buy 4.99% without triggering? - no, because
together (as “agreed” upon_ they would aggregately own over 5%.
- Can Jason announce tender offer on Friday and close on Monday? – no, the
law requires a 20 day minimum for the offer to stay open.
- Can he accept stock on first come first serve basis? – no, it would be coercive,
must accept stock at a pro rata basis for all SH who tender within the first 20
days.
- Can he reward early tenderers with higher $? – yes, but of he raises price/offer
then he has to raise it for all other shares tendered. All SH who tender during
20 day period must be treated equally.

CORPORATE DEBT
• Debt, like equity, I s a way to finance a corp.
o why is it different from equity?
• Debt is a fixed claim to interest and principal.
o Lender or holder does not participate in biz
o Does not have a vote or elect directors
 • What is the relationship btw control & risk?
o Outside of bkrtcy, no control, all you care about is repayment.
• What are the sources of debt?
o Banks, insurance companies, the govt., .
o They all have a lot of money, so what do they do with it?
o They lend money. Directly or through a bank

• Terminology
o Law of debt is governed by the laws of Contracts (loan documents)
o Loan agreement = K with bank
o Instruments = certificates that reflect a loan
 Examples: bonds, debentures, notes
 Bonds can be used to describe all three
 Instruments used by individuals or firms
o Indenture – doc detailing bond terms
o Covenants = promises of borrower (a.k.a. “issuer”)
 The can effectively give lender control over business

• Sharon Steel v. Chase Manhattan
o What is the legal issue?
 Whether, by virtue of the liquidation of UV, the debentures
became due and payable
* RULE on buyer piecemeal Sale of a corporation is not a successor corporation: Boiler-
plate successor obligor clause do not permit assignment of public debt to another party in
the course of a liquidation unless “all or substantially all” assets of the company at the
time the plan of liquidation is determined upon are transferred to a single purchaser.

REVIEW:

• Entities:
 Agency
• A relationship between a principal, an agent, and a 3rd party.
• Authority – agent must have some type of authority (to act on
behalf of the principal)
• Question is…did the principal give any authority? Actual or
apparent, express or implied
• Apparent agency – McCdonald’s case
• Master/servant, now called employer/employee – if the
principal exercise too much control over the agent’s day to day
business, the agent will be deemed a servant, which invokes
respondent Superior.
• Not all agents are servants, not all principals are masters
• Scope of employment (to determine liability) – Conoco case or
manning vs. Brimsley
 • Estoppel – a reliance theory that requires a change of position
• Ratification – Stefonovitz case
 Partnerships
• A form of agency
• The partnership is a principal and the agents are partners (they
could also be agents of other partners)
• Need at least 2 people to create partnership
• Regulated by the UPA or RUPA – uniform acts, but not always
codified in state law
• Partners can bind each other to Contracts, especially with 3rd
parties
• Think of a partnership like marriage
• Partnership for a term – for a period of time, either express or
implied…expectations, Owen v. cohen case
• Partnership at will – Partner can terminate at anytime for any
reason
• If you are deemed a partner, you are liable for the partnership’s
debts, even if you didn’t agree to be a partner
• On-going duties after you leave – Newburry case
• If losses are not mentioned then partners split losses the same
way they would share profits…RUPA
• Exception – Kovacik v. reed…when one partner is a service
partner
• Partnerships must end in three ways:
o Death of a partner
o At will
o Disability
*
 The corporation
• Unlike a partnership, it is a separate entity.
• A corporation is a person under the law, it has rights.
• Offers something the partnership doesn’t – Limited Liability
• Limited to what you put into the company
• In a corp you have the SH (who own stock), they elect
statutory manaers (directors) together they are the board of
directors and they run the company, the officers are usually
elected by the board, sometimes officers are also members of
the boardbecause it offers limited liability and control (if
you’re an officer or director), we must respect the formalities
of the corpartion.
• Separate bank accounts, must have SH meetings, pay taxes,
separate accounting, don’t commingle different corps, don’t
undercapitalize, must exercise control in your capacity as an
officer.
 • If you disrespect the formalities, then you may be vulnerable or
subject to being “pierced.”
• Must show unity of interest, alter ego doctrine/theory, didn’t
treat the corp form with respect
• But if you do it right, you have the advantage of limited
liability
• In K cases…you must also prove a Fraud or Injustice – sea
Land v. Pepper Source
• Mannon & Baxter case…
• Shareholder Derivative Actions
 Cihen v. beneficial
 Eisner v. Flying Tiger
 Yu may be required to post a bond, to avoid nuisance suits
 Derivative suit requires an injury to the corporation, that injury is
usually characterized as a monetary damage/injury, then the SH sue
for the derivative loss or the loss that trickles down on the SH like
morning dew, it applies to all SH in proportion to their holdings.
 It’s a suit in equity, for a wrong by an officer or director (manager)
 You must start by making a demand
 In Delaware you get the benefit of the Aronson test. Just requires you
to show that there is a reasonable doubt as to the
 Compare to the NY Barr test – difference is with respect to the second
and 3rd prong…Barr v. whackman…
 Eisner was not alleging derivative suit in Flying Tiger.
 Zappata case – independent committees
 Ratification by a mojirty of disinetersted SH, then BOP shifts back to
the plaintiff.
 Fairness Test -

 LLCs
 Piercing the Entity
• Duties:
 Fidcuciary dutes of agents and partners
 Duties of corp officers and directos
 Duties under federal law
• 33 act – requires registration of your securities, Escott v.
Barchris case
• No due diligence defense under section 11
• 34 act – look at section 5, 42 to determine whether or not
something is a security…Robinson case
• RULE 10b-5: applies to a material statement or omission made
in connection with the purchase or sale of ANY security.
• Fraud on the market – Basic v. Levenson
• To rebut fraud on the market, one must show loss causation
 • Insider Trading, 10b-5, Texas Gulf Sulfur case,
• No negligence claims, must have Scienter
• Footnote 14, lawyers, accountants
• O’Hagen case…
• Director at time of either purchase or sale
• A 10% Sh at sale and purchase dates
 Voting and control (state laws & federal proxy laws)
 Mergers & acquisitions
• Debt:
 K – it’s all about what the parties agree to in their contract.
 Not so much about fiduciary duty.