Vous êtes sur la page 1sur 37

WHAT IS AGENCY?...................................................................................................................................................4 What are the three elements necessary to form the agency relationship?............................................................

4
Gorton v. Doty..................................................................................................................................................................4

Consent .................................................................................................................................................................4 Control..................................................................................................................................................................4 Action on behalf of the principal...........................................................................................................................4 PARTNERSHIP............................................................................................................................................................5 UPA............................................................................................................................................................................5 UPA 29 43........................................................................................................................................................5 RUPA Articles 6 (601-603), 7 (701-705), and 8 (801-807.............................................................................5 DISSOLUTION UNDER THE UPA 29................................................................................................................................5 DISSOLUTION UNDER THE RUPA 601-603..................................................................................................................5 Sharing of Losses..................................................................................................................................................5 UPA v RUPA Profits/Losses.................................................................................................................................6 Buyout Agreements................................................................................................................................................6 VALUING AN ENTERPRISE.................................................................................................................................................6 Valuation problems:..............................................................................................................................................6 Solutions to valuation problems:..........................................................................................................................6 UPA 29 Dissolution Defined.............................................................................................................................6 UPA 30 Partnership not Terminated by Dissolution.........................................................................................6 UPA 31 Causes of Dissolution...........................................................................................................................7 UPA 32 Dissolution by Decree of Court............................................................................................................7 UPA 33 General Effect of Dissolution on Authority of Partner........................................................................7 UPA 34 Right of Partner to Contribution from Co-partners after Dissolution.................................................8 UPA 35 Power of Partner to Bind Partnership to Third Persons after Dissolution.........................................8 UPA 36 Effect of Dissolution on Partner's Existing Liability............................................................................9 UPA 37 Right to Wind Up..................................................................................................................................9 UPA 38 Rights of Partners to Application of Partnership Property.................................................................9 UPA 39 Rights Where Partnership is Dissolved for Fraud or Misrepresentation..........................................10 UPA 40 Rules for Distribution.........................................................................................................................10 UPA 41 Liability of Persons Continuing the Business in Certain Cases.........................................................11 UPA 42 Rights of Retiring or Estate of Deceased Partner When the Business is Continued..........................12 RUPA.......................................................................................................................................................................12 Article 6 Partner Disassociation.........................................................................................................................12 RUPA 601 Events Causing Partner's Dissociation.........................................................................................12 RUPA 602 Partner's Power to Dissociate; Wrongful Dissociation.................................................................13 RUPA 603 Effect of Partner's Dissociation.....................................................................................................14 Article 7 Partners Disassociation When Business Not Wound Up....................................................................14 SECTION 701. PURCHASE OF DISSOCIATED PARTNER'S INTEREST.......................................................14 SECTION 702. DISSOCIATED PARTNER'S POWER TO BIND AND LIABILITY TO PARTNERSHIP..........16 SECTION 703. DISSOCIATED PARTNER'S LIABILITY TO OTHER PERSONS.............................................16 SECTION 704. STATEMENT OF DISSOCIATION............................................................................................17 Article 8 Winding Up Partnership Business.......................................................................................................17 RUPA 801 Events Causing Dissolution and Winding up of Partnership Business.........................................17 RUPA 802 Partnership Continues After Dissolution.......................................................................................18 RUPA 803 Right to Wind Up Partnership Business........................................................................................18
Page v. Page...................................................................................................................................................................18 Prentiss v. Sheffel...........................................................................................................................................................18 Kovick v. Reed...............................................................................................................................................................18

1933 SECURITIES ACT............................................................................................................................................20 RULE 11 OMISSIONS AND MISSTATEMENTS IN THE REGISTRATION STATEMENT...................................................................20 RULE 12 INVOLVES MATERIAL OMISSIONS AND MISSTATEMENT IN THE PROSPECTUS..........................................................20
Registration Requirements..............................................................................................................................................20

Registration Statements .................................................................................................................................................20 Exemptions from 33 Registration Requirements...........................................................................................................20

1934 EXCHANGE ACT.............................................................................................................................................21 RULE 10B -- MATERIAL MISSTATEMENTS/OMISSIONS INVOLVING SALE OR PURCHASE OF A SECURITY..................................21 10b-5 Cause of Action Elements.........................................................................................................................21
Omissions as False Statements.......................................................................................................................................21 Materiality......................................................................................................................................................................21

Fraud-On-The-Market Theory............................................................................................................................21
Defenses ........................................................................................................................................................................21

INSIDER TRADING.........................................................................................................................................................21
Tippee Liability (Dirks)..................................................................................................................................................22 Howey Test....................................................................................................................................................................22

SARBANESOXLEY ACT OF 2002......................................................................................................................23 LIMITATION ON DIRECTORS LIABILITY......................................................................................................24 DELAWARE 102(B)7 CONTENTS OF CERTIFICATION OF INCORPORATION.............................................................................24
Business Judgment Rule Criteria....................................................................................................................................24

RIGHT TO INDEMNIFICATION...........................................................................................................................................24
Del. 145..........................................................................................................................................................................24

DYNAMICS OF SHAREHOLDER VOTING.........................................................................................................25


Limited Number of Matters............................................................................................................................................25

PROXY........................................................................................................................................................................25 Proxy Process......................................................................................................................................................25 Proxy Fraud........................................................................................................................................................25


14(a) of 1934 Exchange Act.........................................................................................................................................25

DEL. 149(A) PROXY SOLICITATION..........................................................................................................................25 SHAREHOLDER PROPOSALS GROUNDS FOR OMISSION......................................................................................................25 Section 14a of 1934 Exchange Act......................................................................................................................25 Proxy Solicitations Absent Single Majority Shareholder....................................................................................25 SHAREHOLDER INSPECTION RIGHTS.................................................................................................................................26 CLOSELY HELD CORPORATIONS......................................................................................................................27 VOTING.......................................................................................................................................................................27 ABUSE OF CONTROL......................................................................................................................................................27 Control Devices are Key.....................................................................................................................................27 Fiduciary Duties Between Shareholders in Close Corps....................................................................................27
Two Approaches:...........................................................................................................................................................27

Freeze Outs.........................................................................................................................................................27
Massachusetts Test for Freeze Out.................................................................................................................................27

Deadlocked Shareholders (Smith v. Atlantic Properties)...................................................................................27 Delaware Standard for Shareholders Fiduciary Duty......................................................................................28 Exit Mechanisms in Close Corporations.............................................................................................................28 TRANSFER OF CONTROL.....................................................................................................................................29 TWO ISSUES CONTROL PREMIUM AND SALE OF CORPORATE OFFICES................................................................................29 Sale of Corporate Assets.....................................................................................................................................29 Minority Shareholders Entitled to Protection from Abuse, Not Control Premium.............................................29 Sale of Assets to Create a Control Premium.......................................................................................................29 Selling Corporate Offices as Part of Control Premium......................................................................................29 CORPORATE COMBINATIONS...........................................................................................................................................30 1. MBCA & de facto mergers.............................................................................................................................30 2. Voting & Appraisal rights in Corp. Combinations.........................................................................................30 3. How a corporate combination occurs.............................................................................................................30 4. Appraisal Rights What are they?................................................................................................................30

What triggers a minority shareholders appraisal rights?................................................................................................31 Who gets appraisal?........................................................................................................................................................31

5. Appraisal Procedure (Del)..............................................................................................................................31 6. Types of Corporate combinations...................................................................................................................31 7. De Facto merger.............................................................................................................................................31


De Facto Merger Doctrine..............................................................................................................................................31 Del. 311 Sale or Merger..........................................................................................................................................32 Standard for de facto merger..........................................................................................................................................32 Freeze-out mergers.........................................................................................................................................................32 Delaware test for freeze-out mergers.........................................................................................................................33

Majority Shareholder Duties...............................................................................................................................33


Fairness Test for Mergers...............................................................................................................................................33

Doctrine of Independent Legal Significance.......................................................................................................33 TAKEOVERS.................................................................................................................................................................34 Voting rights of non-voting preferred stock........................................................................................................34 Outline of director duties in takeover context.....................................................................................................34 Structure of tender offer......................................................................................................................................34 Defensive measures:............................................................................................................................................35 Duty to Protect Shareholders in Takeover Bid (thru corp.)................................................................................36 Reasonable Defensive Measures.........................................................................................................................36 Board Role for In-Play Corps.............................................................................................................................36
Demand Requirements...................................................................................................................................................37

WHAT IS AGENCY? R3A 1.01 AGENCY DEFINED Agency is the fiduciary relationship that arises when one person (a "principal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act. What are the three elements necessary to form the agency relationship? Consent by both parties to the relationship Control of the agent by the principal Action by the agent on behalf of the principal

Gorton v. Doty An agency relationship results from one persons consent that another will act on his behalf and subject to his control and the other persons consent so to act P sued D based on Ds lending the car to a coach under the theory that the coach was Ds agent met Consent, Control, and Act on Behalf of P court found for P Consent means consent to enter in a relationship, not the explicit consent to be agent and principal. As you saw from your readings, in many cases, the parties may not intend to be agent and principal but still may accidentally enter the relationship Control means that the principal has the power to control the agent. Because of this control, the agent is in effect stepping into the shoes of the principal. Because agents act as the alter-egos of principals, principals are liable for the acts of their agents done within the scope of the agents authority. Action on behalf of the principal This introduces us to the concept of fiduciary duty. An agent is expected to put the principals interests ahead of his or her own interests.

PARTNERSHIP UPA UPA 29 43.

Under the RUPA, a partner may dissociate and the remaining partners must determine whether to continue or to wind up the firm. RUPA Articles 6 (601-603), 7 (701-705), and 8 (801-807 DISSOLUTION UNDER THE UPA 29 29- 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. Typically called dissociation. Dissociation may be wrongful (contrary to the pship agreement) or not wrongful.

Dissociation under the UPA always causes dissolution of the firm. Dissolution is not the same as termination.

Remaining partners wind up and may decide to form a new partnership to carry on the business of the old partnership. DISSOLUTION UNDER THE RUPA 601-603 Unlike UPA, dissociation under 601-603 gives the remaining partners a choice:

Article 7 All partners choose to continue pship and buy out dissociating partners interest (less any damages caused by wrongful dissociation). Note that in a partnership at will, the dissociating partner may force a liquidation by providing notice of that partners express will to withdraw as a partner. 801(1). Article 8 Partners wind up business and terminate. Sharing of Losses General rule: in the absence of an agreement to the contrary the law presumes that partners intended to participate equally in the profits and losses of the common enterprise. Exception: Where one partner contributes the money capital as against the others skill and labor . . . Neither party is liable to the other for contribution for any loss sustained.

UPA v RUPA Profits/Losses UPA all equal unless agreement RUPA all Profits equal and losses proportional to investment, absent agreement Buyout Agreements VALUING AN ENTERPRISE In all buyout agreements, price and valuation is critical. Most of the time, you want to sell your interest (stock, share, membership, pship interest) at market value. Valuation problems:

No market. Minority interest. Control premium.

Solutions to valuation problems: Hire an appraiser. Agreement should provide mechanism for selecting an appropriate appraiser because its hard to do in the middle of a knock-down, drag-out fight over control. Agree on formula. See the liquidated damages provision in Pav-Saver. May use some average of recent incomes, revenues, profits, cash flows, etc. Book value. Net worth, total sum of owners equity interest in the firm less liabilities, assets minus liabilities. Liquidation value (asset value). Going concern value. Discounted cash flow. Many other models. Role of court or appraiser is to determine which model best approximates the value of the firm. UPA 29 Dissolution Defined 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 UPA 30 Partnership not Terminated by Dissolution On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed

UPA 31 Causes of Dissolution Dissolution is caused: (1) Without violation of the agreement between the partners, (a) By the termination of the definite term or particular undertaking specified in the agreement, (b) By the express will of any partner when no definite term or particular undertaking is specified, (c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking, (d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners; (2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time; (3) By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership; (4) By the death of any partner; (5) By the bankruptcy of any partner or the partnership; (6) By decree of court under section 32. UPA 32 Dissolution by Decree of Court (1) On application by or for a partner the court shall decree a dissolution whenever: (a) A partner has been declared a lunatic in any judicial proceeding or is shown to be of unsound mind, (b) A partner becomes in any other way incapable of performing his part of the partnership contract, (c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, (d) A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him, (e) The business of the partnership can only be carried on at a loss, (f) Other circumstances render a dissolution equitable. (2) On the application of the purchaser of a partner's interest under sections 28 or 29: (a) After the termination of the specified term or particular undertaking, (b) At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued. UPA 33 General Effect of Dissolution on Authority of Partner Except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership, (1) With respect to the partners, (a) When the dissolution is not by the act, bankruptcy or death of a partner; or (b) When the dissolution is by such act, bankruptcy or death of a partner, in cases where section 7

34 so requires. (2) With respect to persons not partners, as declared in section 35. UPA 34 Right of Partner to Contribution from Co-partners after Dissolution Where the dissolution is caused by the act, death or bankruptcy of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless (a) The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution, or (b) The dissolution being by the death or bankruptcy of a partner, the partner acting for the partnership had knowledge or notice of the death or bankruptcy. UPA 35 Power of Partner to Bind Partnership to Third Persons after Dissolution (1) After dissolution a partner can bind the partnership except as provided in Paragraph (3). (a) By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution; (b) By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or (II) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on. (2) The liability of a partner under Paragraph (1b) shall be satisfied out of partnership assets alone when such partner had been prior to dissolution (a) Unknown as a partner to the person with whom the contract is made; and (b) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. (3) The partnership is in no case bound by any act of a partner after dissolution (a) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or (b) Where the partner has become bankrupt; or (c) Where the partner has no authority to wind up partnership affairs; except by a transaction with one who (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or (II) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in Paragraph (1bII). (4) Nothing in this section shall affect the liability under Section 16 of any person who after dissolution represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business.

UPA 36 Effect of Dissolution on Partner's Existing Liability (1) The dissolution of the partnership does not of itself discharge the existing liability of any partner. (2) A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business. (3) Where a person agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from any liability to any creditor of the partnership who, knowing of the agreement, consents to a material alteration in the nature or time of payment of such obligations. (4) The individual property of a deceased partner shall be liable for all obligations of the partnership incurred while he was a partner but subject to the prior payment of his separate debts. UPA 37 Right to Wind Up Unless otherwise agreed the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not bankrupt, has the right to wind up the partnership affairs; provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court UPA 38 Rights of Partners to Application of Partnership Property (1) When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner, bona fide under the partnership agreement and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under section 36(2), he shall receive in cash only the net amount due him from the partnership. (2) When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows: (a) Each partner who has not caused dissolution wrongfully shall have, I. All the rights specified in paragraph (1) of this section, and II. The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement. (b) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name, either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under clause (2a II) of this section, and in like manner indemnify him against all present or future partnership liabilities. (c) A partner who has caused the dissolution wrongfully shall have: I. If the business is not continued under the provisions of paragraph (2b) all the rights of a 9

partner under paragraph (1), subject to clause (2a II), of this section, II. If the business is continued under paragraph (2b) of this section the right as against his copartners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damages caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered. UPA 39 Rights Where Partnership is Dissolved for Fraud or Misrepresentation Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled, (a) To a lien on, or a right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; and (b) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and (c) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. UPA 40 Rules for Distribution In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary: (a) The assets of the partnership are: I. The partnership property, II. The contributions of the partners necessary for the payment of all the liabilities specified in clause (b) of this paragraph. (b) The liabilities of the partnership shall rank in order of payment, as follows: I. Those owing to creditors other than partners, II. Those owing to partners other than for capital and profits, III. Those owing to partners in respect of capital, IV. Those owing to partners in respect of profits. (c) The assets shall be applied in order of their declaration in clause (a) of this paragraph to the satisfaction of the liabilities. (d) The partners shall contribute, as provided by section 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities. (e) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in clause (d) of this paragraph. (f) Any partner or his legal representative shall have the right to enforce the contributions specified in clause (d) of this paragraph, to the extent of the amount which he has paid in excess of his share of the liability. (g) The individual property of a deceased partner shall be liable for the contributions specified in 10

clause (d) of this paragraph. (h) When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors as heretofore. (i) Where a partner has become bankrupt or his estate is insolvent the claims against his separate property shall rank in the following order: I. Those owing to separate creditors, II. Those owing to partnership creditors, III. Those owing to partners by way of contribution. UPA 41 Liability of Persons Continuing the Business in Certain Cases

(1)

When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs, creditors of the first or dissolved partnership are also creditors of the partnership so continuing the business. (2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others, creditors of the dissolved partnership are also creditors of the person or partnership so continuing the business. (3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth in paragraphs (1) and (2) of this section, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property, rights of creditors of the dissolved partnership and of the creditors of the person or partnership continuing the business shall be as if such assignment had been made. (4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (5) When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of section 38(2b), either alone or with others, and without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (6) When a partner is expelled and the remaining partners continue the business either alone or with others, without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (7) The liability of a third person becoming a partner in the partnership continuing the business, under this section, to the creditors of the dissolved partnership shall be satisfied out of 11

partnership property only. (8) When the business of a partnership after dissolution is continued under any conditions set forth in this section the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property. (9) Nothing in this section shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. (10) The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. UPA 42 Rights of Retiring or Estate of Deceased Partner When the Business is Continued When any partner retires or dies, and the business is continued under any of the conditions set forth in section 41 (1, 2, 3, 5, 6), or section 38(2b) without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this section, as provided by section 41(8) of this act. RUPA Article 6 Partner Disassociation RUPA 601 Events Causing Partner's Dissociation A partner is dissociated from a partnership upon the occurrence of any of the following events: (1) the partnership's having notice of the partner's express will to withdraw as a partner or on a later date specified by the partner; (2) an event agreed to in the partnership agreement as causing the partner's dissociation; (3) the partner's expulsion pursuant to the partnership agreement; (4) the partner's expulsion by the unanimous vote of the other partners if: (i) it is unlawful to carry on the partnership business with that partner; (ii) there has been a transfer of all or substantially all of that partner's transferable interest in the partnership, other than a transfer for security purposes, or a court order charging the partner's interest, which has not been foreclosed;

12

(iii) within 90 days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or (iv) a partnership that is a partner has been dissolved and its business is being wound up; (5) on application by the partnership or another partner, the partner's expulsion by judicial determination because: (i) the partner engaged in wrongful conduct that adversely and materially affected the partnership business; (ii) the partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under Section 404; or (iii) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner; (6) the partner's: (i) becoming a debtor in bankruptcy; (ii) executing an assignment for the benefit of creditors; (iii) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner's property; or (iv) failing, within 90 days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner's property obtained without the partner's consent or acquiescence, or failing within 90 days after the expiration of a stay to have the appointment vacated; (7) in the case of a partner who is an individual: (i) the partner's death; (ii) the appointment of a guardian or general conservator for the partner; or (iii) a judicial determination that the partner has otherwise become incapable of performing the partner's duties under the partnership agreement; (8) in the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee; (9) in the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or (10) termination of a partner who is not an individual, partnership, corporation, trust, or estate. RUPA 602 Partner's Power to Dissociate; Wrongful Dissociation (a) A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to Section 601(1). (b) A partner's dissociation is wrongful only if: (1) it is in breach of an express provision of the partnership agreement; or (2) in the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking: (i) the partner withdraws by express will, unless the withdrawal follows within 90 days after 13

another partner's dissociation by death or otherwise under Section 601(6) through (10) or wrongful dissociation under this subsection; (ii) the partner is expelled by judicial determination under Section 601(5); (iii) the partner is dissociated by becoming a debtor in bankruptcy; or (iv) in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated. (c) A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any other obligation of the partner to the partnership or to the other partners. RUPA 603 Effect of Partner's Dissociation (a) If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under Section 801, the partnership shall cause the dissociated partner's interest in the partnership to be purchased for a buyout price determined pursuant to subsection (b). (b) The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under Section 807(b) if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest must be paid from the date of dissociation to the date of payment. (c) Damages for wrongful dissociation under Section 602(b), and all other amounts owing, whether or not presently due, from the dissociated partner to the partnership, must be offset against the buyout price. Interest must be paid from the date the amount owed becomes due to the date of payment. (d) A partnership shall indemnify a dissociated partner whose interest is being purchased against all partnership liabilities, whether incurred before or after the dissociation, except liabilities incurred by an act of the dissociated partner under Section 702. Article 7 Partners Disassociation When Business Not Wound Up SECTION 701. PURCHASE OF DISSOCIATED PARTNER'S INTEREST. (a) If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under Section 801, the partnership shall cause the dissociated partner's interest in the partnership to be purchased for a buyout price determined pursuant to subsection (b). (b) The buyout price of a dissociated partner's interest is the amount that would have been distributable to the dissociating partner under Section 807(b) if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest must be paid from the date of dissociation to the date of payment. 14

(c) Damages for wrongful dissociation under Section 602(b), and all other amounts owing, whether or not presently due, from the dissociated partner to the partnership, must be offset against the buyout price. Interest must be paid from the date the amount owed becomes due to the date of payment. (d) A partnership shall indemnify a dissociated partner whose interest is being purchased against all partnership liabilities, whether incurred before or after the dissociation, except liabilities incurred by an act of the dissociated partner under Section 702. (e) If no agreement for the purchase of a dissociated partner's interest is reached within 120 days after a written demand for payment, the partnership shall pay, or cause to be paid, in cash to the dissociated partner the amount the partnership estimates to be the buyout price and accrued interest, reduced by any offsets and accrued interest under subsection (c). (f) If a deferred payment is authorized under subsection (h), the partnership may tender a written offer to pay the amount it estimates to be the buyout price and accrued interest, reduced by any offsets under subsection (c), stating the time of payment, the amount and type of security for payment, and the other terms and conditions of the obligation. (g) The payment or tender required by subsection (e) or (f) must be accompanied by the following: (1) a statement of partnership assets and liabilities as of the date of dissociation; (2) the latest available partnership balance sheet and income statement, if any; (3) an explanation of how the estimated amount of the payment was calculated; and (4) written notice that the payment is in full satisfaction of the obligation to purchase unless, within 120 days after the written notice, the dissociated partner commences an action to determine the buyout price, any offsets under subsection (c), or other terms of the obligation to purchase. (h) A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking, unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership. A deferred payment must be adequately secured and bear interest. (i) A dissociated partner may maintain an action against the partnership, pursuant to Section 405(b)(2)(ii), to determine the buyout price of that partner's interest, any offsets under subsection (c), or other terms of the obligation to purchase. The action must be commenced within 120 days after the partnership has tendered payment or an offer to pay or within one year after written demand for payment if no payment or offer to pay is tendered. The court shall determine the buyout price of the dissociated partner's interest, any offset due under subsection (c), and accrued interest, and enter judgment for any additional payment or refund. If deferred payment is 15

authorized under subsection (h), the court shall also determine the security for payment and other terms of the obligation to purchase. The court may assess reasonable attorney's fees and the fees and expenses of appraisers or other experts for a party to the action, in amounts the court finds equitable, against a party that the court finds acted arbitrarily, vexatiously, or not in good faith. The finding may be based on the partnership's failure to tender payment or an offer to pay or to comply with subsection (g). SECTION 702. DISSOCIATED PARTNER'S POWER TO BIND AND LIABILITY TO PARTNERSHIP. (a) For two years after a partner dissociates without resulting in a dissolution and winding up of the partnership business, the partnership, including a surviving partnership under [Article] 9, is bound by an act of the dissociated partner which would have bound the partnership under Section 301 before dissociation only if at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner's dissociation; and (3) is not deemed to have had knowledge under Section 303(e) or notice under Section 704(c). (b) A dissociated partner is liable to the partnership for any damage caused to the partnership arising from an obligation incurred by the dissociated partner after dissociation for which the partnership is liable under subsection (a). SECTION 703. DISSOCIATED PARTNER'S LIABILITY TO OTHER PERSONS. (a) A partner's dissociation does not of itself discharge the partner's liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred after dissociation, except as otherwise provided in subsection (b). (b) A partner who dissociates without resulting in a dissolution and winding up of the partnership business is liable as a partner to the other party in a transaction entered into by the partnership, or a surviving partnership under [Article] 9, within two years after the partner's dissociation, only if the partner is liable for the obligation under Section 306 and at the time of entering into the transaction the other party: (1) reasonably believed that the dissociated partner was then a partner; (2) did not have notice of the partner's dissociation; and (3) is not deemed to have had knowledge under Section 303(e) or notice under Section 704(c). (c) By agreement with the partnership creditor and the partners continuing the business, a dissociated partner may be released from liability for a partnership obligation. (d) A dissociated partner is released from liability for a partnership obligation 16

if a partnership creditor, with notice of the partner's dissociation but without the partner's consent, agrees to a material alteration in the nature or time of payment of a partnership obligation. SECTION 704. STATEMENT OF DISSOCIATION. (a) A dissociated partner or the partnership may file a statement of dissociation stating the name of the partnership and that the partner is dissociated from the partnership. (b) A statement of dissociation is a limitation on the authority of a dissociated partner for the purposes of Section 303(d) and (e). (c) For the purposes of Sections 702(a)(3) and 703(b)(3), a person not a partner is deemed to have notice of the dissociation 90 days after the statement of dissociation is filed. Article 8 Winding Up Partnership Business RUPA 801 Events Causing Dissolution and Winding up of Partnership Business A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events: (1) in a partnership at will, the partnership's having notice from a partner, other than a partner who is dissociated under Section 601(2) through (10), of that partner's express will to withdraw as a partner, or on a later date specified by the partner; (2) in a partnership for a definite term or particular undertaking: (i) within 90 days after a partner's dissociation by death or otherwise under Section 601(6) through (10) or wrongful dissociation under Section 602(b), the express will of at least half the remaining partners to winding up the partnership business, for which purpose a partner's rightful dissociation under Section 602(b)(2)(i) is an expression of that partner's will to wind up the partnership business; (ii) the express will of all of the partners to wind up the partnership business; or (iii) the expiration of the term or the completion of the undertaking; (3) an event agreed to in the partnership agreement resulting in the winding up of the partnership business; (4) an event that makes it unlawful for all or substantially all of the business of the partnership to be continued, but a cure of illegality within 90 days after notice to the partnership of the event is effective retroactively to the date of the event for purposes of this section; (5) on application by a partner, a judicial determination that: (i) the economic purpose of the partnership is likely to be unreasonably frustrated; (ii) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (iii) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement; or (6) on application by a transferee of a partner's transferable interest, a judicial determination that it is equitable to wind up the partnership business: (i) after the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer; or (ii) at any time, if the partnership was a partnership at will at the time of the transfer or entry of 17

the charging order that gave rise to the transfer. RUPA 802 Partnership Continues After Dissolution (a) Subject to subsection (b), a partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed. (b) At any time after the dissolution of a partnership and before the winding up of its business is completed, all of the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the partnership's business wound up and the partnership terminated. In that event: (1) the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred; and (2) the rights of a third party accruing under Section 804(1) or arising out of conduct in reliance on the dissolution before the third party knew or received a notification of the waiver may not be adversely affected. RUPA 803 Right to Wind Up Partnership Business (a) After dissolution, a partner who has not wrongfully dissociated may participate in winding up the partnership's business, but on application of any partner, partner's legal representative, or transferee, the [designate the appropriate court], for good cause shown, may order judicial supervision of the winding up. (b) The legal representative of the last surviving partner may wind up a partnership's business. (c) A person winding up a partnership's business may preserve the partnership business or property as a going concern for a reasonable time, prosecute and defend actions and proceedings, whether civil, criminal, or administrative, settle and close the partnership's business, dispose of and transfer the partnership's property, discharge the partnership's liabilities, distribute the assets of the partnership pursuant to Section 807, settle disputes by mediation or arbitration, and perform other necessary acts. Page v. Page A partnership may be dissolved by the express will of any partner if the partnership agreement specifies no definite term or particular undertaking - Distinguish from Meinhard no exclusivity of control of the information (equal participants in the business); Pship agreement was at the end and then he was looking to compete; bargaining powers of the brothers is equal to build a new business Prentiss v. Sheffel Upon dissolution of a partnership, a former partner may bid on the partnership assets at a judicial sale - Court held that it was ok because no wrongful purpose and D failed to prove harm Kovick v. Reed Joint adventurer is not entitled to recover from lost capital from another who invested his labor, each loses what they contribute 18

Important because it stands for the minority rule; rejected in the RUPA 401(f) UPA/RUPA apply once a partnership is formed, even if accidental How do you apportion loses when one party contribute labor and the other contributes capital? Each loses what they contributed and applies because Reed did not contribute a penny of capital

19

1933 SECURITIES ACT Deals with Original Issue of Stock RULE 11 OMISSIONS AND MISSTATEMENTS IN THE REGISTRATION STATEMENT Ds: Signer of Registration, Accountants, Attorneys, etc. who prepared it (BarChris) Defenses: Due Diligence/Reasonable Reliance or Negative Causation

RULE 12 INVOLVES MATERIAL OMISSIONS AND MISSTATEMENT IN THE PROSPECTUS Ds: Sellers (broker, dealers, & other soliciting offers to purchase (Pinter) Defenses: Not Material

Registration Requirements - Every non-exempt issuer must file a registration statement - Issuer may on sell securities after SEC allows registration to become effective - SEC does a facial review of all registrations Doran v. Petroleum Management Corp. Offerees need to access to information in order to evaluate LP interest Registration Statements Detailed disclosure of financial structure of the security and risks factors Exemptions from 33 Registration Requirements - Private placement no more than $1M - Private placement no more than $5M if sold to 35 or fewer buyers - Private placement more than $5M if sold to 35 or fewer sophisticated buyers

20

1934 EXCHANGE ACT Deals with Secondary Market Transactions RULE 10B -- MATERIAL MISSTATEMENTS/OMISSIONS INVOLVING SALE OR PURCHASE OF A SECURITY It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--*** (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, *** any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 10b-5 Cause of Action Elements - Misrepresentation or omission - Of Material Fact - Made with Scienter (knowing intent to deceive) - Upon which plaintiff reasonably, detrimentally relied (FOTM) - Causing (FOTM) - Actual Damages FOTM applies to reliance in class action suits Kowal v. MCI Comm. Corp. Omissions as False Statements - Special relationship (Chiarella) - Duty to Update Materiality An omitted fact is material if there is substantial likelihood that a reasonable shareholder would consider it important on how to vote, does not have to change their decision (TSC/Basic) Fraud-On-The-Market Theory - Efficient market - Misleading statements will defraud buyers/sellers - Even if they do not directly rely on the statements Defenses - Any showing severing the link and price paid/received - Truth in the market INSIDER TRADING Corporate Insider who is in possession of material non-public information must disclose the information before trading on it. 21

Tippee Liability (Dirks) - The tipper violates a fiduciary duty to firms SHs in giving the tip; and - The tippee knew or should have known of that breach Howey Test - Investment - In a common enterprise - For a profits - From work of third party

22

SARBANESOXLEY ACT OF 2002 Applies to publicly traded corporations General provisions: - Auditor independence - Audit committees of outside, disinterested directors - Prohibition on loans to corporation insiders - Certification of financial reports - Accountant and attorney professional standards - Required monitoring systems to detect corporate fraud - Compensation not directly regulated - Executive prohibited from trading during blackout periods

23

LIMITATION ON DIRECTORS LIABILITY Breaches of Duty of Care Unnecessary expenses and legal fees DELAWARE 102(B)7 CONTENTS OF CERTIFICATION OF INCORPORATION Limit liability of a director to the corporation or its stockholders for monetary damage for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: i for any breach of the directors duty of loyalty to the corporation or its stockholders ii for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law iii iv for any transaction from which the director derived an improper personal benefit Business Judgment Rule Criteria - Informed - Good faith - Rational - Independent RIGHT TO INDEMNIFICATION Del. 145 (a) good faith (c) provides for indemnification on merits or otherwise (Waltuch) (e) may advance fees (Citadel) (f) permits broader indemnification; must be consistent (g) permits insurance for indemnification

24

DYNAMICS OF SHAREHOLDER VOTING Limited Number of Matters - Elect directors - Fundamental transactions PROXY Proxy Process - Board sets date of annual meeting - Board fixes record date - Board selects its preferred slate of directors/issues - Proxy solicitations are drafted and filed wit SEC - SEC reviews solicitations - Must fully disclose major issues Identification of shareholders Mailing of solicitations Rosenfeld reimbursed proxy fees control v. policy Proxy Fraud 14(a) of 1934 Exchange Act - Misrepresentation or misleading omission (Borak) - Material fact (Mills) - In a proxy solicitation - Causing - Damages DEL. 149(A) PROXY SOLICITATION SHAREHOLDER PROPOSALS GROUNDS FOR OMISSION Section 14a of Rule14a-8(i)(1) Rule14a-8(i)(2) Rule14a-8(i)(3) Rule14a-8(i)(4) Rule14a-8(i)(5) Rule14a-8(c)(6) Rule14a-8(c)(12) 1934 Exchange Act Test for propriety (SEC v. Transamerica) Proposal violate proxy rules Proposal contains personal grief (Austin v. Con Edison) Proposal not signif. (5%) related to companys business (Lovenheim pate) Matter beyond firms control (Dole health care system) Submitted prior without much support

Proxy Solicitations Absent Single Majority Shareholder Looking proxy solicitations, if there is no single majority shareholder (such as the problem on page 555), does finding materiality automatically get causation (like the Supreme Court said in

25

Mills)? This question focuses on the issue left open in Mills -- the Mills materiality standard focuses on whether the defect in the proxy solicitation "has a significant propensity to affect the voting process." This satisfies the causation element as well if plaintiffs can show the defective proxy solicitation was an essential link in accomplishing the transaction. The Supreme Court, in Virginia Bankshares, followed this analysis further. In VB, an 85% shareholder solicited proxies to approve a merger despite having no obligation to do so (the shareholder had more than enough shares to cause the merger regardless of what the minority wanted). The proxy was allegedly defective. The Court held that even if the allegedly misleading statement were material, there would be no causation because the proxy solicitation was not necessary or essential to accomplishing the merger. Del. 141(a) - Corporation shall be managed by the BoD, not the SHs - Decisions must be informed, good faith, and disinterested - Protected by BJR SHAREHOLDER INSPECTION RIGHTS Shareholders have a right to inspect corporate books and records By Right - Articles of Incorporation - Bylaws - Board Minutes - Corporate financial records - Shareholder lists - Other corp. records, that affect the shareholders interest By Demand Del 220 - Other Documents - Shareholders Lists - Written demand under oath stating proper purpose (Pillsbury v. Honeywell) - By stockholder of record (Sadler v. NCR) Shareholders bears the burden for showing proper purpose for other documents. Corporation bears the burden for showing proper purpose for SH lists

26

CLOSELY HELD CORPORATIONS VOTING Voting pools (Ringling Bros./Estrada) Sterilizing the Board (Clark v. Dodge, two SH/pharmas) ABUSE OF CONTROL Control Devices are Key - Stock classes with varying voting power (Stroh; Stuparich) - Super-majority voting requirements (Smith v. Atlantic Properties) - Prohibition on director interference with shareholder voting (SWIB) - Cumulative voting (Ringling Bros.) - Class voting for director slots - Voting trust - Irrevocable proxies - Vote pooling agreements (Ringling, Clark) - Shareholder agreements (Ramos) - Forced sale agreements (Jordan) - Transfer restrictions - Prohibition on transfer - Right of first refusal - Valuation provisions and formulae - Sale on death, bankruptcy, or incompetence Fiduciary Duties Between Shareholders in Close Corps. Two Approaches: Massachusetts like partners owe each other fiduciary duty of loyalty, good faith, & candor (Wilkes; Donahue; Smith) Delaware no fiduciary duties owed, bargain for protection (Nixon) Freeze Outs Majority or control group uses control to force out minority on disadvantageous terms (Sugarman) Massachusetts Test for Freeze Out 1. Minority pleads and proves prima facia case of breach of duty of good faith 2. Control group must demonstrate a legitimate business purpose 3. Minority must then show a less harmful alternative Deadlocked Shareholders (Smith v. Atlantic Properties)

27

Delaware Standard for Shareholders Fiduciary Duty Nixon bargain before buying Jordan v. Duff & Phelps Fiduciary duty to disclose merger or abstain from trading; Omission Duty to Speak because of special relationship with employee Exit Mechanisms in Close Corporations Articles or bylaw provisions Involuntary dissolution under statute (Alaska Plastics, divorce) Appraisal rights in merger, sales of all/substantially all assets or de facto merger Equitable remedies for breach of fiduciary duty by majority to minority (Pedro v. Pedro, Stuparich (whiny slacker twins)

28

TRANSFER OF CONTROL TWO ISSUES CONTROL PREMIUM AND SALE OF CORPORATE OFFICES (1) Payment of control premium. - Why does it exist? o Majority share. o Control share. o When might a majority not give control? (Smith v. Atlantic Properties) - When does the controlling shareholder keep the premium? - When do minority shareholders share in the premium. - Sale to looters. (cf. Perlman) (2) Sale of corporate offices - Distinguish from sale of stock (Essex) - Staggered boards versus classified boards (Essex) Sale of Corporate Assets Frandsen v. Jensen-Sundquist Agency, Inc. Sale of a corporate asset does not trigger right of first refusal, unlike a merger - Merger: target shareholders get cash or other value and target is extinguished. - Sale of assets: target shareholders remain but get cash or other value; acquiror walks with the asset. Minority Shareholders Entitled to Protection from Abuse, Not Control Premium Zetlin v. Hanson Holdings Those who invest the capital necessary to acquire a dominant position in the ownership of a corporation have the right of controlling that corporation, it has long been settled law that, absent looting of the corporate assets, conversion of a corporate opportunity, fraud or other acts of bad faith, a controlling shareholder is free to sell . . . that controlling interest at a premium price . . . - Minority shareholders are entitled to protection from abuse, not sharing in a control premium for which they did not pay. Sale of Assets to Create a Control Premium Perlman v. Feldmann When is a minority SH entitled to share in control premiums - Feldmanns $3 premium over book included two components: - Ordinary control premium hes allowed to sell this. - Ability to control allocation of steel in a tight market (Korean War) appropriation of corporate opportunity. - Newport could have used higher profits to expand business and penetrate other markets. - Could have consolidated local market. Selling Corporate Offices as Part of Control Premium Essex Universal Corp. v. Yates 29

When buying controlling interest is demanding seats on the board as part of the transaction illegal - Yates owns 28% of Republic, agrees to sell to Essex (at premium). - Sale agreement requires Yates to have board members resign one at a time while the other board members replaced them with Essex nominees. - Yates tries to back out claiming it would be illegal to deliver the Essex dominated board required by the sale agreement. CORPORATE COMBINATIONS 1. MBCA & de facto mergers - Current MBCA (enacted 1999 & adopted by a growing number of states) attempts to provide shareholders with appraisal and voting rights regardless of how the transaction is structured. - In other words, current MBCA replicates the de facto merger doctrine discussed in Farris. 2. Voting & Appraisal rights in Corp. Combinations Many of the issues in corporate combination law revolve around the rights of shareholders in both the target and the acquirer to vote on the combination and force their corporation to buy out their shares at a (hopefully higher) fair market value. - Voting rights - Appraisal rights 3. How a corporate combination occurs Initial contact How initiated (informal, open, secret, in-play, market test) Compare Essex v. Yates and Smith v. VanGorkom Negotiations (due diligence & valuations) Merger Agreement Board approval - Fiduciary duties apply to ensure boards are protecting shareholders. o Note countervailing incentives of boards What happened to the Glen Alden board and management? Employed/ retained by new entity. Major concern that target board/management gives away target shareholder value so management can retain positions in new entity. Fiduciary out clause Shareholder approval (Remember: shareholders get to vote) 1. Fundamental change in corporation structure/governance (change to articles, dissolution sale of substantially all assets) 2. Directors 3. Shareholder proposals Consummation 4. Appraisal Rights What are they? When a corporation combines with another so as to lose its essential nature and alter the original fundamental relationships of the shareholders among themselves and to the corporation, 30

a shareholder who does not wish to continue his membership therein may treat his membership in the original corporation as terminated and have the value of his shares paid to him . . . What triggers a minority shareholders appraisal rights? - MBCA (1999): merger, short form merger, sale of assets, some charter amendments - Del 262: merger, short form merger o Delaware does not provide appraisal rights for a sale of assets. Who gets appraisal? 1. Merger MBCA Shareholders of Target entitled to vote Del 262 All shareholders of Target, usually Acquiror shareholders unless: 1. Whale-minnow merger (Farris) or 2. Market out (p.715) under present Delaware law, appraisal is not available if the shares relinquished are (i) listed on a national securities exchange or (ii) held of record by more than 2000 stockholders and if the shares received have similar characteristics (e.g. voting and dividend rights). Del. 262(b)(1). 2. Short form merger Shareholders of subsidiary only 3. Sale of assets MBCA shareholders of seller only Del No appraisal rights 5. Appraisal Procedure (Del) 1. Dissenting shareholders must (a) give written notice of intent to dissent before shareholders meeting; (b) must vote against proposed transaction. 2. Corporation must notify dissenting shareholders of their appraisal rights. 3. Dissenters must tender share to corporation and demand payment. 4. Dissenters must then sue for appraisal. 5. Dissenters bear all then costs and only receive payment after final order. 6. Types of Corporate combinations - Statutory merger - Triangular merger - Sale of Assets / Asset Acquisition 7. De Facto merger

De Facto Merger Doctrine Farris v. Glen Alden Corp. de facto merger doctrine P: (1) This transaction, despite being structured as a purchase of 100% of list assets for a 75% interest in GA, is really a merger. (2) If the transaction is really a merger (a de facto merger) then it was required to satisfy the statutory standards for mergers: (a) Proxy solicitation defective (14 and Rule 14a-9) 31

(b) GA shareholders had a right of dissent/appraisal D: 311 and 908 explicitly provide for these transactions and do not permit appraisal:

Del. 311 Sale or Merger


311 The shareholders of a business corporation which acquires by sale . . . Or exchange all or substantially all of the property of another corporation by the issuance of stock, securities or otherwise shall not be entitled to the rights and remedies of dissenting shareholders. 908 The right of dissenting shareholders . . . shall not apply to the purchase by a corporation of assets whether or not the consideration therefore be money shares or bonds or other evidences of indebtedness of such corporation. The shareholders of such corporation shall have no right of dissent from any such purchase. Ct: (1) Legislature couldnt have really meant it (just a committee report). Activist court. No evidence that legislature intended the same thing as the committee that drafted the legislation. Huh? (2) This transaction is different because here the minnow (GA) is swallowing the whale (List). (3) Its still a de facto merger. Standard for de facto merger. (1) Look to both terms of agreement and to consequences of the transaction and to the purposes of the provisions of corporate law said to be applicable. (2) [Ignore every explicit statutory provision permitting the corporation to structure a transaction to avoid appraisal rights] (3) Where steps (1) & (2) show that the transaction would so fundamentally change the corporate character . . . and the interest of the plaintiff as a shareholder therein . . . Hariton v. Arco Electric Inc. Equal Dignity Doctrine choose whichever form of transaction Sale of assets & dissolution of seller ( 271 & 275) Or Statutory Merger ( 251) Freeze-out mergers o Also known as squeeze-out mergers o Freeze-out mergers are a tool for a controlling shareholder to gain 100% ownership and get rid of the minority shareholders. Weinberger v. UOP The plaintiff in a suit challenging a cash-out merger must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority. 32

Board member were on both sides of a deal, kept information from target board members, intended to reap benefits (acquiror)

Delaware test for freeze-out mergers


Entire fairness o Fair dealing + fair price o Duty of loyalty: Director (individually or through another entity she controls) may not engage in self-interested transactions with the corporation or its shareholders unless: (1) Directors self interest is fully disclosed to, and approved by, a majority of disinterested directors or if required shareholders, and/or (2) Transaction is entirely fair to corporation / shareholders at time of execution. and/or almost all statutes and judicial standards use the disjunctive, but almost al courts hold that proper approval or ratification merely shifts the burden to the plaintiff to prove that the transaction was not fair, making the conjunctive more accurate. Burden shifting o Fair dealing o Fair price

Valuation methods. Majority Shareholder Duties Distinguish Massachusetts shareholder fiduciary duties Coggins duty of loyalty & good faith by virtue of being majority shareholder Delaware no-shareholder fiduciary duties Weinberger duty of loyalty & good faith by virtue of being director Fairness Test for Mergers Coggins Plaintiffs hold non-voting stock o fairness test (a) merger was for legitimate business purpose, and (b) that considering the totality of the circumstances it was fair to the minority Delaware courts hold that a business purpose relating to the majority shareholders business was sufficient. Doctrine of Independent Legal Significance Rauch Doctrine of Independent Legal Significance -- Hariton RCA/GE merger did not trigger the buyout clause Rauch argues de facto merger, merger would not likely happen with a high buyout price

33

TAKEOVERS Takeovers occur 2 ways: - Buy stock - Negotiate deal with managers o Tender Offer o Negotiated acquisition Acquiror indifferent to form of transaction Managers incentives to maintain control or sell out at high price. Takeover law is aimed at counteracting those negative agency incentives.

Voting rights of non-voting preferred stock Statutory rights o Amendment of articles of incorporation will adversely affect or alter the structure or rights of preferred shares. (non-Del) o Del. 151(a) requires all rights of preferred stock to be expressly stated in articles of incorporation and courts will not imply voting rights where they are not specified. Contractual Voting Rights stated in Articles o Amendment to articles adversely affects preferred stock o Merger, reorganization, sale of assets o Non-payment of dividends to preferred for a specified period o Dividend preference o Liquidation preference Outline of director duties in takeover context o Pre-bid o Defensive measures adopted in a decision by the board before a hostile bid. o BJR o Responses to bid o Defensive measures o Put company in play o Unocal o Revlon o Actions while company is in play o Revlon o Paramount Structure of tender offer o Open market acquisitions up to 5% o Schedule 13D filing concurrent with tender offer o One-step / single tier / single stage o Two-tier o Front-end & back end equal: o I will buy any shares tendered for $x until I receive tenders for 51% of shares. 34

After buying 51%, I will cause co. to merge and remaining target shareholders will get $x in back end of merger. o Front-end loaded Tender offer to buy 51% for $x/share, promise to cash out remaining shareholders at $x-$y/share on back end. Coercive. Basic Delaware cases: Unocal: -- Enhanced BJR for defenses adopted in response to unsolicited offer. Moran: upholds poison pills that discriminate against acquiror Revlon: -- Maximize shareholder value if company is in play. Triggered by board decision to put company in play or effect a change in control. At that point, boards only duty is to maximize shareholder value and must ignore other constituencies. o Many state statutes (not Del.) expressly permit the board to consider other constituencies Paramount v. Time Warner: -- corporate combination in effect and to achieve long-term corporate goals does not trigger Revlon. Unocal EBJR applies. Paramount v. QVC: total loser Paramount nearly screws up again. Paramount loses case but ultimately wins the war. Rule: once company is in play, the target board cannot incur contractual duty to prefer one bidder over another in violation of its fiduciary duties. Unitrin v. American General: -- board may adopt any defensive measure within the range of reasonableness so long as it is not draconian. Defensive measures: Poison pills (Shareholder rights plans) - Flip in provision (right to buy target shares at half price upon triggering event) - Flip over provision (right to buy acquiror shares at half price upon back end merger) - Redemption of pills Corporate machinery - Staggered board - Good cause requirement for director removal - Supermajority voting requirements Corporate restructuring - Finance extraordinary dividend with debt (eliminate overcapitalization) White knight / defensive mergers / lock ups Pac man Its so crazy that it just might work. Not so much. Crown Jewels, self-tenders, leveraged recapitalizations & other scorched earth actions 35

Issuance of stock to Employee Stock Ownership Plan Greenmail Del 203 (statutory protection on back-end mergers) Golden Parachute / Employment Agreements Acquire competing company to create antitrust problems Interfere with acquirors financing Cheff v. Mathes - Corporations are allowed to selectively discriminate SHs - Analagous to proxy fight - Director did perform an analysis of potential acquiror Duty to Protect Shareholders in Takeover Bid (thru corp.) Unocal Rule: (1) Del 141(a) requires board to manage corporation and 160(a) permits self tender (2) board has duty to protect shareholders (3) in a hostile takeover context, courts are worried board will act in its own interests. o How does the court protect the company against board entrenchment? o Enhanced Business Judgment Rule Burden is on directors to show reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another persons stock ownership. The director satisfies this burden by showing that defensive measures were adopted in good faith and following a reasonable investigation. Reasonable Defensive Measures What does it mean for a defensive measure to be reasonable in relation to the threat posed? o Inadequate consideration o Nature and timing of offer o Illegality o Impact on constituencies other than shareholders o Quality of securities offered o Reputation of hostile offeror Board Role for In-Play Corps. Revlon good faith & reasonable investigation showed that defensive measures were warranted against this unfair offer. o Revlon adopts poison pill / rights plan and Notes plan in response to hostile tender offer by Perelman of $45/share. (Bd. receives report that co. is worth $60-$70/share in liquidation) o Then $47.50/share. 36

o Perelman raises bid to $53/share. o Revlon gets white knight Forstmann to bid $56 (note that Forstmann gets preferred access to internal Revlon data on which to base his bid). o Perelman: $56.25, will top any bid by Forstmann. o Forstmann: $57.25 plus commitment to support price of Notes in exchange for Lock-Up plus No-Shop plus $25 million termination/cancellation fee. o Perelman: $58 and sues. o Chancery enjoins Lock-Up, No-Shop, cancellation fee Revlon deals with two relevant time periods 1) Response to $45/share tender offer. o Unocal duty applies: Directors bear burden to show a reasonable belief that the hostile tender offer represented a threat to corporate policy and effectiveness. Carry burden by showing defensive measures adopted in good faith and following reasonable investigation. o Defensive measures must be proportionate in relation to the threat posed. 2) After approaching Forstmann, Revlon has put itself in play Different duties now apply. (Revlon duties) Board must ignore other constituencies. Corporate long term goals are irrelevant. Boards duty changes from preservation of the corporate entity to maximization of corporate value at sale for shareholders benefit. Demand Requirements - Del. 141a shall manage the corp, not the shareholders - Decisions by the board are protected by this - Can file demand requesting the corp sue someone - Universal demand requirement mean must always make demand of the board

37