Bus Org Hail Mary Outline PDF

**[Holy Shit, You're Fucked: A Complete Guide to the Must Know Rules for Bus Org. ]** (Or more commonly known as: The short and happy guide for how not to fail the class and embarrass yourself in the process.) 1. **Stuff that makes DeBow Happy** a. DeBow is pretty much of the mindset that i...

**[Holy Shit, You're Fucked: A Complete Guide to the Must Know Rules for Bus Org. ]** (Or more commonly known as: The short and happy guide for how not to fail the class and embarrass yourself in the process.) 1. **Stuff that makes DeBow Happy** a. DeBow is pretty much of the mindset that if it hampers business transactions, competition, or general capitalism, it is probably a bad rule. b. Foundationally, the law of Business Organizations is to **enable** the **creation** and **successes** of businesses and **[not]** to serve as a form of government regulation of business. c. Because the law of BO's is not necessarily regulatory, it relies on **default,** rather than mandatory rules. d. **There are Four Elements of Business Relationships:** i. **Duration:** How long will the relationship between the participants last? ii. **Control:** Who has the right to participate in making decisions that affect the business? iii. **Risk of Loss:** How will losses from the operation be allocated amongst the participants? 1. **NOTE: DeBow loves the idea that in any business setting, you should put the risk of loss on the party most likely to notice such a risk so that they can insure against it.** iv. **Return:** What are the payments to the participants in terms of salaries, interest, and other fixed claims? e. **HYPOTHETICAL BARGAIN** f. ***Meinhardt v. Salmon* shit.** 2. **Agency** g. To dumb it all down, agency is the law or cooperation. h. Agency relationships boil down to a fiduciary (or legal responsibility) which comes from a manifestation of consent by a principal to an agent that the agent will act on his behalf and subject to his control, and that the the agent has consented to act. i. There are **3 Elements to an Agency Relationship:** v. **Manifestation by the principal that the agent will act for him** vi. **Acceptance by the agent that he will do so** vii. **Understanding between the principal and agent that the principal is the one that is in control.** j. With that understanding, there are actors in agency relationships that it is vital to know: viii. **Principal: Person who agent is acting on behalf of** ix. **Agent: Person acting for the principal.** x. **Third Party: Someone who is not part of the agency relationship, but benefits from the relationship between principal and agent.** k. There are **THREE WAYS** to form an Agency Relationship. xi. **Agency by Agreement:** Which unfortunately gets broken down even more: 2. **Actual Authority** a. **Express Actual:** Authority expressly stated within the contract. b. **Implied Actual:** Authority to conduct a transaction includes authority to do acts wbich are incidental to it, usually accompany it, or are reasonably necessary to accomplish it. i. **A good example of this is the church painting case (*Mill Street Church of Christ v. Hogan).* Where the painter hired another worker to help him complete work he otherwise would not have been able to on time.** 3. **Apparent Authority:** Authority created by some direct (verbal) or indirect (silence, omission, conduct, or custom) manifestation by the principal to a third party and the third party responds by assuming the agent's authority. 4. **Inherent Authority:** xii. **Agency by Ratification:** Which again, unfortunately gets broken down even more, but first, what is ratification? 5. **Ratification:** Affirmation by a person of a prior act which did not bind him but which was done on his account, and is then authorized and given effect as if it was originally authorized. 6. **Case-Law Elements of Ratification:** c. **Acceptance of results of agent's act** d. **With intent to ratify** e. **With full knowledge of ALL material facts or circumstances.** 7. **Express v. Implied Ratification** f. **Express:** Pretty easy to establish -- express manifestation by the principal g. **Implied:** More difficult as the ratification must be IMPLIED by conduct. ii. **Ex. *Botticello v. Stefanovicz* -- Land case where woman was receiving benefits -- court still held no implied ratification.** xiii. **Agency by Estoppel** 8. **Agency relationship is created by estoppel when:** h. Principal creates through **intentional or negligent words, actions, or omissions, an APPEARANCE** of authority in the purported agent **AND** i. Third party **reasonably** and in **good faith changes his position in reliance upon the appearance of authority.** j. **Important note:** Duty of principal includes exercise of reasonable care and vigilance to protect customer from loss by deception of apparent salesman (*Hoddeson v. Koos Bros.)* l. **Liability of Agents on the Contract:** xiv. **If the agent wants to avoid personal liability, it is HIS duty to disclose:** 9. **He is acting in representative capacity (actual authority)** 10. **The identity of the principal** k. **Disclosed Principal:** Has notice of principal's identity. l. **Partially/Unidentified Disclosed Principal:** Has knowledge that agent is acting for principal but does not know principal m. **Undisclosed Principal:** Does not have notice 3P is acting for a principal. m. **Liability of the Principal:** xv. **Torts:** 11. When the agent is acting within the scope of his employment: 12. Most important factor is whether the agent is acting with a purpose to serve the employer. 13. There are some exceptions for when principal is liable for acts of independent contractor -- meaningful control over contractor or when P hires incompetent contractor (hiring independent contractor that cannot afford tort judgments) or nuisance per se. n. **Fiduciary Duties of Agency Relationships** xvi. **Duty of Care** xvii. **Duty of Loyalty** 14. **Principal:** n. Duty to act in accordance with express and implied terms of agency agreement o. Duty to indemnify agent in accordance with terms of contract 15. **Agent:** p. Duty to account for profit arising from employment q. Duty not to act as or for an adverse party w/out principal's consent r. Duty not to compete with principal on his own account for another relating to the matters of the agency. s. Duty to deal fairly with principal t. Duty to deal openly with principal and fully disclose matters affecting the company business u. Duty not to use principal's property for agent's own purpose v. Not to communicate confidential information w. Duty to act with care, competence, and diligence normally exercised by similarly situated agent 16. Remedy for Breach = **disgorgement** or taking away whatever agent got from the faithless act and giving it to the principal. 17. **After the Agency Relationship Ends:** After the agency relationship is terminated, and unless otherwise agreed, there is no general duty not to compete with the principal, but there is a duty not to disclose trade secrets, names, or other confidential matters. This is to **increase competition and lower prices.** 3. **Partnerships** o. In general, a partnership is a **VOLUNTARY** association of two or more people to carry on as **CO-OWNERS** of a business for profit. p. There are some elements to partnership formation: xviii. **Intent to be partners** xix. **Co-ownership of the business** xx. **Profit motive** q. **There are also four features of a general partnership** xxi. All partners are PERSONALLY liable for the debts of the partnership xxii. All partners have an EQUAL voice in the management of the firm xxiii. All partners may exit the partnership at will, causing a dissolution of the firm xxiv. Partnerships are NOT taxable entitles for federal income tax purposes r. **How to determine whether someone is a partner or an employer:** xxv. **Intention of the Parties** 18. Likely has the most weight xxvi. **Terms of the Actual Agreement:** xxvii. **Rights to Share in Profit** 19. Probably the second most important factor xxviii. **Right to Share in Losses** xxix. **Ownership of Property/Business** xxx. **Extent of management and control** xxxi. **Rights of parties in dissolution** s. **General Partnerships vs. LLPs** xxxii. LLPs are formed when a written certificate is filed with the secretary of state's office. xxxiii. LLPS must have at least one GENERAL partner t. **Partnership FORMATION:** xxxiv. May be created explicitly or implicitly. xxxv. Partnerships boil down to an agency relationship: 20. **Actual Authority in Partnership Agreements** x. **Partnership agreements govern:** iii. Relations between partners as partners and between partners and partnership iv. Business of partnership and conduct of business v. Means and conditions of amending the partnership agreement. y. **RUPA § 105: Partnership agreement MAY** vi. **Alter or eliminate aspects of duty of loyalty** vii. **ID categories of activities that do not violate duty of loyalty** viii. **Alter duty of care but CANNOT authorize conduct involving bad faith, willful or intentional misconduct, - pretty much you can\'t eliminate duty of good faith but you can limit it.** ix. **Alter or eliminate any other fiduciary duty.** u. **Partnership Property** xxxvi. **Generally:** All property originally brought into the partnership or subsequently acquired. 21. **Owned by the partnership --** **Not by the partners individually.** v. **Right of partners to participate in management of the partnership:** xxxvii. **Five DEFAULT Rules:** 22. All partners have equal rights in the management and conduct of partnership business -- every partner gets one vote 23. Decisions as to the ordinary course of business may be decided by a MAJORITY of the partners z. If it deadlocks -- cannot go forward a. DeBow says include a provision giving an additional vote to a partner in the event of a deadlock. 24. Decisions OUTSIDE the course of business require ALL partners 25. Admission of a new partner requires ALL partners 26. Amendment of partnership agreement requires ALL partners. w. **FIDUCIARY DUTIES OF PARTNERS & CO-ADVENTURERS** xxxviii. **Duties of Partners in General:** General tenant of partnership law is that partners must treat each other fairly in matters relating to the activities of the partnership. 27. **Duty of Care** b. **Refrain from engaging in conduct that is grossly negligent or reckless, willful or intentional misconduct, or a knowing violation of the law.** 28. **Duty of Loyalty** c. **RUPA 409:** x. Account to partnership and hold as trustee for any property, profit, or benefit derived by partner xi. Refrain from dealing with partnership on or on behalf of an adverse party xii. Refrain from competing w/ partnership before the business has been wound up. 29. **Duty of good faith and Fair Dealing** 30. ***Meinhard v. Salmon* IMPORTANT!!!!!** d. Case formed the basis of American fiduciary duties e. "Joint adventurers, like co-partners, owe to one another, while the enterprise continues, the duty of the finest loyalty. f. Cardozo basically set the standard that partners and co-adventurers owe the highest obligation of loyalty to their partners and co-adventurers. x. **TERMINATION OF A PARTNERSHIP:** xxxix. **Dissolution:** Change in relation of partners caused by any partner ceasing to be associated with the partnership which automatically begins the end of the partnership -- begins winding up process. xl. **Winding Up:** Process of settling partnership affairs. E.g., completing uncompleted transactions, reducing assets to cash, distributing proceeds to partners, etc. xli. **Continuation:** Under the UPA, if a partner leaves/retires, the partnership is automatically DISSOLVED and a new partnership is formed if the remaining partners continue on UNLESS a continuation agreement is included in the original partnership agreement xlii. **Termination:** All partnership affairs are settled or completed. xliii. **Rights to Dissolve:** 31. Partnership at will (DEFAULT) -- partnership continues indefinitely and ends when partner exits 32. Partnership at term: partnership has fixed stated term g. Triggering events of RIGHTFUL dissolution = (1) Expiration of express term specified in partnership agreement (2) Expiration of IMPLIED term in partnership agreement. xiii. **Express Term:** Duration/purpose specified in partnership agreement. xiv. **Implied Term:** Partnership lasts until partner who loaned \$ to the firm has been repaid from partnership profits. 33. Express will of any partner in a partnership at will 34. Agreement of all partners 35. Expulsion of a partner h. Two types of expulsion clauses: At will (*Lawlis)* or **for-cause** so long as it is in good faith and for a bona fide reason 36. Illegality of partnership purpose 37. Death of partner 38. Bankruptcy of partnership or any partner 39. Judicial decree i. **Impracticability**: Business can only be carried on at a loss j. **Incompetence**: Partner has been declared a lunatic k. **Incapacity**: Partner becomes incapable of performing his part in the contract. l. **Misconduct**: Partner willfully or persistently commits breach of partnership agreement or otherwise conducts himself in a manner that is not practicable to carry on the agreement. 40. **Wrongful Dissolution --** Does not have a right to force dissolution if other partner fulfills their duties under the agreement. xliv. **Dissociation:** Separation of the partner from the partnership 41. **Right to dissociate:** Dissociation is wrongful if it breaches express provision of the partnership agreement. 42. **When partner dissociates under RUPA one of two things can occur:** m. **701: Continuation by buyout** xv. Must be paid greater share of (1) liquidation value of the assets of the partnership OR (2) going concern value of the entire partnership if the agreement does not specify. n. **801: Winding up** xlv. **Consequences:** 43. Upon dissolution, partnership assets will be liquidated and must be used to pay the liability of the partnership in this priority: o. **Debts to non-partner creditors** (landlords, banks, etc.) p. **Debts to partners for non-capital contribution** (loaned money rather than investing) q. **Debts to partners for capital contributions** (Capital return based on capital account) xvi. **Capital account = running balance of each partner's equity interest.** r. **Debts to Partners for profits** (any surplus is divided amongst partners.) 44. If partners can\'t decide how to liquidate -- court may order a judicial sale. (*Prentiss v. Sheffel)* 45. **Value of Partnership:** s. **Going Concern Value -- Liquidation Value = Goodwill Value** t. **Going Concern Value:** Value of selling partnership as a unit -- purchaser buys partnership to keep it running as is. u. **Liquidation Value:** Value of selling assets of partnership individually/separately. 46. For a rightful dissolution partner gets goodwill value 47. For wrongful dissolution partner only gets liquidation value 4. **Corporations:** y. **Governed by state law** -- this causes competition b/w states for the incorporation of businesses. z. **Reserve Power:** Corporate charters are subject to alteration, suspension, and repeal in the discretion of the state legislature. a. Basic purpose of a corporation is to MAXIMIZE PROFITS -- "social responsibility of business is to maximize profits" Friedman b. What happens to the profits? xlvi. Profits belong to shareholders xlvii. Taxes are paid xlviii. Net profits can used to either/both 48. Provide shareholders with DIVIDEND 49. Reinvest net profits into the corporation. c. **Internal Affairs Doctrine:** Contract exists b/w shareholders and corporation ensuring that corp is operated in a way that maximizes profits for and works to benefit of shareholders. d. **Separation of Ownership and Control:** Shareholders own the corporation but take no role in it other than to elect the BOD -- who then hires the officers who run the business on a day to day basis. xlix. **Shareholders:** Own the corporation. 50. **Rights:** Amend AOI and bylaws, vote regarding BOD, Dividends, inspect/copy corporate records, shareholder agreements, appraisal rights. l. **Directors and Officers** 51. **Director Types:** Create and implement the corporate policy. v. **Inside Director:** Director AND officer w. **Outside Director:** Only part of BOD and does not work for the corporation in any other capacity. xvii. **More likely to be disinterested -- DeBow says to make most of BOD disinterested.** 52. **Officers:** Responsible for management and running of corporation ex., CEO, CFO, COO. 53. **Stakeholders:** Anyone other than shareholders that has stake in corporation. e. **FORMATION:** li. **Articles of Incorporation:** Once AOI are drafted must be signed and delivered along with fees to the state of incorporation's secretary of state. lii. **AOI Requirements:** 54. **Name:** Word/abbrv indicating business is incorporated 55. **Authorized Shareholders:** Maximum number of shares the corporation is allowed to issue 56. **Registered Agent:** agent receives service of process when corp is sued. 57. **Incorporators:** Name and addresses liii. **Optional Requirements:** 58. **Statement of Purpose:** Nature of the corporation's business or purpose for why it was formed. Delaware requires this. 59. **Classes and series of shares:** If corp chooses to split stock into classes or series, must ID different classes and state how many shares per class. x. **Common Stock:** RESIDUAL Value of the corporation y. **Preferred Stock:** Ownership interest given certain preference and rights with regard to assets or dividends over common stock -- usually have priority over common stock. xviii. **Dividend Preference:** Right to receive fixed dividend at set periods during the year xix. **Liquidation Preference:** Right to be paid before common shareholders if corp is dissolved or liquidated xx. **Conversion Preference:** Right to convert shares into another security -- typically common stock after predetermined time span or date xxi. **Redemption Preference:** Right to redeem/buy back preferred stock at a later date 60. **D/O indemnification and liability limitation** 61. **Shareholder voting mechanism** 62. **Whether BOD has right to adopt, amend, and repeal bylaws** 63. **Put vs. Call Rights:** z. Put Right: Owner has right but not obligation to sell specified number shares at a specified price a. Call Right: Option gives owner right to BUY a specified number of shares at a specified price liv. **Amending the AOI:** Can be done at any time by following this process: 64. BOD recommends amendment to shareholders 65. Shareholders approve amendment 66. Amendment filed with SoS's office. f. **Bylaws:** Rules adopted to govern the corporation's internal affairs. lv. **Examples:** Number and qualification of directors, board vacancies, board committees, quarum and notice requirements for shareholder and board meetings, procedures for calling special shareholder and board meetings, voting procedures. 67. **Voting Procedures: Straight Voting:** One share = one vote for EACH issue being voted on, **Cumulative Voting:** One share = one vote divided among ALL issues being voted on, **Proxy Voting:** Shareholder gives his vote to another shareholder lvi. **Bylaws are usually more detailed than AOI because:** 68. Don't have to file with secretary of state (not public record) 69. More easily amended than AOI 70. D/O are more familiar with bylaws -- easier to run business lvii. Power to adopt/amend/repeal bylaws MUST be vested in shareholders entitled to vote. g. **CORPORATE ENTITY AND LIMITED LIABILITY** lviii. **Shareholder Liability:** Shareholder liability in the debts of the corporation is limited to the money the shareholder has invested in the firm; therefore no creditor can expect to collect judgment by attacking the personal assets of the shareholder 71. **Can\'t sue shareholders for the debts of the corporation** lix. **Contract Claim v. Tort Claim** 72. **Contract:** Burden put on party who does business with a potentially judgment proof entity to contract for more security b. **Veil only pierced for FRAUD** 73. **Tort:** Corporations usually insure against personal liability of its shareholders. h. **PIERCING THE VEIL:** lx. Corporation limited liability is occasionally overcome and shareholders can be held personally liable for action of corp by piercing the corporate veil. lxi. **ELEMENTS:** 74. Total disregard for the separate existence of the corporation AND 75. Injustice of some sort (Ex., unjust enrichment or tax fraud) lxii. **Factors that INCREASE the likelihood of piercing:** 76. Failure to observe corporate formalities (failure to hold required meetings, failure to elect officers) 77. Failure to keep corporate funds/transactions SEPARATE from individual funds or transactions 78. Undercapitalization (Forming a corp with 5K) lxiii. NO AMERICAN COURT HAS EVER PIERCED THE VEIL ON A PUBLICALLY TRADED CORP. lxiv. **Enterprise Liability:** Disregarding the separate incorporation of related companies in order to reach the assets of other companies to satisfy the judgment against one of them: lxv. **Factors that increase likelihood of piercing:** 79. Common business name, common employees, common record keeping, common bank accounts, centralized accounting, payment of wages by one corp to the other's employees, sharing office space, undocumented transfers between the two, same shareholders, same telephone \# i. **Fiduciary Duties of Corporations:** lxvi. **Shareholders:** Generally, shareholders owe no fiduciary duties to the corporations 80. **EXCEPT for (1)** Dominant shareholders and **(2)** names shareholder in a derivative action lxvii. **D/O:** Owe both a Duty of Loyalty AND a duty of care -- only to the corporation NOT the shareholders. 81. In doing these duties, D/O must act (1) care that an ordinary person in a similar position reasonably believes appropriate under similar circumstances (Duty of Care) (2) In a manner the director reasonably believes to be in the best interest of the corporation (duty of loyalty) and (3) In good faith. j. **BUSINESS JUDGMENT RULE -- IMPORTANT!!!** lxviii. BJR: **rebuttable presumption that in making business decisions, D/Os act on an informed and rational basis, in good faith, and in the honest belief that the decision was made in the best interest of the corporation.** 82. The BJR rule exists b/c D/Os are in a better situation to make decisions abt what is best for the business. lxix. **How to Comply:** DGCL 141(e): Relying in GOOD FAITH upon the records of the corp and upon that information, opinions, reports, or statements. lxx. **Plaintiff must rebut the protection of BJR by proving D/O failed to inform themselves of all material info reasonably available to them to the point that D/Os decision amounted to corporate waste.** lxxi. **BJR does NOT protect against:** 83. Malfeasance (fraud, illegality, gross negligence) (duty of care) 84. Nonfeasance (neglect of duties) (duty of care) 85. Bad faith (duty of loyalty) 86. Conflict of interest (duty of loyalty) lxxii. Typical Decisions under BJR: 87. **How to Maximize Profits:** c. Courts defer to D/Os business judgment with regard to time frame in which profits are maximized. d. To maximize profits, businesses can xxii. Make charitable contributions, sue and be sued, make contracts. 88. **If/When to Declare Dividend** e. **Types:** xxiii. Cash Dividends -- Shareholder gets cash xxiv. Stock Dividends -- Shareholder gets more of the type of stock they already own. xxv. Property Dividends -- Shareholders get anything else f. Scheduling Distribution xxvi. Regular Dividends -- paid on regular schedule xxvii. Special Dividends -- Paid outside of regularly scheduled dividends. 1. Courts **WILL** interfere when refusal to pay dividend would amount to abuse of discretion as would constitute fraud or breach of good faith **(Ex. Dodge v. Ford Motor Co.).** k. **Breaching the Duty of Care: Two Standards:** lxxiii. **Van Gorkem:** D/O breaches duty of care if prior to making a business decision, he fails to inform himself of all material information reasonably available to him lxxiv. **DGCL § 102(b)(7):** Corporations MAY include a provision in AOI that limits or eliminates personal liability of D/Os for MONEY DAMAGES for breach of duty EXCEPT FOR: 89. Breach of loyalty 90. Acts/Omissions not in good faith that involve intentional misconduct/knowing violation of law. 91. Paying unlawful dividend/making unlawful stock purchase 92. Transaction where D receives improper personal benefit. lxxv. **DeBow:** Fact that it is hard to prevail is good -- if it is easier to hold BOD liable personally, fewer people will want to serve meaning that the corp will have to raise incentives. l. **Duty of Loyalty in Corporation** lxxvi. Must act in good faith in manner that it reasonably believes is in best interest of the corporation. lxxvii. Not independent ground for liability -- is an element of duty of loyalty. lxxviii. D/O at the very least must: 93. **Have rudimentary understanding of the business** 94. **Keep informed about the firm's activities** 95. **Engage in general monitoring of corporate affairs** 96. **Attend BOD meeting regularly** 97. **Routinely review financial statements.** lxxix. **THREE WAYS TO BREACH DOL:** 98. **Conflicted Transactions:** Interested D/O does not disclose CONFLICT OF INTEREST but proceeds to transact with the corporation in his personal capacity regardless g. **Interested D/O:** Has personal interest in the corporation's decision to contract with D/O h. **Disinterested D/O:** Has no personal interest. 99. **Corporate Opportunity Doctrine:** Prohibits D/O from usurping business opportunity that rightfully belongs to the corp for its own benefit. i. **Weighed by TOTALITY OF CIRCUMSTANCES:** xxviii. **Financial Ability:** Corp is financially able to undertake the opportunitu xxix. **Line of Business:** Opportunity is in line of business as is of practical advantage xxx. **Interest/Reasonable Expectancy:** Opportunity is one that the corp has interest and reasonable expectancy in. xxxi. **Self Interest of D/O will conflict w/ interest of corporation.** 100. **Failure to Act in Good Faith** j. **Three Categories:** xxxii. **Subjective Bad Faith:** Fiduciary conduct motivated by an actual intent to do harm. xxxiii. **Lack of Due Care:** Action taken solely by gross negligence without malevolent intent. xxxiv. **Intentional Dereliction of Duty:** Intentionally fails to act in the fact of known duty to act/demonstrating a conscious disregard for duty -- deliberate indifference and inaction in the fact of duty to act lxxx. **Oversight Liability:** 101. ***Caremark* standard:** Where a claim of directorial liability for corporate loss is predicated on ignorance of liability creating activities w/in the corporation, only a sustained or systematic failure of BOD to exercise oversight will establish the lack of good faith that is a necessary condition for liability. 102. ***Stone v. Ritter* standard:** Clarified *Caremark* regarding necessary conditions for liability: k. **BOD utterly failed ot implement any reporting or information systems or controls OR;** l. **Having implemented such a system or controls CONSCIOUSLY failing to monitor or oversee operations -- thus disabling itself from being informed of risks/problems requiring attention.** 103. Debow says this is more like a breach of duty of care rather than loyalty. m. **Three ways to Cleanse Conflicted Transactions:** lxxxi. **DGCL 144(a)(1):** Ratification by majority of disinterested directors: 104. **If actions are disclosed to BOD and they in good faith authorize the transaction by a majority vote of the disinterested directors, Court reviews under BJR** lxxxii. **If Option 1 Fails -- DGCL 144(a)(2):** Ratification by majority of disinterested shareholders -- Same as 1 lxxxiii. **Court may ratify transaction by deeming it fair to corporation.** 105. **Have to prove Good Faith of the transaction and (2) Inherent fairness:** courts apply inherent fairness test to determine breach of loyalty -- look to price of transaction to assess validity. m. Look to whether corp received something objectively reasonable in value in exchange for what it gave to interested D/O n. **Dominant or Controlling Shareholders** lxxxiv. **Parent-Subsidiary Structure** 106. Subsidiaries can either be wholly owned or majority owned -- when situation involves parent and subsidiary with the parent controlling the transaction or fixing terms, parent owes fiduciary duty to subsidiary because parent can control BOD. lxxxv. Self Dealing by Parent -- Apply IFT 107. Self dealing = parent corp causes subsidiary to act in a way that the parent receives something from subsidiary to the exclusion of and detriment of minority shareholders of subsidiary. lxxxvi. Subsidiary being Sued: 108. If there is sufficient separation b/w sub and parent, parent is not liable 109. Only liable if veil is pierced via enterprise liability ecause the two entities were not treated as separate. 5. **Derivative/Direct Actions** o. Suit is **DIRECT** if it alleges a direct loss to the shareholder but is **DERIVATIVE** if it alleges a loss to the shareholder that derives from a loss to the corporation. p. **Direct Action:** lxxxvii. **Elements:** (1) All shareholders share same injury (2) Shareholders would receive the benefit of the recovery/remedy (3) Injury is NOT suffered by the corporation. lxxxviii. **Brought by shareholder in own name.** lxxxix. **COA belongs to shareholders in their individual capacity** xc. **Arises from injury directly to shareholder.** xci. **If shareholder wins, shareholder recovers.** xcii. **Less procedural safeguards.** q. **Derivative Action:** xciii. Suit in equity AGAINST a corporation to compel it to sue D/O xciv. Two Phases: **(1) Name shareholder alleges corporation was WRONG not to bring claim itself. (2) If name shareholder succeeds on (1) then claim proceeds on merits against D/O** xcv. Brought by shareholder against corporation on behalf of the corporation xcvi. COA belongs to corporation as an entity xcvii. Arises from injury done to corporation as an entity. xcviii. If shareholder wins, corporation recovers. xcix. More procedural safeguards. r. **Procedural Safeguards for Derivative Actions:** c. **Named Shareholder MUST:** 110. Demonstrate contemporaneous share ownership n. DE -- only own stock when incident arises o. NY -- Must own at time of incident and t/out suit. 111. Plead case with particularity 112. Demonstrate that it fairly and adequately represents the interest of the corporation in enforcing its rights 113. Comply with relevant security for expense statute 114. Make formal demand on corp to take suitable action. ci. If settled before judgment -- must be fair, reasonable, and adequate and courts consider the following: 115. Maximum and likely recovery 116. Complexity, expense, and duration of continued litigation 117. Probability of success 118. Stage of proceedings 119. Ability fo D to pay a larger judgment 120. Adequacy of settlement terms 121. Whether settlement was approved by disinterested directors 122. Whether other shareholders objected. s. **Requirement of Demand:** cii. Depending on jurisdiction, shareholder may/must demand that BOD assert the corps claim prior to filing derivative suit. ciii. Typically a letter that must: 123. Request BOD to bring suit on alleged COA and 124. Be sufficiently specific as to appraise BOD of the nature of the alleged COA civ. Universal Rule is that no shareholder can commence derivative action until written demand and 90 days have expired from the delivery of the demand. cv. In NY and DE -- complaint must set forth 125. Wrongful Refusal 126. Demand Futility t. **Special Litigation Committee** cvi. **BOD has power to create SLC -- whether or not there should be a suit after shareholder has made demand.** cvii. Can a court review the decision of a SLC? 127. NO: NY -- p. Procedural Process -- court inquires into independence and good faith of SLC and wither SLC used reasonable investigatory techniques q. Substantive Decision; BJR 128. YES: DE r. Procedural Process - court inquires into independence and good faith of SLC and wither SLC used reasonable investigatory techniques s. **Substantive Decision:** Court determines by applying its OWN independent BJR whether the claim should proceed xxxv. **DEBOW HATES THIS because judges are not business experts.** u. **Indemnification/Insurance:** cviii. DGCL 145(a)-(f) Indemnification of O, D, Employees, or Agents 129. \(a) Power to indemnify in Direct or 3P Suits: t. Power to indemnify ANY person against reasonable expenses incurred if the person acted in GOOD FAITH and in a manner that person REASONABLY believed to be in or not opposed to the best interests of the corporation. 130. \(b) Power to indemnify in Derivative actions u. Power to indemnify ANY person against reasonable expenses incurred if the person acted in GOOD FAITH and in a manner that person REASONABLY believed to be in or not opposed to the best interests of the corporation and has not been adjudged liable to the corporation. 131. \(c) Obligation to Indemnify when D/O is successful: v. If a present or former D/O is successful on the merits or in defense of ANY action he MUST be indemnified. 132. \(e) Advancement of Expenses Provision w. Expenses incurred by D/O in defending ANY Action MAY be paid by the corp in ADVANCE of final disposition UPON RECEPIT of undertaking by D/O to repay the amount if determined that D/O is not entitled to indemnification. 133. \(f) Other Rights to Indemnification: x. May enter agreement to provide greater protection than does statute by itself. cix. **Insurance:** 134. DGCL 145(g) Poweer to Maintain D/O insurance y. Corp has power to purchase insurance on behalf of any person and against any liability covered by this section regardless if the corp has power to indemnify. 6. **Special Types of Corporations** v. **Publicly Traded:** Corporations listed on a stock exchange and have stock that is traded freely and regularly cx. **Secondary Market**: Sales of stock are made freely amongst investors in public w. **Closely Held:** Corporations with only a few shareholders and a more relaxed style of governance as shareholders often serve as both directors and officers. x. **Less than 30 members.** cxi. **Primary market:** Sales of stocks are made directly from a corporation to an investor. cxii. TO receive benefit of laws governing this type of corporation, must ELECT such status as it not automatic based on the number of shareholders. cxiii. Prof O'Neal -- wants duties based on partnership law cxiv. They should be treated according to public corporation law. cxv. DeBow -- wants them to be treated like public corporations. 7. **Shareholder Agreements** y. **Expectations:** cxvi. Employment cxvii. Dividends cxviii. Price Appreciation z. Shareholder agreements are VITAL in closely held corps bc anyone investing in the corp will want contractual protections so that their expectations will be realized. cxix. If there is unanimous approval amongst shareholders of closely held corp that a shareholder agreement may restrict the discretion of the BOD in certain situations, the agreement is valid so long as 135. Situations shareholders have discretion rather than BOD are stated in the AOI 136. Shares are only sold or transferred to investors who have consented to the agreement. a. Optional agreements to include: cxx. Employment Contract -- shareholder employed by the corp 137. Duration 138. Compensation 139. Duties and Status 140. Competition and Trade Secrets 141. Consequences of Termination cxxi. Buy Back/Buyout Agreement -- IF and when shareholder partner ends his relationship it must buy back existing shareholder/partner interest in the corporation/partnership. Should include the following: 142. Trigger events 143. Obligation to buy vs. option to buy 144. Method of Payment 145. Protection against debts of corporation/partnership 146. Procedure for offering either to buy or sell 147. Price z. Book value/cost basics a. Appraisal/FMV b. Formula c. Set price each year d. Relation to duration cxxii. Pooling Agreement -- Provision of shareholder agreement b/w two or more shareholders in which the shareholders all agree to vote their shares in a specific manner. b. **Abuse of Control** cxxiii. Plight of the Minority Shareholder:: Majority shareholders have frozen out the minority by terminating employment, will not give the minority shareholder dividends, and the minority shareholder has no one to sell his stocks to. 148. Freeze out -- Majority disappoint the reasonable expectations of the minority shareholder. cxxiv. The issues becomes when majority shareholders freeze a minority whether courts should come to the rescue? 149. YES: Massachusetts e. Governed by partnership law -- thus shareholders owe duty of utmost good faith and loyalty to one another f. When minority SH brings suit alleging a breach of the strict good faith duty, court weighs legitimate business purpose of the majority against the practicability of a less harmful alternative. g. Puts pressure on parties to privately contract for protection and proper remedy is to restore minority SH to position he would have been in had there not been a freeze out. 150. NO: Delaware h. Governed by publicly traded corporation law xxxvi. Shareholders DO NOT owe fiduciary duties to one another b/c only D/O owe duties to corp i. Minority shareholders MUST privately contract for protections. c. **Dissolution of Closely-Held Corporations:** cxxv. Corporation dissolution statutes may be an alternative to buy-back agreements the parties failed to negotiate. 151. May force majority shareholders to bargain with frozen-out minority shareholders because dissolution can destroy the going-concern value of the corp. cxxvi. **Four Remedies for Frozen Out Shareholders:** 152. **Provision in AOI or bylaws for buy-sell/back agreement** 153. **Petition court for INVOLUNTARY dissolution of the corporation** j. Courts may order where such a relief is REASONABLY NECESSARY for the protection of the rights and interests of the minority shareholders. 154. **Demand statutory right of appraisal upon some significant change in corporate structure such as a merger** 155. **Request an EQUITABLE REMEDY if there has been a breach of a fiduciary duty by the majority shareholders.** 8. **LLC's** d. **LLC's are recognized business entities that** cxxvii. **Enjoys the pass-through tax advantage of a partnership** 156. Members pay income tax on personal tax returns but the entity itself is not taxed cxxviii. **Enjoys the limited liability of a corporation** cxxix. **Provides flexibility in contracting and managing the entity via an OPERATING AGREEMENT** e. **Operating Agreement:** While LLC is created by filing a CERTIFICATE OF FORMMATION with the secretary of state, an LLC may also adopt an OA cxxx. **OAs are a crossover b/w corporate bylaws and partnership agreements for partnerships** 157. **OA can govern all aspects of affairs** 158. **OA does not have to be written -- can be implied like a partnership agreement.** 159. **Can also limit but not eliminate member's fiduciary duties.** cxxxi. Will only be invalidated if it is inconsistent w/ mandatory statutory provisions. cxxxii. Duties/Obligations usually articulated in OA's 160. Not expressly articulated = subject to IMPLIED COVENANT OF GOOD FAITH/FAIR DEALLING cxxxiii. Court cannot impose personal liability on members of the LLC for outstanding debts unless OA clearly states that members assume personal liability. Racing Investment Fund. 161. **Penalty Dilution:** Contributors of new money get new percentage interests in the investment greater than what the original money got. 9. **Securities Law** f. If a creditor OR ownership interest constitutes a security, the corporation must comply with the REGULAORY (MANDATORY) Requirements of the Federal Securities Law. g. **Flexible Capital Structure: Ways Corps can raise money** cxxxiv. **(1) Debt Securities:** 162. Create a CREDITOR INTEREST 163. Covered by SEC 164. reditor is a lender who must be paid back. cxxxv. **Equity Securities (Stocks)** 165. Create an OWNERSHIP INTEREST 166. Covered by SEC 167. Holder is an owner, not creditor, and does NOT need to be paid back. cxxxvi. **Initial Public Offering (IPO):** Private corporation attempts to raise capital by selling stocks to the public for the first time. 168. **Corp sets price/stock for IPO** 169. **Once it becomes public, it is subject to SEC Regulation.** h. **Parties Involved:** cxxxvii. **Issuer:** Corp that offers its securities for sale to raise capital cxxxviii. **Investor:** Person/corp that owns, directly or indirectly, and is seeking return on investment. i. **Purposes of Fed. Securities Law:** Designed to protect the INVESTOR whether they are buying from an issuer, trading in the market, exercising voting rights, or selling in a tender offer. cxxxix. **Protection accomplished in TWO Ways** 170. **Mandatory Disclosure:** Ensures investors have all info they need to make informed decisions k. **Registration Reqs:** xxxvii. SA of 1933 -- Registration statement xxxviii. SEA of 1934 -- Ongoing Disclosure 171. **Anti-Fraud Liability:** Ensure that investors and securities makers with non-fraudulent information move capital to its optimal uses. l. **SA of 1933 -- 11, 12(a)(2)** m. **SEA: 10(b) Rule 10(b)(5), 16(b), 14(a), 14(a)(9)** cxl. **Dual Enforcement:** Can be brought by SEC AND Investors harmed by violation. cxli. **Blue-Sky Laws:** State laws that provide additional protection to investors from having no standing behind their investments besides water or blue skies 172. **Includes (1) Disclosure requirements (2) Anti-Fraud provisions.** j. **STATUTES:** cxlii. **Securities Act of 1933** 173. Regulates primarily the sale of securities on the PRIMARY MARKET -- sells securities to directly to the public for the purpose of raising capital. 174. MANDATS INITIAL DISCLOSURE for IPO's 175. **Types of Securities** n. **Specific Instruments** xxxix. Bonds 2. Fixed contract clam 3. Safer 4. No upside xl. Debenture: Debt xli. Notes: Debt xlii. Stocks: Equity 5. Riskier 6. Potential upsides xliii. DeBow: HAVE BOTH STOCKS AND BONDS. 176. Most Securities Litigation involving atypical instruments turns on whether the instrument falls within one of the catch all phrases o. Evidence of Indebtedness p. Investment Contracts xliv. Howley Test: Investment K is one where a person invests his money into a common enterprise and is led to expect profits from the efforts of the promoter or third party. q. Any instrument commonly known as a security 177. General partnerships are NOT securities -- Limited partnerships ARE 178. **Registration:** r. Prohibits sale unless issuer has registered with SEC. Requirements: xlv. **Registration (form 10) filed with SEC.** xlvi. **Registration statement has become effective** xlvii. **Prospectus (disclosure doc) must be delivered to the purchaser before sale.** s. **Transactions EXEMPT from Registration:** xlviii. Private Offering/Placement: 7. Factors: Number of investors and their relationship to each other and the issues, number of units offered, size of offering, manner of offering. xlix. Market Trading Exemption 8. Exempts from registration transactions by any person other than the issuer, underwriter, or dealer. cxliii. **Securities Exchange Act of 1934** 179. Primarily regulates the trading of securities AMONGST investors t. Secondary Market -- investors trade securities among themselves without any significant participation by the original issuer. u. ONGOING DISCLOSURE for any exchange of securities l. Form 10-K -- Annual report li. Form 10-Q -- Quarterly report lii. Form 8-k -- Report filed when certain important event happens 180. Created to Address the Following: v. Insider trading/other securities fraud w. Short-swing profits by corporate insiders x. Regulation of shareholder voting via proxy solicitation y. Regulation of tender offers 181. Created the SEC z. Congress has given SEC to adopt and enforce regs pursuant to the Admin Procedure Act of 1988 liii. Debow things the nondelegation doctrine, the SEC commissioner removal for good cause, and the fact that SEC has all 3 facets of government power is unconstitutional. k. **ANTI-Fraud Provision Violations:** cxliv. **Common Law Fraud** 182. Misrepresentation of a material fact 183. Made in reasonable reliance 184. Causation 185. Intent 186. Injury cxlv. **Misrepresentation/Omission** 187. **Express -- Securities Act of 1933 § 11** a. Directed at fraud committed in connection w. sale of securities through the use of a REGISTRATION statement. liv. MUST SHOW: 9. **He bought security in an IPO or offering by D issuer AND** 10. **There was a material misrep/omission in the registration statement.** lv. **Issuer is STRICTLY Liable unless:** 11. **Investor knew misrep/omission when they purchased the security** 12. **Misrep/omission was not material OR** 13. **SOL has run** lvi. **Non-Issuers can escape by showing DUE DILLIGENCE --** Must show 14. **Conducted reasonable investigation** 15. **Reasonable grounds for believing and DID believe** 16. **That there was no misrep/omission.** b. **Remedy:** Money Damages lvii. Current Price -- Price Paid = Damages 188. **12(a)(2)** c. Imposes private civil liability on any person who: lviii. **Offers or sells securities in interstate commerce** lix. **Makes a material misrep/omission in connection w/ offer or sale.** lx. **Cannot prove he did not know of the misrep/omission AND** lxi. **Cannot prove that he could not have known even with the existence of reasonable care.** 189. **IMPLIED -- 10(b) and SEC 10(b)(5)** d. 10(b) and 10(b)(5) prohibit making any material misrep/omission in connection with the sale or purchase of any security e. **ELEMENTS** lxii. **Material misrep/omission** lxiii. **Scienter** lxiv. **Connection between the misrep/omission and the SALE OR PURCHASE of the security** lxv. **Reliance on the misrep/omission** 17. Investors can satisfy this element by invoking a rebuttable presumption of reliance, rather than proving direct reliance. 18. Based on FRAUD ON THE MARKET theory which holds market prices of shares traded on well-developed markets reflects all publicly available information and hence any material misrep/omission. 19. This is based on Efficient Capital Market Hypothesis which is the idea that professionals working in the stock market are efficient in processing info about corps -- meaning that the market price of a corp's stock reflects all known info about the corp at any given time. lxvi. **Economic Loss** lxvii. **Loss Causation** 10. **Insider Trading** l. **10(b) and 10(b)(5)** cxlvi. Insider trading is not in the language of either statute but is rather a judicial interpretation of the 10(b) and 10(b)(5) rules that EXPANDS the idea that securities fraud is based on manipulation/deception which is wrong. m. **What constitutes IT under 10(b)(5)?** cxlvii. Anyone who trades on **MATERIAL and NONPUBLIC** information for his own account on securities of a corporation UNLESS HE 190. **Abstains from trading OR** 191. **Discloses the information to the public.** f. IF he chooses to disclose, must give market opportunity to respond which happens almost instantaneously because of the Efficient Market Hypothesis. g. **Strong Form:** Share price reflects all public and private knowledge h. **Semi-Strong Form:** Share price reflects all public knowledge -- this is DeBow's favorite. i. **Weak Form:** Share price reflects all past historical data. cxlviii. **Liability is premised on a fiduciary relationship of trust and confidence that exists b/w shareholders of a corp and those insiders who have obtained confidential info by reason of their position w/in the corp.** n. **Who has a duty to abstain/disclose?** cxlix. **Insiders** 192. D/Os and dominant shareholders who obtain material nonpublic information b/c of their position cl. **Constructive Insiders** 193. Certain professionals who are retained temporarily by the corp ad can become fiduciaries b/c of relationship cli. **Outsiders (if I work for a company that is about to be acquired but I work for the print shop -- I buy stocks in the acquiring company).** 194. Non-Insiders are under duty to abstain/disclose when they are aware of material or nonpublic info they got in a relationship of trust or confidence. clii. **Tippers** 195. People who cannot trade themselves and simply pass along the information to others and let them trade for/with the insider. 196. Elements of Tipper/Tippee Liability j. Info is from tipper in breach of tipper's fiduciary duty to retain from profiting on undisclosed information k. Knows or should know tip came from person who breached a confidential duty l. Tipper expects tippee to trade m. Tipper expects/receives a reciprocal benefit in exchange for the tip. o. **Classical v. Misappropriation Theories of Insider Trading** cliii. **Classical** 197. Securities fraud is committed by corporate insider who trades in securities of HIS Corporation on the basis of material nonpublic information obtained through his position as an insider in breach of duty owed to shareholders of the corporation 198. **Elements:** n. **Existence of relationship giving access to inside info intended only to be used for corporate purpose** o. **Unfairness of allowing corp insider to take advantage of that info by trading without disclosure.** cliv. **Misappropriation** 199. Securities fraud is committed when an OUTSIDER misappropriates confidential info for securities trading purposes in breach of duty owed to SOURCE of INFORMATION p. Person does this when they trade in other companies stocks when he learns that his firm will do something that affects the value of the other companies stocks and trades on this info. 200. Applies to Outsiders and Tippers/Tippees p. **SEA § 16(b)** clv. Contains prophylactic rule against insider trading. clvi. 16(b) is a STRICT LIABILITY act that states that if an insider makes a purchase AND sale of the companies stock within 6 months of each other and makes a profit from it, the insider MUST disgorge itself by giving his profit to his company. q. Prof Manne advocates insider trading should not be criminalized. r. Remedies for Insider Trading clvii. SEC injunctions clviii. Disgorgement clix. Civil Penalties clx. Criminal Sanctions. 11. **Problems of Control** s. **General** clxi. While privately traded (closely held) corps are often owned by a majority shareholder, it means that the majority shareholder will essentially make all decisions as his vote overrides the remaining shareholder votes. Publicly traded corps are rarely owned by a majority shareholder even if an institutional investor invests a substantial amount. clxii. Institutional Investors: 201. Mutual Funds 202. Hedge Funds 203. Insurance Companies 204. Pension Funds clxiii. Because a minority shareholder alone cannot override the BOD he has the following options if he disagrees: 205. Sell stocks in corp and reinvest elsewhere 206. Sue for breach of duty of care 207. Start a proxy fight 208. Approve a merger 209. Attempt to acquire enough shares to become dominant shareholder. 210. Tender shares to a bidder trying to take over the corp. t. **Proxy Fights** clxiv. **Shareholder Meetings:** Annual meetings set at time and place specified in bylaws. clxv. **Special Meetings:** Meetings outside ordinary schedule. clxvi. Proxy fights start when insurgent group tries to oust incumbent members by soliciting proxy cards and electing its own reps to the board. 211. **Incumbents**: Current BOD 212. **Insurgents:** Shareholders/Outside parties who propose own SLATE OF DIRECTORS to (1) Replace incumbent BOD or (2) approve merger. clxvii. **Reimbursement for Parties in Proxy Fight:** 213. May not reimburse either unless dispute concerns questions of POLICY 214. May reimburse but only REASONABLE and PROPER expenses 215. May reimburse incumbents whether they win or lose. 216. May reimburse insurgents if they win and only if new BOD approves reimbursement. clxviii. VERY RARE: 217. Expensive 218. Shareholders are RATIONALLY IGNORANT -- uninformed about BOD and reluctant to listen to insurgent critique u. **Proxy Solicitations** clxix. When a shareholder does not attend a meeting he may vote by PROXY by: 219. **Allowing someone else to vote on his behalf** 220. **Vote by mail via PROXY SOLICITATION card** clxx. If/When shareholders become unhappy with the operation of the corp, they can use signed proxies as an attempt to pool voting power and force members of the BOD out v. **Fed Regulation of Proxy Solicitation:** clxxi. **SEA 14(a) PROHIBITS people from soliciting proxies in violation of SEC rules which are concerned with assurance of full disclosure to shareholders of matters likely to be considered at shareholder meetings.** clxxii. 14(a)(2) Shareholder does not fall under general SEC filing req if it does not solicit proxies. clxxiii. 14(a)(6) Anyone who solicits proxies to furnish each shareholder with a Proxy Statement disclosing info that may be relevant to the decision the shareholder must make including 221. Corp annual report 222. Conflicts of interest 223. Potential issues that may arise during the annual meeting clxxiv. (a)(7) Shareholder inspection rights clxxv. (a)(8) Shareholder Proposals 224. When incumbent managers mail proxy solicitation cards, they must include printed copy of shareholder proposal AND must place proposal on the solicitation ballot itself. 225. Purpose was to create functional corporate democracy q. DeBow thinks this naive. 226. **Substantive Limitations: Exclusion of Shareholder Proposal from Proxy Solicitation Material** r. **Proper Subject Exclusion** lxviii. Proposal is not proper under the law of the jurisdiction of the company's corporation OR proposal if implemented would cause corp to violate state law. s. **False or Misleading Exclusion** lxix. Proposal is too vague t. **Economic Substantially Related Exclusion** lxx. Proposal relates to operations which 20. Account for less than 5% of the company total assets at the end of its most recent fiscal year 21. Account for less than 5% of corp net earnings and gross sales for the most fiscal year AND 22. Are not otherwise significantly related to corp's business. lxxi. EXCEPTION: Should not be excluded if significant relationship to corp business is demonstracted. u. **Ordinary Business Exclusion** lxxii. Proposal deals w/ course of ordinary business operations 23. \(1) What is the subject matter of proposal 24. \(2) Does it relate to corps' ordinary business operations (Day-to-Day operations)? v. **POLICY EXCEPTION** lxxiii. When a proposal focuses on a significant (societal or other) policy issue that TRANSCENDS a corporation's ordinary business, it is NOT excludable. 227. **To Invoke:** w. **Must notify shareholders of the problem within 14 days and wait 14 days** x. **If proposal is still due to be excluded, in the corp's opinion, it MUST file with the SEC staff the reasons why it believes the provision is excludable and it MAY request a no-action letter** lxxiv. Response in one of two ways: 25. With a no action letter = SEC won't recommend enforcement action if the corp proceeds with transaction 26. It is unable to concur with the corporation. clxxvi. (a)(9) Anti Fraud Provision 228. Suit can be brought for fraudulent material misrep/omission in proxy statement under 10(b) via 10(b)(5) or 14(a). clxxvii. **14(a)(7) Shareholder Inspection Rights** 229. **General Rule:** Upon written consent, shareholders have right to inspect for any proper purpose the corp's stock ledger, a list of shareholders, and its other books and records and to make copies. 230. **Procedural Limitations:** y. When insurgent disagrees with/wishes to oust a member of or the ENTIRE BOD and solicit proxies -- Incumbent managers can either lxxv. Mail insurgent group material to shareholders directly but charge for cost OR lxxvi. Provide copy of shareholder list to insurgent group with and let it distribute its own material. 231. **Substantive Limitations: Proper Purpose** z. Proper Purpose = one that reasonably relates to shareholder interest as a shareholder lxxvii. Can be long term well being of corp or enhancement in value of the shareholder's share. a. Improper Purpose lxxviii. Wanting corp to adopt the shareholder social or political concerns. lxxix. To use to harass other corporate officials lxxx. Acquiring corporate secrets. 12. **Mergers, Acquisitions, Hostile Takeovers** w. There are Two strategies available to a corp that wants to acquire another corp. clxxviii. **Negotiate Merger with target corp BOD** 232. M/A clxxix. **Purchase stock from target corp shareholders through tender offer** 233. Hostile/Friendly Takeover x. **Merger:** Combination of two or more corp such that only one corp survives. Three Categories: clxxx. **Horizontal Transaction:** Acquiring corp buys or merges with competitor target corp clxxxi. **Vertical Transaction:** Acquiring corp stands in a supplier/customer relationship with target corp clxxxii. **Conglomerate Transaction:** Any that is not one of the above. y. **Statutory Merger:** combination accomplished by using procedure prescribed in state corp law. clxxxiii. **Typical Procedure:** 234. BOD for both Corps must approve merger 235. Shareholders of each must approve AND b. Shareholders who don't are entitled to appraisal right -- demand shareholder be paid in cash for the fair value of his shares. 236. Required docs must be filed with the state z. **Practical Mergers:** Combination accomplished in a way that does not use statutory procedure. clxxxiv. **Asset Acquisition --** Acquiring shareholder deals with target as entity rather than with shareholders 237. **Stock for Stock Merger --** Convert shares in target into shares in surviving corp 238. **Freeze Out/Cash Out Merger --** c. Acquiring Corp purchases all of target shares thus depriving shareholders of any ownership interest. 239. **Entire Fairness Test:** DE courts use to analyze freeze-out/cash out mergers upon request of minority sharehlders determining whether there was fair dealing and fair price. d. **Fair Dealing -- Procedures used in structing/negotiating must be fair** lxxxi. Consider: how transaction was timed, how it was initiated/structured/negotiated/disclosed to directors, and how approvals of directors and shareholders was obtained. e. **Fair Price -- Objectively reasonable OR it is a breach of fiduciary duty.** lxxxii. Consider economic and financial consideration of proposed merger including all relevant factors like: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or extrinsic value of corporation's stock. 240. **If following factors are present BJR should be used in analyzing freeze-out/cash out merger rather than inherent fairness test:** f. **Transaction approved by BOTH a special committee of the board AND a majority of the minority (target) shareholders.** g. **Special committee is independent** h. **Special committee was empowered freely to select its own advisors and say no definitively** i. **Special committee met its duty of care in negotiating a fair price** j. **Vote of target shareholders is fully informed.** k. **No coercision of target shareholders.** a. **Short Form Merger --** Parent Corp owning at least 90% of stock of subsidiary corp may FORCE a merger with the subsidiary upon approval by the parent's BOD but must pay a FAIR price for shares of subsidiary shareholders. b. **Substance v.** **Form** clxxxv. **De Facto Merger Doctrine --** even if combination is achieved without following statutory merger procedures, such merger is valid because the substance of the practical merger resembles the substance of a statutory merger -- Farris v. Flen Alden clxxxvi. **Equal Dignities Rule --** If a combination/acquisition is achieved without following the statutory merger doctrine, the merger is INVALID. c. **Options for Disgruntled Shareholders:** clxxxvii. Sell shares clxxxviii. Sue BOD for breach of fiduciary duty 241. Money damages 242. Injunction 243. Recission clxxxix. Judicial appraisal 244. Any minority shareholder dissatisfied with terms can: l. Reject terms m. Obtain independent judicial appraisal of values of shares n. Receive that value in cash rather thn consideration offered in cash merger transaction 245. ONLY AVAILABLE FOR FREEZE-OUT/CASH OUT MERGERS because of MOE o. **Market Out Exception:** There is no appraisal rights in stock-for-stock merger if corp shares are traded on public market before and after merger -- disgruntled Shareholders can cash out on their own -- assuming Market price is good approx of fair value. 13. **TAKEOVERS** d. **Tender Offer:** Offer made by bidder often above market price directly to shareholders of target corp to purchase their shares. cxc. **If opposed, as is the norm, referred to as a hostile takeover.** cxci. To prevent rejection of tender offer, bidder often sweetens the pot with pay outs, higher salaries, employment contracts. e. **BOD Defenses to HOSTILE Tender offers** cxcii. Recommend shareholders do NOT approve of takeover cxciii. Greenmail payment -- when corp repurchases shares at premium to prevent takeover. cxciv. Self-tender -- Target makes tender offer for its own shares -- inviting shareholders to sell their shares for specified price w/in window of time. 246. Unocal Corp v. Mesa Petroleum Corp example -- target BOD repurchased stock from selected shareholders in order to defeat a tender offer it considered coercive p. BOD of target can enact defenses to prevent hostile takeover 247. SEC did not like this so it amended rules to prevent tender offers not made to ALL shareholders. cxcv. Poison Pill -- Target Corp swallows poison pill to make it less attractive as a takeover target -- but such poison can be reversed by BOD. f. IF BOD Uses one of the above it has burden to show there reasonable grounds to believe danger to corporate policy and effectiveness existed b/c of the tender offer. g. Meets burden by showing: cxcvi. \(1) Good Faith cxcvii. \(2) Reasonable investigation. h. **Opposing Views of Hostile Takeovers** 14. **REVLON DUTIES:** i. American corporation law is board centric -- the board runs the show. j. When sale becomes inevitable -- duty of target shifts to auctioneer to get the best price for shareholders. k. **Revlon Duties** -- when are they triggered -- duties are on behalf of the target companies board -- they manifest when it is apparent to everyone that the breakup of the company is inevitable. l. **The board no longer "defends" the corporate bastion and instead become like auctioneers no longer need to defend corporate policy and effectiveness.** 15. **Four Years after Revlon -- *Paramount* -- adds new trigger to *Revlon*** m. **DOES NOT HAVE TO BE SALE --** Just change in control -- if company does not have controlling shareholder but under new deal there is a controlling shareholder -- Revlon duties are triggered. 16. Paramount v. QVC: Might trigger Revlon and change in control