biz org 2008

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1Business Organizations Outline – Ragazzo

Business Organizations - Ragazzo

Spring 2008

I. Agency

a. The Creation o Agency Relationship

i. Introduction!. Agent – a person who by mutual assent acts on behalf of the principal and is

subject to the principal’s control.a. Special Agent – an agent authorized to conduct only a single transaction

(or a series of transactions not involving continuity of service)". #eneral Agent - authorized to conduct a series of transactions involving

a continuity of service where acting in the usual course of businesscommits acts that are !"!#$ % &''""#*.

2. $rincipal – the person for whom the agent actsa. %isclose& principle – #t the time of the transaction between the agent

and +rd person the +rd person (,) nows that the agent is acting for a principal and () nows the /’s identity.

". $artially %isclose& $ – 0he +rd person nows the # is acting for a principal but doesn’t now the /’s identity

c. 'n&isclose& $ – 0he agent is dealing with the +rd person purports to be

acting on his own behalf.(. Agency relationship – '1ists when (,) the principal manifests the agent shall

act for him () the agent accepts the undertaing and (+) the understanding ofthe parties is that the principal is to be in control of the undertaing

a. #greement need not be a formal or written 2 (consideration notre3uired)

". ontrol doesn’t have to actually e1ercised but simply that the / has the power to control the #.

c. Test is the su"stance o the relationship) intent is only a actor.

&. Three *le+ents o an Agency Relationship,

i. 4utual agreementii. # must be acting on behalf of the /

iii. # must act subject to the /’s control

. Agency Law governs the relationships between:a. #gents and /rincipals". #gents % 0hird /ersons with whom an agent deals or purposrts to deal

on a /’s behalf c. /’s and third persons when an agent deals or purports to deal with a +rd

/ on the /’s behalf.. Restate+ent o Agency /2n& 1ill "e consi&ere& our la13 or this course as

+ost cases still &eal 1ith the 2n&.

ii. #gency v. 5ratuitous 6ailment!. Gorton v. Doty

a. 4acts7 oach was agent of appellant teacher8 control was present.". Issue7 9as there enough control to have agency relationship in

e1istence:

i. #gent acts on /’s behalf and is subject to his control for his benefit. 0he right to control is enough.ii. ourt is focusing on the control element of agency test

c. RA#7 ourt’s mistae8 not for the benefit of8 / is not liable for the detailof the wor under his control – the coach was merely a I of teacher notagent. ourt was clearly wrong.

i. / is only liable for the torts of agent if agent is servant oremployee. 0his case is completely wrong no control and no benefit.

iii. #gency v. reditor-;ebtor elationship

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!. Rule7 <,=> – # creditor is a principal when he assumes control of his debtor’s business for their mutual benefit.

a. Ignores the benefit half of agent test.2. Gay Jenson Farms Co. v. Cargill, Inc.

a. 4acts7 9arren was the agent (supplier) who owed argill the / ?,million. argill continues to loan 9arren the grain operator moneyeven though they are not paying it bac.

". Issue7 an argill be liable for debts of 9arren as 9arren’s principal:c. 5ol&ing7 0he ourt held that 9arren was the agent and was held liable

for the debts of 9arren.i. 4ust as – is 9arren subject to argill’s control: Is 9arren

running the grain elevator for their own benefit or for the benefit of argill:

&. $olicy7 @ow much control should a creditor have: # creditor crosses theline to being held as a principal when they begin to operate theaffirmative day-to-day affairs of the business. >nly e1ercising veto power does not cross the lineA.

e. Rule7 <,=2 – # supplier is an agent only if it is agreed that he is to act primarily for the "eneit of the buyer. # purchaser bBc principal of itssupplier when7

i. Ci1ed price – regardless of price buyer paid for the grainii. #ttaining title

iii. Independent business beyond what it sells to argill.iv. DDD,=2 emphasizes transaction in the benefit but ignores the

control half of the test.. '1am #nalysis7 <,standard7

i. 9as there a mutual agreement:ii. 9as 9arren acting on behalf of argill:

iii. 9as argill e1ercising control:iv. #gency v. ontract elationship

!. Green v. H! "loc#, Inc.

a. 4acts7 @ 6loc gives out I" efund loans – gives loans to customersfor a large percentage of money and I" will send the refund directly to

@. @ is getting a icbac from the lending company for offeringthese services to their clients.

". Issue7 Is @ 6loc its customers’ agent: If so they owe to them fid-duties to disclose these icbacs.

c. 5ol&ing7 @ is an agent to customers with regards to the loan and thusowes to their clients fid-duties.

i. ourt reasoned that clients controlled @ 6loc for their benefit. @owever you can argue against it.

&. RA#7 !nder est. +E, @% can be the agent of conflicting parties (the ban % its clients)

e. Independent ontractor – F# person who contract with another to dosomething but is &>0 controlled by the other nor subject to the other’s>&0>$ of physical conduct. @e may or may not be an agentG

<(+)". 6ia"ility in Contract77ost i+portant section o Agency9

i. $he %rincipal&s Liability to $hir' %arties

!. #eneral Rule – /’s are liable for the acts of their agents only when the agentsare acting with a type of authority – implied actual e1press actual inherent andapparent authority.

2. '1press #ctual #uthoritya. Actual Authority – /’s words or conduct would lead a reasonable

person in the #’s position to believe that the / wishes the agent to act

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". *:press Actual Authority R. 2; – / speciies +inutely what agent is todo. !nless special rules apply authority to do an act can be created bywritten or spoen words or other conduct of the / which reasonablyinterpreted causes # to believe the / desires him to act on the /’saccount. $ tells A e:actly 1hat to &o.

i. Test7 what a reasonable person in #’s position would thin:c. (illiams v. D)gan

i. 4acts7 2 authorized 9illiams to pay all ta1es in 6essy’s name.It doesn’t say he can borrow ? to pay ta1es. ;oes he haveauthority to do so:

ii. 5ol&ing, &o granting a general blanet clause is overly- broad and borrowing money is not included.

iii. @owever he has the power to mortgage the property. @e hasimplied authority "<c a reasona"le person 1oul& thin= he

ha& authority.,. %olicy – courts will typically never grant general

clauses bBc they worry about seriousness of borrowing money.

(. Implied #ctual #uthority % #pparent #uthoritya. I+plie& Actual Authority R 2; – 9hether a reasonable person in the

#’s position would assumeBinterpret from all of the /’s manifestations tohim (lie conduct previous dealings etc.) that he had the authority to dosomething.

". Apparent Authority R 2> – 4anifestations of the / to a +rd party (ormanifestations by the # of the +rd /arty that the / authorized # toemploy) would lead a reasonable person in the +rd /arty’s position to believe that the / had authorized the agent to do.

i. &ot possible where / is '?%ISC6OS*% – +rd /arty has nonotice that # is acting for /.

,. %isclose& – +rd party has notice that # is acting or a /% notice of /’s identity

. $artially &isclose&<uni&entiie& – +rd party hasnotice that agent is acting or a / but no notice of /’s

identityc. Comparison with implie' act)al a)thority – usually if there is implied

actual there is also apparent authority bBc reasonable +rd parties % #’sdraw same conclusions.

i. '1ception – # letter to an # limiting his authority that a +rd party never receives.

&. *ssco Geometric v. Harvar' In')striesi. 4acts7 /urchasing manager engaged in a 2 without authority

from /resident. &o e1press authority for 2’s over ?H permemo.

ii. Issue7 ;id 5ray have either e1press actual or apparentauthority to bind the company to the 2:

iii. 5ol&ing7 # reasonable person could conclude that 5ray acted

per his actual e1press authority via his position and prior acts.,. I+plie& – &o 5ray could do as much as his predecessor 6est could do in that office e1cept forthe memo. (remember from #’s view)

. Apparent – *es +rd /arty doesn’t now about thememo8 custom of the industry purchasing agentshave the authority to mae such sales.

. Inherent #uthoritya. Inherent Authority Rest 2& !;! – only available for a general agent8

agent may bind a / even where agent had neither actual nor apparent

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authority. >perates much lie respondent superior in torts. 'n&isclose&

principal only.i. #eneral agent – authorized to conduct a series of transactions

involving a continuity of service where acting in the usualcourse of business commits acts that are !"!#$ % &''""#*.

,. 'ven if they are forbidden by the / the other partyreasonably believes that the # is authorized to dothem and has no notice that he is not so authorized.

ii. Special Agent – authorized to conduct only a singletransaction or only a series of transactions not involving acontinuity of care.

iii. 777(r& Restate+ent &oesn@t a&opt inherent authority9

". +i'' v. $homas *'ison, Inc.i. 4acts7 #gent booed Ftone testG recitals.

ii. Issue7 ;id the employee have inherent authority to bind thecompany to the 2:

iii. 5ol&ing7 ourt says he did. @e was a general agent to a fullydisclosed principal.

,. 6y engaging in activity that would cause most people

to believe he has the authority to do this he naturallyis charged with inherent.

c. orris -il Co. !ainbow -iliel' $r)c#ing, Inc.i. 4acts7 4orris sues ;awn for ainbow’s failure to pay ?H2

under their 2 for installation of a diesel fuel bul dispenserthat too place in the ordinary course of business.

ii. Rule7 " ,E= – # / is liable for usual or necessary acts donein transactions by the # if / authorized # to do transactionseven if / forbids specific acts.

,. %olicy – 4orris mislead. *ou would assume that a big company lie ;awn had capacity to buy the fuelnecessary for business and mae / liable for the costsof doing business

. 'stoppel and atification would also applyiii. *:a+ Analysis,

,. 9as ainbow ;awn’s agent:a. 9as ;awn in control: ight to control: b. 9as it for ;awn’s benefit:

. 0hen assuming is ;’s agent then did ; havee1press actual authority to act:

a. In the ordinary course of business: b. easonable # interpret authority:

+. #ssuming it’s not in the ordinary biz then did haveimplied actual authority:

a. emember if no e1press actual authoritycan be no implied actual

=. ;id have apparent authority:a. 9hen / is undisclosed no ##H. ;id have inherent authority

a. !ndisclosed / b. 9as a general agent:

. atificationa. Ratiication 82 – 9here agent lacs actual apparent or inherent

authority / will be bound to +rd party if # purported to act on /’s behalfand the / with nowledge of the material facts either7

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i. #ffirmed the #’s conduct by manifesting an intention to treatsuch conduct as authorized (e1press)8 >

ii. 'ngages in conduct that is justifiable only if he has suchintention (implied)

,. / basically creates authority which wasn’t there before

". *vans v. !)thi. 4acts7 'vans hired by oral 2 by $umber to haul stones. 9hen

he went to collect pay $ didn’t pay him.ii. Issue7 ;id $ ratify his unauthorized act by furnishing the wor

slips and verbally acnowledging that she will pay him:iii. 5ol&ing7 #lthough ' relied primarily on oral 2 wB# it was

sub ratified by the / and is enforceable.,. 'vans had no way o fnoing that $ had sublet wor

to an I.iv. *:a+ – ;id e1press ratification e1ist: ;id implied ratification

e1ist: (reasonable person test)c. "otticellow v. /teanovic0

i. 4acts7 oupled owned farm as tenants in common. @ sold to6otticellow but he only owned half. 6 didn’t now that the @

only owned half of property.ii. Issue7 ;id the @ act as the 9’s authorized agent in selling the

property:iii. 5ol&ing7 &o # relationship e1isted bBc wife never authorized

him to act on her bBh as #. 6eing married doesn’t establishagency relationship.

,. 77emember under nd you can’t have ratificationif the / is undisclosed so if there is no actualauthority there will be no ratification.

. DD+rd allows ratification even if / is undisclosed;. 'stoppel

a. Agency "y *stoppel – /erson has not made a manifestation that actorhas authority as an agent and therefore would not otherwise be liable for

a transaction is liable to +rd

party who was induced to mae a detrimentalchange in position bBc the transaction is believed to be on the person’saccount if putative /7

i. Intentionally or carelessly caused such belief in /8 > ii. 9ith notice of such a belief % its potential effect failed to

tae reasonable steps to notify the + rd party of the facts.". Ho''eson v. +oos "rosDDD>ne of #5’s favoriteJ

i. 4acts7 @oddeson purchased furniture at a store but got noreceipt8 she never got her furniture.

ii. Issue7 ;id the fae salesman have apparent authority:iii. Rule7 'stoppel covers omissions to act. 0his ind of estoppel

is more lie saying there is a duty for the store to usereasonable care to protect customers.

c. "ummary of two other ways that a / may be liable even without #&*type of authorityi. atification – e1press or implied

ii. 'stoppel theoryii. $he Agent&s Liability to $hir' %arities

!. Stan&ar&7 9here # has actual apparent or inherent authority such that the / is bound the #’s liability depends on the disclosure of the /

a. %isclose& $ 2& (20 –If # contracts with a + rd party on bBh of adisclosed / the # is not liable on the 2 absent a contrary agreement.

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". 'n&isclose& 2& (22 – # is liable even though / is also liable. # purporting to act upon his own account but in fact maing a 2 onaccount of undisclosed / is party to 2. an force you to choose whichone to sue can’t sue both.

i. aority Rule – # is discharged upon judgment against /("ingle Kudgment ule)

ii. inority Rule – # is discharged once judgment is satisfiedc. $artially %isclose& R2& (2! – If agent contracts with +rd party on bBh

of a partially disclosed or undisclosed / the agent is normally liable onthe 2. $iabilities are alternate. (jointly % severally liable)

&. here the agent &oes not haDe actual) apparent) or inherent

authority such that the $ is "oun&) agent is lia"le.

2. 1an D. Costas v. !osenberg

a. 4acts7 Keff osenberg signed for 4agic 4oment as agent for "eascape.0he reason for liability under +, is that we want #’s resources tosatisfy the 2 because the +rd party doesn’t now /’s creditworthiness.

". Issue7 ;id Keff sign 2 as agent for undisclosed / ("eascape):c. 5ol&ing7 In order to avoid personal liability Keff should have disclosed

not only he is an agent of " but also disclosed the identity.i. DD0rade name doesn’t count as good enough disclosure2

iii. $he $hir' %arty&s Liability to the %rincipal!. #eneral Rule – eciprocal liability where / is liable to the +rd party (if agent

acted with authority). +rd party is bound if / is bound. +a. *:ception (0 – / is undisclosed and either the / or the # nows that he

wouldn’t do if he would have nown who the / was. @irsch case is agood e1ample of this.

". Hirsh v. /ilbersteini. 4acts7 "ilberstein purchased a lot from @irsch and

immediately conveyed to rosses a blac family. "’s nowwant the land bac they are racists.

ii. Issue: Is @irsch liable as +rd party for concealing undisclosed/ the rosses: (no)

iii. 5ol&ing, 0here was no fraudulent concealment or inducement

and @ had no legal duty to disclose.,. 6ut because "ilberstein the agent could not have

nown they were racists they would not have nowthey would not have dealt with him.

. "hould have put in contract no undisclosed /’s.iv. Liability o Agent to %rincipal

!. Stan&ar&7 If an # taes an action that she has no actual authority to perform butthe / s nevertheless bound because the agent had apparent authority the # isliable to the / to resulting damages.

v. Liability o %rincipal to Agent

!. Stan&ar&7 If an agent has acted within her actual authority the / is under a dutyto indemnify the agent for payment authorized or made necessary in e1ecutingthe principal’s affairs.

c. The Agent@s %uties to the $rincipali. $arnows#i v. !esop!. 4acts7 0 sues # for commission and damages arising from #’s breach of fid-

duty. # accepted a bribe.a. 4erely rescinding the 2 did not mae / whole8 he also had business

losses investigation fees and attorney fees.2. 5ol&ing7 0he ourt awards the / contract damages to mae him whole again

plus breach of fid-duty damages to pay bac the bribe moneya. ecovery on breach of fid-duty maes / better than whole – deters

disloyalty by #

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". 9hether he had any losses or not – # would still have to pay for breachof fid-duty

(. Rule7 #ll profits made by an agent in the course of an agency belong to the /whether they are the fruits of performance or of a violation of an agent’s duty.

. Stan&ar&7 #n agent is a fiduciary a person who is re3uired to act for the benefitof another person on all matters within the scope of their relationship.

a. An agent has 3 i'4')ties to a %:i. 6oyalty – to act in the best interests of /

ii. Care – to perform tass of / with all reasonable careiii. O"e&ience – "ubject to /’s control

. 5ol&ing7 #s part of these fid-duties all profits earned by an # during the courseof agency whether inBoutside scope of business or with or without authority belong to the / regardless if the transaction was profitable or if the / suffered nodamages.

a. / and # are free to contract for #’s commission8 anything else belongs tothe /

". !ationale – precludes having to investigate nature of #’s loyalty;. Stan&ar&7 # is liable where he acts without authority (breach of warranty)

a. If / revoes actual authority # may still be liable to / for damageswhere apparent but not actual authority e1ists. 0his rule with inherent is

unsettled.&. The $rincipal@s %uties to the Agent

i. cColl)m v. Clothier

!. Cacts7 4collum brought action against lothier to recover under implied 2 forservices rendered by / in securing bidders on and buyers of machinery ande3uipment sold for benefit of ; at sheriff’s sale after foreclosure.

2. 5ol&ing7 # /rincipal must pay for the reasonable value of his services pluse1penses there is an implied contract.

(. Stan&ar&7 If # has acted within actual authority / has a &uty to in&e+niy for payments that were authorized or made necessary in e1ecuting affairs.

e. I+puting an Agent@s Eno1le&ge to the $rincipal

i. Stan&ar&, 282/! – # / is not affected by the nowledge of an agent in a transaction inwhich the agent secretly is acting adversely to the / and entirely for his own or another’s

purpose unless7!. 0he failure of the # to act upon or to reveal the information results in a violation

by the / of a contractual or relational duty82. 0he # entered into negotiations within the scope of his powers and the person

with whom he deals reasonably believes him to be authorized to conduct thetransaction8 >

(. 6efore he has changed his position the / nowingly retains a benefit throughthe act of the agent which otherwise he would not have received.

ii. Cenco v. /ei'man /ei'man

!. 4acts7 "@ brought class against the corporation and auditors alleged violationsof securities fraud.

2. Issue7 9hether enco is liable for fraud planned by its managers:(. 5ol&ing7 # company is deemed to now what its agents now (unless the agents

were acting adversely to the company) @ere there is no adversity of interest soenco is deemed to be nowledgeable.a. i5e' motives – even when # acting in self-interest must be entirely for

own benefit to be acting adverse to the company". -pen iss)e – what about nowledge of lower-level employees:

i. + est H.+ – "o long as # is acting within the scope of hisemployment / is bound by his nowledge.

. Ter+ination o the Agency Relationship

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i. Stan&ar&7 0he / always has the power to terminate but based on what the contract sayshe may or may not have the right to do so. It’s a powerBright distinction. 'ven if he breaches the contract as long as damages are paid.

ii. H)nt v. !o)smanier&s A'ministrators!. 4acts7 was lent money and as security e1ecuted power of attorney on two

ships which gave the lender power to mae and e1ecute a bill of sale2. Issue7 ;oes the power of attorney retain efficacy after death: (&o)(. Rule, # power of attorney ceases wBlife of person giving it e1cept7

a. I a po1er is couple& 1ith an interest3 it surDiDes the person giDing

it) an& +ay "e e:ecute& ater his &eath. ". 0he interest be in the thing itself (title to item not proceeds)

. @olding7 '1ception doesn’t apply here not coupled with an interest.a. 9hen coupled wBinterest no longer acting as # but now as /

. 0o avoid confusion + uses Ftermination of powers given as securityGII. The $artnership

a. 4or+ation

i. $artnership – an association of two or more persons to carry on as co-owners a businessfor profit. See '$A ;) R'$A !0!/;

!. Cor purposes of our class !/# will be considered Fthe lawG. ,EE- but all p-ship analysis will start with !/# since this was the law when these cases were

being decided.ii. Rules or &eter+ining e:istence o a $-ship. %oes the relationship eDi&ence an

agree+ent to "e partnersFF hen no e:press $-ship agree+ent e:ists) a relationship

1ill only "e consi&ere& a $-ship i our ele+ents are present - See '$A >,

!. #greement to share profits is Fprima faceG evidence of /-ship but inferencedisappears where profits received in payment as a debt by installments orotherwise

2. #greement to share losses(. 4utual right of control or management of the business. ommunity of interests (rarely used no one nows what that meansJ)

iii. 0he four-element tests departs from !/# <(a) which simply says F'1cept asotherwise provided in subsection (b) the association of two or more persons to carry onas co-owners a business for profit forms a /-ship whether or not the persons intended to

form a partnership.!. R'$A 202/c/(, # person who receives a share of the profits of a business is

presumed to be a / in the business unless the profits were received in paymentof debt by installments or otherwise.

iv. '1am #nalysis7 #lways loo to see whether the group is actually a partnership.v. /artnership v. reditor-;ebtor elationship

!. artin v. %eytona. 4acts7 # baning partnership was in financial difficulties so they

entered into an FagreementG with a few individuals to loan them li3uidsecurities to get more cash. In compensation for the loan they were toreceive =L of the profits of the firm until the loan was paid off and thereturn was made.

i. 0he men did not believe they were bBc partners but rather just

FlendersG. @owever intent doesn’t matter but rather thenature of the relationship.". Issue7 9hether they are partners and whether they operated as co-

owners of a business for profit: 0he ourt loos to the ey provisions of the loan agreement for answersA.

i. "hare /rofits,. *es – even if reason is repayment of loan. &o – there was a ceiling on the amount that would be

shared so they were not true business partnersii. "haring $osses

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,. *es – if business fails outside creditors will taesecurities

. &o – theoretically it is the company’s job to pay own bills

iii. ontrol,. *es – veto power . &o – only had negative power and could not suggest

business ideas.c. 5ol&ing7 0he court says there was no affirmative control here – veto

power alone doesn’t give them enough control to consider them partners.0hey also didn’t have affirmative control to bind the company to anytransaction or mae the company do something

i. @owever #5 thins the better reason was there was nointent to be partners in this situation.

&. Stan&ar&7 0est for whether a /-ship has been formed is based onwhether the parties intended to have the ind of relationship which thelaw characterizes as a p-ship not whether the parties thought they wereactually partners.

i. ourt will give some weight to the parties’ intentii. Informal creation is a uni3ue aspect compared to other

business entitiese. Stan&ar&7 /owers that investors have such as seeing boos the right to

be consulted on big decisions veto power and even the right to maeother /’s resign % bBc /’s themselves is not sufficient for them to beconsidered a /. 0hey do not have the right to control day-to-day businessof /-ship.

vi. /artnership v. 'mployment elationship!. Stan&ar&7 Ciring a partner for the purpose of eeping the business or profits to

oneself is a breach of fid-duty.2. "ec#man v. Farmer

a. 4acts7 0hree $’s had joint practice and received large settlement fee after Carmer left.

". Issue7 9as the joint practice a partnership:

c. Cactors that pointed to the e1isted of a /-ship7i. "haring profits

ii. "haring losses – 6ecman guarantees all loansiii. ontrol – 6ecman included Carmer on some decisions but

unilaterally fired Carmer’s secretaryiv. #greement – yes firm name ta1es and lease

vii. /artnership v. Independent ontractor elationship!. 6ieglar v. Dahl

a. 4acts7 "everal men create ice fishing service. 0hey hired other menand e1tended a F/-ship proposalG but never signed.

". Issue7 9ere Mieglar and 2irsh partners:c. 5ol&ing7 0hey failed to satisfy the element s of intent and co-ownership

re3uired to form a /-ship.

&. Stan&ar&7 0o form a /-ship three elements must be satisfied7 intent co-ownership and profit motive. #dds in intent.2. R'$A 202 adds to definition Fwhether or not the person I&0'&;" to form a

/-shipG ;id they intend to be co-owners of a business:viii. /artnership by 'stoppel

!. Stan&ar&7 !/# <+N if a person purports to be a partner or consents to beingrepresented by another as a partner and a +rd party relies on that representationthe person is liable to the +rd party.

a. If the representation is public the person is liable even though he isunaware of the representation of the claimant

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i. If /-ship liability then there is liability as partner ii. If no /-ship liability then the person is liable jointly and

severally with any other person consenting to therepresentation

iii. $>>2 at !/# % !/# differences here in boo 2. Cheeseca#e Factory v. "aines

a. 4acts7 heesecae says they wouldn’t have entered the 2 if they wouldhave nown 6aines was just a corp and not a /-ship.

". Issue7 9as there reliance in this case:i. 7es – there was no way for a +rd party to now whether they

were a partner or a corporation (not registered with the state)8creditor would not have e1tended credit 6!0 for therepresentation

ii. 8o – creditor could have simply run a credit chec c. 5ol&ing7 eliance is re3uired to establish public misrepresentations of a

/-ship. /ublicly he held himself out.&. R'$A (08/a re3uires '$I#&' whether the misrepresentation is

public or private.i1. #ggregate v. 'ntity "tatus

!. Stan&ar&7 !/# – #ggregate theory7 as soon as partner leaves partnership will

be dissolved. /-ship is sum of persons who comprisea. an’t contract around this re3uirement". >ld /-ship should have included in the contract that any new partnership

would have same rights as old /-ship2. Stan&ar&7 !/# – /-ship is viewed as an entity. /’s unanimously agree not to

dissolve the partnership when a partner decides to leave.(. Fairway v. Development Co. $itle Ins)rance Co.

a. Cacts7 0itle o insured Cairway against defective title but Cairway laterfound an encumbrance. "ays they are only liable to Cairway , and notnd /-ship.

". 5ol&ing7 #ny change in the personnel of /-ship will result indissolution under !/#. 0herefore no 2 e1isted with new oneB

i. 77Re+e+"er) this 1oul& "e &ierent un&er R'$AJ

1. Cederal 0a1 onse3uences!. /-ship is ta1ed on a pass-through basis

a. &et income or loss from /-ship is allocated among the /’s % then carriedover to each /’s individual return

". 6enefits of Fpass-throughG ta1ation7i. &o double ta1ation (ta1 at / level)

ii. $osses may shield other incomec. ;isadvantages7

i. / ta1ed whether or not there is a cash distribution". anage+ent G Control

i. Stan&ar&7 !/# <+, 'ach partner is an agent of the /-ship for the purpose of its business.

!. #n act of a partner for apparently carrying on in the ordinary course of the

business binds the /-ship unless the partner ha& no authority to act to the /-ship in the particular matter #&; the +rd party ha& notice that the partner

lac=e& authority

ii. !/# <+,-++ is subject to a "tatement of /-ship #uthority filed with ">".iii. R'$A 0! /'$A !8 $artners Rights G %uties

!. /" %eault proits an& losses – each partner is entitled to an e3ual share of the p-ship profits and is chargeable with a share of the p-ship losses in proportion tothe /’s share of the profits.

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2. /c anage+ent – # p-ship shall reimburse a / for payments made %indemnify a / for liabilities incurred by the / in the ordinary court of the business of the /.

(. / each / has e3ual rights in the management and conduct of business. / /a"sent an agree+ent business differences between the partners may be

decided by a majority of the /’s. #n act outside the ordinary course of businessof the /-ship and an amendment to the /-ship agreement may be made only withconsent of other partner s.

. '$A !8 is su"stantially si+ilar

iv. /)mmers v. Dooley

!. 4acts7 "ummers and ;ooley entered into a /-ship agreement. ;o couldn’t woranymore so " was the only / actively running the business. ; hired areplacement but " wanted to hire a third person as an employee of the /-ship but ; objected. " still hired the +rd person.

a. " sued for reimbursement of the employment costs of the +rd personunder !/# <,N(b)

2. ; argues !/# <,N(h) all decisions regarding ordinary matters of the business

re3uire consent of the majority of the partners.a. 'ach partner gets one e3ual vote regardless of investment in the p-ship

unless altered by the /-ship agreement.

(. " argues !/# <,N(e) all partners have e3ual right in the management and

conduct of the /-ship business.a. 0herefore " has just as much of a right to hire someone as ; does and

by refusing to hire " can’t carry on the business of the /-ship". ;’s rebuttal to this argument is that this reading of the statute directly

conflicts with ,N(h)i. 4ost would side with this argument and say that <,Ne only

means to say that all /’s have a right to be consulted on /-shipdecisions but they might not get to have their view followed bBc of <,Nh

. 5ol&ing7 0he court follows ,Nh and states that a majority didn’t consent to thehiring. @e made it clear and actively objected. 0herefore " had no right to hirethe third person.

. Apparent Authority 5ypo – if third party sued ;ooley for not paying wagesapparent authority says that all parties in a p-ship are liable. +rd party couldrecover against ;ooley. ;ooley could recover against "ummers the principle ifhe is solvent.

a. !8h is ust a &eault rule that can "e contracte& aroun& v. "an# v. International ")siness achines Corp.

!. 4acts7 I64 had veto power where arbitration contract is unclear. 0rust could notforce arbitration.

2. 5ol&ing7 #n amendment to managerial authority must be very clear toovercome presumption of default rules – an e1traordinary matter re3uiresunanimous consent. "o I64’s veto is absolute bBc proposal involves anac3uisition in real property instead of refinancing.

c. 4inancial Rights G O"ligations

i. /artnership #ccounting5!. Stan&ar&7 If sold for cash absent an agreement each partner is entitled to

receive an amount e3ual to his or her capital account and each partnercontributing only personal services is not entitled to any share of /-ship capital pursuant to dissolution.

a. @owever there may be an e1press or implied agreement that personalservices 3ualify as capital contributions.

". ;raw O cash contribution and must be determined by a majority of the partners.

ii. "haring /rofits % $osses

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!. 0!/" Stan&ar&7 ;efault profits and losses – each partner is entitled to ane3ual share of the /-ship profits and is chargeable with a share of the /-shiplosses in proportion to the /’s share of profits.

a. %eault Rule: Losses ollow proits )nless there is an agreement to thecontrary.

". ;espite this default rule courts to hold in e3uity that labor should notcount as liability when there is loss by implying that the laborer agreedonly to ris his labor. "ee +essler

2. /chymans#i v. Convent0

a. 4acts7 /’s agreed to build fishing lodge HBH basis. " put in large cashcontribution and ’s put more non-cash contributions.

". Issue7 "hould ’s personal services be treated as a non-capitalcontribution:

c. 5ol&ing7 9hen drafted agreements that they would substitute cash for labor contributions these documents implied a modification of the /-ship agreement.

&. Stan&ar&7 In the absence of an agreement otherwise a / contributingonly personal services is ordinarily not entitled to any share of /-shipcapital pursuant to dissolution.

i. But 1here personal serDices +ay Hualiy as capital

contri"utions 1here an e:press i+plie& agree+ent "<tparty e:ists. 5et contribution for services.

(. +essler v. Antinora

a. 4acts7 /’s entered into a Koint Penture /-ship agreement to build and sella home. 2 said how profits would be divided but silent as to losses. 2 put up cash # did all labor.

". 5ol&ing7 9here a house sold at a loss losses should not be splitaccording to their share of the profits. #ccording to 2 2 would only berepaid from proceeds of sale not by # personally.

. *:a+, 0hese two cases above indicate there has been an agreement to alter thedefault rule to help the minority party.

a. Basically) the serDice partner 1ins in "oth scenario. 0he service partner doesn’t get credit if there are losses but they do get credit if

there are profits. 0his is e3uitable rule.". Re+e+"er, If the 2 is silent as to losses the profits follow losses by

default.iii. $iability to 0hird /arties

!. R'$A, $-ship can "e sue& in o1n na+e) ointly G seDerally lia"le or all

o"ligations o $-ship.

2. Stan&ar&7 !/# <+,() Actual authority – any act that maybe authorized bythe other partners.

(. Stan&ar&7 !/# <+,(,) Apparent authority – 'ach partner is an agent of the/-ship for the purpose of the businessAfor apparently carrying on in theordinary course of the business of the ind carried on by the /-ship unless

a. 0he partner had no authority to act for the /-ship in the particular matter8#&;

". 0he person with whom the partner was dealing with new or hadreceived notification that the partner laced authority.c. onsider a +rd party’s e1periences dealing with similar business of the

same FindG.. '$A /())!(-!)!>

a. $-ship can@t "e sue&) oint G seDeral – sue all or so+e) or oint only)

+ust sue all partners.

. *:tra 5ur&le or Cre&itors in a $-ship

a. # creditor may not collect his judgment against a / unless7i. "eparate judgment against the / #&;

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ii. "atisfied the e1haustion re3uirement of the /-ship8iii. /-ship is banrupt8iv. / waived the e1haustion re3uirement by 2 ourt waives it

> / is independently liable to /.;. $iability in ontract

a. ")rns v. Gon0ale0 i. 4acts7 6os3uez and 5onzalez are /’s in radio station ad

agency. 6os3uez got a loan from 6urns. "hould 5 also beliable as /-ship obligation:5ol&ing7 laimant did not fulfill burden of proving act ofagent was in the Fusual wayG in which advertising agenciestransact business.

,. 6os3uez didn’t have authority to issue a note to6urns and bind the /-ship therefore 5onzalez wasnot liable.

>. $iability in 0orta. Stan&ar&7 /-ship is liability to a + rd party in tortBcontract for wrongful

acts or omission of /’s acting 9I0@ #!0@>I0* > in the ordinarycourse of the /-ship business.

". /heri'an v. Desmon'

i. 4acts7 I % ; owned as tenants in common a bldg that leasedto night club. ; also owned property ne1t door8 bloced thefire e1it doors to night club.

ii. Issue7 ,.) ;id ;’s tort occur wBin ordinary scope of /-ship biz: #nd .) ;id I authorize his actions:

iii. 5ol&ing7 ;’s actions weren’t wBin ordinary scope % I didn’tauthorize thus I wasn’t liable.

8. Stan&ar&s in '$A<R'$A

a. '$A !(-! – 9hen liability is joint and severable / may sue the /’stogether or jointly

i. 9hen is joint must sue /-ship altogether ii. !/# maes substantially easier to sue in tort than in 2

iii. &o e1haustion rule

". R'$A !0/a – !nless stated otherwise principles of law and e3uitysupplement this #ct.

c. R'$A 20! – # partnership is an entity distinct from its partners&. R'$A (0 – # partnership is liable for loss caused by a partner’s

conduct in the ordinary course of business of partnership or withauthority of the /-ship in both contract and tort.

e. R'$A (0;/a – /artners are liable jointly and severally for allobligations of the /-ship unless otherwise agreed8 e1cept

i. # person admitted into an e1isting /-ship is not personallyliable for any /-ship obligations incurred before the person’sadmission8 #&;

ii. #n obligation incurred while a limited liability /-ship is solelythe obligation of the /-ship

,. >nce the /-ship assets are e1hausted each partner becomes individually liable for the debt.. R'$A (0> /a specifically provides that a /-ship may both sue and be

sued in its own name. (remember the entity status vs. the aggregatestatus of !/#)

. 'nforcing /artnership $iabilities #gainst /artnersa. $hompson v. (ayne /mith Constr)ction Co.

i. 4acts7 0 was in /-ship wB others. /-ship entered enter 2with 9" for building home % after dispute 9" sued for breach of 2.

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ii. Issue7 Is 0 liable individually for the full amount of the /-ship’s debt: (yes)

iii. 5ol&ing7 !nder the F*:haustion Rule3) a /-ship creditormust first e1haust /-ship assets before pursuing individualassets of the other /’s. 9" did this therefore 0 isindividually liable for debt.

iv. To esta"lish in&iDi&ual lia"ility – proDe a separate EJ or

proDe the $ assets haDe "een e:hauste&. R'$A giDes

cre&itors oint G seDeral lia"le "ut also has e:haustion that

'$A &oesn@t haDe) "<c aggregate theory.

!0. In&e+nity G Contri"ution Stan&ar&7 if a / pays a p-ship obligation he isentitled to be indemnified by the /-ship !/# <,N(b)8 !/# <=,c

a. If the /-ship unable to pay the other /’s must pay according to theirloss-shares

&. >wnership Interests % 0ransferabilityi. /artnership /roperty

!. R'$A Stan&ar&7 A partnership is its o1n entity. "ee !/# <,(a). /ropertyac3uired by a partnership is the property of the /-ship and not of the partnersindividually. "ee !/# <+.

2. '$A Stan&ar&: !nder !/# <N(+) which reflects the aggregate theory the /-

ship can’t own its property directly. #lthough N(+) real estate 4#* be ac3uiredin the /-ship’s name.

a. # /-ship cannot use the /-ship property for non-partnership purposes". annot assign interests in p-ship property

(. Stan&ar&7 #lthough a partnership interest is assignable a p can’t mae anassignment of his /-ship interest that would sub the transferee as a / in thetransferor’s place bBc no person can be a / without the consent of the rest of the/’s.

. Stan&ar&7 !/# <=(a) /roperty belongs to the /-ship is ac3uired in thename of the /-ship or one or more partner with an indication in the instrumenttransferring title of the e1istence of a /-ship.

. Stan&ar&7 !/# <H, # partner is not a co-worer of a /-ship property and hasno interest in /-ship property which can be transferred.

;. onveyancea. Stan&ar&7 !/# <+, /artnership property may be transferred by a

partner in the /-ship name if7i. 0he title in the /-ship name if they have authority under "++8

ii. 6y the partner in his name if the property is held in that nameand indication of /-ship

iii. 6y the partner in his name if property is held in his name,. 0here’s no limitation to real property lie in !/#

". Stan&ar&7 !/# , 0itle to /-ship property may be conveyed by7i. 'ither partner in the /-ship name when title in the /-ship name

ii. 'ither partner in his own name where title in the /-ship nameand authority under E.,8

iii. # partner in his own name where the property is in that name8

iv. # partner in his name of /-ship name when /-ship not just inhis name and has authority under E, and passes e3uitableinterest.

>. +ay v. Gitomer

a. 4acts7 0enants in partnership (couple). 2 sold lot by 2 % ' wBo '’sconsent.

". Issue7 9as the lot owned by 2ay and ' as tenants in pp: (yes intent touse property as cap contrib. for pp) ;id the 2 of sale signed by only 2 bind the p-ship:

c. 5ol&ing7 2 had actual authority to sign the 2 for the p-ship.

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&. 5itomer has an e3uitable interest under !/# <,(=). 0his is sloppy bBcnot good as legal title which will prevail. !/# is better and all transferswill count and there is no distinction bBt legal % e3uitable time.

ii. #dmitting &ew /artners v. #ssigning /artnership Interests!. Stan&ar&7 !/# <=,(i) # person may become a partner only with the consent

of all the other partners.a. ourts are reluctant to enforce a contract around this rule unless intent of

the parties is clear.". 0he assignee of a /-ship interest doesn’t bBc a / has no right to

information. @owever as long as /-ship continues the assignee has aright to /-ship distributions and on dissolution a right to receive theassigning /’s interest.

2. Stan&ar&7 !/# <H the only transferable interest of a / is the /’s share of the profits and losses of the /-ship and receive distributions – personal propertyinterest.

(. Stan&ar&7 !/# <N,(a) provides that a transferee of a /’s transferableinterest is entitled to judicial dissolution of the /-ship

a. #t any time in a /-ship at will8 #&;". #fter e1piration of the /’s term or the completion of the undertaing in a

/-ship for a particular undertaing

. !apoport v. 99 %errya. 4acts7 0wo families owned HL each of a /-ship. $ater the ’s assigned

a ,L interest out of their share to the adult children. >ther /’s refusedto recognize the children as new partners.

i. @ere the parents can assign interest to ids wBo consent butcan’t mae ids /’s wBo unanimous consent.

". Rule7 It taes unanimous consent to mae a new partner unless there is a prior agreement. R'$A 0(,

c. Stan&ar&, # partner has a property right in his interest in the partnershipand can assign his interest in profits and losses and the right to receivedistributions. R'$A 02

,. 0he right to participate in management though is the property of the partnership itself.

. #n assignee may be made without consent but he isonly entitled to receive the profits of the assigning partner.

iii. 0he ights of /artner’s reditors!. Stan&ar&7 *ou can freely assign partnership interests but you can’t assign to a

person your status as a partner. 0his means that /’s can use their interest tosecure a debt to creditors but the assigning / will remain a /.

2. Hellman v. Anderson

a. 4acts7 CBc sale of #nderson’s interest in the /-ship.". 5ol&ing7 # debtor’s interest in p-ship may be fBc’ed upon % sold even

though other /’s don’t consent to sale provided the fBc doesn’t undulyinterfere with the p-ship biz.

c. Stan&ar& Seizure o a $artner@s $roperty, /'$A 28/2 G R'$A

0/"i. Step K!- Lu&g+ent

ii. Step K 2 - reditor achieves a charging or&er – which is alien on the judgment debtor’s transera"le interest in the /-ship.

,. 5ives creditor a right to be paid in distributions. 6ut bBc /-ship doesn’t have to mae distributions of

little use+. ;ebtor partner retains the rights of management

ordinary % e1traordinary votes

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iii. Step K( - 4oreclosure Qother option is forced banruptcyR!/# <H= (b) ourt 4#* order this to happen at any time

,. "till doesn’t force p-ship to mae distributions. 0his is a discretionary matter – the court will

consider the lielihood of creditor getting paid %liely disruption to the /-ship.

+. !/# doesn’t re3uire approval by the partiesiv. Step K 4orce& Lu&icial %issolution

,. !nder both !/# <+() and !/# <N,(S) anyonewho buys at fBc sale is entitle to force dissolution ifthey receive no distributions after fBc sale

. ourts tend to grant this optionv. Step K Ban=ruptcy Mi all else ailsN

,. !pon banruptcy a partner is dissociated from the partnership. !/# <S,(S)(i)

. 0he other partners may buy out the dissociated partner’s interest in the /-ship. !/# <T,(a)

vi. Outco+e - @opefully reditor receives debtor partner’s shareof the /-ship

e. Fi')ciary D)ties

i. 0he ommon $aw!. einhar& D. Sal+on

a. 4acts7 4 cuts " out of a deal on a new lease agreement. "almoneffectively stole an opportunity for greater investment from 4einhardwho was his partner. >nce the lease was over "almon pursued aredevelopment plan that was offered to him while they were still in a /-ship together. /’s owe each other A the &uty o the inest loyalty. A

trustee is hel& to so+ething stricter than the +orals o the

+ar=etplace. ?ot honesty alone "ut the punctilio o an honor the

+ost sensitiDe.3

". Stan&ar&7 9hile partners are not true fiduciaries their relationshipentails several fid-duties which can’t be changed by contract. 0hey mustnot usurp business opportunities belong to the partnership from your

partner .See R'$A !0(/"i. %uty o 6oyalty – cannot steal business from one another.

0his reduces the ris of doing business but also underminesefficiency.

ii. %uty o Care

iii. %uty to Inor+ each other of material facts. '$A 20

c. ompared to '$A) R'$A 0 /" limits fid-duties of a partner toloyalty and care and e1plicitly provides that acting in own interest is nota violation.

i. R'$A 0/e – # partner doesn’t violate their duties to the/-ship just bBc their conduct furthers their own interests

ii. R'$A !0(/"/( – 0he duty of loyalty is mandatory and itcan’t be contracted away via a written /-ship agreement but

the /-ship agreement CA? define reasonable standards of1hat constitutes loyalty.&. "uits by /’s against /-ship have been limited to suits for an accounting

'$A 22 or for dissolution as a result of language in '$A !(.R'$A

(0 permits suits by /’s against /-ship in tort or any other theorye. $olicy Reason7 ;ue to the level of intimacy and economic vulnerability

partners would be able to tae advantage of one another. 0his rule protects minority partners against majority oppression. 6ut as dissentwrites is this overly broad:

ii. odification of Ciduciary ;uty and ontractual 9aiver

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!. Stan&ar&7 !/# <,+b(+) # fid-duty cannot be waived but7a. It can be defined by indentifying specific types of activities that do not

violate the duty of loyalty and". #cts that would violate the duty of loyalty may be authorized or ratified

by the /-ship.2. Stan&ar&7 !/# <== # partner owes the fid-duties of loyalty and care. ==d

re3uires good faith and fair dealing when discharging any duties owed to the /-ship.

a. <== e acting in one’s own interest does not violate the duty of loyalty". <==f allows transactions with the partnership

(. /inger v. /inger

a. 4acts7 " had /-ship8 made specific amendment to agrmt said it would beo for / to compete wBp-ship just as if not members

". Issue7 ;id this violate the /’s fid-duty not to compete: (no)c. 5ol&ing7 6Bc of the /-ship’s specific agreement the /-ship 2’ed away

its rights to e1pect a non-competitive fid relationship with any of its /’s.&. RA#7 0his case practically eliminates the duty of loyalty and is an

e1tremity. ;oes it fit within the standards of !/# or even !/#: ==bduty of loyalty can’t compete::

. %ela1are@s 6a1

a. 0here is no limitation on ability to waive fid-duties by agreement. "inger then would not be an issue. 0his is default rule and is uni3ue. If allagree will not owe fid-duties at all.

iii. 0he ;uty of $oyalty!. Stan&ar&7 !/# <==(b) # partner’s duty of loyalty to the /-ship % other /’s is

limited toAacting as an adversary with the /-shipa. !/# <,+(b) lists what may not be waived under this act

2. *nea v. /)perior Co)rt a. 4acts7 ;’s were not categorically allowed by ==e to lease property to

themselves at less than maret value. 0his would depend on whether thiswas a breach of loyalty which was done on behalf at the e1pense of the/-ship.

". 5ol&ing7 "o long as a transaction is consistent with ==b and ,+b you

may transact with the /-ship under ==fc. Broa& Rea&ing 07 0aing away anything that would be considered

profits would be considered violating the duty of loyalty. <==(e). (Curthering own interest doesn’t violate duty of loyalty)

&. ?arro1 Rea&ing 07 ;oesn’t violate the duty if they had unanimousconsent – they all did it here.

e. R'$A 0/7 # / may transact wB /-ship when the obligations of the /are the same as those of the person who is not the /. !nder !/# no ";wBo unanimous consent. 0hey should have been leased to /’s at C4P.

iv. 0he ;uty of ;isclosure!. Stan&ar&7 !/# <=+(b) – 'very partner has the right to access the /-ship’s

boos and records. <== c7 /-ship has an affirmative duty to disclose to a partner any information re3uired for the proper e1ercise of the partner’s rights and

duties and to furnish on demand any other information that are not unreasonableunder the circumstances.a. 0his may not be eliminated by the /-ship agreement.

2. (alter v. Holi'ay Inns

a. 4acts7 6uy-out transaction majority / sells out to min /.". Issue7 Is there any duty to mae a disclosure: (no)c. Stan&ar&7 #t common law the partnership has a fid-duty to disclose to

a / material facts.

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i. 4ateriality is whether a reasonable investor would havewanted to have this information when they made theirdecision.

,. Cactors include8 the degree of access to the /-shiprecords sophistication of the complaining partner3ualifications of those preparing information purpose for which the information was intendeddegree of bias reflected.

&. 5ol&ing7 ourt finds immateriali. 0he financial projections (speculative)

ii. ash flow projections (/laintiffs could have found them)iii. #nd the audit report (/’s could have accessed it)

e. RA#7 ourt was wrong here the test is not whether the information isspeculative but whether a reasonable person would have found material, and +. (most wouldJ)

i. es – material – it was done to negotiate the buy-out so it wasobviously an important factor in their calculation.

v. 0he ;uty of are!. Stan&ar&7 R'$A 0/c # partner’s duty of care to /-ship and other /’s in the

conduct and winding up of the /-ship business is limited to refraining from

engaging in grossly negligent or recless conduct intentional misconduct ornowing violation of the law.

2. "ane v. Ferg)son

a. 4acts7 /artners who laced bad faith for merging caused a former partner’s pension to be terminated.

". 5ol&ing7 /artners have a reasonable duty to be careful in a /-ship but aslong as a / is fully informed the /-ship is protected by the business judgment rule. Fi'4')ty 'oes not apply to ormer partners.

vi. ;uties on $eaving the /artnership!. Stan&ar&7 *ou may do the prep wor for moving to the new firm including

hiring new employees but this must be balanced with the duty to wor for the benefit of your current firm.

a. ou can tell clients you are leaDing) i you giDe the ir+ air 1arning

so they +ay also co+pete or the clients@ "usiness.2. eehan v. /ha)ghnessy

a. 4acts7 + /’s leave firm taing over , clients. 0hey secretly sent letterto clients asing their authorization to tae cases wBthem % they deniedthey were leaving /-ship when ased.

". Issue7 ;id the /’s breach their fid-duty by unfairly ac3uiring assent toremove clients to their new firm:

c. 5ol&ing7 *es it was an unfair advantage and it was a breach of their fid-duties. 6>/ on defense that the clients would have shifted to themregardless and looed at circumstantial factors.

&. R**%7 0he firm could deduct overhead costs for the clients taen but attorney’s bills include overhead costs so it is difficult todistinguish.

vii. emedies!. '$A Stan&ar&7 !/# < #n accounting action involves an all-encompassingreview of the /-ship’s affairs and the /’s obligations to each other. It doesn’tre3uire dissolution under !/#. # / has a right to accounting 1hen7

a. If he is wrongfully e1cluded from the /-ship business or possession ofits property by his co-partners

". If the right e1ists under the terms of any agreementc. #s provided by <, – every partner must account to the /-ship for any

benefit derived by him without the consent of the other partners fromany transaction connected with the /-ship

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&. 9henever the circumstances render it just and reasonable2. R'$A Stan&ar&, !/# <=H #ctions by partnerships % partners7

a. # /-ship may bring a claim against a partner for breach of the /-shipagreement or for a violation of a duty to the /-ship causing harm to the/-ship

". # /artner may bring a claim against a /-ship or another partner for legalor e3uitable relief 1ith or 1ithout accounting to7

i. 'nforce the /’s right under the /-ship agreementii. !nder the #ct including =,=+ or ==8 articles STN or T,

right to have interest purchased and N, right to dissolutionand winding up

iii. 'nforce the individual rights of the partner (. D)nn v. 6immerman

a. 4acts7 6reach of fid-duty of loyalty by a / against another.". Issue7 9hether a formal accounting is re3uired in an action at law bBt

partners: (yes typically)c. 9hat is an accounting:

i. #n all-encompassing review of all p-ship’s affairs % at the endanything not complained about can’t be complained aboutagain. 4eant to resolve everything.

&. 5ol&ing7 5eneral rule is that an accounting is generally a prere3 toaction at law that arises from affairs of /-ship.

i. *:ception7 if the dispute is narrow as far as scope and timethen you don’t have to go through the whole accounting

e. R'$A a"olishe& the rule that legal clai+s "<t $@s can only "e

"rought in an accounting action.. %issolution

i. UPA: Aggregate Theory7 ;issolution results when any partner leaves the /-ship !/#<E.

!. aority – ;issolution can’t be prevented by agreement. Cor e1ampleagreement that e1pulsion of a / will not result in dissolution.

ii. %issolution – a change in the relation of /’s caused by any / ceasing to be associated inthe carrying on (as distinguished from winding up) of the business

!. Rightul &issolution – '$A (!/! a. 6y the termination of the definite term of agreement". 6y the e1press will of any / when no term is specified (#t will /-"hip)c. 6y the e1press will of all /’s who have not assigned their interest either

before or after specified term&. 6y e1pulsion of any / from the business bona fide under the power

conferred by agreemente. 6y any event which maes it unlawful for the business to be carried on. ;eath of any partner g. 6anruptcy of any / or the /-shiph. ;ecree of court under <+,(H) !/#

iii. 'vents ausing ;issolution!. %age v. %age

a. Stan&ar&7 /-ships are terminable at-will !/# <+,.,.b". 4acts7 6ros. had /-ship in linen supply biz % as soon as they made a profit , bro wanted to dissolve the /-ship.

c. Issue7 9hether the /-ship was at-will or a term /-ship:&. 5ol&ing7 ourt determines this was not a /-ship by term. 9hat they

claim was a term was no more than a hope /-ship earnings would payfor all necessary e1penses. ;efault is at-will.

i. '$A (!/!/" dissolution of the /-ship occurs by the e1presswill of any p where there is no fi1ed term.

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,. $I4I0 – bBc of fid-duties there is an implied duty ofgood faith.

e. Rule7 *ou can’t e1pel a partner or dissolve a /-ship for the purpose ofstealing their share of the business. "till owe fid-duties not to steal eachother’s business. !/# changes result:

2. "ohatch v. ")tler "inion

a. 4acts7 Kr. / was e1pelled as a / for reporting suspected over-billing/ennzoil by another "r. /8 reduced distribution wBo notice

". Issue7 9hether fid-rlshp bBt /’s creates an e1ception to the at-will natureof /-ships:

c. 5ol&ing7 0he firm didn’t owe a duty not to e1pel her. #lthough fid-relationship bBt /’s /’s have no obligation to remain partners. 0rustrelationship is necessary bBt / and the court refuses to mae an e1ceptionfor whistleblowers.

i. 6ut %age – can’t steal /’s business: Cirm says they didn’t fireher to steal her share8 fired her bBc nuisance

ii. 6Bc of this reasoning they don’t owe her comp damages.&. %issent7 6ad policy – partners have a duty to mitigate nown violations

by other $’s in their firm for the protection of clients.i. /artners may dismiss her but they must compensate her in tort

damages including punitive.ii. RA#7 not fair letting /-ship steal her share of the biz.

e. oul& this case co+e up &ierently un&er R'$AF *es – bBc <T,(a)says she should be bought out by the /-ship.

i. !/# <T,(a) If a / is dissociated from a /-ship that doesn’tresult in dissolution the /-ship will purchase the dissociated/’s interest in the /-ship at a determined buy-out price.

ii. 6ottom $ine – if you are a whistleblower partner you can’t bescrewed.

iv. onse3uences of ;issolution!. #ny partner according to his own will can see dissolution in contravention of

the agreement between partners (!/2 '$A

2. Drei)erst v. Drei)erst

a. 4acts7 0 ordered an in-ind of order of assets but the /’s wanted cash.". Issue7 9hether absent a written agreement to contray a / to the

dissolution and windup of /-ship can force a sale of the /-ship assets:c. 5ol&ing7 *es absent unanimous agreement court would not order in-

ind distribution. !/# <S, and !/# <+Ni. 9hen the dissolution is wrongful breaching partner must pay

breach of 2 damages and has no right to his share in the business.

&. 5ol&ing7 $awful dissolution gives each / the right to have the businessli3uidated. (in cash if they want) 0hat is default.

i. "ame agreement under !/# % !/#v. '47 /er /age a /-ship is dissolvable for will #&; they have right to have entire /-ship

soldJ

vi. 9rongful ;issolution!. Drashner v. /orensona. 4acts7 / is drining a lot not doing his /-ship duty % drawing ? from

the /-ship for personal use bBy /-ship agreement.". 5ol&ing7 # penalty for wrongfully dissolving a /-ship includes a

distributive share that does &>0 reflect goodwill of biz.i. ourt dissolves /-ship bBc it’s not reasonably practicable to

continue biz. It’s been constructively dissolved by the /’sactions. /lus this was a /-ship for term so there was no rightto dissolve it yet.

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c. Rule7 0here are substantial penalties for one who wrongfully dissolves.<+N !/#

i. $iability to other partners for damages for breach ofagreement

ii. Paluation of interest in /-ship discounted for goodwilliii. emaining /’s have right to continue business or li3uidate

regardless of desires of departing /&. R'$A >0!/" is &ierent – wrongfully dissociating partners get a

FbuyoutG price that represent the greater of the going concern orli3uidation value at the time of dissociation. 5oodwill is rejectedJ

2. The *:pulsion o a $artner

a. '1pulsion of a /artner without good cause is wrongful dissolution <+,d". # p-ship agreement may lawfully provide for the e1pulsion of a partner

without cause. <+,dc. '1pulsion cannot be in bad faith – to prevent a / from e1ercising rights

under agreement(. in&ing up (0, A &issolution co++ences 1ith the 1in&ing up o a $-ship

a. /eriod after dissolution but before termination when /-ship finalizesaffairs

i. #fter dissolution assets are sold liabilities of the /-ship paid

in this order. See '$A 0,. &on-/ creditors. / reditors+. / in respect to capital contributions=. ;istribution of remaining profits

. Ter+ination – completion of the winding up process and end of the p-ship as agoing concern.

a. <= d if the /-ship assets are insufficient to satisfy the /-ships

liabilities the /-ship must contribute according to their loss shares(relative to profit shares)

. !/# <++ – ;issolution terminates all authority of the /’s to act for the /-shipe1cept7

a. 0o wind up the /-ships affairs

". 9hen the dissolution is by banruptcy or death of a partner if nonowledge of the dissolution +=

c. 9ith respect to +rd parties (apparent authority - <+H);. Rights to the $-ship $roperty '$A (8

a. /artners can agree by unanimous consent not to li3uidate the businessupon dissolution unless the dissolution is against the /-ship agreement

". # partner who has not breached the /-ship agreement is entitled to windup the /-ship and force li3uidation and to receive his portion of the proceeds in cash

>. A successor $-ship succee&s to the lia"ilities o its pre&ecessor !-!

a. ,T – a new partner’s liability for /-ship obligations incurred before hisadmission may be satisfied only out of /-ship property

vii. RUPA: /artner ;issociation

!. *ntity theory, # /-ship is an entity distinct from its partners <,2. Certain eDents 1ill lea& to &issociation. See R'$A ;0!

a. # / has the power to dissociate rightfully or wrongfully by e1presswill.

". A partner "eco+es &issociate& 1hen,

i. 0he /-ship has notice of the /’s e1press will with withdraw<S wrongfulBrightful

ii. #n event agreed to in 2 occurs

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iii. / is e1pelled per the /-ship agreement (wBd at /’s e1press will bBc end of /-ship term or bBf completion of purpose for which/-ship was formed)

iv. / e1pelled by court order v. / engaged in wrongful conduct that adverselyBmaterially

affected businessvi. / willfully committed material breach of the /-ship agreement

or a duty of care loyalty good faith fair dealing owed to/’sBship under <==

vii. / bBc banruptcy debtor viii. / dies

c. rongul &issociation ;02 #n event of dissociation is rightful!&$'"" is specified in <S(b) as wrongful7

i. 6reach of an e1press provision of the agreementii. Cor term /-ships before e1piration of term

iii. #nything else is rightfuliv. <S (c) a / who wrongfully dissociates is liable to the /-ship

and / for damages&. >0( %issociate& $artner@s 6ia"ility

i. $iabilities incurred before dissociation continues

ii. $iabilities incurred after dissociation where +rd party thoughthe was a partner continues for years

(. So+e &issociations cause &issolution. See R'$A 80!

a. # partner may dissolve an at-will /-ship at anytime". 80! /2 A $-ship or a ter+ or particular un&erta=ing is &issolDe&

1hen,

c. #t the e1piration of the term or on completion of the undertaingi. 6y unanimous agreement of the partners

ii. 9ithin E days of dissociation of at least half of the remaining partners when a partner has wrongfully dissociated himselfunder S(b)

iii. #n event specified in 2 occursiv. #n event maes it unlawful to carry on /-ship business

&. #fter dissolution p-ship continues only to winding up <Ne. A court &ecrees &issolution "ecause,

i. 0he economic purpose of the /-ship is liely to beunreasonably frustrated

ii. # / has engaged in conduct so that it is not reasonably practicable to carry on the business in conformity with the /-ship agreement

iii. >r it is not reasonably practical to carry on the business inconformity with the 2

. "ettlement of obligations with creditors. <NT 9inding up7i. # partner creditors are e3ual to outside creditors when /-ship

assets are soldii. "ame as !/# <+b

g. &o distinguishing of identity as under !/#. I the partner is &issociate& 1ithout &issolution an& 1in&ing up) $-ship

shall "uy out the &issociating $ accor&ing to the Dalue o his interest. See

R'$A >0!

a. 6usiness valued – greater of li3uidation or going concern value <T,". ;eparting / gets same share whether departing rightfully or wrongfully

<T, b but can be held liable for damages if dissolution is wrongful.<T,c

c. emaining /’s have ability to continue the business if made byunanimous agreement

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. %istri"utions in %issolution G *ect on SerDice $@s

a. 0he /rocessi. "plit losses among capital accounts

,. Dea)lt 7 losses follow profits if no agreement on profits split losses HBH <,N !/#

. 9here any / has a negative balance on capitalaccount must bring that balance to zero <,Na

+. #fter all e1ternal and / creditors are paid distributecapital accounts <=

ii. 6ig issue is whether courts will treat the value of /’s servicesas a capital contribution. ourts have tended to applyinconsistent treatment7

,. %roit sit)ation – implied agreement to mae value of services a capital contribution

. Loss sit)ation – agreement that services are not acapital contribution and capital contributor sustainsthe entire loss8 capital contributor is the Fmoneyman’G who should sustain all the loss

III. The Corporation

a. Intro&uction

i. Comparing the %artnership an' the Corporation!. 6i+ite& 6ia"ility

a. "hareholders ("@) can’t be held personally liable on corporateobligations

". In /-ships individual /’s can be held personally liable2. 4ree transera"ility o o1nership interests /creating ne1 +e+"ers

a. >wnership interests – shares of stoc freely transferable". /-ship re3uires unanimous vote (!/# <,Ng) to add new /’s

(. Ter+s o *:istence

a. orporation is perpetual – it e1ists until it is dissolved (which re3uiresformal procedures)

". 9hereas /-ship can be dissolved at will. 6ea&ership

a. orporations have centralized management under the discretion of the board of directors (6;)

". 9hereas in a /-ship everyone participates. 4or+ation

a. orporations are &'P' formed by accident – you must choose whereand what state to incorporate

". /-ships can be formed wherever the arrangement conforms with thelaw’s view of /-ships

". 4or+ation

i. Incorporation and its #ftermath!. Internal Aairs %octrine – $aw of the state where a corporation ()

incorporates is the law that governs all the internal affairs of .a. "mall ’s (closely held ’s) are liely to incorporate where they do the

majority of their business bBc of the overlap in franchise % doing business ta1". $arge ’s are unaffected by the franchise ta1 % incorporate in state that

has most manager-friendly laws2. ;elaware (;'$) is by far the most successful state in attracting incorporation of

publicly held ’s bBc it has the most manager-friendly laws in the country.a. /olicy evaluation to understand reasons for ;'$’s success7

i. Race to the Botto+ Theory

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,. "tates fall all over each other to get franchise ta1dollars % must produce more manager-friendly lawsto receive ’s business

. 0he end result is negative for "@a. "@ rights plans prevents "@ from receiving

the benefit of taeover b. 'ntrenches managementc. $eads to federalization of corporate law

ii. Race to the Top Theory

,. 0he near universal acceptance of ;'$ law isevidence of superiority % efficiency of ;'$ law

. haracterization of Fmanager-friendlyGa. In both 6lasius % 44 court have bent over

bacwards to protect "@+. easons why other states lie &evada who have

tried to adopt versions of ;'$ law have been lesssuccessful is they lac infrastructure of ;'$ –talented bar bench etc.

ii. >rganizing a orporation!. 4iling a certiicate o incorporation

a. ust "e ile& 1ith SOS %* !0!i. # can be incorporated to conduct or promote any lawful

business purposeii. /rocess is defined in <,

". Contents o Certiicate o Incorporation %* !02/" +ay inclu&e: &ame #ddress /urpose for which you were organized number ofshares rights % obligations of each class name of registered agentanything else (but remember it’s public domain and it’s difficult tochange – re3uire 6; % "@ vote)

c. Corporate e:istence "egins upon iling. %* !0;

&. !08, #fter filing the >I the incorporators of temporary boardmembers shall meet to adopt the by-laws and elects board members.

e. !0 By-la1s, "@ have power to adoptBamend by-laws can also give

this power to the 6oard if in >I and you can put whatever you want inthem as long as not illegal

iii. Cinancing the orporation!. "asic o'el o Corporate Finance

a. Bon&s<In&entures, # promise by the company to pay a certain amounton a certain date.

". Stoc=s – T1o 4or+s

i. /referred "toc – @ybrid stoc that combines the ownershipelement of common stoc and the senior nature of debt. 0hereis no promise of repayment lie bonds have

,. 5ives holders FpreferenceG in the event that thedirectors are able and willing to pay a dividend

. >ften carries a periodic dividend – before dividends

are paid out – must first go to them.+. &ormally don’t have voting rights similar tocommon stoc holders.

=. 0hey usually have preference at li3uidation.H. /referred stoc can be convertible if deemed able at

time of purchase and company rules. '1p7 buy one preferred share for ?,8 common stoc sales for ?=each. "toc holder can convert stoc to two shares ofcommon stoc.

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ii. ommon "toc – conceived as e3uity interests in the so theholders are the owners of the o.

,. $owest on the totem pole as far as payments areconcerned.

. Investors re3uire higher return % usually carriesvoting rights but that is not a re3uirement

iv. /romoters’ ontracts!. $ro+oter – a person who gathers the needed people and assets to transform an

idea into business.2. Stan&ar&7 9here the promoter maes a 2 for the benefit of a contemplated

the promoter is personally liable on the 2% remains liable even after the isformed.

a. *:ception – +rd /arty new orp. didn’t e1ist % agreed to loo only tothe orp.

(. 6ia"ility o Corporation Stan&ar&7 # orp. only becomes liable on a promoter 2 if it Fa&opts3 the 2.

a. "imilar to FratificationG in the agency conte1t but does not travel bacward in time. Instead it is called FadoptionG and the date is notrelated bac but rather the date the corp. FadoptsG the 2 entered byorp.

". /romoter is not released unless the parties agree.c. !nless there is an e1press or implied novation agreed to by the +rd party

substituting the for the promoter under new 2.i. ourts will re3uire une3uivocal evidence of the +rd party

agreeing to novation.. Illinois Controls, Inc. v. Langham

a. 4acts7 $ invested a new device % entered into a corp. wB6 individuallyand 6 inc. to form Illinois ontrols Inc. !nder the 2 6I would maretthe product but they didn’t do that here.

". Issue7 9hat are 6I’s obligations % is 6 personally liable:c. 5ol&ing7 6oth 6 as a company and 6 as a promoter are liable.

i. 6 is liable bBc it accepted the benefits conferred by the 2 withnowledge of its terms % 6 personally is liable bBc the corp.

never formally adopted the 2 and the 2 doesn’t mae thecorp solely responsible for those obligations.

&. Stan&ar&7 0he 6>/ is heavy so normally the promoter will continue to be liable unless it’s clear a novation occurred.

v. ;efective Incorporation!. Stan&ar&7 # &e ure Corporation is a organized in compliance with the

re3uirements of the state of incorporation ($awfully enough compliance withthe law)

a. "tatus is established upon filing". against all the world including the state (e1cept #5)c. "ubstantial compliance is enough to satisfy re3uirements

2. Stan&ar&7 # &e-acto corporation e1ists when there is insufficient complianceto constitute a de jure corporation in a challenge by the state (3uo warrento

proceeding) but steps taen toward formation of a are sufficient to treat theenterprise as a with respect to +rd parties.a. Three *le+ents,

i. "tatute under which incorporation is possible (not reallyimportant bBc it’s possible everywhere)

ii. # FcolorableG good faith attempt to incorporateiii. 'nterprise purported to act lie you were a corporation – you

must actually useBe1ercise corporate powers(. (ho may be hel' liable: If the is neither de facto de jure nor by estoppel

then courts differ on which "@ may be liable7

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a. 4odel #ct <. – all those who assume to act for the are liable which means managing "@ are liable while passive ones retain limitedliability

". 5eneral trend eliminates liability for those who don’t actively participatein the management of the business.

. Stan&ar&7 by 'stoppel is an amalgam of three theories – those purporting toact for the have represented to a +rd party that the has been lawfully formed.0hen the party changes positionBrelies to their detriment. 0hree 6ranches oforporate 'stoppel7

a. Branch K! Real *stoppel – can’t get out of the deal after maing arepresentation to a +rd party

". Branch K2 Technical *stoppel – # +rd party can’t get out of a deal onthe theory that the didn’t really e1ist bBc he achieved the results he bargained for (this is more corporate law not estoppel)

c. Branch K( 0he +rd party can’t sue the promoter to hold him personallyliable (also corporate not true estoppel)

i. $iability of 9ould-be "@ is protected as if it were a de jure ii. #s a matter of e3uity the +rd party having dealt with the

enterprise as if it were a corporation is FestoppedG fromtreating it as anything else.

. o&ern Acceptance o %octrines,a. %*6 Stan&ar&, Cirst two branches of estoppel doctrine are codified in

;' <+E. &either a or +rd party sued by a can assert the defense of'stoppel

i. +rd branch has been accepted as a matter of $ii. ;e facto doctrine e1ists

". o&el Act States Stan&ar&7 #ccepts two branches of 'stoppel but"@B/romoter are not protected from liability however7

i. *:ception7 4# .= provides limited liability for "@ whodidn’t now it hadn’t been incorporated

ii. >therwise those who purported to act on behalf of the andwho new there was no incorporation are ointly G seDerely

lia"le.

iii. #lso they &o not accept &e acto incorporation) *ou areonly a once the >I is issued by the ">" and once it isissued you are a regardless of any clerical error

,. &o opportunity to assert 3uestions about a ’se1istence bBc filing is Fconclusive proofG thatincorporation was proper. 4# <.+

. !nder ;'$ law filing is only prima facie evidence8de facto is therefore a permissible defense. "ee ;'<,S

;. Cantor v. /)nshine Greenery, Inc.

a. 4acts7 6 on bBh of "5 entered into a lease with on ;ec. ,S th.@owever the corp. was officially filed with ">" until ;ec. ,Nth. 6 never paid for this lease.

". Issue7 9as there a de facto corp. in e1istence at the time of leaseagreement: (yes) an impose liability individually on 6 as a promoter: (no)

c. 5ol&ing7 "5 was a de facto corp. and therefore is estopped fromimposing liability on 6 personally. "ee elements above.

>. !obertson v. Levya. 4acts7 $ was to buy ’s biz % e1ecuted a bill of sale on ,BN but the cert.

of incorp. wasn’t filed until ,B,T. sues $ on the loan that defaulted %e1penses for the lease.

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". Issue7 Is the president ($) personally liable on the obligation entered intowith before the >I was issued: (yes)

i. Is estopped from denying the e1istence of the corp. bBc heaccepted a first installment pymnt on the note: (no)

c. Stan&ar&7 6efore the >I the individuals who act as a corp. wBoauthority are Koint % "everable liable for all debtsBliabilities incurred8after the >I is issued only the corp. can be liable.

&. 5ol&ing7 0herefore $ is held personally liable bBc he acted on bBh of thecorp before the >I was issued.

i. 0he court here follows 4odel #ct (0U) ;'$ is a $ j1("unshine) in which estoppel is recognized.

vi. 0he !ltra Pires ;octrine!. !ltra Pires are transactions outside the sphere of activities in which the can

engage.a. # remnant of the ,Eth century where the state’s job was to eep

corporations within the limit of the purposes for which they were former.". 0oday !P only an issue when conduct doesn’t benefit the corp. in any

matter.2. Classical %octrine

a. 6Bc a e1ists only within its charter any transactions other than those

which see to ma1imize "@’s economic wealth are !P (lie – donationsto charity etc.)

i. '1ample7 0rain company was not authorized to build railroadsso all contracts on that matter are void.

(. %*6 Stan&ar&7 ’s are authorized to mae donations for public welfare orcharitable scientific or educational purposes as well as to enter into transactionsthat help the government. See %* !22 / ;'$ practically abolishes any notionof the !P doctrine.

a. "ome states lie onnecticut provide that a may consider otherconstituencies such as the community when maing determinations ofthe ’s best interest.

". ;'$ hinted at such a power in nical but subse3uently limited suchconsiderations to reHuiring a rationally relate& "eneit to S5 in

!evlon.. @owever <,= a corporation is not allowed to use !P nature of its action to

escape an obligation under a 2.. o&ern %octrine: Goo'man v. La'' *state

a. 4acts7 "@ of 9estover see to enjoin 9’s reimbursement to $add forguaranteeing a 6;’s loan. 9estover was in the business of sellingmortgage insurance but the loan they guaranteed to 9 was for his personal use.

". Issue7 #re the "@’s entitled to e3uitable relief: (no)c. 5ol&ing7 0he agreement is enforceable even though !P and they can’t

get relief bBc the "@ which they bought shares is the person who procured the note to begin with. (0ainted "hares)

&. Rule7 0he classic !P doctrine has been severely limited by state law8

bBc a company can be formed for Fany lawful purposeG the onlyactivities that are !P are those with ?O COR$ORAT* $'R$OS*.

%* !02 i. 5eneral powers of officers directors and "@ limited to

powers % privileges necessary or convenient to the conduct of business purpose set forth in certificate of incorporation. See

%*6 !2!

ii. # corporation can guarantee debts mae donations for publicwelfare lend ? for corporate purposes. !22

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iii. >nly potential use of narrow corporate purpose clause would be so minority "@ could eep majority in chec

;. As a result o the any la1ul purpose3 language) the +o&ern 'P &octrine

is no1 circu+scri"e& in statute. %*6 !2 – # corporation is not allowed usethe !P nature of its own conduct to escape its obligation.

a. /roceeding by "@ against the corporation !2/! i. ontract must be e1ecutory on the ’s behalf – which is a

contract in which duties of one or more of the parties have notyet been completed.

ii. +rd party to contract must be party to the lawsuitiii. ourt will only enjoin the performance if it is e3uitable to the

+rd party,. eliance but not e1pectation damages. # court will not enjoin a 2 under <,=, if it would

be unfair to the third partyiv. /roceeding by the against an incumbent or former officer or

director of the for loss due to his unauthorized act <,=(d),. 0his is the largest value of !P today

v. Tainte& Shares Rule, If you buy shares from someone whocouldn’t challenge (bBc they participated in the !P act) you

are prohibited from challenging it as well.,. Caveat – you had to now about the !P conduct bBf

you purchased. *n'4aro)n' – arrange for min "@ who did not

participate in act to challenge. 6ut proof that put"@ up to challenge will undermine challenge

vi. # proceeding by the #ttorney 5eneral". reditors never have the right to sue for !P actsc. If "@ unanimously approve conduct they can’t sue for !$ act at all.

i. If they didn’t do this they can still only sue for an injunction bBf the conduct taes place. #fterwards they are screwed.

&. !02/a/( – orp. can limit purpose in >I to just any Flawful businessactivityG 0hat maes it easier in this respect.

>. Do'ge v. For' otor Co.a. 4acts7 ; as min "@ demand more special dividends from @C. @C

claims he doesn’t have to give them bBy what is re3uired % he intends to put ? toward benefiting customers % employees.

". Issue7 ;oes @C have to distribute surplus dividends as demanded by the"@: (yes)

c. Stan&ar&7 # corporation has a legal duty to ma1imize "@ value % notact for the general benefit of the public.

i. !P to sell cars too cheaply and be good to your employees. Ifhe would have made up a reason (e.g. goodwill) it would have been covered by 6K. @e lost bBc he told the truthJJ

8. AG /mith v. "arlow

a. Stan&ar&7 # corporation may do something that benefits non-"@ groups

so long as the impact on "@ is minimal. ourt upheld corp.’s gift to/rinceton bB c it was an incidental gift.c. anage+ent G Operation

i. #llocation of /ower !. Stan&ar&7 ;5$ <,=,(a) unless otherwise provided in the articles of

incorporation the business of the corporation shall be conducted by and underthe 6;.

2. Charlestown "oot /hoe Co. v. D)nmore

a. 4acts7 "@ want directors 9%; to tae >’s advice in winding up the business8 they ignore % lose money % are sued by the "@.

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". Stan&ar&7 ;irectors have full discretion in using their own judgmentunless the #>I or by-laws limit them %*6 !!/a

c. $otential S5 re+e&ies 1here "elie e:ists that &irectors are not

running "usiness properly7i. Pote out directors the ne1t time they are up for election

,. 0his remedy may not be of use where "@ wantimmediate action though

ii. "ue directors for negligence,. 6ut high transaction costs directors might just be

judgment proof etc.iii. emove directors from the 6;

,. !nless ertificate >f Incorporation otherwise or the’s directorships are staggered directors can beremoved without cause. ;'$ <,=,()(i)

a. Staggere& "oar&s allow change to happenmore gradually by preventing a majority of"@ from maing wholesale changes to board. <,=,(d)

b. 0his is often more advantageous toremoving Fwith causeG bBc removing Fwith

causeG re3uires ; receive elements of ;/. emedy is limited to "@ % not ;’s+. "plit of authority on whether court can remove

directors for cause.iv. #dd a director

,. 9here the certificate of incorporation provides for afi1ed number of directors "@ would need to amendthe certificate

a. "uch action re3uires a majority "@ votes aswell as director approval ;' <=

b. &ormally though the certificate doesn’tcontain such a fi1ed number

. >ther option is to amend the ’s by-laws

a. "@ may adopt amend or repeal by-lawswithout director approval. ;' <,E

b. &e1t proposed amendment would need to be voted on at a "@ meeting. <,,

i. 6ut see the model act (and 0e1as)under which "@ holding ,L ofthe ’s stoc can call a meeting8this L can be increased in thecertificate of incorporation butdirectors can’t prevent anyoneholding more than HL callingmeeting

c. 6ut any action which would otherwise

re3uire a meeting can be accomplished via awritten consent without a meeting priornotice or a vote if signed by min number ofholders re3uired to win a vote if a meetingwere held. <N

i. In all matters other than election of; vote of majority of shares isre3uired to win. <,S

+. "till under default rules 6; fill vacancies on the6;. <+

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a. 0hus before adding ; by written consent"@ must amend by-laws to provide that "@will fill 6oard vacancies

v. "@ remedies for influencing corporate officers. <,=,. 6; has power to chose % remove officers. <,=. "ince most ’s would be unwilling to amend by-laws

to endow "@ with this power "@’s best remedy is toissue a precatory resolution

a. &on-binding resolution that the "@ don’thave confidence in the president

(. !emoval o Directors a. Stan&ar&7 ;5$ <,=,() any director may be removed with or without

cause by a majority of the "@ at a "@ meeting.ii. Interference with the "hareholder Cranchise See !02) !0) !!) 2!2) 228) 22

!. /tro)' v. Grace

a. Blassius Rule, 'ven though the 6oard has the mechanical power toachieve this change in corporate governance conduct that interferes with"@ voting is not reviewed under the 6K but instead must meet astandard of compelling justification.

". 4acts7 4illien brothers control the majority of the shares. 0hey want to

amend the charter to outline 3ualifications of the directors. 0hey alsoamend the bylaws changing the procedure of nominating candidates forthe board. 0he amendments were approved by TNL of the shares entitledto vote.

c. 4iliens are trying to tae over company at the "troud’s e1pense. 0he proposed amendment listed + categories of 3ualifications for peoplethey’d consider as potential board members.

i. /eople with sub e1perience (must be board majority at alltimes

ii. 6eneficial "@ of the (must be at least + on the board)iii. 0he '> >> and president (must be at least +)

&. 0hese new 3ualifications handicap "trouds bBc 4iliens have moreconnections they are just passive investors.

e. <,=,(b) says that the certificate or bylaws can contain the 3ualificationsfor directors. <=(b) says no amendment to the charter can be effectedwithout "@ approval.

i. 6urden is on them to prove charter amendments were not properly adopted or prove fraud or misconduct

. 5ol&ing7 "@ vote was fully informed and valid8 ourt holds that the6lassius Fcompelling justificationG only applies when the primary purpose of the board’s action is to interfere with or impede the e1erciseof "@ franchise.

i. ;iffers from 6lasius bBc there’s a lac of imminent harm. >Iwas vague and subject to abuse – ourt says just come bac tocourt if you are actually abused.

2. *:a+ple o a Blasius Diolation7

a. anceling a "@ meeting". 4ust show a compelling justification (can’t be paternalistic)i. '.g. postponing the meeting few wees to provide more

information to "@ for more informed voting.(. Companies v. Li;)i' A)to

a. 4acts7 44 company owned TL portion of $i3uid #uto. $# controlledthe board.

". 5ol&ing, "lassi)s test applies in this case bBc the amendments (toe1pand number of directors) approved by $# vote were only made todilute the effect of the vote of new 44 directors.

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i. #mendments were made solely to weaen 44’s voting power and were made only after $# new the 44 directors wouldget elected.

iii. Cormalities e3uired for 6oard #ction!. Stan&ar&7 ;irectors must act at a duly convened meeting at which a 3uorum is

present. <,=,(b)a. %oes the B% haDe to haDe a B% +eetingF

i. !!/, they don’t @#P' to unless the >I or bylaws say so provided all 6 members consent in writing

ii. !!/", implies that meeting I" re3uired,. ourts have taen approach that meeting is re3uired

bBc president might otherwise visit 64 individuallyto solicit votes.

iii. !!/i, videoBwebBphone conferencing is acceptablealternative

2. Quoru+ Stan&ar&, <,=,(b) the default rule is the majority of the 6oard must be present8 may be altered to as low as ,B+rd or as high as they want by the by-laws.

a. 0his is measured by the total number of authorized seats "o if there arevacancies they still count toward the 3uorum.

". Cormal notice is not re3uired for any regular board meetingi. >nly re3uired in case of special meeting at which point notice

of date time and place must be given to every director.ii. '17 if there are E 6; seats total H is 3uorum

iii. If are dead and seats aren’t filled it still taes H for 3uorum bBc re3uirement is based on the total V of directors fi1ed incertificate <,=,(b)

(. Poting Stan&ar&7 <,=,(b) #ssuming a 3uorum is present8 the vote of a majorityof those present is re3uired to tae action.

a. 'ven when someone abstains this is effectively a FnoG vote bBc thoseabstaining are included in determining what the majority is

". e3uirements can be altered by #>I or by-laws. $imit though is that youhave to re3uire at least more than HL or else both sides could win.

. Stan&ar&7 0he failure to follow the formalities rend the action of the 6; of a publicly-held corporation void7

a. esult is less clear cut in a closely-held corporation (@) wheredepending on the circumstances courts may uphold informal boardaction.

. Co++ittee Stan&ar&7 6oards can delegate decision-maing authority tocommittees. #lmost anything can be delegated.

;. Gearing v. +elly

a. 4acts7 4 owns HL of the stoc of corp. and she stayed away from "@meeting for purpose of preventing a 3uorum % setting aside the electionof a new director.

". Issue7 4 wants the court to order a new election.c. 5ol&ing7 ourt will not order new election bBc 4’s refusal to attend

meeting nowingly frustrated corp. action.iv. 0he #uthority of >fficers!. Stan&ar&7 officers are appointed and removed only by the 6;. <,=2. 5enerally the authority of officers mirrors the law of agency.

a. Stan&ar&7 a<ority r)le is that the president has apparent authority to bind his company to contracts in the usual an& regular course o

"usiness) but not contracts of Fe1traordinaryG business.". inority rule = In 0e1as the /resident has little or no apparent

authority so it’s crucial to mae certain when dealing with officers theyhave authority.

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(. Lee v. Jen#ins "rothers

a. 4acts7 $ alleges that /res. /romised that the corp. would give him pension Fno matter what happenedG regardless of staying until S or not.@e is fired at HH and gets no pension.

". Issue7 ;id the agreement ever happen: &othing in writing.c. 5ol&ing7 'vidence insufficient to support a finding that /res. /romised

$ pension that did more than protect his rights under pension plan.&. Analysis7

i. 9as there an agreement:ii. 9as the agreement enforceable:

,. ;id the /res have authority: '1press actualauthority: Implied actual: #pparent:

a. Is this an ordinary or e1traordinary act:e. Basic Rule – /res. @as authority to tae ordinary but not e1traordinary

actions. $ should have gotten 6; authorization.v. "hareholder #ction

!. Cormalities e3uired for "hareholder #ctiona. Stan&ar&7 &otice of place time and date is re3uired for the annual

meeting of "@ <i. &otice of special meeting must describe the purpose is called

<ii. &otice provided to "@ of record on a designated record date

prior to the meeting. <,+,. >nly those "@ who are record holders on the record

date may vote. ecord date fi1ed by the bylaws or by the 6;

". Quoru+ Stan&ar&7 <,+ majority of shares entitled to vote constitutesa 3uorum and that can be changed

i. "howing up by pro1y is e3uivalentii. an alter this default rule but can’t be less than ,B+ (@as to be

done in articles)iii. '17 If there are , shares H, "@ are needed

c. Poting Stan&ar&7 !nless otherwise provided common "@ have , vote

for every , share. <,(a)i. >f the "@ 3uorum to carry motion you need a majority of

voting shares /'"'&0 – abstaining votes count as noii. >ften corporations will issue dual-class super voting stoc

(weight voting stoc) to enable a control group to control the with a minimum investment.

iii. Or&inary Business, <,S majority of shares present atmeeting. (0U majority of those voting)

iv. 4un&a+ental Transaction, ;'$ majority of those sharesentitled to vote

v. *lecting %irectors, <,S plurality wins from votes taen,. andidates who receive the highest number of votes

are elected up to the ma1 number to chosen at the

election even if they receive less the majority of thevotes of those present at the meeting2. "traight v. umulative Poting See 2!

a. Straight Poting, # "@ can cast for each candidate for election to the board a number of votes e3ual to his number of shares

i. 'n&er this syste+) ! o1nership giDes you !00 o the

po1er "<c you can outDote the opposition on eDery +atter

an& no one can stop you

ii. ;elaware default rule (but cum is allowed)

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". Cu+ulatiDe Poting7 a "@ can cast for any single candidate or for twoor more candidates as he chooses a number of votes e3ual to hisnumber of shares he holds times the number of directors to be elected.

i. esults in reasonably proportionate board repii. 6enefit – provides the min "@ with access to happenings at

director’s meetings and access to company information via thedirector’s rights

,. 'nables min to avoid result where board acts withouta meeting by unanimous written consent <,=,(f)

(. Poting Out A %irector

a. ath or+ula or &eter+ining nu+"er o shares nee&e& to elect a

&irector

i. 4in number of shares needed to elect a particular number ofdirectors

,. U O((sDn)B(dW,))W,a. U O 4in V shares needed b. " O total V shares that will be voted at

meetingc. & O V of ;’s desired to be electedd. ; O total V ; to be electedR

ii. 6egal i+portance o or+ula7 you can’t remove a directorwithout causeAif the number of votes cast against his removalwould have been sufficient to elect him <,=,()

iii. 4a1 number of directors that can be elected by a groupcontrolling a particular number of shares

a. & O 1D(dW,))Bs. Informational ights See 220

a. /#o)ras v. A'miralty *nterprisesi. 4acts7 " wants access to the records bBc he claims there is

mismanagement by the 6; % claims "; by giving themselvestoo many pers.

ii. Rule7 "@ has a right to see records in ;'$ if he proves he hasa proper purpose. Investigation of mismanagement would be a

proper purpose but you have to have some evidence of it bBfyou see boos.

,. $roper purpose, Fpurpose which is reasonablyrelated to such person’s interest as a "@G

iii. 220/"/2 says he gets the records of the parent company andany subsidiary if they are relevant.

&. Altering Corporate ?or+s "y Corporate

i. Poting #greements "ee <,=, ,H, , ,N!. Ringling Bros.-Barnu+ G Bailey D. Ringling

a. 4acts7 + "@7 min "@ agreed they’d vote together (each owned +Hshares) and &orth owns +T shares and if they’d disagreed they’d go toan arbitrator and agreed they’d vote as he decides.

". Issue7 9as either party empowered to the #’s decision: (no)

c. Rule7 # voting agreement which enables "@ to name each otherdirectors and tae a majority of the board is not illegali. odified by ;' <,N(c) which re3uires that such agreements

be in writing an designed by the parties theretoii. 9hile voting agreements are generally held to be valid such

will be deemed invalid if based on a private benefit such as aside payment (vote selling is illegal)

&. Rule7 Poting agreements are problematic bBc they re3uire courtenforcement and the court doesn’t always fi1 the problem

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i. 4odern trend towards granting specific enforcement ratherthan money damages.

2. "elf-enforcing Poting 4echanismsa. Poting $ro:ies

i. "elf-e1ecuting remedies utilized by parties where they areconcerned about needing to re3uires specific enforcement for breach of 2.

ii. 5overned by agency law it is a general rule that a / canterminate an agent’s authority at will unless the agent hold sthe power couple& 1ith an interest3

,. oupled with an interest – ensures person withauthority has best interest of company at heart

. ;ifferent interpretations of what it meansa. "ome j1 re3uire pro1y holders to have an

interest in the stoc itself which is thesubject matter of the pro1y

b. >thers tae broader view enough that pro1yholder has an interest in the company notnecessarily shares themselves

iii. %* 2!2/e) says that a pro1y can be irrevocable provided7

,. It says it is irreDoca"leJ A?%. Only so long as it is couple 1ith an interest in la1

suicient to support an irreDoca"le po1er

iv. The interest couple 1ith can "e an interest in the stoc=

itsel or an interest in C generally

(. Poting Trusts

a. # device which "@ separate – voting rights in and legal title to theirshares from beneficial ownership of the shares

i. /rocess – authorized by <,N". $ie a voting agrmt e1cept it’s self-enforcing and never secretc. 9here a voting agreement creates an irrevocable pro1y bBc voting rights

have been separated out form the other attributes of the stoc the ourtmay deem such agreement in substance a voting trust7

i. esult will be invalidation for failure to follow formalitiesre3uired of voting trusts under <,N

ii. onversely some cases have found a voting agreement e1istswhere the parties thought they had created a voting trust. #s aresult failure to follow statutory formalities is not punishable.

&. ;'$ is unusual in that portions of statutes have in&epen&ent legal

signiicance. 0his means that a / can’t pop up to a challenge on a votingagreement on the grounds that7

i. It meets the statutory definition of a voting trustii. It doesn’t meet the statutory standards for a voting trust

iii. 0herefore it’s invalid. Classiie& Stoc= an& eighte& Poting

a. !nder <,(a) the default rule is , share , vote

". lassified voting schemes present one of the simplest ways for min "@to have rep on the 6;.i. esult – different classes carry voting power that differs

considerably from investmentc. It’s not illegal to grant a class of stoc with voting right but no property

rights in the corporation&. #n amendment to the >I to created classified stoc re3uires a majority

oii. ontrolling 4atters 9ithin the 6oard’s ;iscretion See !!

!. c>)a'e v. /toneham

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a. 4acts7 4cXuade a min "@ is angry bBc the majority fired him from hisdirectorship and officer against an agreement bBt 4cXuade "tonehamand 4c5raw all "@ in &* 5iants. 0heir agreement said that "toneham(who had most shares) would vote for the other as directors plus threeothers.

". Issue7 Is the agreement to put 4cXuade on the board valid:c. Rule7 #n agreement among "@ to mae each other officers is illegal in

so far as it abrogates the directors’ duty to use their independent judgment

i. %* !!/a it is the job of the board to manage the affairs ofthe company and "@ can’t tell the board who is an officer

ii. %* 2!8 /c permits "@ to agree to their agreement&. Issue, 6ut can "@ agree to mae 4cXuade an officer by way of agreed

upon vote:i. &o they would be hamstringing themselves as 6;4 on the

issue bBc their duty is to the corporationii. If the contract 9'' enforceable that would be unfair to

minority "@ who are entitled to assume the directors wererunning corporation in the ’s best interest not 4cXuades.

e. In actuality however it’s not so hard to create an agreement among "@

which constraints the 6;’s ability to fire officersi. Option K! – amend the >I to have classified stoc

ii. Option K2 – amend the >I to re3uire unanimous boardapproval to fire an officer per <,=,(b)

iii. Option K( – amend the >I per <+== to bBc a statutory @which per <+H is permitted to have a written agreementamong "@ which impinges on the discretion of the directors

,. In so far as <,=,a enables restrictions to be placed ondirectors in the >I (which can be made by simplemajority) this seems to enable a wor-around.

. If everybody who was a 5iants "@ voted to restrict the board’s conductthat would be o bBc no minority is disadvantaged

i. <+H7 a written agreement bBt "@ is not invalid bBc it relates to

the conduct of the business such that it restricts or interfereswith the power of the board.

2. Clar# v. Do'gea. Rule7 #nother &* case which upholds a "@ agreement which seemingly

impinges on the power of the 6; by re3uiring that ;odge majority "@and director continue lar in his role as general manager.

i. 6ut in $ong /ar the same court invalidated a "@ agreementwhich provided Fthe management of all theaters leased oroperated by 0renton or any other sub is vested in "@agreement without approval of directors and this managementmay not be changed by the directors but only provided insection =G

,. $ong /ar represents the ;' rules in so far as the

ourt is loath to approve a "@ agreement whichFsterilizesG the 6; in violation of ,=,aiii. "upermajority Xuorum and Poting e3uirements See !0) !!/") 2!;) 22

!. Stan&ar&7 "upermajority 3uorum and voting re3uirements (up to and includingunanimity) are legal at the board <,=,b and "@ levels ,S

2. Fran#ino v. Gleasona. 4acts7 C wants to regain control of the board even though he already

has HHL. 6ut bylaws say there will be S directors and article E says thatNL vote is re3uired to change the bylaws.

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i. C gets written consent to get rid of article E’s supermajorityre3uirement (only H,L re3uired to amend article E). "o amendE to say article + can be changed with a regular majority. 0henamend article + to say there can be more board members.

". 0hen he’d have to amend the rule that directors fill the vacancies andthen he’d nominate his friends.

i. @e won’t be able to amend the >I bBc re3uires board action<=(b)

c. 0o prevent him from doing this they should have also said it tae anNL vote to amend number E (before only + re3uired NL to change)#rticle E only re3uired H,L

i. 0his is malpractice by lawyer who drafted these agreements.>ther than in the certificate you must protect thesupermajority provision by saying it also re3uires asupermajority vote to be amended.

&. 5ol&ing7 4ust loo at the language of the bylaws to see which articlesre3uire supermajority vote to amend.

iv. "hare 0ransfer estrictions See 202

!. Allen v. "iltmore $iss)e Corp.

a. 4acts7 6oth contract and property law operates when transfer restrictions

are at issue restrictions on alienability #/. 0he /’s contract stated thatif he died the could buy bac his stoc.

". #n agreement that says you may ?*P*R sell your stoc is a classice1ample of an illegal restrain on alienation.

c. 4irst Option Agree+ent7 6ylaws say that if a "@ wants to transfer their stoc they have to give the the first option to buy bac the stoc at the price the "@ paid for them.

i. 0he restriction must be reasonable property #/ law can’t tieup property for too long in future.

ii. even offers to buy it bac for more than the purchase price but it’s still just a fraction of the present value the stoc isworth more than the original purchase price.

&. !nder this agreement no one would ever sell or transfer their stoc.

0his is almost an absolute transfer restriction which is unreasonable andillegal. ourt says it’s reasonable:

e. 5ol&ing7 ourt says it’s reasonable bBc so long as the price wasreasonable at the time of the contract it doesn’t matter that it bBcunreasonable later. 0his is the law everywhere even if at the time youtry to sell the stoc there is a huge disparity in value.

. estriction law prohibits almost nothingJ 9hy do we permit this:i. 9hy don’t we allow them to 2 that they offer the stocs bac

at C4P first:,. /roblem is that this applies to @ so there may not

be a real maret for the shares they will disagree onwhat the C4P is

. 9hen they disagree litigation ensues and there’s

uncertainty.v. >peration and legality of "hare 0ransfer estriction!. Stan&ar&7 #greements are strictly construed. "hould be very specific. 4ust be

reasonable to be valid. <(c)(,)-(H) list restrictions on transfer that are oaythere is a $ gloss over that all restrictions must be FreasonableGReasona"le restrictions are Dali& an& enorcea"le

2. 4irst Option agree+ents 202/c/!, orporation has first option to buy bacshares.4ost popular method for determining option price is apitalization of'arnings7

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a. #vg. of company’s historical earnings over some period of time (+-Hyears) multiplied by an appropriate number to arrive at fair value for thecompany. 0hen divide by number of shares.

(. 4irst Reusal Agree+ents 202/c/2, "@ can negotiate a sale with a third partyfor any price. /rior to the sale shareholder must offer the shares to the companyfor that price the third party was willing to pay.

a. 6etter way to find maret value but still might not get fair value because no one wants to buy shares with a restriction.

". ollusion is also a problem. "hareholder gets his buddy to offer a veryhigh price.

. Consent agree+ents 202 /c/(, 4ust get consent to sell your shares.a. onsent must be reasonably withheld and given. &ot allowed to refuse

everything.. Buy-Sell agree+ent 202 /c/, an&atory agree+ent, "hares will be sold or

automatically transferred upon the occurrence of stated events or circumstances(i.e. death termination of employment).

;. $rohi"iting Transers to %esignate& $ersons 202/c/, Corbids sale todesignated persons or classes of persons.

vi. "tatutory lose orporations7 ;5$ ,=,(a) +=-+=+ +H-+H, +=S +HH.!. losely @eld orporations7 a subset of private corp characterized by7

a. $ess than + shareholders". estrictions on transferability of sharec. orporation shall mae no public offering of its shares.

2. If these conditions are met the corporation simply states that it is close in thecertificate of incorporation. +=(a).

(. '1isting corporations who meet these re3uirements can also elect to becomeclose by amending their certificate. ;5$ +==.

. >nce they are statutorily close the shareholders have greater power to varycorporate norms by contract7

a. estrict power of board of directors ;5$ +H". 'lect that shareholders not directors will manage the business

(unanimous vote) +H,.c. 'lect that shareholders with 1 amount of shares can decide to dissolve

the corporation. +HH(a)&. 0hese are rarely used. $ess than HL of corporations are close.

. 6ion v. +)rt0 a. 4acts7 &* case dealing with a ;'$ corporation. 0his agreement gives

"@ Mion a veto power over any actions by the 6;. 0his would liely beillegal in a non-statutory closed bBc it sterilizes the 6;.

i. 0his ;'$ didn’t specify they were close in their certificate". 5ol&ing7 0his court gives them the benefit of the doubt and treats them

as a @ and enforces the agreement allowing "@ to restrict boardaction.

c. DDD%*6 &isagrees 1ith this result – dicta in &i1on v. 6lacwellindicates that if you don’t tae advantage of the statute and elect to be astatutory @ you can’t have the 6'&'CI0" of one.

i. ;'$ would find the veto power to be a sterilization of the 6;and therefore illegal bBc they didn’t specify.e. 6i+ite& 6ia"ility an& $iercing the Corporate Peil See !02/"/;

i. /olicy Kustifications for $imited $iability!. Stan&ar&7 <,(b)(S) 0he #>I may include a provision imposing personal

liability for the debts of the on the "@ to a specified e1tent8 otherwise the "@shall not be liable for the payment of the ’s debts.

a. 0hus "@ ris is limited to their investment". $imitation on manager liability is derived from agency law

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c. /romotes ris taing – "@ liability would force ultra-diligence inresearching stocs

ii. 0ort ases!. (al#ovs0#y v. Carlton

a. 4acts7 arlton owns a cab company. @e has , ’s each holding cabs per . >ne of his cabs hits / and / wants to reach the assets of the other’s holding cabs by Fpiercing the veilG and his theory is that arltoncommitted fraud.

i. / wants to pierce the veil in two ways7,. 5orizontally7 4aes the other cab ’s liable for the

action of the that owned the cab that hit /a. 6a1 in T) not in %*6

. Pertically7 4ae arlton personally liable for theliabilities incurred by the .

". Peil $iercing Stan&ar&, ourts will disregard the corporate formwhenever necessary to prevent fraud or to achieve e3uity. DD$oo at thegeneral rules of agency whenever someone uses control of the to

urther his o1n rather than the ’s business he will be liable.i. Strongest actors, fraud commingling funds8 siphoning off

funds8 undercapitalization injustice.

c. 5ol&ing7 ourt determines that the / does not have a claim bBc theyallege no allegations that he conducted the business in a personalcapacity.

&. 'nior+ 4rau&ulent Transer Act,

i. # transfer is fraudulent when7,. It’s taen by a debtor with the intent to put the funds

somewhere the creditor can’t get it8 > . 0he debtor is getting something without giving value

in return and the debtor was7a. #bout to put the business in a position with

a deal where it would be insolvent b. 0he debtor realized they’re taing on debt

way beyond their ability to pay

ii. If your company remains or bBc undercapitalized the above provision maes it fraud to siphon out funds

2. inton v. Cavaney

a. 4acts7 2id drowned in corp.’s swimming pool8 corp has no ?8 /’s wantto sue personally for the death of the child.

". Issue7 9hether it’s appropriate to pierce the veil:i. Inade3uate capital by itself is not enough to pierce the veil.

#lso failure to follow formalities can also play into it but it isnot enough by itself.

c. 5ol&ing7 @ere the court determines piercing was appropriate7 corp.inade3uately capitalized A?% didn’t follow formalities

&. Stan&ar&7 4any courts will hold that inade3uate capitalization plusfailure to follow procedures would be enough to pierce.

i. 0'U#" – e1plicitly states that failure to follow formalities isnot enoughii. DDD"iphoning is always a justification though but beyond that

it is up for grabs and will depend on how the judge feels.e. $oo for – ,) undercapitalization .) siphoning off resources and +)

failure to follow formalitiesiii. ontract ases

!. %erpet)al !eal *state /ervices v. ichael %roperties Inc. = Pirginia law

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a. 4acts7 /' and 4 /roperties are partners. /-ship sued for breach of 2./' settles the claim and they see contribution for 4/I and 4 personally – 4 is the sole "@.

i. 0hey split the profits HBH so liability is the sameii. /' wants to pierce the P to get to 4 personally. @e was

siphoning off money of the he didn’t follow formalitiesand he did not pay dividends.

". 5ol&ing7 ourt says that despite all of that there’s no evidence that hehas used the corporation to disguise any wrongs.

i. Craudulent transfer7 tae money out without reasonableconsideration and there is not enough money to settle possiblefuture obligations.

c. 9ithout proof of fraudulent transfer (no records) there is no reason togo beyond the parties in the agreement that 4/ not 4 would indemnify/'. 0he limited liability was a bargained-for part of the 2.

i. 0hey >!$; have agreed to mae him personally liable theydidn’t.

&. Stan&ar&7 ;on’t pierce veil here bBc it is a 2 case not tort. (tort victimsdon’t have ability to bargain) ourts will rarely pierce the corporate veilin a contract case.

i. onsiderations – sophistications of the parties capacity toinvestigate the credit of the or "@.

e. ourts are split – some say can’t pierce unless proof of actual fraud(0U) others treat 2 cases same as tort. 4iddle ground is above case inPirginia.

iv. /arent-"ubsidiary ases!. Stan&ar&7 It is much more difficult to pierce the veil in order to hold the parent

liable for the debts of a wholly owned subsidiary.a. 9here the parent company is not running the day-to-day business and

otherwise observing proper parent company eti3uette the creditorsshould have been on notice as to the liability of the party it was dealingwith.

". 5o1 1as +uch CO?TRO6 &oes parent e:erciseFFF

2. Stan&ar&7 9here a parent company taes over the operations of a subsidiarythat parent company is liable for its own misconduct

a. &atural first 3uestion – is the parent liable for anything it did personallywrong:

(. /resumption that ;B> holding positions with a parent and subsidiary FchangehatsG to represent corp. separate despite common ownership.

v. '3uitable "ubordination!. Stan&ar&7 when a is in banruptcy debt claims that a controlling "@ has

against the may be subordinated to the claims of other persons including theclaims of preferred "@ on various e3uitable grounds.

a. #nother remedy is to redress improper conduct but only appropriatewhere sins are of a lesser order of magnitude

i. "@ only loses out on investment if it has already made as

opposed to veil piercing where liability e1ceeds investmentii. e3uires a lesser showing of misuses of the corporate form8thus undercapitalization alone may result in e3uitablesubordination7 6>/ seeing subordination

iii. # lesser remedy than fraudulent transfer where penalty is toavoid the transfer.

2. Costello v. Fa0io

a. 4acts7 + partners create /-ship they decide to incorporateA of the partners pulled out all of their capital contribution e1cept for 2 each."o they pulled out =H2 from /-ship leaving it undercapitalized.

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". 4rau&ulent transerF 0hey don’t have consideration and they are notliely to be able to settle obligations with ?S. 0hey are losing money. &o problem of proof we now amount taen out.

i. 0hey new company was failing – in anticipation ofincorporation they stripped the company of all its capital tothe detriment of the and it’s creditors for their own personalgain.

ii. 0hey should not get paid before other creditors.c. 5ol&ing7 !nfair to pierce the veil here bBc they put the money bac into

the corporation. 0hey never too money out of company but they tootheir capital out and made it a loan which is wrong but they put it bac.

&. /P would be overill. '3uitable subordination is proper8 other creditors’debts will be settled bBf their promissory notes.

. The Tra&itional Role o 4i&uciary %uty

i. $he D)ty o Care an' the ")siness J)'gment !)le

!. Stan&ar&7 ;irectors always have a fid-duty of loyalty % care to "@. !nlie partners directors are true fid’s and must act for corp. selflessly.

a. 0here is no duty to creditors unless insolvent or there is a special trustrelationship if corp. is acting lie a ban etc.

2. 0he >versight onte1t

a. Francis v. nite' Jersey "an#i. 4acts7 4other and sons are directors of re-insurance

broerage which did not eep separate accounts % sons beganFtaingG loans from ’s treasury. $oans left wBout ? andmother did little as director.

ii. Issue7 9hether the mother can be personally liable for a breach of fid-duty by letting her sons steal ? from :

iii. Stan&ar&7 6reach of duty of care re3uires a finding that shehad a duty to clients that she breached duty and that the breach was pro1imate cause of their losses.

,. %uty – directors always have duty to "@. Breach – all directors are responsible for managing

the business % affairs of as she never did anything

duty was breached+. Causation – 4ust determine reasonable steps a ;

should have taen % whether that course of actionwould have averted a loss.

a. #ct or failure to act must be a sub factor in producing harm.

b. @ere court finds her actions contribute tocorruption.

c. 9here it is reasonable to conclude failure toact would produce a particular result %result has followed causation may beinferred.

=. Stan&ar&7 5eneral obligations of a director include

understanding the business eeping informed of theactivities of the corporation general monitoring of a’s affairs and policies and regularly reviewingfinancial statements.

iv. %*6 Causation – If / establishes breach of ; showingovercomes presumption of rule % establishes prima facie caseof liability even without showing of injury.

,. 6urden shifts to ;’s to show transaction was entirelyfair .

(. 0he ;ecision-4aing onte1t

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a. /)bstance: $he "asics o the ")siness J)'gment !)lei. Stan&ar&7 In the decision-maing setting directors are

obligated to use care in maing decisions that affect the ’swelfare. 6K basically provides that a substantially unwisedecision by a director will not by itself constitute lac of duecare.

". Cour e3uirements: ational business purpose no "; informeddecision and good faith.

i. Rational Business $urpose – if ; can articulate #&*#0I>&#$ business purpose for conduct (not even that youdid it for that reason)

,. 0his is lower than FreasonableGii. ?o Sel %ealing /S% 4 ;’s can’t have an FinterestG in the deal

apart from everyone else.,. !02/"/> doesn’t allow limiting7

a. #cts % omissions not in good faith or whichinvolve intentional misconduct or a nowingviolation of law

b. 0ransactions where ; derives improper personal benefits

iii. Inor+e& %ecision = # ; must not act too 3uicly or fail tostudy. 0o determine if 6K is an informed one7

,. *ou must engage in an investigation8 #&;. @ave no conflict of interest

iv. #oo& 4aith – can’t mae a decision you now violates thelaw

c. Stan&ar&: If any of the four re3uirements are violated then the 6Kwill not protect the decision and a higher standard F'ntire Cairness"tandardG ('C") will apply

&. *ntire 4airness Stan&ar&, e3uires a showing of fair dealing % fair price

e. /chlens#y v. (rigley,. Cacts7 "@s argue that they have been damaged by the

6>; for failing to implement lights in 9rigleystadium and allow night games

. @olding7 annot recover because of the business judgment rule.

. 0he Kustifications for the 6usiness Kudgment ulei. $olicy in aDor o BLR,

,. Goo' – promotes ris nobody is looing over thedirector’s shoulder

. "a' – encourages stealing money for yourself at thee1pense of the "@

. /rocess7 /mith v. 1an Gor#)m FTh* %uty o Care case3

a. 4acts7 ;irectors were selling the business in an $6>. 0hey never perform an ade3uate study stating how much was worth to the "@ or

potentially to the other .. 0he deal was very fast and never hired an i- baner for help in transaction". %*6 BLR Stan&ar&7 ;irector liability is predicated upon concepts of

gross negligencei. !nder this standard it’s pretty clear to the court they breached

duty of care.c. ourt says the 6oard breached duty of care7

i. ;idn’t ade3uately inform themselves as to '>’s role inforcing sale at ?HH

ii. !ninformed as to intrinsic value of the company

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iii. 5rossly negligent in approving the sale of the company upon hours consideration

&. Stan&ar&7 *ou do not breach your duty of care if you hire an investment baner to do a study about the price of stocs for the cash-out merger.*ou may not enter a transaction without first performing a studyconducted by e1perts.

i. eality chec – can give you whatever numbers he lies.e. %*6 Stan&ar&, 4ay not have to hire baner bBc of the lenient ;'

<,(b)(T) which allows provisions limiting the personal liability of adirector to the corporation or the "@ of the corporation for monetarydamages for breach of fid-duty as a director.

ii. $he D)ty o Loyalty!. Stan&ar&7 ;irectors and officers are re3uired to put the corporations interest

ahead of their personal interests.2. onflict of Interest 0ransactions

a. Stan&ar&7 0hese commonly arise in two principal conte1ts7i. ;irectors or officers enter into contract or other transactions

with the including for compensationii. ;irector or officers tae potential opportunities for

themselves

". "; trans. are not per se illegal bBc it might be beneficial to thecorporation and thus there are statutory Fescape hatchesG

c. A transaction is not illegal i,

i. *scape 5atch K! !/a/!

,. ;isclosure of 4aterial Cactsa. egarding everything that gives rise to the

>I b. egarding everything related to the

transaction itself . 4ajority of ;isinterested ;irectors #pprove the

0ransactiona. !sual rules for 3uorum and voting are

re3uired

i. ommon or interested directorscount toward the 3uorum

b. 9ithin the 3uorum a majority of thedisinterested directors must approve of thetransactions

i. 0his majority can be as little as , ifonly , ;; remains

ii. ;isinterested – no financial interestin the transaction position in +rd party company close familyrelationship etc.

ii. *scape 5atch K2 !/a/2

,. ;isclosure of 4aterial Cacts

. #pproval by "@a. "tatute doesn’t re3uire them to bedisinterested

b. 6ut Clieger (;'$) has read a disinterestedre3uirement into this

i. 0o meet this the self-interestedtransaction must meet approval bya majority of the disinterested "@

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ii. #s in case of directors need notthemselves form a 3uorum ormajority

iii. *scape 5atch K( !/a/(

,. 0ransaction must be fair a. Interpreted as the same standard as the

'ntire Cairness 0esti. Cair ;ealing – process by which

transaction was completed wasdesigned to ensure entrance into thetransaction is in the ’s interest(lac of disclosure violation)

ii. Cair /rice (and terms). #pproval by the 6oard a committee of the 6; or

"@a. 6ut this element is not necessary where

there is a HBH deadloc among the 6;&. Coo#ies Foo' %ro')cts, Inc. v. La#es (areho)se Distrib)ting, Inc.

i. 4acts7 "@ derivative suit against majority "@ @errig whoused auto parts distribution networ to sell 66X sauce.

#lleged self-dealing transactions7 distribution and warehouseagreement royalty on taco sauce consultant fee

ii. Rule7 '1ception to @atches V, and V,. #ssuming "; is not otherwise illegal achieving

director or "@ approval under , and will ordinarilyrevive the protection of the 6K.

. In cases where there is a majority "@ however evenwhere hatches , and have been satisfied the 6Kwill not be revived until the entire fairness test has been satisfied.

iii. Instead of the director needing to prove entire fairness herethe plaintiff will have the burden to prove the transactionwasn’t entirely fair.

,. ationale – the majority "@ controls minoritye. arciano v. 8a#ash

i. Cacts7 Interested director transaction. &aash gave thecompany a loan worth .H million wich means that &aash hasthe first claim as creditor when the corp li3uidates. 9hatisgoing on is that the &aashes actually helped the corp.survive the loan was on fair terms plus without the loan the6>; would remain deadloced and would stifle the corp.

ii. @olding7 If you satisfy none of the self dealing FescapehatchesG under ,== you can still win if you prove that youractions comply with the intrinsic fairness test. 0he facts arespecific here that there are directors and it is a deadloc.

(. 0he orporate >pportunity ;octrine 0hree 0ests7 $ine of 6usiness

InterestB'1pectancy(0U) 0est and #$I testa. Stan&ar&7 0est to determine whether a corporate opportunity has beenwrongfully appropriated. ;ifferences in tests that are used.

i. All tests – Cirst you must establish from the facts that the fid-relationship e1isted

,. nd – argue the e1istence of the corporate based on thefollowing common law tests to determine whether a business opportunity has been wrongly appropriately

ii. All Three Tests,

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,. ;id the insider receive the offer in a corporatecapacity:

. ;id the insider use the corporate resources toinvestigate or develop:

+. Is it in the line of business or closely related to theline of business:

". 6ine o Business Test

i. # fid can’t tae an opportunity that is the same line of business as the if the is financially able to undertae it.

,. Issue7 9hether the opportunity was so closelyassociated with e1isting business as to bringtransaction wBI class of cases where director’stransaction would throw him into competition wB:

c. Interest<*:pectancy Test /Te:as

i. 9hether it could be e1pected by the that this was a opportunity as determined by its e1isting businessrelationships

,. /roved using minutes at meeting for evidencefavorable to ’s

&. #$I 0est – see the ne1t case

e. 8ortheast Harbor Gol Cl)b v. Harrisi. 4acts7 @arris was president of golf club8 contacted about land

opportunities because she was the president. @arris decides to buy the land herself rather than for the lubAshe didn’tdisclose this to the 6;.

,. 0he sues her for stealing opportunityii. Issue7 9hether she usurped a opportunity:

iii. Rule7 ourt adopts A6I .0 %einition o Corporate

Opportunity

iv. ;efinition of orporate >pportunity

,. #ny opportunity to engage in a business activity ofwhich director or e1ecutive becomes aware7

. In his capacity as &irector<e:ecutiDea. @e should reasonably believe that the

offeror e1pects it to be offered to thecorporation

+. #s a result of his use o corporate resources

v. #ny opportunity to engage in a business activity of whichdirector or e1ecutive becomes aware and nows it is closely

relate& to the "usiness in which the corporation is engaged or is about to become engaged

. >nce a corporate opportunity has been identified7i. ;irector must &isclose the opportunity to the board

ii. 0he opportunity is rejected,. 6y disinterested directors in a manner that satisfies

the 6K or by disinterested shareholdersa. @ere party challenging the corporate

opportunity bears the burden of proof . If board is not disinterested rejection must satisfy the

entire fairness testa. In this case party that too the corporate

opportunity has the burden of proving therejection was fair

iii. >nly then can the director pursue the opportunity

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iv. 0his disclosure element which brings the #$I in synch withe1isting law of self-dealing is the uni3ue aspect of this law

g. Re+e&y7 ;irectors holds the opportunity in constructive trust for thecorporation

i. 0urns over her ownership and corp. will reimburse her for the purchase price

h. ;'’s orporate >pportunity ;octrine is set out in G)th v. Lot, Inc. (;',E+E)

i. #uth Test Stan&ar&7 # corporate officer may not tae a business opportunity for his own if7

,. 0he is financially able to e1ploit the opportunity. 0he > is within the ’s line of business+. 0he has an interestBe1pectancy in the >8 #&;=. 6y taing the > for his own the fid will be placed

in a position inimical to his duties to ii. ;efense7 ;B> may tae the > if7

,. not financially capable. > was presented to ;B> in his individual and not

corporate capacity+. 0he holds no interest or e1pectancy8 #&;

=. 0he ;B> has not wrongfully employed the resourcesof the in pursuingBe1ploiting the >

iii. Analysis7,. Is it a corporate opportunityF

a. $ine of business test b. InterestB'1pectancy testc. &ote – no factor is dispositive loo at

totality of circumstances. Is there an air+atiDe &eenseF

a. has bypassed opportunity or ones lie it inthe past:

b. Cinancial inability:+. I it is a C O an& there are no &eenses) has the B%

approDe& or reecte& the transactionF. The T an& %* tests are +aority la1

. -strows#i v. Averya. Cacts7 "mall wheel manufacturer opens a separate company for

manufacturing small wheels while using the resources of the originalcorporation and not disclosing to the shareholders that he was doing this.

". Issue7 (,) Is the majority shareholder a fiduciary () Is there thee1istence of corporate opportunity:

c. @olding7 (,)7 *es majority shareholder owes a fiduciary duty () !sedthe business purpose test and determined yes.

&. FADo1e& Business $urpose Test3, /aority rule 0his is acombination of a line of business tests and interestBe1pectancy tests7

i. 9hether the business opportunity was one in which the

complaining corporation had an interest or an e1pectancygrowing out of an e1isting contractual right:ii. 9hether there was a close relationship between the

opportunity and the corporation’s business purposes andcurrent activities:

iii. 9hether the business areas contemplated by the opportunitywere readily adaptable to the corporation’s e1isting businessin light of its fundamental nowledge practical e1periencefacilities e3uipment and personnel:

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e. FADo1e&3 means how the corporation holds themselves out publicly orto the "@B6;.

i. '.g. in the @arris case golf course never avowed that theywere in real estate business to the public.

. DDD0he Favowed business purpose testG just as ambiguous as the line of business test.

g. 5ol&ing<aority rule, 'ven if there is the e1istence of a corporateopportunity the court might decline to impose liability if there wasade3uate disclosure.

iii. '1ecutive ompensation and the 9aste ;octrine!. Stan&ar&7 '1ecutive comp. in @ is set by the 6; and in typical one all of

the directors also serve as officers of the company. 9hen determining 'directors are often establishing their own compensation.

a. 0his is most important self-dealing are bBc it’s unavoidable subject tomuch abuse

". ompensation agreements are significantly influenced by ta1 concerns7wages are ta1 deductible dividends paid to "@ are not.

c. #ctions on behalf of the corporation may be brought in an effort torecover the e1cess or FunreasonableG amount of compensation paid toe1ecutives

i. ;uty of loyalty claimii. # procedural duty of care claim asserting that a board was

grossly negligent in the procedures it used in the informationit considered in setting '

iii. # substantive duty of care claim asserting that a boardcommitted a Fwaste in setting e1ecutive compensationG

,. <,==(c) discusses the 4arciano case that say s in adeadloc if you can satisfy none of the escapehatches it’s still oay if you prove it is fair.

2. ay too high, ;isparity between salaries of '>’s and average employees inother countries bBc protect by the 6K.

a. Solution7 create a compensation committee composed of non-e1ecutivedirectors bBc they have no stae in the decision8 hire outstanding

consultant8 approved by a majority of the disinterested 6;(. Challenging the Co+pensation o *:ecutiDes

a. In /@ rarely challenged bBc ,.) approved by disinterested directors and.) represents a small percentage of earnings

". 6ut in @s these circumstances are less liely to e1ist thereforechallenge occurs more often7

i. If the I" suspects that compensation in the form of salary(rather than dividends) is unreasonably high

ii. 6y "@ in derivative actions where there is a lac of pro ratasalaries among "@

c. (il'erman v. (il'ermani. Cacts7 /resident increases his salary very much. an he

unilaterally increase his salary:

ii. @olding7 *es to some e1tent he can unilaterally increase hissaltery. 6>/ on the /resident to prove that his salary wasreasonable considering the facts of the situation. It is very hardto define what reasonable is. 4ust pay bac the e1cessive payments. $ooed at profitability looed at what other corpshave done loo at comparable businesses.

iv. D)ties o Controlling /harehol'ers

!. onflict of Interest 0ransactionsa. Stan&ar& or COI Transactions Tests, Cirst you have to see the type

of self interest to apply the proper test

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i. 'ither there is a benefit that the majority "@ receive and themin "@ do not receive O apply the Intrinsic Cairness 0est8 >

ii. 0here is not a disadvantage to the minority "@ O apply the6usiness Kudgment ule

". Stan&ar&7 /arentB"ubsidiary "elf-;ealing then you will apply theIntrinsic Cairness 0est7

i. Step K! - ;efine the standard7 "elf-dealing happens when themajority receives a benefit that the min "@ did not receive

ii. Step K2 – If yes apply the entire fairness test.,. Intrinsic 4airness Test, Fa high degree of fairness

and a shift in the burden of proofGa. 4ust prove two things – fair price % fair

dealing (6urden is on controlling "@ to prove)

c. Boar& o %irectors %ecision – Apply the BLR

i. Step K! – ;efine the standard7 if the director can articulateany rational business purpose for the conduct (not even thatyou did it for that reason) .

,. 0his is applied where there is not a disadvantage tothe minority "@.

&. /inclair -il Corp. v. Levieni. 4acts7 "inclair owns ETL of "inven’s stoc. 0he / is

complaining about three count. /ayment of dividends –"inclair is causing "inven to pay out dividends in order tocreate cash for themselves instead of reinvesting it bac intothe company.

ii. 5ol&ing7 6reach of contract between the parent andsubsidiary is not enough if it doesn’t disadvantage theminority "@. 0here must be a disadvantage to the min

,. The BLR 1ill apply7 when there is no self-dealinginvolved 0here is no contract bBt a director and orvisa versa.

iii. In this case everyone was paid out dividends so weren’t the

majority and minority treated the same:iv. Be&roc= %*6 la1 principle, the >&$* thing ourt will loo

to is the e3uality of treatment of the shares.v. !st Clai+7 Improper distribution of dividends that drained the

company. ourt must decide if ";7,. S% 'ntire Cairness 0est

a. 4air %ealing

b. 4air $rice

. ?ot S% 6K justify the decision with a rational

business purpose+. %*6 Test, ere all shares treate& eHuallyF

a. ;'$ will never loo bBy the effect the actionhad on the shares themselves. (other states

not lie this) b. #pplying this test the court determines

shares were all treated e3ually and no ";. &o benefit to majority at the e1clusion ofminority.

vi. 2n& Clai+, "inclair usurped > doctrine. 6ut there was no breach of > – none of the >’s came to "inven but ratherdirectly to "inclair and " had no duty to cut "inven on thedeal.

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vii. (r& Clai+, "inclair set up a supply contract with "inven where"inclair agreed to purchase all oil produced by "inven.Curthermore "inclair didn’t comply with provisions re3uiringthem to buy a minimum and "Inven didn’t enforce7

,. Clearing S% – ;erived a benefit to the e1clusion ofminority "@8 furthermore caused "inven not toenforce its contractual right of min purchases

a. #etting on-competivie business from"inven which will greatly benefit their own business

b. Apply *ntire 4airness Tests, i. Cair ;ealing

ii. Cair priceviii. Rule7 # self-dealing transaction between a controlling

shareholder and the corporation e1ists where the majorityreceives a disproportionate benefit when compared to theminority

2. "ale of ontrola. The #eneral Rule, ontrolling "@ can sell shares at a premium and

eep profit for himself. It is understood that a part of the premium price

is the privilege of directly influencing the corporate affairs.". 6etlin v. Hanson Hol'ings, Inc

i. 4acts7 M owns L of stoc and majority owns ==.=L. In salemajority got more than double what M received (?,H to ?T) asa control premium. M sues because he thin he has an e3ualopportunity to share in the control premium.

,. ourt states the Metlin is wrong and tha tthe has noright to control premium

ii. Rule7 # controlling stocholder is free to sell and purchaser isfree to buy that controlling interest at a premium price

iii. ontrol premiums are justifiable because the purchaser isac3uiring control of the corporation. 6enefits

,. 4anagers will do what you say

. lowers agency costs and ris +. an replace management=. "ynergy with e1isting businessH. "elf-dealing (legally)

iv. 0his is a property right of the majority and therefore theminority has no right to share in it

c. The 6ooting *:ception. '1ception to the Metlin ulei. Stan&ar&7 *ou cannot sell the corporation to a party that is

liely to loot the corporation and if you do the penalty isdraconian.

ii. Ger'es v. !eynol's,. 4acts7 >B; and maj "@ of I control of to /rentice

% 6rady who looted ?E2 from .

. Rule7 0he sale of control in gross e1cess of the truevalue may result in a breach of fid-duty where thecontrolling "@ fails to undertae a sufficientinvestigation as to the purchaser’s motive and the purchasers subse3uently loot the corporation.

+. Factors which ten' to in'icate looting – e1cessive premium e1cessive interest in li3uid assetsinsistence on immediate possession of such assetsand a lac of interest on how assets wor.

&. >ther '1ceptions

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i. Stan&ar&7 *ou can turn over control of the board but only ifyou have control.

ii. # sale of control can’t involve the conversion of corporateopportunity.

v. In'emniication an' Ins)rance

!. Stan&ar&7 #nalysis to decide whether a director can be indemnified7a. Step K! – 9as the person who was sued in their capacity as a director of

officer:". Step K2 – ;o any of these automatic bars play in: If no move to the

ne1t step.i. Auto+atic Bar K! – 9as act committed in bad faith:

ii. Auto+atic Bar K2 – 9as the act in a manner opposed to theinterest of the company:

c. hich category protects a &irectorF !a) !") or !

i. !/a – /ermissive indemnification for +rd party actions,. #cted in good faith8 #&;. #cted in a manner not reasonably opposed to the

corporation’s best interest (not liable)+. Pery broad (officers directors agents etc.)=. /rotects even if person(s) is guilty.

ii. !/" – "imilar indemnification provision for derivativesuits

iii. !/c – mandatory indemnification provision if successfulon the merits for an (a) or (b) type claim (9hen they wineven if on technicality)

iv. !/ – a provision for <,=H(a) is not e1clusive. @ow does,=Ha and f fit together:

,. an give people additional rights beyond <,=H butcan’ do anything that violates or is inconsistent with<,=H(a).

a. <,=Ha sets out the outer limits of permissibleindemnification – can add but cancontravene

v. !/g – oay to buy insurance that indemnifies directorseven if you don’t satisfy the terms of <,=H(a).

,. 0his is why ,=Hf is read so narrowly. <=Ha trumps,=Hf

vi. 6ut even if a can buy it most insurance won’t cover actsthat the ;B> personally benefitted in the 2.

2. (alt)ch v. Conticommo'ity /ervices, Inc.a. 4acts7 9 was sued as an individual by the C0. @e lost one of his

suits8 provision says it will cover his legal fees regardless of good faith.". Issue7 <,=H(f) if you read this to say that the ’s could write agreements

to indemnify under #&* circumstances then the good faith re3uirementof <,=H(a) would be meaningless.

i. @ow can ,=Ha and ,=Hf be read consistently:

c. 5ol&ing7 0he court reads ,=Hf to say that you can do anything you want by way of indemnification provided it does not violate the whole of<,=H.

i. '1ample7 you could have a provision in your >I that'X!I'" indemnification allowed by ,=H whereas thelanguage of the statute is permissive.

ii. #lso <,=H(g) says that if you buy insurance for yourdirectors you can indemnify them for things that the statutedoesn’t allow.

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&. @ere 9altruch did get his e1penses paid for the other part of his suit bBche succeeded Fon the merits or otherwiseG.

g. %issension in the Closely 5el& Corporation

i. ;eadloc7 (ollman v. Littman!. 4acts7 / and ; are HBH "@. ; is now trying to steal the business. 6Bc the ;’s

don’t need the $’s anymore. 6ut the $’s still need them. 0he ;’s are seeing todissolve the corporation they argue that this is justified bBc it would violate the principals of e3uity.

a. 0heir plan is to dissolve the business and start up their own business wBothe $ittmans

2. 5ol&ing7 Kust as in /age v. /age you can’t dissolve the /-ship for the purpose of stealing the /-ship from the other partners you can’t dissolve a corporation forthe purpose of stealing the corporation.

a. 0he board in this case is deadloced via their irreconcilable differenceshence the is paralyzed

". ourt can’t dissolve the business bBc that will give the FbadG partye1actly what they want.

c. 9hat can the court do in this case:i. Can appoint a custo&ian 6; is completely displaced %

custodian has all power <S

ii. Can also appoint a proDisional &irector sits has a tie-

breaing vote on the boardAdefinitely less harsh remedy.<+H+

(. In ;'$ <T+ is the only statute conferring court the affirmative authority todissolve a corporation – applies where there are "@ each owning HL on thecompany

a. &o other provision gives court same authority. ;'$ courts will use alimited e3uity power to dissolve but only in most e1tremecircumstances bBc they want to be the least intrusive into corporateaffairs.

ii. >ppression!. $he inority /harehol'er&s %light

a. 5o1 to 4reeze-Out a inority S5

i. Cire him from his officerBemployment positionii. 0hen withhold dividends

iii. ;eny him access to information by icing him off the 6oardof ;irectors

iv. 'ngage in self-dealingv. Cinally offer to buy him out at a cheap price – at a fraction of

what the stoc is actually worth2. %rotecting inority /harehol'ers rom -ppressive a<ority Con')ct

a. /rotection 0hrough ontracti. Stan&ar&7 # min "@ who is cognizant of the riss of

oppressive majority conduct could see to protect his financialand participatory rights by contract before committing hiscapital to the venture.

ii. ?i:on Stan&ar&7 In ;'$ closed corporations should mae protections through contract. 0his essentially means that thecourt in ;'$ won’t grant additional protections liedissolution to protect them.

". /rotection in the #bsence of ontract7 Breach o 4i&uciary %uty,

i. Donah)e v. !o'' *lectrotype7 >ld "tandard in 4#"" andnow only followed in # F'3ual >pportunityG

,. 4acts7 odd sold his stoc bac to the corporation for N ;onahues argue it was an unlawful distribution.;onahue own L and odds owns NL. ;onahues

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haven’t been given an Fe3ual opportunityG to selltheir stoc bac to the corporation lie odd has.

. Stan&ar&7 ontrolling "@ does owe a heightenedfid-duty to protect minority "@ which is even a broader duty than an ordinary fid-duty. – 0hin4einhard standard.

a. ore a &uty to act air then to act selless

+. 0he ourt must first decide which rule to apply 6Kor 'C0:

a. learly self-dealing therefore do not apply6K

b. 'ntire Cairness – fair price fair dealing=. %onahue Stan&ar& or air7 '3ual >pportunity ule

– similar cases should be treated similarly. 4inority"@ should have an e3ual opportunity to sell areasonable V of shares to the corporation at anidentical price as the controlling "@.

a. *ADDD0o argue '> doesn’t apply –argue why the / is not in the same positionas the ;

i. 6onus was part of a retirement planand not part of benefits for being anemployee

ii. Cair O everyone gets treated thesame

H. $olicy Reasons – It’s good because it protectsinterests of min "@. It’s bad bBc it gives too much power to minority.

a. ould create perverse incentives for min "@to engage in illegal conduct and be abusiveto majority.

b. ;ecreases maj’s fle1ibility to run business.c. (il#es v. /pringsi'e 8)rsing Home, Inc.7 0he current "tandard &ow in

4#"" – $#""I C''M' >!0 "@'4'i. 4acts7 9iles one of = directors at a &@ is fired from his

officer position in a classic freeze-out scheme. 0he ourtabrogates the F'>G test laid down in ;onahue in favor of anew test.

ii. Rule7 0he actions of a controlling group of "@ are not said to breach a fid-duty where7

,. 0here was a legitimate business purpose for thisaction(burden on majority)8 #&; if so

. 0here was no less harmful alternative course ofaction (burden on minority)

iii. In this case the ourt overrules ;onahue out of a concern thatthe previous standard unduly hampered the majority’s

effectiveness in running the corporation.iv. hile %onahue ocuse& on the +inority) the il=es

stan&ar& changes the perspectiDe o airness3 to a ocus

on the +aority.

,. @owever 4odel act % 0U retained minority focusedyou have breached your duty to minority if you haveupset the reasonable e1pectations that minority hadwhen they invested.

v. 5ol&ing7 In applying the test the court determines that therewas no legit business purpose. 0his was a true freeze-out

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scheme designed to pressure 9 into selling his shares at acheap price.

,. DDD&ote7 in applying 9iles tests the outcome willdepend on the given facts and whether there is a legit business purpose.

&. erola v. *5ergen Corp.#pplies the ;onahue "tandard but comes out;ifferently

i. 4acts7 4erola former P/ and minority "@ was fired assertedthat controlling "@ violated fid-obligation.

ii. Rule7 Illustrates a case where minority "@ of a @ isterminated but the controlling "@ didn’t violate fid-duty

,. 'nli=e in il=es) 1here the +inority S5 1as

rozen out an& the e:pectation is the only 1ay to

receiDe a return on inDest+ent is through salary)

in this case) the $ 1as oere& 4P or his stoc=

"y the controlling S5.iii. #lthough there was no legit business purpose for the

termination of the / the termination was not for financial gainof the majority or contrary to public policy

,. ontrolling group in @ must have some fle1ibility

to run their business. #n employment decision – not freeze-out

iv. 9hy is this consistent with 9iles:,. 0here is no-freeze-out. Ciring him is not stealing money or putting him out in

any way bBc he’s getting ? from C4P+. DDDemember to argue inconsistent for e1amJ

e. /mith v. Atlantic %ropertiesi. 4acts7 4inority "@ refuses to vote in favor of dividends

despite being fined by the I".ii. Rule7 0he court states there are certain times in a @ conte1t

where the majority "@ need to be protected from the minority"@

,. The 80 proDision eectiDely reDerse& the nor+alroles "y giDing the +inority a su"stantial a+ount

o po1er.iii. Rule7 # minority "@ who holds a veto power over the

majority has a fid-obligation to the majority.,. 0his obligation re3uires the min "@ to e1ercise his

power in accordance with 6K and in general tomae decisions that are reasonable

. 9iles 0est 9as there a legit business purpose:

$ess restrictive alternative:iv. 5ol&ing7 ourt determines that "@’s adamant refusal to vote

for any sort of dividends despite the threat of penalties violatesthe fid-duty he held toward his fellow "@.(he was also

engaged in "; transactions)v. In this case the court was willing to Floo behindG the min "@voting and determine that he was engaging in a level of self-dealing

,. !nlie the court’s approach in this case ;'$ has astrong view that you should never loo behind theeffect on the shares of the "@

. %issolution or OppressiDe Con&uct3, In re +emp "eatley, Inc. &ew *or "tandard

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i. 4acts7 had the habit of paying FbonusesG based on stocownership. 0hese aren’t really bonuses they’re dividends forfavorable ta1 treatment.

,. /’s are long-term senior employees with sub stocholdings. >nce they are fired the changed the bonus policy to being tied to employment statusrather than stoc.

a. /’s stoc is rendered worthless.ii. ?e1 or= Stan&ar& or OppressiDe Con&uct, 9hen the

majority conduct substantially defeats a reasonable objectivee1pectation of the minority "@.

,. 6oo=s to the reasona"ly e:pectations o the

inDestor an& 1hether they@De "een rustrate&. iii. %ierence ro+ ass stan&ar&, 9iles ass whether or not

the majority did something wrong.iv. 5ol&ing7 0he ourt holds that it is oppressive conduct to fire

these /’s bBc they had reasonable e1pectation of theirinvestment affording them the job and return on their stoc.

,. ;'$7 the &i1on case holds there are no special dutiesowed by "@ to one another in @

. emedies7 the court decides to give them the optionof either buying them out at a fair price or dissolvingthe company.

g. Franchino v. Franchinoi. 4acts7 0here was no recognition or firing him from his

employment or position or removing him from 6; bBc thesedo not affect his interest as a "@.

ii. 5ol&ing7 $imits a "@’s recovery for oppression for damagesin his capacity as a "@.

iii. ase is wrong by saying that it would render the statutemeaningless if they found a connection bBt employment and"@ status.

,. 4ichigan case and leg there has not changed statute

to mae employment a factor.h. 0he F&o "pecial ulesG #pproach ?i:on D. Blac=1ell, %*6 SC reects

"oth the eHual opportunity G i&-&uty principles9

i. 4acts7 4in "@ are unhappy about the '">/ and ey man lifeinsurance policy bBc it gives the majority "@ more li3uidity tothe controlling "@

ii. ourt uses the 4airness Test – bBc ;’s are on both side of thetransaction thus 6K can’t apply

,. Cairness "tandard7 fair dealing bBt parties and fair price (good business deal) and remember it is selfdealing director’s burden to prove fairness.

iii. Rule7 "o long as stoc is purchased at a fair price no specialrules applicable to @ unless you bBc a statutory @ then

you can tae advantage of those rules.,. # @ does &>0 have to treat employee and non-employee "@ alie and treating them different is &>0 a breach of fid-duty

. 6ut unlie ;onahue there was no real Ffreeze-outGso it’s difficult to assess how the court would hold ifconfronted with a case more on point.

iv. &i1on does at least stand for the principal that not #$$minorities have to be treated e3ually. 4anager-friendly

v. 9hat is the benefit that you get by being a statutory @:

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,. *ou get to run your company by 2 . #llows much greater freedom for to 2 for its

preferences+. 9ide ability to protect yourself by 2 =. , – articulate preferences in the #>I

i. econsidering the ole of ontract in >ppression ;isputesi. Gallagher v. Lambert

,. 4acts7 / is employed by and purchases stocsubject to a mandatory buy-bac provision if theemployment ends. @e is fired just before that date sothe buy-bac price for the stoc is lower. 6reach fid.

. 5ol&ing7 &o breach of duty for firing. ; abided bythe terms of the 2. ourt focused on the fact that hewas an at-will employee so he can be fired for anyreason.

a. 5ood faith doctrine is narrowly appliedunless you imply an e1tra-contractual dutythe court will not apply that for you.@#"@J

+. Reasoning7 5 entered into a freely negotiated 2 and

got what he bargained for so there is no reason for thecourt to step in and invalidate the 2

a. $imitation in the future7 he doesn’tchallenge the fact that he was fired just therepurchase price

=. &ote7 "eems inconsistent with 2emp same court thatdecided that case. 0his is the most protective ofminority rights in the !".

a. &* broadly protects minority "@ rights yetcase held above. ::::

H. 0he outcome of this case depends on what ind ofcase you thin it is

a. /ure transfer law is clear that

discrepancies between boo value and fairvalue maes no difference

b. 6>C; if they breached their duty of

5C%C then you can argue he should havereceived his fair value.

iii. %ea&loc=

!. 9hat is the greatest form of relief:a. "tates lie & thin there are much wider remedies than just

compensatory relief. &* thins you should broaden the relief bBc /sshouldn’t be forced to wor with the ;s against their will esp ifrelationship has disintegrated bBt hem.

2. %isillusion stan&ar&7 an e3uitable remedy (never mandatory) and if there is a

less restrictive remedy then the corp. should not be dissolved.a. Poluntary &isillusion7 not ordered or compelled by ct or state you havethe right to do this if you comply with the following7

i. <TH – what you need to do in order to have the right tovoluntary disillusion7

,. 5et the approval of a majority of the 6>;a. 0he approval of a majority of all of the

outstanding shares of stoc entitled to vote. < +H – statute provides that a corporation can be

dissolved upon a specified event or at a specified

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time if such provisions are included in the articles ofincorporation.

". InDoluntary &isillusion7 ordered or compelled by ct or state8 allows ashareholder to petition for court-ordered disillusion

i. 4odern involuntary disillusion statutes typically allow ashareholder to petition for court-ordered dissolution on variousgrounds including director or shareholder deadlocmisapplication or waste of corporate assets and fraudulentillegal or oppressive actions by directors.

ii. < T+ – ;' statute very narrow only allows shareholder to petition for involuntary disillusion for &ea&loc= ;e has a

limited involuntary disillusion statute authorizing shareholdersof a corporation Fhaving only stocholders each of whichowns HL of the stocG to petition for involuntary disillusion.

,. %ea&loc= O HL owned by distinct groups that areat odds with each other so that effective managementis impossible.

. "o probably not judicial authority to dissolve thecorporation is based on deadloc alone.

+. ourt could decide to dissolve as an e3uitable

remedya. 6ut not if dissolving would violate the

principals of e3uity % participate in the breach of fiduciary duty ( Littman)

b. Kust as you cannot dissolve a partnership forthe purpose of stealing the pship from theother partners ( %age v. %age) you cannot dothis in a corporation either under $ittmanJ

c. A&+inistratiDe &isillusion

i. ;isillusion for noncompliance with certain re3uirements of thestate such as failure to pay ta1es or fees.

ii. !nder most statutes a state official (e.g. secretary of state) isempowered to bring a proceeding for dissolution. 6ut under

some statutes lie ;' the dissolution is automatic.&. Appoint a proDisional &irector

i. # neutral third party who is appointed by the court and vestedwith the rights and powers of a director to vote at boardmeetings.

ii. < +H+ – #ppointment of a provisional director,. can only use it if you’re a statutory closed corp in ;'

(eligible to be a close corp under ;' law and met allthe re3uirements.

iii. $ess harsh remedy than a receiver bBc not allowed to shift thecontrol of the business away from the owners.

e. Appoint a custo&ian<receiDer

i. 4anages the affairs of the corp until the conflicts are resolved.

ii. 4ore severe remedy than a provisional director because taesover the management of the business entirely.iii. ;' S % +H – appoint a custodian or receiver problems7

,. /otential negative impact it will have on thecompany’s relationship with creditors customers andsuppliers bBc they may view the appointment to meanthat the company is financially troubled.

. 0here might be a limited source of funds+. 4ay not generate a fair value for the business

iv. /ossible good things7

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,. # punitive damages types of relief might beinade3uate

. 0he court is not destroying a profitable corporationfor the public interest in a profitable firm

iv. emedies for ;issension!. oDing Beyon& %issolution

a. #fter successfully proving oppressive conduct courts can offer a wide-range of remedies. ourts are not limited to dissolution.

". '1am #nalysis7i. Is there oppression:

,. &* % 0U "tandard O easonable e1pectations of the"@ 0est

. 4# "tandard O 9hether there was a legitimate business purpose test

c. emediesi. %isillusion – the ultimate the rest of the remedies are less

harsh because they are not as drastic letting the businesscontinue.

ii. Buy-out, 4inority might thin it is a better solution thandisillusion because allows minority "@ to be compensated and

wal away they don’t have to be oppressed any longer ,. 4ajority

a. /ro buy-out they get to eep running the

business b. on of buy-out the large capital

re3uirement to buy out the minorityshareholder

. &ote on 4andatory 6uyoutsa. !nlie &* and 0U which grant disillusions

based on oppression in most states there are &> statutes permitting dissolution on thegrounds of oppression.

b. ;' courts have common law power to grant

dissolution at least in e1treme cases ( 8i5on)c. &ice 3uestion whether that $ power in ;'

e1tends to simple cases of oppressioninstead of egregious cases – ct hasn’t ruledon it yet.

+. 8i5on is an open 3uestion right now bBc under the;' law only compensatory relief can be granted.

=. !emin'er o hol'ing o 8i5on: court says that theentire fairness test would apply to public shareholders but holds that there are &> special duties owned tominority "@s in closely held corps. (6enefit ofclosely held corp- running it by contractJ)

iii. Inunction

iv. Appoint Custo&ian<ReceiDer,. @as authority to e1ercise #$$ powers of the 6>;

and effectively replaces the 6>; as the decision-maing body

. /urpose I to maintain status 3uo in the biz and preserve operations

+. 4ore severe remedy bBc taes over the managementof the business entirely

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=. In 0U if the court grants a receiver then there is a ,year gap between granting a receiver and the remedyof dissolution.

v. Appoint $roDisional &irector

,. &eutral +rd party vested wB power to vote at boardmeetings

. /urpose is to act as an arbitrator by breaing votingdeadlocs

+. $ess harsh remedy bBc not allowed to shift control ofthe biz away from owners

2. The Concept o 4air Palue3 is T1o Approaches

a. #pproach , 4air Dalue 4air ar=et Palue – what a purchaser on

the maret would be willing to pay for the shares.i. inority &iscount

,. ;iscount accounting for the fact that minority sharesinherently lac control

. 4ajority rule O there is no minority discount.+. 9hy: 6ecause the only reason that the minority is

selling is because they are oppressed. 0hey neverwanted to sell in the first place but they have to now.

It is better to give the boondoggle to the oppressedminority than the oppressor majority.

=. ;' standard is majority rule7 ejects the use ofminority and maretability discounts in the appraisalcontest. (Cavalier -il Corp. v. Hartnett )

ii. ar=eta"ility &iscount

,. ;iscount because shares are difficult to li3uidate. 0he cases are split as to whether there should be a

maretability discount+. 4aretability discounts do not mae sense when the

controlling shareholder is the purchaser in anoppression-related buyout bBc the discount for lac of control is mute in this case bBc intervenor already had

control of the shares.=. #$I "0; for maretability discounts –&o discount

for maretability )nless e1traordinary circumstancesare present. ( Follett ).

a. 9hen considering whether to apply as if itis too much of a burden on the majority to pay the full value of the minority’s stoc.

b. In considering e1traordinary circumstancese1ception ct can consider factors such as7

i. 9hether "@s had oppressiveconduct or devalued corp.

ii. 9hether oppressed "@ had addt’lremedies

iii. 9hether buy-out would be unfairto remaining "@siv. !ndue burden on the corp.

c. 9hether buy-out is fair % e3uitable to all parties.

iii. #pproach 4air Dalue $ro-rate share o a co+pany@s

oDerall Dalue ,. &o discounts for lac of control (minority disc.) or

lac of li3uidity (maretability disc.)

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iv. /ay attention to the facts of the case and whether the award isrealistic for the circumstances

,. # minority "@ who brings a disillusion action shouldnot receive less than he would have received had thedissolution been allowed to proceed just bBc thecontrolling shareholder wants to invoe the buy-outremedy ( Allie' Corr)gate' "o5 Co.)

". "rown v. Allie' Corr)gate' "o5 Co.i. Cacts7 /s filled for involuntary disillusion of #llied alleging

fraud failure to pay dividends unfair competition and e1cesssalary. 0he rule justifying a minority discount for lac ofcontrol is mute in this case bBc intervenor 5erald 6rownalready ha' control of the shares.

ii. @olding7 Rule, # minority shareholder who brings an actionfor disillusion should not receive less than he would havereceived had disillusion been allowed.

c. A'vance' Comm)nication Design v. Follet i. Cacts7 0 found the CP of Collett’s shares to be ,B+ of the

value of #; as an enterprise wBo discounting for lac ofmaretability (valued at =TH2). #; appeals arguing that a

maretability discount should be applied to the valuation.ii. Issue7 ;id court err in declining to apply a maretability

discount (ie is the e1ception for e1traordinary circumstancesmet in this case: (yes).

iii. @olding7 4in t adopts the #$I std re maretability discountsfor minority shares. ule7 no discount for maretability unless

e1traordinary circumstances are present.h. Securities 4rau&

i. "ecurity is a fungible negotiable instrument representing financial value (includingstocs bonds and mutual funds)

ii. Cor elements of securities fraud – see the section on "ecurities fraud for the elements etc.i. 4un&a+ental Transactions

i. ertificate #mendments

!. Stan&ar&7 <= certificates may be freely amended subject to broadre3uirements7

a. #n amended certificate may contain only such provisions as may belawfully contained in an original certificate of incorporation

". If a change in the rights of shares or "@ or an e1changereclassification or cancellation of shares or rights is to be made the provisions necessary to effect such a change must be set forth in theamendment.

2. 0o amend the certificate you must now things7a. 0he percentage of 3uorum". @ow to measure the vote

i. 0hree ways to measure the "@ vote depending on the statute7,. 4ajority of outstanding shares

. 4ajority of 3uorum entitled to vote+. 4ajority of "@ actually votingii. ;'$ – majority of "@ entitled to vote (HL)

iii. 0U – B+ majority of all shares entitled to vote (SSL)(. /han#en v. Lee (olman

a. 4acts7 0e1as case. 0here was three classes of stoc. 0hey were going tovote for increases of shares for each class. lass # % 6 voted for thechange class voted against. lass didn’t want class # and 6 to beable to add shares without his vote.

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". Class Doting S22/"/2, you get a class vote if your class rights arespecifically changed.

i. *ou divide into classes to specify different rights per classes.@ere they had differently weighted votes for 6; voting.

c. 9hen class voting is needed there are two re3uirements – 0U % ;'$i. 0he certificate amendment must be approved by the re3uisite

L of shares entitled to voteii. #lso approved by the re3uisite shares of each class entitled to

vote separatelyiii. 6ut loo carefully at the class in 3uestion may not need a

class vote.&. Stan&ar&7 *ou don’t get a class vote unless your class rights are

specifically changed.e. 5ol&ing o case7 ourt holds they could add shares without vote. @ere

the court differentiates bBt reorganizing and restructuring the stocwhich re3uires class voting and merely increasing the number of sharesin the aggregate which doesn’t re3uire.

i. @ere there was no stoc split all the old shares stay the samedoesn’t change his underlying rights.

ii. 6ylaws #mendments

!. 6ylaws are typically adopted by the 6; at the initial meeting of the board.2. Stan&ar&7 In ;'$ the power to adopt amend or repeal bylaws is in the hands

of the "@ entitled to vote. >r 6; might have the power if the power is grantedto them in the certificate of incorporation.

(. +eating v. +C+ Corp

a. 5ol&ing7 ;'$ $aw if bylaws are amended by custom and usage that isenough. Cormalities aren’t re3uired. 0he course of conduct is enough toamend the bylaws and is just as good as following formal procedures.

i. %olicy – in @ formalities are almost never followed to theletter there’s not general counsel watching every step

ii. Contra7 &i1on v. 6lacwell – says that we should assume thatall @ should have access to $’s and protect themselves.

iii. ertificate #mendments

!. 4ust be filed with the ">" just as #>I bBc it is a publicly-filed document.2. ;ifferent than amending bylaws – which can be done by custom and practice

not the same with #>I.iv. "ale of #ssets

!. Transactions Triggering Sharehol&er Rights

a. Sale o Su"stantially All Assets 2!>

i. 5enerally ;' <T, says that every corporation may sell all or substantially all of its assets

ii. All or Su"stantially all,

,. +at0 ?D*@ – the sale of a company’s anadianoperations that comprised H,L of total assets and=HL of net sales but which had been the only profitable element of the enterprise for the last

years met the test.. Hollinger ?D*43B@ – In an effort to return a plainlanguage interpretation court refused to find a salewithin the meaning of "T, in which @ollinger soldHL of its operation

a. It depends on how profitable remaining HLassets are

". ApproDal7 e3uires 6; approval as well as the vote of a majority ofoutstanding shares

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i. 0his is in contrast to the normal voting rule of majority ofshares present

ii. ationale – give the "@ the benefit of the bargain where a salehas the potential to substantially change the nature of thatinvestment and this decision is otherwise protected by the6K.

c. *:ception7 <T, doesn’t apply to corporations whose ordinary course of business is selling asset

i. In ;'$ there are no appraisals for a sale of assets onlymergers <S(b)

ii. 0e1as7 "@ vote is needed for sale of all or sub all company’sassets other than in the ordinary course of business (B+ vote)

,. >rdinary course of business e1ists where a companyis left with any assets at all after the sale and doesn’tdissolve

. /ermits corporations to sell assets without "@approval by retaining nominal assets after the sale.

&. !)'isill v. Arnol' (hite an' D)r#eei. Cacts7 #9 sold all their assets: 9as this in the Fregular course

of business:G

ii. @olding7 *es in the reg. course of business. "0;7 0e1asstatute widely interprets Fusual and regular course of biz.G#ccording to 0U statute Fnot in the ordinary course of bizGmeans that you’ve li3uidated and you’re not in biz anymoreJ"o practically everything is considered to be in the course ofordinary biz.

iii. 0U ct clearly reverses the ;' cases that say HLis goodenoughAag says why the court gave so much weight to thelegislative history is beyond him.

iv. #mazingly even though they sold almost everything the firmsown the court still held it wasn’t substantially all of theirassetsJ

v. ags thins holding is crazy.

2. Appraisal Re+e&y 2;2a. #eneral Stan&ar&7 It’s a remedy for "@ who object to a corporate

transaction that allows them to receive the fair value of their shares asdetermined by a court.

i. !ationale – available bBc the nature of a "@’s investment has been changed

ii. %roblem – it only taes into account value of stoc pre-merger it disregards the value and synergies of transaction

". *ligi"ility or Appraisal Rights

i. In the event of a mergerBac3uisition a "@ may be entitled toappraisal rights for the fair value if7

,. 4ade a written demand on for an appraisal prior tothe meeting at which the transaction was voted on

. ;id not vote for transaction+. 0ried to reach an agreement on value and if not filedaction with ourt seeing appraisal within , daysafter effective date of merger (court will determineC4P)

=. ontinuous "@ through the effective date of merger c. %ela1are Bloc= etho& 2;2/h Steps,

i. $oo at three values,. ;etermine maret value of ’s stoc . ;etermine value of the ’s net assets

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+. ;etermine the ’s Fearning valueGii. ourt assigns weights to each of + values depending on

reliability of each factor iii. 0his has actually fallen out of favor

&. %iemonte v. 8ew "oston Gar'en Corp.i. 4acts7 "@ sue for judicial determination of Ffair valueG of

their shares on the eve of a merger ii. Rule7 <S governs ;elaware valuations <S(h) says that

shares are valued aside from any value arising fromaccomplishing a mergers so the Fs shares should be appraisedwith the added value of the looming merger.

e. 0his case illustrates application of the %ela1are Bloc= etho& ofvaluation which is a weighted average of7

i. ar=et Palue – loo at most recent purchase and saletransaction

ii. *arnings Palue /Capitalization o *arnings – $oo at past earnings (+-H years) and arrive at an average

,. 4ae certain adjustments tae out e1traordinarygainsBlosses and arrive at earnings per share

. /rice-'arnings atio7 "hare /riceB'arnings /er "hare

– the investment return sought8 a measurement of thedegree of ris the purchaser is willing to undertae

iii. #pply a multiplier to ascertain prospective financial condition – generally use other comparable corporations to identifyaverage rate of return

,. 6ut compare with ;iscounted ash flow valuation –which re3uires the discounting the present value ofall future receipts and salvage value which arguablyinvolves more judgment maing

iv. ?et Asset Palue – tae all assets of company add up anddivide by shares

(. 4reeze-out Transactions

a. Farnsworth v. assey

i. 4acts7 ,L sale of assets to a new company. &ew companyowned ,L of the old majority "@. 0he minority "@ isessentially frozen out. 0he old corporation dissolves.

ii. 5ol&ing7 #s long as you follow the statuteBblac letter law itis not a freeze-out.

,. #57 this holding is strange bBc ;' courts typically protect "@ even if they are being frozen out. @ere the" of 0U allows "@ to be blatantly frozen out.

iii. Stan&ar&s to &eter+ine 1hether there is a "reach o i&-

&uty,

,. &* "tandard for oppressive conduct (2emp) – whenthe majority conduct substantially defeats thereasonably e1pectations of the minority "@

. 4#"" "tandard (;avis) – loos at it from themajority’s perspective – legit business purpose:iv. To&ay7 0e1as appraisal statute says that an appraisal is the

e1clusive remedy for a "@ absent fraud.. ergers

a. erger7 a combination involving the fusion of two constituentcorporations pursuant to a formal agreement e1ecuted with reference tospecific statutory merger provisions under which one corporation (thesurvivor) succeeds to the assets and liabilities of the other corporation byoperation of law

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i. "teps7 <H,,. /reliminary agreement. 6oard #&; vote of the majority of the outstanding

shares by both constituents+. Ciling of articles of merger =. "toc of surviving corporation is e1changed for stoc

of disappearing corporationii. In most agreements authority is given to the boards to

abandoniii. If "@ approve file merger agreement with ">" <,+iv. onsolidation7 Identical to a merger e1cept that constituents

fuse to form a new corporation,. 0riggers voting and appraisal rights in the

shareholders of both constitutents". S+all-Scale ergers, 2!/

i. &o "B@ vote of a surviving constituent corporation re3uiredunless forth in certificate if7

,. #greement does not amend the certificate ofincorporation of the constituent

. 'ach share of stoc of the constituent is identical

post-merger +. "urviving corporation neither issues stoc >

amount of shares to be issued does not e1ceed Lof total shares outstanding prior to effective date ofmerger

c. Short-4or+ erger, 2(

i. 4erger can be effected by a simple vote of parent’s board if7,. /arent corporation is at least a EL shareholder in

subsidiary. 6d. adopts a resolution to merge+. ertificate of merger filed with the "ec. of "tate=. "hareholders of subsidiary advised of <S appraisal

rights but no vote

H. "hareholders of parent are neither afforded anappraisal nor are they permitted to vote because verylittle change in investment8 at worst paying the ,Lminority to go away

&. #ppraisali. In ;'$ "@ always have a right to appraisal in a merger but

not for a sale of assets. <S(b)ii. '1ceptions to always having the right to an appraisal7

,. &o appraisal rights for "@ in surviving corporationfor a small-scale merger

. &o appraisal rights for "@’s of parent corporation ina short-form merger (but "@ of the sub corporationdo have appraisal rights)

+. &o appraisal rights for "@ of a /@ – based onefficient maret theorye. ;e Cactor 4ergers

i. 0wo new inds of combinations stoc-for-assets and stoc-for-stoc trigger 3uestions about how to characterize thesetransactions7 a purchase and sale of assets or merger:

ii. %e 4acto erger7 # theory which loos to the substance of atransaction whereby one constituent sells assets inconsideration for shares of stoc of the surviving corporationwhich would not otherwise trigger appraisal rights for the

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shareholders of the asset selling constituent under <S(b) asa merger in fact and therefore deserving of appraisal rightsand in the nd step asset seller agrees to dissolve

,. ;e facto merger theory is a form of shareholderrights8 under the Internal #ffairs doctrine court willapply this theory if plaintiff is a shareholder in acorporation whose state of incorporation recognizesthis theory

iii. 9here the de facto merger does not apply7,. onstituent that purchase assets does not become

liable for seller’s obligations. In a statutory merger surviving company 'oes

become liable by operation of lawiv. Stoc=-or-Stoc= 7 "urvivor does not become directly liable

although ac3uired corporation is now a subsidiary and carriesits obligations along

v. "elling constitutent must provide for a shareholder vote under<T, but does not need to provide appraisal rights under<S(b)

. %* &oes not recognize the &e acto +erger theory. Hariton v. Arco

*lectronics, Inc. (;' ,ES+)i. 4acts7 #rco (;') sells its assets in consideration for N+

shares of $oral (&*) and then agrees to dissolve and distributethe shares to its shareholders

,. 6ut permitting the selling corporation to do an end-run around the merger statute by casting the form ofthe transaction under <T, cuts against the veryreason for providing voting and appraisal rights in amerger transaction

ii. ourt relies on the doctrine of in&epen&ent legal signiicance

to justify reading <T, separately from appraisal rightre3uirement for mergers <S(b)

,. !ationale7 /rovides certainty for boards8 don’t need

to worry that a court will later recharacterize theirtransaction as a merger

iii. 6ut legitimate rights of shareholders and creditors were astatutory merger actually completed are fairly easy to do anend-run around7

g. Asset Selling Corporation7 "@s lose appraisal rightsh. Stoc= selling corporation7 "@s lose both appraisal and voting rights

i. 0his rule says form prevails over substanceii. 0U follows this rule as well

i. $olicy7 'vidence that ;' is racing to the top: or ;oes the trampling of"hareholder rights in favor of managerial discretionBenabling proveracing to the bottom:

. In states that &o accept the &e acto +erger &octrine) court a&opts a 2-step

analysis. Farris v. Glen Al'en

a. @as there been a sale of assets of one corporation in e1change forsecurities:

". ;o the conse3uences of the transaction give rise to concerns for whichthe merger statutes which provide appraisal and voting rights wereseemingly addressed:

c. 'specially prevalent where the smaller company ac3uires the assets of alarger corporation and the shareholders of the surviving company seetheir influence and the value of their shares dramatically reduced

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;. 'ven where a "@ vote is otherwise not re3uired might need a "@ vote if7a. 0ransaction re3uires amendment of certificate to issue more shares of

stoc ". orporation is listed on the &*"'

v. Creeze-out 4ergers!. 4reezeout7 # corporate transaction whose principal purpose is to reconstitute the

corporation’s ownership by involuntarily eliminating the interest of minorityshareholders

2. 4or+s7a. ;issolution Creeze-outs". "ale-of-#ssets Creeze-outsc. ;ebt 4erger &. ash-out 4erger

(. # minority shareholder in a publicly held corporation who is subjected to afreezeout by the majority through a cash-out merger transaction has remedies in both appraisal and 6>C;

. 'ven if the merger is fair the transaction is invalid under 4ass law if the purpose of the merger is solely to eliminate the minority "@ interest. (Coggins)

a. 9hat we are debating is whether it is a property rule or a liability rule.i. Is it a breach of fiduciary duty to get rid of a minority "@ wBo

their consent: (liability view of shares 4ass viewii. Is it fair to get rid of minority "@ so long as you give them a

fair price % fair dealing: (property view of shares ;e view)

". ass Test7 4ust satisfy both the legit biz purpose test % the entirefairness burden

i. 9as the merger for a legit biz purpose:ii. !nder the totality of the circumstances was it fair to the

minority:iii. 6>/ is on the controlling "@ to prove that the transaction

does not violate fiduciary dutiesiv. 6ut even if it is fair the transaction is invalid under 4ass law

if the purpose of the merger is solely to eliminate the minority"@ interest.

c. %* approach, it is enough to satisfy the entire fairness test (fair dealingand fair price).

i. egardless of whether your sole motivation was to freeze outthe minority shareholders (eliminated the business purposetest).

ii. &o need to show a legitimate purpose for getting rid of theminority "@s ((einbarger case- the facts of this case were a public corp but still applies to closely held corps)

. %issolution

a. Grato v. Gratoi. 4acts7 5rato involved family trucing companies. 6asically

transferred all the first company’s assets into a newcompanyAwanted to get rid of mom % son so didn’t tell

them.. it was a fraudulent conveyance.ii. 5ol&ing7 Paluation of /’s interest in the biz should be based

on value of the biz as operated under the old corporate entitles just prior to the disillusion.

,. 9hy is this case different from Coggins (get presentvalue for stoc):

. @ere the minority shareholder got the CP as of thedate you were frozen out. ourt’s remedy hereimplies that the court’s remedy is consistent with ;'law saying that there was nothing wrong with getting

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rid of them per se just that you should have paidthem CP as of the day you got rid of them.

iii. f7 4ass7 'ven getting rid of them for the purpose of freezeout is illegal (Coggins Yso they get /P).

,. &ote7 6oth of these cases are totally inconsistent with Farnsworth (which says that so long as statutoryre3uirements are followed its oay.

iv. It can be considered a breach of fiduciary duty freeze peopleout even if you follow the statute (this can be accomplished +ways)

,. ashout 4erger. ;issolution (5rato-illegal disillusion)+. 0ransfer of assets for the purpose of freezing out the

minority shareholder . %eriDatiDe Suits

i. %eriDatiDe Suit, # suit by a minority "@ brought on behalf of the corporation to enforcea corporate cause of action against officers directors and +rd parties

!. '1traordinary procedural comple1ity in order to minimize frivolous suits2. #s contrasted with direct action7 6rought on a "@’s own behalf either against

corporate fiduciaries or the corporation itself

(. #s who would the relief benefit in this case: If it benefits individual O directsuit. If it benefits corporation O derivative suit.

ii. /rocedural e3uirements7!. Stan&ing7 # "@ must at time action is begun and during the pendency of the

actiona. # "@ may lose standing when his corporation merges with another

during pendency of action". reditors ordinarily have no right to bring a derivative suit unless a

corporation is insolvent2. $ersonal %eenses, orporate defenses which bar a "@ from bringing a

derivative suit due to factors not related to the merits of the actiona. # "@ is barred form bringing a ;# if she7

i. /articipated in the wrong consented to the wrong ac3uiesced

in the wrong by failing to object". $ainte' /hares !)le7 the transferee of a "@ who is barred from bringing

a ;# due to a personal defense is also barred(. orporation is a defendant in a lawsuit for purposes of establishing diversity.

iii. ;irect v. ;erivative "uits!. "arth v. "arth

a. 4acts7 4inority "@ sues /resident and orporation for actionsinvolving self-dealing which reduced value of shares.

". 5ol&ing7 In some jurisdictions in the case of a @ for suits against themajority the court has the discretion to allow a direct action against thecorporation even if it is technically a ;# if to do so would not offendthe policy rationale for re3uiring ;# including7

i. /rotecting creditors of the

ii. $imiting a multiplicity of suits against the iii. 'nsuring a fair distribution of proceeds if the / winsc. 0his is the law in 0e1as7 if a company has over +H "@ court has

discretion to treat ;# as a direct.2. ;' doesn’t allow this type of judicial discretion – can’t loo behind effect on the

shares to the effect on the shareholders.(. %istinguishing Classic Suits,

a. %eriDatiDe – 9rongful act that depletes corporate assets7 "elf-dealing breach of duty of care e1cessive compensation corporate opportunityusurped for ;B>’s own benefit

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". %irect – 9rongful act that interferes with the incidents of ownershipsuch as voting rights or the right to receive dividends.

. In&iDi&ual RecoDery

a. #eneral Rule, 0he recovery goes bac to the corporation rather thandirectly to the "@ who were harmed. "ee 6angor /unta e1ceptionthough.

. Three oDer-arching Pie1s,

a. >hio – if two parties involved it’s basically a suit between two partiesso considered a direct action

". ;'$ – &othing special about @ so no e1ceptions. 4ust file aderivative suit subject to the procedural re3uirements.

i. ;'$ courts prefer derivative mechanism bBc recovery will be put bac into the corporation % help creditors

,. 'fficiency – prevents multiple law suitsc. #$K – (4ajority including 0U % Indiana) ;iscretion to treat a

derivative claim lie a direct action. an do so if7i. 0he action won’t unfairly e1pose the of the ;’s to a

multiplicity of actionsii. 9on’t materially prejudice the interests of creditors8 >

iii. 9on’t interfere with a fair distribution of the recovery among

interested persons.iv. ;emand on the 6oard of ;irectors

!. 0his is the ey procedural hurdle in a ;". 9here /laintiffs fail to mae ademand if they lose on the 3uestion of whether demand was e1cused they willtry and argue the suit was direct rather than derivative.

2. #eneral Stan&ar&, In bringing ;" a "@ must plead with particularity hisefforts to mae a demand on the 6; unless demand is e1cused bBc its futile./lead with particularity – must have some facts to support your claim can’tsimply get around maing a demand by suing entire 6;

a. 4utile – 6; is unable to mae a decision that would be protected by the6K because7

i. Cailed to satisfy the duty of loyalty (by engaging in a self-interested deal) or

ii. ould not satisfy the duty of care (by failing to engage inreasonable procedures to investigate the transaction)

". 9hen demand is made7i. If refused by the 6; decision is protected by the 6K8 suit is

barredii. If accepted then suit bBc corporation’s suit

c. 9hen demand is e1cused7i. %*6 – / must allege with particular facts that raise a

reasonable doubt that7,. 4ajority of directors are disinterested and

independent8 > a. &aming 6; member as ; isn’t enough

. hallenged transaction was the product of a valid

e1ercise of due care (didn’t follow ade3uate procedures % investigations)8 > +. 0he acts are so gregarious on their face so they could

not possibly be the product of sound business judgment

a. 0erms of transaction itself give rise to aninference that the 6K could not be satisfied.

ii. &* – basically follows ;'$ standardiii. A6I, 'niDersal %e+an&

,. ;emand re3uired in #$$ cases

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. If board decides not to bring the suit then court willtae up 3uestion of whether this decision was a valide1ercise of 6K

+. In this case futility is really about Fe1haustionG of allefforts

=. 0e1as law&. 6oard’s response once the suit is allowed to go forward7 form an

independent litigation sub-committee to evaluate whether to move todismiss the suit7

i. 'ven if entire 6; is sued 6; may enlarge itself and add newdirectors

ii. &ature – comprised of law professors retired judges etciii. I" may then choose to dismiss the suit. Impact of this

decision7,. &*7 # symmetrical result- before dismissing court

e1amines whether I" acted independently with duecare7

a. If yes then court will not review the meritsof substantive decisions

b. If no then motion is denied.

. &7 #n asymmetrical result – before dismissingcourt e1amines whether I" acted independently andwith due care #&;

a. ourt must mae its own decision regardingthe propriety of dismissing the suit –ultimately court’s decision

(. Johnson v. /teel, Inc.

a. 5ol&ing7 Cutile e1ample is that everyone in the 6; has a stae in theoverpayment.

v. ;emand on "hareholders!. ;' used to be C/ +.,7 *ou must mae a demand on the board or you must

plead circumstances that demonstrate futility #&; you must allege you made ademand on "@s if necessary

a. "tatute did not provide a definition for ZnecessaryZ". ;' defined FnecessaryG as demand was futile and no other e1ception

appliedc. ;' no longer says a demand on "@s must be made if necessary

i. Inference7 0oo out sentence to mae clear that it is nevernecessary

ii. 0his is 0U law as well2. States retaining Ui necessaryU

a. '1ceptions which foreclose necessity of maing a demand on "@si. 9rongdoers own a majority of the stoc

ii. 0oo e1pensive to mae a demand on the "@s (pro1y)-Kurisdictions split on this

iii. 9rong is not ratifiable by the shareholders

,. '.g. 9aste can only be ratified by a ,L "@ vote. 4ajority rule (and ;')+. 4inority7 ;istinction between approving transaction

(ratifying) and deciding not to sue8 thus decision notto bring a lawsuit is not the e3uivalent of a ratifiabledecision

(. !nder Cederal rules re3uirements for derivative are always state law 3uestionsa. 0hus if a ;' corporation is a party to a diversity suit ;'[s laws control

whether you must mae a demand on the boardvi. $lainti@s Counsel 4ees

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!. #ttorney’s fees generallya. #merican ule7 /arties bear their own fees in the absence of a statute or

a basis in 3uantum meruit for reimbursing a party who has benefitedothers

i. If the winning party gets costs the costs do not includeattorney fees (filing costs copying costs etc.)

". 'nglish ule7 0he losing party pays the winner[s costs and costs doinclude attorney[s fees

c. 6enefits of the 'nglish "ystem7i. ;iscourages frivolous lawsuits and defenses (companies don’t

want to pay for defense fees if they are ultimately going tosettle the claim)

&. ;rawbacs of the 'nglish "ystemi. ;iscourages potentially meritorious claims and defenses

ii. 6ecause the #merican system removes this disincentive it isnearly impossible to collect a claim for a small sum of money

2. Co++on 4un& Theory7 #n e1ception to the #merican ule by which a plaintiff in a derivative suits who has successfully established a fund under thecontrol of the court from which many besides himself will benefit may recoverhis counsel fees out of the fund

a. 'ncourage meritorious claims by individual shareholders who have asmall financial stae in the outcome

". 6ecause benefit accrues to the corporation not just the shareholderindividually encourages fair distribution of cost among all shareholders

c. 'ven in a direct action the court has discretion to re3uire the corporationto pay attorney fees where the corporation receives some benefit(economic or otherswise) from the suit. $an'ycrats, Inc. v. Initio

%artners (;el. "upr. ,ENE)vii. "hareholder "tanding

!. "angor %)nta v. "angor an' Aroostoc#

a. 4acts7 #moseag owns EEL of 6# purchased from 6angor /unta.0hey cause 6# to sue 6/ for alleged mismanagement that occurredwhile 6/ owned the EEL of shares. 6# is suiing in its own name and

this is not a ;#.i. 0his case just gives you the procedure on how to bring about

demand on a board. In ;'$ remember demand it re3uired bBc it gives the 6; on the ’s behalf a chance to say no andstop the suit.

ii. 0he court treats this as a ;# not an direct suit.". 5ol&ing7 0o bring a ;" 4!"0 be a "@ at the time of the wrong in the

complaint and "@ at the time of filing and "@ throughout the periodand during the final judgment.

i. If you were not a "@ at the time of the stealing you arecomplaining of you can’t bring the action.

viii. Individual v. orporate ecovery!. Glenn v. Hoteltron /ystems

a. CactsBIssue7 9hen there is a closely held corporation and the damagesawarded to the corporation would be shared by the corporate officerB"@responsible for the injury can the award of damages just go directly tothe innocent shareholder and not to the wrongdoing shareholder:

". @olding7 0he damages should be awarded directly to the corporationnot just to the innocent "@ directly. 0he mere fact that the wrongdoerwill indirectly benefit from the award to the corporation does not re3uirean e1ception to this rule.

i1. "ettlement or ;iscontinuance

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!. Rule7 0oday in most states you need court approval to settle a derivative actionand the court must approve the terms as fair just and reasonable

a. !ationale7 ;erivative suit he brought it on behalf of the company andany relief should benefit the stocholders in proportion to theirownership

2. Cor derivative suits that tae place in federal courts C/ +., re3uires courtapproval and notice of the proposed dismissal be given to shareholders andmembers

(. Desimone, -$art test to &eter+ine i settle+ent shoul& "e approDe&.

Bur&en on proponent

a. "ettlement reached at arm’s length negotiation". /roponents are counsel e1perienced in similar casesc. "ufficient discovery to enable counsel to act intelligently and&. &umber of objectants or their relative interest is small

. Settle+ent 1ithout $lainti@s Consent

a. !nder (ol v. "ar#es (nd ir.) no judicial approval for settlementdirectly between director and corporation in a derivative action

i. ationale7 C/ +., re3uires court approval for settlement of a derivative s)it rather than a settlement of the claim

". 6ut once you settle the underlying claim there is no suit left

c. "hareholders may still sue for lac of fairness if board was interested&. 0hus this is a controversial holding. 4any jurisdictions say you can[t

settle claim that underlies derivative suit without court’s permission.i. 6ut in every jurisdiction in country bd. can do whatever it

wants bBf the suit is filed8 thus why can[t they do this after suitis filed:

IP. The 6i+ite& $artnership

a. Intro&uction

i. $/ lie a corporation is a creature of statute – it can only be created by complying withformation re3uirements of statute.

ii. # partnership formed between or more persons comprised of at least , 5eneral /artner(5/) and at least , $imited /artner ($im /)

,. 5/ lie in general p-ship has unlimited liability for obligations of firm.

a. 9here a corporation is the 5/ then the $/ could enjoy nearly noliability due to principles of corporate law.

. $im / typically enjoys limited liability - has no liability for debts of venture bByloss of investment.

a. an forfeit limited liability if there is too much FcontrolG by $/. b. 5istorical ODerDie1

i. !niform $imited /artnership #ct (!$/#) first adopted in ,E,S – by all statesii. 0hen it was revised in ,ENH and entitled !$/#

iii. Curther revised in , – !$/# (,) – however only E states have adopted so for purposes of our class R'6$A !8 1ill "e consi&ere& our la1.

c. Statutory 6in=age3 G %e-6in=age3

i. $/ statutes are typically FlinedG to 5 /-ship statutes.,. !$/# – 5 /-ship law applies to $/ issue when that issue is not covered by the

$/ statute.. @owever , !$/# is completely confined.d. 4or+ation

i. General !e;)irements – See R'6$A !0!/2) !02) !0) 20!) 20) 0! ,. !nlie 5 /-ships $/’s can only be formed by filing certificate of $/ with ">".

See R'6$A 20!. a. ertificate is seletal document which includes only basic information

– name % identity of 5/’s. b. /urpose is purely to provide notice to third parties.

. $a5 "eneits

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a. /’s in $/ usually re3uired to mae capital contribution b. I" allows alternative business entities to Fchec the bo1G and pic

which form of ta1ation it prefers7i. /ass-through ta1 treatment (lie /-ship)

!. Cirm not subject to ta1ation % instead all firm’sincome % e1penses gains % losses are ta1abledirectly to the firm’s ownersBpartnersBmembers

ii. orporate style – ta1ed as legal person on income!. If firm maes distributions to its owners out of after-

ta1 income owners then ordinarily pay ta1es on thosedistributions

iii. '1ception – if you are a public $/ you must be ta1ed ascorporation.

+. Internal Governance provi'es m)ch str)ct)ral le5ibilitya. @ow you run $/ is essentially a matter of contract – /’s can contract to

run business how they see fit. b. $/ interest typically treated as securities under securities laws – $/’s

lac right to participate in management % depend on efforts of 5/ for profit.

c. $artnership Agree+ent

i. "eparate non-public document that parties draft to governtheir particular firm – including detail on rights % duties of partners % overall operation of $/

ii. #greement’s terms – displace default provisions of the statute.iii. !nder statute not re3uired to have one default rules provide

operative termsii. 4or+ation %eects – See R'6$A 20!) 20) (0

,. R'6$A 20! /" Stan&ar& – F$/ is formed at the time of the filing of thecertificate of limited /-ship in ">" . . . if there has been substantial compliancewith the re3uirements of this section.G

. Issue7 what is substantial compliance:a. Direct ail /pecialist, Inc. v. "rown

i. 4acts7 ;efendant ompany’s name failed to put F$/G

informing third parties of their status. ertificate not recordedin ">" % didn’t show contributions made by each partner %share of profits each was to receive.

ii. Stan&ar&7 9here there is a failure to s)bstantially complywith the statutes authorizing $/’s the parties remain liable asgeneral partners as to third parties having no nowledge of thelimited nature of the /-ship

!. @owever where party has nowledge that they’redealing with $/ status is not changed by failing tofile.

e. anage+ent G Operation. See R'6$A (02) (0) 02) 0(

,. Pery little case law because not about case law. 0ypically contract will say thatthe $/ will be managed by , 5/ subject to the $/’s right to vote on certain

e1traordinary transactions % generally subject to the 5/’s right to remove. See0(/a.

. @owever $/’s who participate in the control of business ris liability for someor all of the obligations of the venture.

a. 0hus many cases have stated that $im /’s can’t tae part inmanagement of the business.

b. # person can be removed from 5/ position if that person Fis removedin accordance with p-ship agreementG.

c. !$/# does give $im /’s (<+H) the right to inspect the $/’s records% obtain information % spells out default voting rights

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f. 4inancial Rights G O"ligations. See R'6$A !0!/2) 0!-) ;0!) ;0) ;0>) ;08

i. $/’s by contract can do what they lie. 0ypically 5/ will have small financial interestand the $/’s will divide up the rest in proportion to their capital interests.

ii. If the partnership agreement is silent above default rules will then apply.iii. !$/# spells out various default provisions including7 <H+ % H= state that unless

contract says otherwise profits losses and distributions of a $/ shall be allocated on the basis of the value of the contributions made by each partner.

g. *ntity Status. See '6$A !0

i. Stan&ar&7 $/ as an entity possess a number of characteristics that suggest separateness between the partners and business itself.

ii. !nder !$/# $/’s possess limited liability ($$) for obligations of the business $/’scan bring derivative suits on behalf of the $/ and the dissociation of a partner doesn’tnecessarily result in dissolution of $/.

,. ourts generally treated $/’s as legal entities distinct from owners.iii. C)rrier v. Amerigas %ropane, L.%.

,. 4acts7 ;efendant $/ comprised of 5/ #merigas % $/ #merigas /artners $/./laintiff was employee of the 5/ at time of injuries and he received worer’scomp under policy owned by 5/. @ere the whole $/ is saying that they are the plaintiff’s employer and thus under worer’s comp you cannot sue youremployer.

. Issue7 'ven though plaintiff wors for 5/ is the $/ the employer or not:+. 5ol&ing7 0he ourt says the $/ is immune from suit bBc they are the employer.

;oes this mean the $/ is essentially the same as the $/:a. !nderlying policy reason of worer’s comp – 5/ is running the

business of the $/. If you can sue the $/ after you receive benefitsfrom 5/ 5/ will be liable for obligations of $/. 5/ will ultimately beheld liable notwithstanding worer’s comp

b. 6ottom $ine – just bBc $/ is considered a separate legal entity8 youmust view it under the present set of facts % policies.

h. 6i+ite& 6ia"ility – 4ost Important Xuestion of $/’s DDDDi. $he *vol)tion o the Control !)le

,. Stan&ar& - $imited /’s have no liability for the debts of the venture bBy the lossof their investments. $/’s can lose their $$ protection if they participate in the

FcontrolG of the business. &otice the evolution of the FcontrolG rule below – witheach subse3uent version of the $/ statute the rule has bBc progressively more protective of limited partners.

a. '6$A !!; – # limited partner is not liable unless he e1erted FcontrolGover the corporation.

4erely engaging in FcontrolG was enough to cause $im /’s to

lose their limited liability. b. R'6$A /!>; – # $im /’s FcontrolG will subject him to liability for

the obligations of the /-ship were such control is7i. FSu"stantially the sa+e3 as a general partner >8

ii. If not Fsubstantially the sameG then +rd party must have hadactual =no1le&ge of your controlling activity

!. !ationale – If you represent to others you are in

control then the creditor may be misled into thiningyou are 5/.

c. R'6$A /!8 – # $im /’s FcontrolG of the business will subject himto liability for the p-ship obligations when7

i. 0here is control8 #&;ii. Reasona"le "elie by cre&itor8 #&;

iii. 6ased on con&uct o the li+ite& partner that he is a general partner – the source of the belief is the $im /

d. '6$A /200! – $im /’s are simply not liable for debts of $/

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i. !ationale – In a corporation there is nothing wrong with ashareholder ("@) being director or officer so $im /’s should be afforded the same fle1ibility.

ii. @owever many states have a combination of the !$/#’s andmost haven’t yet adopted ,. "o there’s always a possibilityif $im / engages in too much control may lose $$ status –B* $ASSIP*9

. Hol0man v. 'e *scamillaa. 4acts7 #ction brought claiming ussell % #ndrews by taing part in

control of the p-ship business had bBc liable as 5/’s to the creditors ofthe p-ship.

i. 0hey made decisions lie what crops should be grown cameto the farm twice a wee and consulted about crops planted

ii. hecs could be drawn on signatures of any of + /’s – 5/had no power to wBdraw ? wBout signature of , of $im /’s.

b. 5ol&ing7 0he ourt finds under '6$A !!; they had too muchcontrol in the operation – they had affirmative obligations % not justveto power in the entire operation. "ee creditor % control in p-shipconte1t.

+. Gateway %otato /ales v. G.". Investment Co.

a. 4acts7 5ateway is creditor – they sold potato seeds to "unworth/acing the 5/ but plaintiff wants to reach 56 Investments a $im /and mae them pay on the account.

b. Issue7 9here in the spectrum of standards #rizona’s statute lies:c. Rule, 0he evolution of !$/# reflects a narrowing of $im / liability.d. 5ol&ing7 ourt determines #rizona operates under the !>; R'6$A

(0( standard. 0herefore for FcontrolG must prove either7i. $imited partner e1erted control Fsubstantially the sameG as

that of a general partner8 > !. In this scenario you would not need to deal directly

with limited partner ii. If not Fsubstantially the sameG the third party transacted

business with the limited p-ship with #0!#$

2&>9$';5' of the limited partner’s participation incontrol.

!. In this situation you would need to deal directly withthe limited partner

e. Stan&ar&7 0herefore statute imposes liability on a limited partnerwhenever the Fsubstantially the same asG test is met even though thecreditor has no nowledge of the limited partner’s control

i. 0herefore in this situation no contract is needed with thelimited partner

ii. DDD&ote – this case shows that how much control you have alimited partnership has huge implications with how muchliability you have as a limited partner.

iii. 9e create this e1ception bBc third parties may thin they’re

dealing with 5/ not a $/

law punishes those who pass aninvisible FcontrolG threshold.i. 4i&uciary %uties

i. General %artners. See R'6$A !0>) (0) 0() !!0 ,. Stan&ar&7 # corporation can be a general partner in a limited p-ship – is subject

to the control of somebody else though. (i.e. directors of the corporation). 0here are certain situations where a directorBofficer of the corporate general

partner can be held liable for the debts of the $/ – may personally owe fid-duties to the $im /’s and the $/.

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a. Cailing to maintain corporate identity in conducting p-ship affairsthrough the corporation or if the corporation assets are intermingledwith p-ship assets or if the corporation is not sufficiently capitalized.

+. Gotham %artners, L.%. v. Hallwoo' !ealty %artners, L.%.a. 4acts7 0his is a public $/. 0he 5/ is a subsidiary of @5I. 0he p-ship

creates a reverse split % then maes an odd lot tender offer. #ll of theodd lots are purchased by the parent % gives them complete controlover the $/.

i. 5otham is a $im / % is angry bBc @5I paid too low of a pricefor the stoc % did not pay a control premium either

!. 6y paying too low of a price this taes money out ofthe picets of the rest of the partners.

b. Issue7 9hat are the duties the 5/ owes to the rest of the partners:c. Stan&ar&7 #s a default rule 5/ owes the traditional fid-duties of

loyalty and care to the $/ and its partners.d. I this ha& "een corporation7 9here the 5/ has engaged in self-

dealing transaction the default fid rule is the standard of F'ntireCairnessG whereby the 5/ must conduct FCair ;ealingG at a FCair/riceG. (<,== (a))

i. R'6$A 0( /" /+aority rule – allows p-ships to modify

these duties through the p-ship agreement as long as they arereasonable.

!. %*6 – fid-duties can be eliminated nearly entirely but an implied contractual covenant of good faithmust remain.

a. "eneits – allows parties to allocate maretriss as they choose consistent with ;' lawon creating ma1 fle1ibility % enablingtransactions

ii. &ote - In situations where 2 is inconsistent wBmandatory provisions or no e1press provision in 2 court loos forguidance from default rules traditional notions of fid-dutiesor other e1trinsic evidence.

iii. If not altered by contract any self-dealing transaction re3uiresa showing of *?TIR* 4AIR?*SS – including fair dealing %fair price.

!. Cair ;ealing – a bargaining process designed toreplicate how bargaining would occur amongindependent +rd parties

2. Cair /rice – the terms of the dealing must besubstantially e3uivalent to what they would be on themaret.

e. Court loo=s to the 6$@s p-ship agree+ent,

i. <T.H – e1pressly permits self-dealing transaction with the 5/or its affiliate provided that the terms of the transaction aresubstantially e3uivalent to terms obtainable from a third party

– mimics fair priceii. <T., – re3uires 5/ to form an independent audit committeeto review % approve self-dealing transactions – mimics fairdealing prong

f. Court &eci&es there 1as a "reach o the &uties) proDi&e& or in the

$-ship agree+ent

i. @ere there was no audit committee – no fair dealingii. &o control premium – no fair price

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iii. 0herefore the parent is going to have to repay the whatevervalue the shares would have sold for had they accounted forthe control premium.

=. Labowit0 v. Dolana. 4acts7 0he $/ had significant income – but only made minimal

distributions for ta1 coverage. 5/ offered to buy out interests of B+rdsof boo value of $im /’s – EL accepted offer but filing suit claimingthis was a breach of fid-duty.

i. @ere the /-ship agreement granted 5/ full responsibility %complete discretion in management % control % that he wouldonly be liable for willful misconduct but not for errors in judgment etc.

ii. oul& this 1or= in the corporation conte:tF

!. &ew *or7 easonable e1pectations of "@:2. 4ass7 if the majority had a legitimate business

purpose unless the minority can show there is a lessharmful alternative:

iii. lassic freeze-out scheme regardless of choice of state lawyou apply – if corporate conte1t

b. Issue7 9hether management discretion granted solely % e1clusively to

5/ in $/ agreement authorizes the 5/ to use economic coercion tocause his $im / investors to sell their interests to him at a bargain price:

c. Stan&ar&7 ;espite broad discretion 5/ still owes $im /’s a fid-dutyincluding duty of good faith honest and fairness in his dealing withthem and funds of $/.

i. FSole &iscretion3 doesn’t mae 2 into unrestricted license toengage in self-dealing at the e1pense of those whom the 5/owes a fid-duty to.

ii. /lus – of course a freeze-out scheme is willful misconductJiii. @owever although the provision of willful misconduct doesn’t

save him here it is considered illegal bBc you can@t totally

eli+inate the &uty o care.

!. &ote – remember you can in ;'$Jd. Botto+ 6ine – ourts won’t give up applying C; doctrine too easily8

unless the /-ship 2 plainly % unambiguously mandates the end result.H. In re /A Caes, L.%.

a. 4acts7 $im /’s see to impose liability on the directors of the corporate5/ for selling assets at less than fair value % taing side payments fordoing so – breach of duty of loyalty.

i. ;efense claim they do not owe any duty to them b. Issue7 9hether the directorsBofficers of a corporate 5/ have a fiduciary

duty (fid-duty) to $im /’s of a $/:i. ourt analogizes this to 0rust law where beneficiaries can sue

the directors of a corporate trustee who misuse the trust property

c. Stan&ar&7 ;irectors of a corporate 5/ owe a fid-duty not only to thecorporation but also to the /-ship and to the $/’s $im /’s.i. They o1e all the sa+e &uties they o1e to corporation to

6$’s – fighting issue though in 0e1asAii. If you’re stealing ? from $/ you are clearly doing something

wrongAiii. RA#, 5o1 else coul& 1e "ring a suit 1ithout recognizing

this &irect &utyF

!. #iding % #betting (civil tort)

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a. orporate 5/ owes a duty to the $im /’s –you can allege that the directors aided %abetted the corporation to breach its fid-duty

2. #lthough this court wants to say the duty runsdirectly to the corporation it’s not clear that otherstate will do same thing so you may have to go aboutit this way

ii. Limite' %artners,. +* %roperty anagement Inc. v. 3E9 a'ison anagement Corp. See R'6$A

!0!/8 an& !!0

a. 4acts7 5/’s are 2' % TH. $/ is 2K. TH is the managing 5/. 2K the$im / wants to get rid of TH.

i. %artnership Agreement says – HL unit partners can e1pel 5/for fraud or willful misconduct – must show proof offraudulent actions by the 5/ though re3uires courtinterference. (has to be found guilty) – not automatic

!. 6ad drafting – should have been majority vote andautomatic.

b. Issue7 9hether the fraud by agent of managing 5/ justified the 5/’sremoval by a $im /:

i. "ydell (TH’s '>) has stolen money from $/ even thoughhe is not the 5/ the corporation has put him in the position todo the stealing.

ii. 0hrough TH’s president’s misconduct TH committed fraudc. Stan&ar&7 #ll partners owe each other fid-obligations

i. 0o the e1tent that a /-ship agreement empowers a $im /discretion to tae actions affecting the governance of the $/the $im / may be subject to fid-duties to others.

!. @ave a fid-duty when (min "@B$im /’s) have powerand are e1ercising control

2. #lthough court didn’t hold $im /’s had fid-duty to5/ bBc claimed they merely had veto powersRagazzo &isagree& – they ha& po1er to re+oDe

j. O1nership Interest G Transera"ility See R'6$A !0! /!0) (0!) 0!) >02) >0i. >verview

,. /’s in $/’s may have management % financial rights.. %eault rule7 financial rights are transferable while management rights are not.

a. !nder < T= assignee of $/ interest (including 5/) has the right to bBca $im / if and to the e1tent that 7

i. 0he assignor gives assignee that right in accordance withauthority described in /-ship 2 >

ii. #ll partners consentii. 'ntity 5eneral /artners

,. Re+e+"er) these are t1o &istinct things – transer o shares o #$ G

transer o #$ interest

. In re Asian 7ar' %artners

a. 4acts7 #> is ,L 5/ in $/ and also a =EL $im /. (under differentname). #*/ wais in financial trouble and want to sell the =EL interestto @oldings who own ,L of #> stocs.

i. !es)lt – @oldings would be =EL $im / and would have all thestoc of 5/.

b. Issue7 an they sell their $im / interest to @oldings:i. ;'$ law prohibits transfer of management interest in $/

without other partner’s consent unless /-ship 2 says o

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ii. !nless in 2 new 5/’s can only be admitted with writtenconsent of each /. "ee !$/# <=, – written consent maycome from act of specified majority of $im /’s.

iii. "ince their /-ship agreement says them must get unanimousconsent – must get consent first

c. Stan&ar&7 If the sale of stoc of the corporate 5/ results in a change incontrol of that corporation then there has effectively been transfer ofthe /’s interest at least with regards to the e1ercise of managementrights.

iii. harging >rders See R'6$A >02-() 802 ,. <T+ – charging order procedure. 0he ourt may charge /-ship interest of the /

wBpayment of the unsatisfied amount of the judgment with interest. @oweverthe judgment creditor had only rights of an assignee of the /-ship interest.

a. Re+e+"er in #en $artnership,

i. 5ives creditor the right to any distributions that have been paid.

ii. If no distributions are made entitled to foreclosure on the partner’s interest of the partnership

iii. 0hen someone buys up the /’s right to distributionsiv. If the new person can’t get distributions then the only thing he

can do is as the court for dissolution. "ayban# v. Catamo)nt Constr)ction, Inc.

a. 4acts7 @ere the trial court made a mistae and appointed a receiver.0here should not have been dissolution until foreclosure and the buyerre3uested it missed a step.

i. Re+e+"er, 6I?EA#* – if not covered in !$/# loo in!/#

b. Charging or&er /CO is &esigne& to preDent the personal cre&itors

o a 6$ ro+ &issolDing the 6$

i. Corces creditor to loo solely to the debtor’s /-ship interest –his share of profits % losses of $/ % right to receivedistributions of /-ship assets than /-ship assets themselves.

!. > leaves $/ intact – but gives to creditor the stream

of profits that would otherwise flow to the debtor$im /.

c. 0o enforce > under < T+ court may loo to !/# <N (,)d. 5ol&ing7 @ere as they were a creditor rather than a purchaser in fBc

sale 6ayban not entitled to petition for dissolution. "ince they couldhave had fBc first not entitled to dissolution yet.

i. # creditor with > has only rights of assignee of /-shipinterest – can’t e1ercise any rights of the partner

e. <N !$/# governs judicial dissolution and you can see there is aninconsistency between the two acts bBc !/# would say otherwise

i. 'ven though it is beneficial to just see dissolution – courtsays must first order fBc (will not give distributions anyway:)

ii. &oteDDD "erious problem with collecting debts from $/ and

with linageiii. eceiver may be appointed only to collect whatever moneythe /-ship distributes that would otherwise have gone to thedebtor partner.

. *:it Rights, %issocation G %issolution.

i. Dissocation. See R'6$A 02) ;02- ,. R'6$A &eault rules – specifics for wBdrawal of 5/ – voluntary removal %

banruptcy. #lso allows 5/ to wBdraw at any time by giving written notice toother partners. $/ may recover damages if violates 2.

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a. 9Bdrawing / is entitled to receive any distribution provided for in /-ship 2. If silent a / shall receive within a reasonable time afterleaving the fair value of their interest in $/ as of the date ofwithdrawal based upon their right to share in distributions of $/.

. 4a+ily 6i+ite& $artnership /46$

a. 'state planning device involving a business owner who creates a $/wBfamily members as $im /’s

i. 5oal is to transfer the business to family members whileminimizing estate % gift ta1es

ii. Dissol)tion See R'6$A 80!- ,. Stan&ar&7 !nder <N, $/ is dissolved when7

a. #t the time specified in the certificate of $/8 b. !pon occurrence of events specified in /-ship 28c. !pon the written consent of all /’s8d. !pon an event of withdrawal of 5/ under <=8 ande. 6y the entry of a decree of judicial dissolution under <N (court may

do this whenever it isn’t reasonably practical to carry on business inconformity with /-ship 2.

. -bert v. *nvironmental !esearch Development Corp.a. 4acts7 $im /’s brought action against 5/ '#;> and it’s owner.

!$/# <N, – "ee above for specifics of statute. /-ship agreementonly provides provisions for voluntary reasons for dissolution – buthere it is involuntary. 0he 5/ has been removed.

i. #ll $im /’s have to consent to substitution of 5/ when noother 5/ remains whether there is an agreement to thecontrary or not.

b. Stan&ar&7 If a $/ removes a 5/ the $/ can continue under twocircumstances7

i. If there is another 5/ and it’s oay to continue per the /-shipagreement8

ii. If only , 5/ then the $/ will be dissolved unless agree inwriting within E days to appoint new 5/ in an unanimousvote

c. 5ol&ing7 @ere dissolution occurs because no 5/ remains (see V)following the removal of 5/ if there has been no unanimous approvalof a sub 5/ within E days.

P. The 6i+ite& 6ia"ility $artnership

a. Brie ODerDie1

i. Cirst started in 0e1as8 $$/s are general p-ships with one core difference % one ancillarydifference

!. Core Dierence – liability of 5/’s of an $$/ is less e1tensive than the liabilityof a 5/ in an $/

a. &ot liable to an unlimited e1tent8 you are responsible for your ownmisconduct and those you are responsible to supervise only (popularamong attorneys)

2. Ancillary Dierence – $$/s must be registered with the appropriate state office

they are creates of statutes and can never be formed by accidenta. "ome states limit what types of organizations can hold $$/ statusPI. The 6i+ite& 6ia"ility Corporation

a. 5istorical ODerDie1

i. ombines elements of corporations % p-ships. 0hey are relatively new % were firstcreated in 9yoming only about ,H-,S years ago.

!. Corporations – owners of $$ enjoy limited liability % entity status2. %artnerships – members have great freedom to structure internal governance by

agreement

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ii. "ince it is such a new creature there is much uncertainty % relatively few case law outthere.

iii. Since there is no state unior+ity on the la1 that is use&) or our class 1e 1ill treat

%66CA) co++on la1) an& principles o $-ship G corporate la1 as our la1

!. %66CA contains e1 &eault proDisions

iv. 6ottom line – there will always be dispute as to how to treat an $$ when /-ship %corporation law conflicts

!. $oo at the underlying policy or aspect involved. 9here the characteristicoriginated from the /-ship aspect use /-ship laws – same for corporate law.

". 4or+ation. See %66CA !8-!0!/() />) /!!) !8-!02) !8-!0) !8-20!) !8-(0!) !8-0!

i. Stan&ar&7 $$ is formed by filing an articles of organization is a designated state office – can usually be formed by a single person – seletal document7

!. !sually contains – name of $$ address address of agent purpose of $$names of initial managersBmembers depending on management duration of $$

2. eal detail on governance of $$ is contained in operating agreement.c. The Role o Contract See %66CA !8-!0!/>) !8-!!0!

i. -perating Agreement ?-A@

!. &on-public agreement among members concerning $$’s affairsa. "imilar to corporation’s by-laws % /-ship agreement

2. /rovides for governance capitalization admission and withdrawal of members

and distributions(. Stan&ar&7 5enerally ># can be tailored to suit the particular needs of $$’s

members % its provisions will displace most if not all of the default provisionsin the statute

a. Creedom of 2 is central theme of $$s – so very important to draft>#’s well – few default provisions are out there to use

". 0he parties’ ># is often only supplier. 0he role of #gency

a. In %*6, 'nless other1ise proDi&e& in the OA) each +e+"er G

+anager has the authority to "in& the 66C

i. -'' thing – ># is not a public document but it can still limitapparent authority.

ii. *l Atochem 8orth America, Inc. v. Jaari

!. 4acts7 Kaffari president of 4ale Inc. designed an alternative to a current product in maret8 'lf approached him and proposed investing. 0hey created4ale $$ – with ># and registered with ">".

a. 'lf sued Kaffari and $$ individually % derivatively on behalf of 4ale$$ seeing e3uitable remedies. #lleged = things7

i. Kaffari breached his Cid-dutiesii. /ushed 4ale $$ to brin of insolvency by withdrawing

funds for personal useiii. Interfered with business opportunitiesiv. Cailed to mae disclosures to 'lf v. 0hreatened to mae poor 3uality masant and violate

environmental regulations". 'lf argues that 0 failed to classify its claims as derivative % that the

arbitration clauses of the ># are invalid under <,E(b) o which prohibits parties from vesting e1clusive jurisdiction in a forum outside of;elaware.

2. $olicy o %*6 Act, modeled after the $/ #ct – basic approach is to providemembers with broad discretion in drafting the ># and to furnish default provisions when ># is silent.

a. <,N-,,,(b) – it’s the policy to give the ma1 effect to the principle of thefreedom of 2 and to the enforceability of $$ agreementsG

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". >nly where ># is inconsistent with mandatory statutory provisions will># be invalidated – most of which are liely o protect third parties andnot the members themselves

(. <,N-,,(T) defines $$ agreement as any agreement written or oral of themember of members to the affairs of the $$ and conduct of business

a. 0herefore the court here says that the *B*RS are the real parties ininterest and $$ simply their business vehicle

. ourt also says that the act e1plicitly allows $$’s to bring derivative suits.@owever here 'lf contracted away its right to bring a derivative action in ;'$and agreed instead to arbitration in #.

. Stan&ar&, &o reason why members can’t alter the default jurisdiction provisions of the statute and 2 away their rights – also based on ;'$’s strong public policy favoring arbitration.

a. DDDeflects deference courts are willing to give to contractualarrangements bBt $$ members

iii. ")t see ")bbles v. "leach LLC !. 5ol&ing7 6ut here the ourt found that the $$ is not bound by the arbitration

provision in the ># – since the provision only bound the parties and the $$was never listed as a signing member.

&. anage+ent G Operation See %66CA !8-!0!/!0) !8-20!) !8-(02) !!8-0!-02) !8-0(

i. General Governance!. $$’s can be member-managed (thus more lie p-ship) or manager-managed

(more lie a corporation’s board of directors)a. e+"er-+anage& is &eault rule

". an be a combination of both though – may choose manager-managedfor ordinary business decisions but member-managed for e1traordinary business

2. In an $$ it is generally safe for members to tae part in management whichsolves the problem inherent in $/’s of the $im /’s not being able to manage ore1ercise any control.

(. 4ost $$ statutes often provide members with defined rights to inspect recordsand have access to information

ii. #uthority See %66CA !8-02

!. Stan&ar&7 !nder most statutes members in member-managed $$ possess /-ship lie agency authority to bind $$ – so do managers in man-managed

2. $aghipo)r v. Jere0a. 4acts7 Kerez formed $$ to purchase and develop particular piece of

property. Kerez was designated as the $$’s manager. 0he ># statedFno loans may be contracted on behalf of $$ unless authorized by aresolution of the membersG

i. !nbenownst to other members Kerez too out loan on behalfof $$ with 4t. >lympus using $$’s property as collateral.

ii. Kerez defaulted and 4> is fBc on property – members werenever notified at all.

". Issue7 since the loan was signed by the $$’s manager is the loanvalid: $oo at two seemingly conflicting statutes7

i. !2> /2 – documents providing for ac3uisition mortgage ordisposition of property of $$ shall be valid and binding ife1ecuted by one or more managers

ii. !2/2/" – If the management of $$ is vested in amanager any manager has authority to bind $$ unlessotherwise provided in articles of organization or >#.

c. 5ol&ing<Rule7 9hen two statutory provisions conflict the provisionmore specific should apply. Cirst one is more specific bBc it applies onlyto docs e1plicitly stated in statute.

i. $oan documents are thus binding on $$ bBc of Kerez

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e. 4inancial Rights G O"ligations See %66CA !8--2 to 0) !8-;0!) !8-;0>

i. Stan&ar&7 $$ statutes tend to provide either /-ship lie e3ual allocation orcorporateB$/ lie pro-rata allocation based upon contributions to firm – but remembermembers can always contract around default provisions in statuteJ

!. 4ember typically establish capital accounts lie /’s in /-shipii. Five /tar Concrete, L.L.C. v. +lin#, Inc.

!. 4acts7 2in and = other concrete corporations formed $$. 2lin contributed,.HL of initial total capitalization % issued ,.H ownership units. 2lin laternotified $$ in writing of its intent to withdraw – did so correctly – statue saysmust give + days written notice.

a. #t end of year $in allocated ?+,NNE. in income – it’s share of the$$’s profits in the , months it was a member. @owever it neverreceived that in distribution only issued for determination of 2lin’s ta1liability.

". 2lin didn’t get the money just had to pay ta1es on it.2. 2lin argues that when there’s an allocation of income to members for income

ta1 purposes – that creates an automatic legal right to receive distribution inamount of that income – even if member is withdrawing.

a. @owever the act and the agreement do not say that – both the ># andact are silent in regards to timing % amount.

(. 5ol&ing7 #llocation of profits for ta1 reporting purposes did not provide 2linwith a legal right under either the #ct or ># to receive a distribution in the sameamount.

a. !nfair: 6etter drafting ne1t timeA.. The ?ature o the 66C, Regulatory Issues

i. "ince other substantive law tends to focus on only /-ships or corporations this leavesconsiderable uncertainty whether new business forms fall within the statutory coverage.

ii. eyer v. -#lahoma Alcoholic "everage Laws *norcement Commission!. 4acts7 0his was an appeal from a declaratory judgment from the #6$' that a

newly-created $$ was not entitled to receive and hold a retail pacage storelicense for selling li3uor.

a. >lahoma constitution prohibits giving licenses to corporations business trusts and secret /-ships (::)

". @owever $$ #ct authorizes $$’s to conduct business in any state for any lawful purpose e1cept baning % insurance.

2. 5ol&ing7 0he ourt holds that the constitution prohibits an $$ from receivinga license to sell li3uor.

a. 0he ourt reasons that since only individuals and /-ships could obtainlicense the fact there could be personal liability and responsibility inthis area was a very important public policy

g. *ntity Status See %66CA !8-20!) !8->0!

i. !nder most $$ statutes $$ is e1plicitly characterized as separate legal entity whoseidentity is distinct from that of its owners – can e1ercise rights % powers in its own name.(lie corporation)

ii. %remier 1an /chaac# !ealty, Inc. v. /ieg

!. 4acts7 /remier is trying to enforce a broerage fee payment provided in a

$isting 2 it entered into with "ieg to sell a piece of property. /remier introduces"ieg to ;PK who offered to purchase but deal fell through. ;PK % "ieg decideto form $$ and the ># said "ieg would convey property to $$ – "ieg wouldreceive =L interest and future profits.

a. /remier wants its commission but 0 granted 4"K claiming transferwas not a sale or e1change per the agreement bBc it laced consideration

2. 5ol&ing7 9here a person retains substantial interest in property they continue toassume the riss of an investor instead of the ris of a seller – /remier didn’t getits commission.

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a. Ragazzo7 0hins the court is saying stuff that is simply not true (noconsideration separate legal entity etc.) but thins that this is a ind ofsaleBe1change that the listing 2 does not cover

". ?ote7 In deciding to apply clause of contract you have to see if the $$fits within it. "ome $$’s would others do not. 4ust loo at theunderlying body of law that matters.

h. 6i+ite& 6ia"ility

i. Stan&ar&7 5enerally the $$ provides its owners with $imited liability for the venture’sobligations

ii. 0he "cope of $imited $iability See %66CA !8-2!) 0(0) ;0>

!. %epsi Cola "ottling Co. v. Han'y

a. 4acts7 /epsi bought property from 9illow $$. @andy wasofficerBdirectorB"@ of @andy ealty also member of 9illow – 5insburgand 4c2inley also members of $$.

i. @andy on behalf of $$ purchased piece of property todevelop. @owever he learned that it contained wetlands whichadversely affect the value % development potential

ii. "o $$ decided to sell property without disclosing that the property contained wetlands.

iii. 6ought property for ?,TH2 and sold it to /epsi for ?=HH2 –

outright lied to /epsi about the wetlands designation.". Issue7 an the other $$ members be liable for @andy’s fraud: "hould

they be shielded from liability simply for using $$:i. $$ is the entity that actually sells property to /epsi

ii. $$ committed fraud but members have protection but notfrom personal liability

,. 9hen an individual commits fraud they are all personally liable for that bad act.

. $$ was formed #C0' the fraud – but still ageneral p-ship and all jointly % severally liable.

iii. 9hat if the $$ pre-dated the fraud: #lways remember still personally liable for your own torts.

,. &ote DDD6efore piercing the veil always as whether

someone personally did something wrong and thenthey will always be held liable.

c. 5ol&ing7 If a person maes material misrepresentations to induce a purchaser to purchase a parcel of land at a price far above C4P andthereafter forms a $$ – that person cannot claim that his status as $$member protects from liability to purchaser under <,N-++

2. (ater, (aste Lan', Inc. v. Lanhama. 4acts7 $anham and lar were members of /II $$. lar contacted

99$ about hiring them to develop a project. @e gave him his businesscard – all it said was /II – nothing else that may have given rise to $$status.

i. 9estec was told to begin wor8 they did and were never paid.". Issue7 9hether membersBmanagers of $$ are e1cused from personal

liability on 2 where the other party to the 2 didn’t have notice that theywere negotiating on behalf of $$ at the time 2 was made:i. $$ #ct provides that articles of organization provides

constructive notice to +rd parties about $$ statusii. @owever law of agency also applies

iii. !sing the word /II is simply not enoughJc. 5ol&ing7 !sing agency law agent is liable on 2 entered on behalf of

principal if the principal is not fully disclosed. 0he agent who negotiatesa 2 with a +rd party can be sued for any breach of 2 unless the agent

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discloses both the fact that he is acting on behalf of principal and theidentity of principal.

i. +rd party with whom agent deals with has no duty to discovere1istence of or identity of principal.

ii. lar and $anham did not identify their $$ identity ore1istence.

iii. /iercing the Peil See %66CA !8-(0(

!. +aycee Lan' Livestoc# v. Flahivea. 4acts7 2aycee leased the surface rights from Clahive’s $$ % later they

found the $$ had contaminated the surface. $$ has no assets %2aycee wants to pierce the veil % hold C$ahive personally liable.

". Issue7 9hether in the absence of fraud the entity veil of an $$ can be pierced: Xuestion – whether to treat this lie a corporation veil-piercingcase or not.

i. ourt decides to loo to corporate alter ego theory for veil piercing.

c. 5ol&ing7 ourt determines that there is no reason to &>0 e1tend theveil piercing $ for corporations to $$’s.

&. Stan&ar&7 If members % officers of an $$ fail to treat it as a separateentity as contemplated by the $$ statute they should not enjoy

immunity from individual liability for the $$’s acts that cause damageto third parties.

i. &ot just for cases of fraud – the court has to loo at all thecircumstances just lie in corporate veil piercing actions

e. Botto+ 6ine – every time an issue comes up under this form of entityyou are going to have to fight the battle of whether to follow p-ship lawor corporate law.

. Te:as rule – 5enerally not allowed in $/ conte1t one advantage that$/ has over the $$

i. It is easier to pierce $$ veil than corporationii. $ate N’s 0e1as passed many anti-veil piercing statutes absent

actual fraud can’t pierceiii. 9hen attempted to apply same in $$’s much debate and it

is not allowed.iv. 6ad result7 $$ should either have more protection or at least

be same as corporation.i. 4i&uciary %uties See %66CA !8-0;) !!0!

i. Stan&ar&7 In jurisdictions where fid-duty is not addressed by statute courts have agreater role in shaping the contours of fid-duty without legislative aid

ii. 1G/, Inc. v. Castiel !. 4acts7 astiel is the major shareholder who has fallen out with another $$

member. astiel is using his controlling member status to direct funds to his particular branch of the $$. + managers of $$ are astiel "ahagen %Xuinn.

a. Xuinn was appointed by but " able to persuade him that they neededto get rid of .

". X % " merged $$ into corporation but did so without notifying .2. Issue7 $ac of notice meant that X % " failed to discharge their duty of loyaltyin good faith: ;o members owe duties to one another:

a. *es – even though this is ;'$ case in their capacity as managers X % owe duty to one another by analogy to p-ship law. . . i.e. Fpunctilio ofan honor of the most sensitive.G

". 0hey did it secretively didn’t give him notice.i. 6ut see ,N-==Id) could do so without vote or meeting if they

have written consent of majority which they did.

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(. 0he ourt wanted to loo at this particular case as more than one involving theduty of members to one another rather than duty of manager to one another.

. 5ol&ing7 #lmost reasonable e1pectations test7 4anagers have fid-duty tomembers as well as to $$ as a whole. 6ut compare to ;'$ case of 8i5on v.

"lac#well

a. ;' $$ – easiest state to establish duty directly to other memberswhile complete opposite in corporate conte1t.

. Botto+ line – $$ is still developing – constantly analogizing Aiii. cConnell v. H)nt /ports *nterprises

!. 4acts7 $$ formed with the goal of pursuing &@$ franchise but @unt refuseslease deal % 4connell (member of $$) decides to accept deal on his own.

2. @unt says that 4connell breached duty and undercut his negotiations –usurped $$ opportunities.

(. 4connell claims $$’s ># allows this – to compete with one another."pecific language says that members may compete with one another for anyFother businessG. It all boils down to what is meant by FotherG.

. Rule<5ol&ing7 9hile $$ can’t disclaim fid-duty of loyalty owed by membersto one another altogether they can redefine it by contract.

a. Ragazzo7 0his should have been a jury fact 3uestion. F>ther businessGcould mean so many different things.

". emember that in ;'$ you can contract away #$$ of your fid-duties ina $$. ,N-,,, clearly says you can modifiy restrict or eliminate fid-duties lie in $/’s.

i. 4ost states won’t allow this so be $'# in draftingoperating agreementsJJ

iv. An'erson v. (il'er

!. 4acts7 ;ispute between members of Cuturepoint $$. /laintiffs were e1pelledfrom the $$ by a vote from the ;’s who owned majority. /’s say ;’s violatedtheir fid-duty of good faith. 0hey received a buyout price of ?,H per unit andthen ;’s turned around and sold those shares for ?H per unit.

2. 66C@s OA7 Fompany may e1pel member with or without case upon vote orwritten consent of members who hold majority. emaining members shall beobligated to purchase those shares.

(. Issue7 9hy would this be considered in bad faith if it the parties clearlycontracted for this: Isn’t this what the minority actually bargained for:

a. Implied limitation for an ouster clauseA. 5ol&ing7 Cid relationship e1ists between members of either /-ship or closely

held corporation under established principles of both /-ship law and corporatelaw.

a. 4embers owe each other obligation of utmost good faith % integrity intheir dealings with one another and with regards to their /-ship affairs.

v. "ome $$ statutes that address fid-duty indicate that members (in member-managed$$s) and managers (in manager-managed $$s) owe fid-duties to the individualmembers as well as to the entity itself.

vi. "arbieri v. /wing484/li'e Corp.

!. 4acts7 # director % several officers of corporation form $$ to act as one of

two 5/’s in a 5/ that then maes a tender offer for the corporation.2. Issue7 9hether a claim for breach of fid-duty may be stated against the $$andBor the 5en /-ship by "@ of corporation:

(. 0he ourt focuses on the composition of the several entities involved in thetransaction.

a. @oldings the offerorBac3uirer is ;' 5en /-shipi. 0wo partners – 4anagement % 5reen 5rass apital $$

owned and controlled by parties unrelated and unaffiliated by"&"

ii. 4anagement organized by

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. Stan&ar&7 ;irectors % officers of corporation owe fid-duties to independentthird parties. 0hey have a duty to come forward with informationBanything theynow that may be considered material.

a. 5ere) 1e loo=e& through the 66C) eDen though it is consi&ere& a

separate legal entity.

". Shoul&n@t a"an&on your i&-&uties "y si+ply creating a 66C

vii. DD !emember – there will be times where you can argue that $$ is different fromcorporation right now it’s just looing at the statute % comparing it to what wasintended % nature of the entity as compared to that of a corporation % p-ship

. O1nership Interests G Transera"ility See %66CA !8->0! to >0

i. Stan&ar&7 #n ownership interest in an $$ entitles a member to7!. 0he right to receive distributions and to share in the profits and losses of the

venture (financial rights)8 and2. 0he right to participate in the management and control of business (management

rights)ii. $ie /-ships $$ statutes say that an assignment of $$ ownership interest transfers the

member’s financial rights but not his management rights.iii. "tatutes provide for transfer of management rights only with the consent of the non-

transferring members!. onsent usually re3uires unanimous vote but some say simple majority is oay

2. 4ost statutes allow ># to modify default provisionsiv. In a !niform statute state the most you can get is a fBc – that is the end of the road

!. @owever in ;'$ the most you can get is a charging order 2. DD0his may be a reason to be $$ rather than other entity

=. *:it Rights, %issociation G %issolution See %66CA !8-;0() ;0) !8-80!) 80

i. Lieberman v. (yoming.com LLC

!. 4acts7 $ieberman is member of $$ and would lie to withdraw. 0he remainingmembers accept his withdrawal but cannot agree on financial conse3uences andfile petition for declaratory judgment on the issue.

2. Issue7 "ince the ># contain no provision regarding the e3uity interest ofdissociating member what happens: @e can retain his e3uity interest and isunder no obligation to sell it and $$ no obligation to buy it::

(. 6ecause $ has not voluntarily forfeited his e3uity interest the ourt must loo

to the agreements entered into by the members with regards to a member whohas dissociated.

a. 0he ># contemplates a member maintaining rights of e3uitymembership but nothing else. It is clear that $ has no intention of givingup his economic interest in the company.

. 5ol&ing7 9eird – $ is no longer a member of $$ but does maintain an e3uityinterest. 6ut since no 2 provision for buy-out he can’t force $$ to buy andthey can’t force him to sell.

a. @e remains an e3uity holder with no further rights or obligations". Kust lie a creditor who has a charging order or assignee who has been

assigned the member’s distribution if $$ gives out distributions he’sentitled to =L. (cold comfort though)

i. 0hey will typically cut him off – classic freeze-out case

c. @ere $$ law is more lie corporate law member is loced in and atthe mercy of the majority "@ group.i. If this were a /-ship he could leave whenever he wants and

that would result in dissolution or at least a buyout at a court-ordered C4P.

. oul& this haDe happene& in %*6F /er <,N-S+ you are not allowed towithdraw as a member of a ;'$ $$ you are only allowed to withdraw if your># permits it. 0he default rule is you can’t withdraw at all.

a. @owever if ># allows it ;'$ law provides that you are either boughtout by a price specified by the ># or C4P <,N-S

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i. Botto+ line – you might not be able to withdraw at all but ifyou are it will be at a court ordered C4P

,. @ere it is more difficult to withdraw than p-ship in;'$ but at least if you leave if you get bought outand not left in limbo lie in 9*.

;. %issent7 ;isagrees with the conse3uence for failure to provide a provision forthis situation.

a. 9hile it’s not the duty of the court to write terms of 2 it is necessaryhere to provide ">4' ind of remedy

ii. D)nbar Gro)p, LLC v. $ignor

!. 4acts7 Upert $$ formed by ;ubar $$ and 0ignor who each owned HL.obertson sole member of ;unbar. !nder ># ;umbar and 0ignor were solemanagers of Upert $$ and 0ignor’s main purpose was to provide Upert withaccess to his business contacts in the industry.

a. ;isputes arose between the two of them. Upert and ;unbar bring suitagainst 0ignor alleging that 0 engaged in numerous acts of misconductas memberBmanager of Upert including commingling funds.

". Applica"le la1 states7i. # member is dissociated from a $$ upon the occurrence of

any of the following events7

,. 0he member engaged in wrongful conduct thatadversely % materially affected the $$ business

. 0he member willfully or persistently committed amaterial breach of the articles or >#8 or

+. 0he member engaged in conduct relating to the business of $$ which maes it not reasonably practicable to carry on business with him

c. 0he ourt find he did do bad things and orders 0 to be e1pelled as amember.

2. "o does 0 have the right to have the $$ dissolved bBc not reasonably practicalfor members to continue the business:

(. 5ol&ing7 "ince 0’s e1pulsion changed his role in Upert from one of an active participant to more passive role of investor there is no reason nor ground to

dissolve the $$.a. @e retains his interest in e3uityBdistributions but has no other rights. Kust

lie $ieberman but brought this one on himself.". 0here’s a problem in leaving him in 66C 6IBO – they hate each

other and possibility of harassment on either side is lielyiii. Stan&ar&7 'limination of default withdrawal and dissolution rights leaves minority

members vulnerable to oppressive majority actions since the majority can no longereasily e1it the venture with the value of its investment.

!. $ro"le+ – there’s a problem when the ># is silent as to how you withdraw or if the court e1pels you as member but eeps you in limbo

l. *:pulsion o an O1ner See %66CA !8-!!0!

i. (al#er v. !eso)rce Development Co. Lt'., LLC (;'$ $#9)!. 4acts7 #ccording to managing member on same day he determined that the

entity would not receive needed financing from source introduced by =

th

member (6ush sr’s counsin) that =th member disclosed an inappropriate compensationarrangement with the potential financier.

a. 9ith consent of other two members – he removes the =th memberwithout compensating him for interest – refuses to sign the agreement.

". ;efendants’ claim that upon learning of =th member’s side deal theyremoved him for that reason because of his failure to honor his re3uiredcapital contributions they were entitled under ># to reduce hisownership interest to zero and because of his material omissions >#voidable and removal letter constituted a rescission of that 2.

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2. 5ol&ing7 <,N-,,, provides that to the e1tent that a memberBmanager hasduties and liabilities relating to a $$ or another memberBmanager shall not beliable for that person’s good faith reliance on the provisions of the $$agreement.

a. @owever here the ourt finds they failed to show proof they formed belief they could ic him out based on good faith reliance on theagreement – no provision to support that here

". 0his provision is intended to mae clear that a apparent limit on liabilityfor breach of fid-duty is to be interpreted broadly

(. !nder ;'$ law the above are not grounds for e1pulsion and is more liecorporate law – where the court has no authority to tae away your shares.

a. @owever in other states (uniform) they are more lie /-ship law.". an sue him for breach of contract but can’t ic him out of the $$c. 0he ># should have said that a member may be e1pelled if he breaches

2 or a certain L of members could ic him out. If you don’t providefor it in ># ourt has the power to do nothing in this case.

. $olicy7 @ere ;'$ is unusual is that it favors the minority "@Bmember morethan the majority in $$. In $$ conte1t ;'$ is more protective of interests of minority members than most states

+. 4inal Thoughts

i. $$’s are definitely the wave of the future as far as closely held business go – there is no5/ everyone has limited liability and having too much control will not hurt you.

ii. hy 1oul& anyone choose to con&uct a closely hel& "usiness in a non-66C or+F

!. ;ifferences in fees % franchise ta1es2. 0he relative comple1ity of the $$(. #ttorney and business owner inertia. "parse case law – relatively new – lots of uncertainty. $ac of e1it rights

a. 0he desire to Fgo publicG". 'ase of reorganization

;. $$ statute doesn’t solve a lot of problems – doesn’t have too many defaultrules and there are still several potholes that members can fall into.

a. If you don’t fill in these statutory gaps by anticipating them in the >#

you are in $$ $imbo not liely in other entitiesi. 4ay all be wored out over time though:

PII. $u"lic Corporations

a. Insi&er Tra&ing

i. Insi&er tra&ing means a person has used information ac3uired by way of position in acompany about that company to trade securities for personal gain.

ii. 0he ommon $aw!. Goo'win v. Agassi0

a. 4acts7 / sold his stoc on the 6oston stoc e1change It was bought by adirector % general manager of the company.

i. 0he insider information was an e1pert’s report that suggested prior negative reports on mining potential of

". Stan&ar&7 !nder common law insider trading is not common law fraud

(majority) though a substantial majority holds it as fraud. 0hereforeinsider trading is legal.i. @owever !"" has created Fspecial factsG e1ception

whereby it would be a $ fraud. '1ceptions include7,. Craud (includes false statementsBhalf-truths). Craudulent concealment+. F"pecial factsG even if director has no general duty to

disclose there are cases where by reason of specialfact such duty e1ists.

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c. @owever "ecurities '1change #ct has since been passed and $ has been frozen.

2. *le+ents o Co++on 6a1 4rau& /state la1,

a. $ie". 4aterialc. "cienter &. eliancee. $oss ausation. ;amages

". 4e&eral Regulation

i. Introduction!. $hree main goals o sec)rity reg)lations are:

a. 5et information to investors". 4ae sure it is complete and truthfulc. egulate the maret to an e1tent. (this is what we will focus on)

2. >ne of the purposes of the Cederal "ecurity egulations is &>0 to referee thefairness of transactions that is a state law concern.

(. "ecurities fraud actions don’t always have same elements. 0here are alsostanding issues as to who can be a / and which ;’s you can sue.

. 9e study securities regulation in this class bBc it deals with violations of fid-

duties that arise from corporate law.ii. As a +atter o policy – shoul& insi&er tra&ing "e illegalF

!. 0here is less ris when you trade in maret if there are rules against insidertrading. If we permitted insider trading it would raise every company’s cost ofraising capital (re3uire greater return of raising ris)

2. /ho)l' it be legal #rgument that good things come from it. Insiders bBc moreinvolved in their companies and the maret responds appropriately when theytrade. (4inority position)

iii. Su++ary o !0" - always focus on who is lying on why it matters you can’t reachother issues without that first.

!. Stan&ar&7 ule ,b H it is !&$#9C!$ for any person directly or indirectly7a. 0o employ any device scheme or article to defraud". 0o mae any untrue statement of a material fact or to omit to state a

material fact necessary in order to mae the statements made in light ofthe circumstances under which they were made not misleading or

c. 0o engage in any act practice or course of business which operates orwould operate as a fraud or deceit upon any personAin connection withthe purchase or sale of any security.

&. *le+ents o a !0" clai+ inclu&e/si+ilar to C6 rau&,

i. # lieii. 0hat’s material

iii. "cienter (either nowing or recless)iv. eliancev. $oss causation

vi. ;amagese. DDD"et out e1am answer by the elements % address each in turnJ

iv. 0rue Insiders "ee ,H !" <TNj(b) TNu-, ,T C <= ,b-H!. /*C v. $e5as G)l /)lpher Co.a. 4acts7 0he defendant directors bought stoc in droves based on an

insider report that suggested they were going to hit a big mine strie.". Issue7 "ilence is normally not considered a lie unless there is a duty to

disclose. ;id these directors have a duty to disclose:c. Stan&ar&7 0he duty may come from the federal policy of maing the

maret a level playing field or perhaps from state law. # pure omissionis not a lie unless there is a duty to disclose.

i. There is a &uty to &isclose this inor+ation /e&

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ii. There is a i&-&uty to the purchaser<S5 /state

,. 77ourt doesn’t choose where that duty comes fromin this caseJ

&. Issue7 9as speculative information in the survey FmaterialG enough toviolate ,bH:

e. Stan&ar&7 0o decide if a lie is material is an objective standard. 9hether a reasonable investor in maing an investment decision would find thisinformation important before maing their decision.

i. In u&ging 1hether speculatiDe inor+ation is +aterial)

you loo= at the pro"a"ility that the eDent 1ill happen G

1eigh it against the +agnitu&e o the eDent i it &oes

happen

. RA# – what the ;’s did her was wrong. 0hey got bargain stoc at a price that didn’t reflect what the maret would have done had theydisclosed the discovery of the mine.

i. /lus they new it was material bBc the first thing they didwhen they found out was call their broersA

,. ;on’t have to prove reliance where the lie is based onan omission – it is presumed by the court or wherethe stoc trades under the efficiency of the maret.

a. 6oth occurred in this caseJii. %a+ages – sellers would have received actual value of stoc

minus the price they were paid at the time of the transaction.iii. (hen may insi'ers act

,. Stan&ar&7 6efore insiders may act upon materialinformation such information must have beeneffectively disclosed % the maret must have time toabsorb the information.

2. Chiarella v. ./.

a. 4acts7 was a printer who was able to see financial information fortender offers – since he printed the deals. 0his information is valuable bBc the buyer will pay over maret price for the stoc (usually HL morein tender offer) and therefore the price will go up.

i. didn’t lie though bBc he didn’t say anything and he had notduty to the "@ of the target company just to his employer.0herefore there was no fraud based even on silence.

". @ere the duty doesn’t flow from ,b-H but flows from some otheroutside source usually state law. #5 thins this is interesting 3uestionwhy the !"" maes this determination:

i. 9hy didn’t they create this duty and base it upon federalsecurities law: 9hy not have rules that if you nowsomething material you have duty to disclose:

,. 0his is opposite of the rule of freedom of informationand e3uality in the maretplace.

c. Stan&ar&7 In non-disclosure cases there can be no fraud absent a dutyto discloseBspea.

i. Insiders have a duty bBc they have an obligation to theircompany’s "@.ii. >utsiders don’t have the same ind of duty

&. 5ol&ing7 ourt find no duty to disclose in this case. 0hey refuse toe1tend the duty it must arise from a specific relationship. @e had notfid-duty or any other ind with "@ of target company his silence is notfraud because he has not lied. 0herefore he has not violated federalsecurities law.

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i. 0herefore the printer gets off the hoo even though he didsomething bad. It also allows people to do a lot of trading thatshould be prohibited.

ii. @ere the court says the duties to disclose come from state

la1) instea& o e& securities la1.iii. @ad they said it came from fed you could find the duty bBc it

is the policy of the "'# to protect the integrity of the maret.e. Stan&ar&7 # duty to disclose does not arise merely from possession of

non-public maret information8 there must be a specific duty to thecompany or "@.

v. 0ippers and 0ippees!. Dir#s v. /*C

a. 4acts7 ; is a trader and he gets a call from a former board membertelling him there is fraud going on at a ompany by misstating the valueof assets. 0he information had previously gone to the news insurancecommission and "' but they all dismissed the claims.

i. ; investigates and discovers that claims are true so he callsall of his buddies and they sell their holdings in the company.9hen that happens "' becomes concerned

". D charge' with b9 violation by /*C

i. "' wants rule that states where tippees come into possessionof confidential material information from an insider that thetippee steps into the shoes of the insider.

,. 0his rule would mae this case easy because thetipper directors had fid-duty to corporation and didnot publicly disclose.

. 6ut the court rejects "'’s rule hereAc. Issue7 9hether ; can be liable in light of the fact that he holds no duty

to the corporation bBc he is an FoutsiderG:&. Stan&ar& /Tipper@s %octrine7 0he ourt reiterates the Chiarella rule

that absent a duty to disclose trading on non-public information will notviolate ,bH.

i. Test, A tippee is lia"le or insi&er tra&ing 1hen,

,. 0he tipper has breach a fid-duty in passing along theinformation

. 0he tipee nows or should now that the tipper breached his duty

+. 0he tipper gains from the relationshipa. /ayment b. eciprocal relationshipc. 0ippee is a friend or relative

e. 5ol&ing7 0he !"" that ; is not liable because " didn’t gain anythingfrom maing the tip thus there is no liability.

. !nder the 0ipper’s ;octrine let’s apply test here7i. Di' / breach a i'4')ty in telling / &o not seeing to mae

any money just wants public to now fraud

,. 6ut argue yes- he hurts his co’s "@. "o probably fid-duty breachii. 6ut ; didn’t gain anything – nothing pecuniary

g. Stan&ar& /Quasi-Insi&er %octrine, onfidential information receivedin the course of a fid relationship (such as lawyers accountants etc.)can’t be traded on.

h. Botto+ 6ine – !"" is willing to use federal law to base this duty on but still not ready to mae the full leap to basing the entire duty ofdisclosure on federal security laws

i. Consis

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ii. Tipper 6ia"ility7,. Tipper is lia"le or all oreseea"le &a+ages

. Tippee is lia"le or all &a+ages as a result o their

actions. vi. 4isappropriation 0heory

!. nite' /tates v. -&Hagan = B?e@?@

a. Stan&ar&7 ,=(e)(+) if you now something material non-publicinformation regarding a tender off that you got from either the ac3uiringcompany or the target company you cannot trade on it

i. It +ust "e +aterial G nonpu"lic.". 4acts7 >’@agan is a partner in a law firm that represents 5rand 4et. @e

nows that 54 wants to tae over /illsbury. >’@agan uses thisinformation % buys several /illsbury shares at ?+E per share. 54 offers?S per share and >’@agan maes 3uite a profit.

i. learly >’@agan violated ,=e+. @e has information regardingthe tender offer he got from the ac3uiring company. 0heinformation is material and not public when he ac3uires andtrades on it.

c. 5ol&ing7 0he !"" says that he clearly violated the ,=e+. #dditionallythey hold that the rule is valid and permissible.

i. Cor ,=e+ purposes it does not matter whether fraud isinvolved or not. 0his is purely a prophylactic rule and the!"" says this is fine.

,. !nder ,b this wouldn’t be allowed bBc of scienterlanguage

. 6ut ,=e has broader language and therefore it’soay to have this rule

&. Issue, 9hether he violated ,bH in light of the fact that his duty ran tothe ac3uiring company rather than the targeted company:

i. Has he also committe' a b9 violation 0he lie here is he hasan implied duty to his client not to use information he gainedfrom the relationship for his own benefit.

,. 6ut this is the same argument as hiarelli. 6ut this

court finds this a violation of duty as seen as a lie.ourt holds conviction is proper under themisappropriation theory. 4erely woring at the lawfirm you are representing to your partner’s that youwon’t divulge the confidential information of yourclients.

. 0his may be a stretch but it’s a lie – a violation ofduty he owes to his clients and employer state lawviolation basically.

ii. Stan&ar& isappropriation Theory, # person commitsfraud in connection with a securities transaction and violates,bH when they misappropriate confidential information.

,. 0his theory premises liability on a fid turned trader’s

deception of those who entrusted him with access toconfidential information.. @owever full disclosure to the entity owed the fid-

duty forecloses liability under the misappropriationtheory.

iii. 6OO$5O6*7 Cull disclosure forecloses liability under thistheory.

,. 0heoretically >’@agan could tell law firm and hisclient he was going to trade on information and hewould be relieved of liability.

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a. #57 it seems bBc of this e1ception8 we arereally punishing him for a beach of hisemployment 2 and / rather than breach of,bH.

2. hat the court has no1 &one is create a "unch o artiicial &istinctions,

a. '1ample V,7 *ou hear about a tender offer over dinner by chancei. *ou can’t trade bBc violation of <,=

". '1ample V7 *ou hear about the development of a new product overdinner by chance

i. 0rade to your hearts contentii. &ot a violation of <,= bBc no tender offer involved

iii. &ot a violation of <,bH bBc no duty to disclose(. 4iDe %octrines %esigne& to Close #aps Cause& "y Chiarella,

a. 0ipping ;octrine (;irs)". Xuasi-Insider ;octrine (;irs)c. ,=e+&. 4isappropriation (>’@agan)e. 4ail CraudB9ire Craud

. ?ote – these doctrines have closed all the holes e1cept for the restaurantsituation where you overhear some information that is not about tender offers.

a. /ay attention to which stoc is being traded. If it’s the stoc of companythe tip comes from then it’ll be a 3uasi-insider case. If it’s the stoc ofthe other company in transaction then it’s be a misappropriation case

. ?ote on $riDate Insi&er Tra&ing Actions

a. (ho can s)e yo) or insi'er tra'ingi. #s an insider trader you can be liable for7

,. *our own trading. /eople you gave tips (as long as it’s reasonably

foreseeable)to8 #&;+. Coreseeable users of the information

ii. #dditionally in the trading window from the time you firsttraded using your insider information to the time of disclosureanyone who traded in that window can sue you.

,. *ou only have to pay one judgment though – eitheryour illicit gains of the money you saved by gettingout early.

". #nyone trading contemporaneously can sue you regardless of whetheryou owe a duty to them. 6ut you are liable for only a single lose socontemporaneous traders split pro rata.

vii. "hort-swing /rofits!. Stan&ar&7 <,S(a) re3uires covered persons in covered companies to disclose

any changes in their beneficial ownership of securities by reporting to the "'within days of the trade

a. To "e consi&ere& coDere& co+pany,

i. @ave H "@ or greater than ?, million in assets8 >

ii. *ou trade on a national e1change". To "e consi&ere& a coDere& person un&er the Act,

i. *ou have ,L of sharesii. ;irector8 or

iii. #n officer of the companyc. !; " /a reHuires you /as either a coDere& co+pany or a coDere&

person to report your tra&ing at all ti+es.

i. emember people all watch this because people thin they aretrading on insider information using their superior nowledge

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and understanding of the company when they trade. 5oodthing to shadow trading.

&. !;/" re3uires that any profit realized by an insider from any purchaseand sale of any e3uity security within any period of less than si1 monthsshall inure to and be recoverable by the issuer8 not intent8 can neither buy and sell nor sell and buy.

i. 0his is a strict liability rule on insider tradingii. #ny e1isting "@ can bring a suit on bBh of the corporation if

the corporation opts not to sue8 contemporaneous stocownership at the time of the wrong is ?OT R*Q'IR*%.

iii. It &oes punish insi&er tra&ition "ut its '?%*R-

I?C6'SIP* – if you buy using insider information but don’tsell for more than S months ,S b won’t cover it.

iv. It also can "e consi&ere& OP*R-I?C6'SIP* – it punishesfor trading that is not insider trading. Cor e1ample if you startwith ,L of the shares raise your ownership to ,L thenchange your mind and sell L within S months you haveviolated this section.

2. Grat0 v. Cla)ghton

a. TO'#5 Stan&ar&7 4atch transactions so as to ma1imize profits to the

great e1tent possible from any given transaction you can loo aheadsize si1 months as well as bac si1 months to find the most profitablematch.

". To get &a+ages) you +ust igure out the pairs o,

i. 0he highest sale price in any S month period and match it withthe lowest purchase price in S months.

ii. 0hen you continue to do this with the nd highest sale priceand the nd lowest purchase price.

,. 2eep going until there are no more sale prices higherthan purchase prices.

. $he total amo)nt is what the company m)st be pai'

bac#.c. *:a+ple7

i. Kan. ,st

– ;irector buys , shares at ?+ii. Ceb. ,st – ;irector sells , shares at ?H

iii. 4ar. ,st – ;irector buys , shares at ?iv. #pril ,st – ;irector sells , shares at ?,H

,. #ccording to 5ratz you would match the highestselling price of ?H with the lowest buying price of?.

a. Since the &ierence is V ti+es !000) the

%irector 1oul& haDe to pay VE eDen

though he actually lost V on &eal

(. +ern Co)nty Lan' Co. v. -cci'ental %etrole)m Corp.a. Stan&ar&, emember <,Sb provides that officers directors and "@ of

more than ,L of the stoc of the company shall be liable to the

company for any profits realized from any purchase and sale or sale and purchase of such stoc occurring within a S month period.". 4acts7 >ccidental is trying to do a hostile tae-over of 2ern. 0hey buy

,L of 2ern then later buy ,L more and mae a tender offer for ataeover. 2ern negotiates a friendly taeoverBmerger with 0enneco.0enneco tries to get rid of >ccidental by offering to buy bac the stocthey are going to receive from the merger.

i. This is the &eal7,. =BST own .=L

. HB,NBST add ,,.TL

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+. HB+,BST add N.TL

=. SBN tae away ,L

H. 0his e3ual O .H,L shares of 2ernc. Stan&ar&7 ,S(b) re3uires that you be a ,L "@ at both ends when you

buy and when you sell. ules do not cover any transaction where amore-than-,L owner was not such both at the time of the purchase

#&; the sale of the security involvedi. ou haDe to hol& !0 "eore +a=ing the purchase to "e

coDere&

ii. I you sell enough to go "elo1 !0) then go to sell the

re+ain&er) these su"seHuent sales are not coDere&

iii. *5change,. >n the date of the merger there will be an e1change

of 0enneco stoc for 2ern stoc iv. -ption

,. 6efore merger is finished >ccidental offers 0ennecoan option to buy the stoc before the merger occurs.

v. $imeline,. HB,E merger announced

. NB+ merger consummated8 e1change occurs

+. ,B,, option e1ercised

vi. 6oth of these transactions are potentially in the window of <,Sliability

&. Assu+ing no option e:iste& – haDe to &eter+ine 1hat a sale3 is or

the purpose o !;,

i. Is the e1change of 2ern stoc for 0enneco stoc a FsaleG thatviolates <,S:

ii. ourt announces that in such unorthodo1 transactions theywill in3uire as to whether the type of transactions involved isone that gives rise to speculative abuse.

iii. Test<Stan&ar&, # transaction is FinvoluntaryG and e1empt if7,. 9hether they had control of the timing of the sale or

merger occurring. @ere they abstained from voting

on the proposal.. 9hether they could have possibly had access to

insider information. @ere they are on outside.e. The option pro"le+,

i. 9hat was given was an option to buy 0enneco stoc not 2ernstoc after the merger was over and S months had passed.

ii. Is giving an option a FsaleG &o they are not covered personwith respect to 0enneco bBc they are not ,L "@ an officer or a director.

. 5ol&ing7 0he court says that <,S is a tough rule and as tough as it is itwould be really unfair to >ccidental since they were forced. 'venthough technically what they did was a sale the transaction asinvoluntary and you at least deserve a chance to conform your conduct

to meet re3uirements of law.i. >ccidental got off in this case bBc the court held this was not a

sale within the meaning of sale in the "ecurities '1change #ct.ii. 0he court reasoned this way bBc >ccidental had no control

over the merger between 2ern and 0enneco – >ccidental wastrying to mae a hostile taeover so they couldn’t had anyinside information that 0enneco was competing to tae over2ern otherwise they’d have done something.

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g. Botto+ 6ine – under ,Sb there is no liability for an involuntary saleand impossible to have access to insider information.

. *A$6*S7a. # director (,) buys () resigns sells his stoc all within S months.

DDD0his is a ,S(b) violation bBc at the buy point the director had accessto insider information and resignation doesn’t change that.

". #n employee (,) buys

() becomes a director

(+) sells. ule ,S(a)says that this is not a violation bBc at the buying point the trader was justa regular employee hence no access to the insider information.

i. "' has promulgated this as a rule so b is oay but a is still aviolation.

c. 4e&eral $ro:y Regulation

i. 0he /ro1y ules7 #n Introduction!. In a large publicly held corporation usually necessary for management to solicit

pro1ies in order to ensure that a 3uorum will be present at "@ meetings.a. 5ive someone else the power to vote for your shares. 4ostly irrelevant

in @. /@ they probably wouldn’t get enough votes for a 3uorum but for pro1ies.

2. $erminology

a. $ro:y 5ol&er – a person authorized to vote shares on a "@’s behalf ". $ro:y – the written instrument in which such authorization embodies. It

is a grant of authority by "@ to someone else to vote for the former’sshares.

i. elationship is one of principal % agentc. $ro:y Solicitation – the process by which "@’s are ased to give their

pro1ies. 0his will broadly include a Fcommunication to security holdersunder circumstances reasonably calculated to result in the procurementwithholding or revocation of a pro1yG

i. #nyone who FsolicitsG a pro1y must comply with "'’s rules&. $ro:y state+ent – a written statement sent to "@’s as a means of pro1y

solicitation(. %ro5y !)les: %rivate actions )n'er the %ro5y r)les

a. ule ,=aE – /ro1y "olicitation rule – no false or misleading statements8

no omissions of material information may be made in any pro1ystatement.

". *ou may not commit fraud in connection with a pro1y solicitation. <,=doesn’t spell out the elements $ does.

ii. /ro1y Craud!. In KI ase v. 6ora the !"" held that a private right of action e1ists under ,=a

of the '# and ule ,=a-E.2. ills v. *lectric A)to4Lite Co.

a. 4acts7 #utolite issued a pro1y statement for a vote on a proposedmerger. / claims that the pro1y statement contained misleadingstatements. 0hey claim that the statement did not disclose that the boardrecommended the merger without also disclosing that the board wasdominated by 4ergenthaler the company that #uto-$ite was being

merged with.". ourt has to determine what proof is necessary to establish a claim

i. 6ecause the private right of action was read into the statutethere is no guidance

c. ourt loos to common law fraud and it’s elements – lie materialscienter reliance loss causation % damages.

&. '1amination of the elementsi. 6ie7 #ny misrepresentation half-truth (literally true but left

out stuff maes what you said misleading) or omission

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,. &otice that pure omissions are not a FlieG unless youa duty to the other to mae disclosure

. 9hat ind of lie involved in this case:a. 0his was a failure to disclose since they

were directors. b. 4 didn’t connect the dots. It does tell you

truthfully it owns the stoc and who thedirectors are doesn’t significantly "/'$$ itout in plain 'nglish.

ii. ateriality Stan&ar&, 9hether a reasonable "@ in the samesituation would have wanted to now the fact in maing arelevant decision

,. *ou don’t have to show that he would have changedhis mind "ut ust that he 1oul& haDe 1ante& to

=no1

. In this case there are two things missinga. 0he statement about 4ergenthaler

controlling the 6oard ne1t to the part wherethey say that the 6oard recommends themerger

+. 9ouldn’t simply rely on your 6;’s recommendation bBc they are not neutral therefore it IS AT*RIA6

iii. Scienter7 0his is a tougher 3uestion as to what the standard is7,. "ome say negligence. "ome say nowing conductBscienter+. "ome say it depends on who you are=. an’t loo it up in statute it is $ bBc they didn’t

specify and courts must tell usa. 9@#0 I" mens reas "0#&;#; 0@#0

4!"0 6' #//$I';:iv. Reliance Stan&ar&7 @ad you nown the truth you would

have acted differently,. *ou don’t have to show true reliance because that

would be a difficult standard to meet.. In a ule ,=a-E case honest-to-goodness reliance is

not re3uired you don’t have to prove the "B@s wouldhave voted otherwise if fully informed.

+. In this case the court only re3uires by way of reliancethat it be demonstrated the merger could not have been consummated but for the affirmative votes ofthose who were ill informed.

v. Rule<Stan&ar&7 "how that the pro1y statement itself was anFessential linG in the accomplishment of the transactionreliance is then presumed.

,. In this case reliance is satisfied because they neededa SSL vote so they needed the minority to be on

board with the merger . . . therefore the pro1ystatement was an Fessential linGvi. $oss ausation

,. elationship bBt why you loss money and what it isyou are complaining about

vii. %a+ages Stan&ar&, 'conomic loss,. /rove the difference between the stoc received and

the stoc given up. 0he problem with this is that if the deal is fair you

damages will be M'>JJ

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a. ust inally as= the "ig airness

Huestions) is ulti+ate Huestion

+. 0his cuts against the principle that a shareholderdeserves to not be lied to but there’s no way aroundit

viii. If you can get to a court fast enough you would be entitled toan injunction until proper disclosure is made but this isunliely – here it’s too late to do that.

(. 1irginia "an#shares, Inc. v. /an'berg

a. 4acts7 ;irectors issued a pro1y statement in connection with a pendingmerger. 0he statement said that directors approved the merger bBc of the

opportunity or +inority S5 to o"tain a high3 Dalue an& it 1as a

air3 price. / claims their statements were false bBc the real reason wasthey believed they had no alternative if they wanted to remain on the6oard.

i. 0he minority can raise a claim here bBc majority "@ isengaged in a "; transaction thus must prove entire fairness – price and dealing.

ii. @ad the disinterested "@’s (minority) approved the merger the burden would shift from the ; to the /’sAremember that a

majority "@ is always evaluated under entire airness neverthe business judgment rule

,. 0hey must prove the transaction was !&C#I". Issue7 0he directors render their >/I&I>& that the merger was a good

thing so can they be sued for that >/I&I>&: *es – if it was a lie.(misstating the truth of what you really thin)

c. *ou can prove the opinion is a lie by esta"lishing that the un&erlying

acts are a lie.

i. 0he purchase price was only a premium as to the boo valueof the corporation but assets appreciated so boo value is notFhighG or FfairG

ii. 4aret value was sewed bBc the purchaser dominated themaret

iii. # thte time they were telling "@ that ?= was a FfairG pricethey had a study saying company was worth ?S

&. 0here was a lie by omission – the board had evidence going concernvalue was ?S per share which is ? more than merger priced.

i. 0he board might try to rebut that by saying they judged thestudy unreliable but contrary to that is the view that the "@should see it and decide themselves.

ii. 0rue that ?= is true than maret price but half-truth bBc theyare leaving out other information. "ame with boo value.

e. Stan&ar&7 ourts says that it is an affirmative defense to show that theycould have blessed the transaction without the minority votes.

. 5ol&ing7 0he court held that the ,HL minority votes weren’t needed tocomplete the merger so the /’s lose on the reliance (Fessential linG)

element.i. 9e don’t now what they would have done. It cuts the burdenof the uncertainty in favor of the wrong-doing party. &ormallyit is the other way around.

ii. Crancis case – clients wanted to sue the mother. 9here thestate court cuts the uncertainty in favor for the wrong-doing party.

,. ;on’t now what would happenAhere oppositeiii. an never bring a pro1y fraud case if the majority "@ have

enough voting power

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. &ote on the "tandard of Cault in /ro1y Craud #ctionsa. #lthough language of ,bH imposes no fault re3uirement the "' in the

'rnst v. @ochfelder case argued that a negligence standard should beread into the rule.

i. Stan&ar&7 !"" disagreed and ruled that scienter (nowledgeor reclessness) is re3uired.

. "hareholder /roposalsa. <,=aN grants certain "@ the right to submit proposals for "@ action for

inclusion in the corporation’s pro1y solicitation material.i. 0o be eligible to tae advantage of option "@ must7

,. @ave been the record or beneficial owner of at least,L or ? in maret value of class(es) of securitiesentitled to vote on the matter

. Cor at least one year8 #&;+. 4ust continue to hold this status through the state of

the meetingii. A'vantage – allows "@ to mae proposals at company’s

e1pense

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