JFK UNIVERSITYSCHOOL OF LAW

BUSINESS ASSOCIATIONSBLaw 425

Spring 2009

Susan A. Morgan Former Entrepreneur (MacInTax, TurboTax) J.D. – Santa Clara University, School of Law Fenwick & West, LLP – 7 years Corporate Attorney Start-ups and Private Companies Equilytics, Inc. – private equity analysis Katovich Law Group – Oakland (Virtual) Contact Info: smorgan@equilytics.com 925-935-7767 Available after class, for questions

Class Assignments Texts – case book plus supplement Statutes – recommended Syllabus – rough cut, will be updated Material increases in complexity later on Briefing cases – recommend paper/written briefs for every case Why is this case in this book? Participation – expect to be called on and participate in class Notify me, if you are unprepared

Grading Final Exam – Essay (closed book) Format (most likely): 2 longer, multi-part questions (1 hour) 3-4 shorter essay questions Grading – Final will count for most of your grade Up to +5 points, for class participation Final Exam Date: Wed., May 13th, 10am-1pm Pleasant Hill Campus, Room N271

1

Best practice – come to class prepared, and participate!

Class Mechanics Roll Call Sign-up Sheet Attendance Must attend at least 80% of class (to earn credit) 3 unit class = no more than 3 classes missed! Tardy – same result if more than 1 hr late for more than 9 classes. Seating – pick your permanent seat next week Breaks – 3hr class 55 min, then 10 min break (each hour); OR 80 min (1 hr, 20 min), then 20 min break, then 80 min.

Class Content Agency Rules of agency Actual and apparent agency Inherent power Principal’s liabilities Agents duties Partnership Rules of partnership; creation Partners’ rights and duties (property, each other) Partnership dissolution Corporations Basics Formation Liability (limited) Shareholder derivative actions Role/purpose of corporations Duties of Insiders (D&O, etc.) Duty of Care and Duty of Loyalty Ratification (by corporation of D&O actions) Insider Trading (Rule 10b-5) and short-swing profits (Rule 16(b)) Indemnification and D&O insurance

Control Proxy fights Shareholder duties in closely-held corporations Dissolution and transfer of control

2

Mergers and Acquisitions (M&A) De facto mergers Freeze-out mergers Takeovers Pre-emption (State vs. Federal law) Skip Ch . 4 (LLCs) and Ch. 8 (Corporate Debt)

Agency Restatement (3 rd ) of Agency

Authority Actual Express Authority (AEA) P tells A to act, A acts (A believes has authority)

Actual Implied Authority (AIA) P tells A to act, A takes needed steps not expressed Apparent Authority (AA) P tells 3P that A is authorized, or P tells A to make statements to 3P that A is authorized P tells A not to act, but fails to tell 3P that A has no authority 3P believes A authorized, based on P’s actions, or based on normal business customs Ratification (R) A has no authority to act, but does so anyway, P adopts act after the fact Inherent Agency Power (IAP) No explicit authority but A does act similar to those A does has authority for

FKJFK UNIVERSITYSCHOOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 2Spring 2009

Liability / Obligations of Agents Apparent Agent (Franchise / License) Is there an Agency relationship? Rest.2d §2 - Nature and Extent of Control Rest.2d §220 – Agent vs. non-agent

Scope of Employment (Employer/Employee) Agency relationship exists (not at issue) Was Employee acting with Scope of Employment Rest.2d §219, 228; Rest.3d §7.07 Fiduciary Duties Duty of Care, Loyalty Kickbacks/secret profits, taking business opportunity, trade secrets Rest.2d §387, 388, 389, 404

Rest.2d § 2

3

Master : principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service. [Employer] Servant : agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master. [Employee] Independent Contractor : person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. [non-agent contractor]

Rest.2d § 220(2)Agent vs. non-Agent (Independent Contractor): (a) the extent of control which, by the agreement, the master may exercise over the details of the work; (b) whether or not the one employed is engaged in a distinct occupation or business; (c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision; {WHAT vs. HOW} (d) the skill required in the particular occupation; (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; (f) the length of time for which the person is employed; (g) the method of payment, whether by the time or by the job; (h) whether or not the work is a part of the regular business of the employer; (i) whether or not the parties believe they are creating the relation of master and servant; and (j) whether the principal is or is not in business

Apparent Agent Cases Murphy v. Holiday Inns Miller v. McDonald’s Vandemark v. McDonald’s

Rest.2d § 219(1); 228(1) 219(1): A master is subject to liability for the torts of his servants committed while acting in the scope of their employment. 228(1): Conduct of a servant is within the scope of employment, if, but only if: (a) it is of the kind he is employed to perform; (b) it occurs substantially with the authorized time and space limits; (c) it is actuated, at least in part, by a purpose to serve the master, (d) if force is intentionally used by the servant against another, the use of force is not unexpected to the master.

Rest.3d § 7.07

4

(1) an employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment. (2) An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control.

Rest.2d § 229(2) Scope of Employment – factors: Time, place, purpose of act Similarity to authorized acts Act commonly performed Extent of departure from normal methods Would employer expect such an act? Previous relations Business apportioned Act outside of employer’s business (or not performed by employees) Employer provided instrument of harm Act seriously criminal

Cases Bushey v. U.S. Forseeable (R.2d §228) Arguello V Conoco 3 incidents, 2 issues: Apparent Agency (branded stores) Scope of Employment (owned stores – R.2d §229)

Fiduciary Duty: Rest.2d §387-389 §387: Unless otherwise agreed, an agent is subject to a duty to his principal to act solely of the benefit of the principal in all matters connected with his agency. §388: Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal. [disgorge] §389: Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge.

5

Rest.2d §404 An agent who, in violation of the duty to his principal, uses for his own purposes or those of a third person assets of the principal’s business is subject to liability to the principal for the value of the use. If the use predominates in producing a profit he is subject to liability, at the principal’s election, for such profit; he is not, however, liable for profits made by him merely by the use of time which he has contracted to devote to the principal unless he violates his duty not to act adversely or in competition with the principal.

Fiduciary Duty Cases Reading v. Regem Secret profits Position Gen. Auto v. Singer Secret profits Disclosure Town & Country v Newbery Trade secret – customer lists

Contract vs. Fiduciary Duty Breach of Contract Litigate exact terms of contract Remedy is restitution Equitable remedy – restore ¶ to original position prior to “loss”

Breach of Fiduciary Duty Violates duty of care, loyalty, trust Remedy is disgorgement Regardless of NO loss to ¶ due to ∆’s actions

Using Confidential Information After Termination of Agency (Rest.2d §396(a) & (b)) After the termination of the agency, the agent: (a) has no duty not to compete with the principal; (b) has a duty to the principal not to use or to disclose to third persons, on his own account or on account of others, in competition with the principal or to his injury, trade secrets, written lists of names, or other similar confidential matters given to him only for the principal's use or acquired by the agent in violation of duty. The agent is entitled to use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of his duty as an agent.

6

UNIVERSITYSCHOOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 3Spring 2009

Partnership Law Sources of Law Common Law / cases Uniform Partnership Act (UPA) (1914) Currently used by ~1/3 states

Revised Uniform Partnership Act (RUPA) (1997) Adopted by ~2/3 states CA adopted RUPA: CA Corp. Code §16100-16962

Partnership Basics Types of Partnerships: General Partnership (GP) Limited Partnership (LP) Limited Liability Partnerships (LLP) Some Other Entities Corporations (S-corp, C-corp) Limited Liability Companies (LLC) Professional Corporation (PC)

Factors Differentiating Entities Ownership (who owns the entity?) Management (centralized / owner) Liability (Who’s liable? For what? When?) Distributions (of profits and losses) Tax treatment (who gets taxed? When?) Transferability of interests (buy / sell) Continuity of life (Limited life or perpetual?) Formalities/formation (filings?) Flexibility of structure (standardized/flexible?)

7

Some Differences Among Entities

Taxation Flow-thru Partnership pays no taxes (as an entity) Gains and losses “flow-thru” to the partners Are recognized on partners individual income tax returns “Phantom income” – gains flow-thru, but not distributions Dividend Corporation pays taxes on gains and losses (as an entity) Corporation cannot deduct dividends to shareholders Shareholder must also recognize dividends as income, and pay taxes on them = DOUBLE TAXATION How to get the $$ out? Bonuses, perks, (problems with excess payments) Buyback shares (capital gains tax - lower [15%]) Why get the $$ out? Limited accumulations (personal holding company) corporate tax – lower [35%]

What is a Partnership? UPA (§6(1)): A partnership is an association of two or more persons to carry on as co-owners of a business for profit No one-person partnership No non-profit partnership Person – can be entity (e.g., corp., partnership, LLC) No written documents required UPA §7 / RUPA §202 – Rules for Existence

Partners vs. Employees Fenwick: Is Chesire an Employee or Partner? Written Agreement: No capital investment by Chesire Fenwick - control and manage Chesire – salary plus bonus (20% profits) Fenwick – liable for debts “Partnership” would continue until notice by either party

Partnership or Contract? Commission – Employment Agreement

8

S. Ct. - Partnership: Entered into written agreement - partnership Called themselves Partners App. Ct. – Reversed, Contract /employ

UPA §7(3)&(4): Rules §3: The sharing of gross returns does not of itself establish a partnership … §4: The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) As a debt by installment or otherwise, (b) As wages of an employee or rent to a landlord, (d) As interest on a loan, though the amount of payment vary with the profits of the business,

Test of Partnership - Fenwick Intention of Parties Language = partnership / intent = financial Right to share in profits Yes (but not conclusive) Obligation to share in losses No – Fenwick took all the losses Ownership Fenwick owned (contributed all the $$) No $$ to Chesire on dissolution Chesire – no ownership

Fenwick (cont’d) Management (community of power) Fenwick – exclusive control! Language of agreement Called themselves Partners / Partnership Chesire had no rights of partnership Conduct toward 3rd parties Filed partnership returns, Fenwick report indiv. tax Held themselves out as partners to Commission NOT claim partners to others (vendors, etc.) Not file trademark registration for partnership

Fenwick (cont’d) Rights of parties on dissolution Fenwick received all partnership property Same results as if Chesire quits employment Burden of proof – partnership exists => party claiming partnership exists Ct => NO partnership

9

NO authority / control Not subject to losses Not held out as partners Definition: Co-ownership lacking (essential element) Distribution vs. wages Sharing profits =>prima facie evidence of partnership

Partners vs. Lenders Martin v. Peyton: is ∆ a lender or partner? Written Agreement: Loan of $2.5M (securities) – 2 yrs ∆’s get 40% profits ($100K - $500K) ∆’s have option join firm (buy up to 50% equity interest) Inspection rights, right to veto speculative transactions Hall to manage, signed resignations from partners

Partners vs. Lenders KNK speculation – insolvent, creditors sue Ct. – Not a partner Provisions proper to secure lenders interests Option unusual, but not sufficient to create partnership Possible for individual elements (of partnership test) to fail, but taken as a whole – the set is so broad that a partnership exists. BUT – not the case here – taken as a whole, no partnership exists Compare: Cargill (Gay Jenson Farms) – Lender was Principal (agency relationship existed)

Partnership by Estoppel Young v Jones PW entities: Franchise or Partnership? No partnership in fact Estoppel: If two partnerships are partners by estoppel, then PW-US is liable for negligent acts of PW-Bahamas UPA §7(1) & 16(1)

Estoppel (cont’d) If estoppel: joint and several liability!! ¶: PW held itself out as partners (brochure) No distinction in advertising, TM, names, … “common knowledge” – they are partners ∆: NO reliance

10

¶ did not rely on brochure to make their decisions Brochure did not state that PW entities are liable for each other

Fiduciary Duties (RUPA §404) Duty of Loyalty Trustee of partnership property No adverse interests No competing Duty of Care No negligent or reckless conduct No intentional misconduct No intentional violation of the law

CHJFK UNIVERSITYSCHOOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 4Spring 2009

Dissolution v. Going out of Business Dissolution is not the same as going out of business: A dissolution is simply the “change in relationship of the partners caused by any partner ceasing to be associated in the carrying on” of the firm’s business. UPA § 29. “Winding up”: The process of shutting down post-dissolutionDissolution and Winding Up:UPA Dissolution:Effect on Partnership After dissolution, the partnership must be wound up, absent agreement among the partners to carry on the business.

11

Assuming that the business will not be continued, the winding up process generally contemplates that the firm’s assets will be distributed to the partners. Authority of partners to act on behalf of partnership terminated except in connection with winding up of partnership business. UPA § 33; RUPA § 804.

Continuation per Agreement:Effect on Partnership Technically creates a new partnership Recall confusing treatment of this issue in Putnam v. Shoaf Creditors of former partnership automatically become creditors of new partnership. UPA § 41.Continuation per Agreement:Effect on Departing Partner Departing partner entitled to accounting Fair value of partnership Interest from date of dissolution in event of unreasonable failure to pay Departing partner remains liable on all firm obligations unless released by creditors. UPA § 36; RUPA § 703.Continuation per Agreement:Effect on New Partners If a new partner joins the firm when it continues after a dissolution, the new partner is also liable for the firm’s old debts, but such liability can only be satisfied out of partnership property. UPA § 41(1); RUPA § 306(B). The new partner can not be held personally liable for the old debts, unless he or she expressly agrees to be so held.

The Right to Dissolve “there always exists the power, as opposed to the right, of dissolution”—Collins v. Lewis Dissolution by act of one or more partners. E.g., UPA § 31(1)(b) Dissolution by operation of law. E.g., UPA § 31(4) Dissolution by court order. E.g., UPA § 32(1)(a)

Owen v. Cohen UPA § 31(1)(b):

12

“Dissolution is caused … By the express will of any partner when no definite term or particular undertaking is specified” Potential for wrongful dissolution UPA § 31(1)(b) v. § 31(2) Dissolution of a “term partnership” (a.k.a. “partnership for a term”) prior to expiration of the term is “wrongful” Adverse consequences; see UPA § 38(c) Hence, “there always exists the power, as opposed to the right, of dissolution

UPA § 18 “The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules: “(a) Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute towards the losses, whether of capital or otherwise sustained by the partnership according to his share in the profits.”

UPA § 40 § 40(b): subject to contrary agreement, upon dissolution partnership assets should be distributed as follows: “(I) Those owing to creditors other than partners, (II) Those owing to partners other than for capital and profits, (III) Those owing to partners in respect of capital, and (IV) Those owing to partners in respect of profits.” § 40(d): "partners shall contribute, as provided by [§18(a)] the amount necessary to satisfy the liabilities [set forth in § 40(b)]. . . ."

Possible rules All capital losses were to be borne by the capital partner

alone (Kovacik) Sharing of capital losses in accordance with sharing of

profits (statute) Allocate capital losses as per ratio of capital contributions

Exceptions Courts do not apply the Kovacik rule where: The service partner (Reed) was compensated for his work The service partner (Reed) made a capital contribution, even if that contribution was nominal

Limited partnerships

13

Defined: A partnership formed by two or more persons and having one or more general partners and one or more limited partners. Formation: The limited partnership is formed by filing documents required by statute. Typically filed with Secretary of State Tax aspects: Pre-Tax Reform Act of 1986, significant tax shelter advantages Post-TRA, those advantages eroded but still widely used to generate passive losses

Limited Partner Liability in Limited Partnerships ULPA (1976): “A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.” What constitutes control?

Limited Partnership (added) Limited Partnership similar to General Partnership, except – two types of partners: At least one GP, who manages and is liable for debts; At least one LP, who invests $$, does not participate in management, and is usually not liable for debts Limited Partnership is taxed like a General Partnership Profits and losses flow through Partnership files a tax return Partners receive and file IRS form K-1’s Formation of Limited Partnership Partners must file the Certificate of Partnership with the State and pay a fee

Dissolution Summary (added) Partnership at will, unless: Parties agree to a term, or Court implies term (e.g., to repay partnership debt) Partners entitled to share in control They must have access to information and allowed to vote May be altered by agreement Agreement violated if majority deprives minority of opportunity to participate Winding-up Upon dissolution Partners may wind up, or if disagree, count may appoint receiver, order sale (as a going concern, or piecemeal – as a liquidation) Fiduciary Duty Partners owe each other a fiduciary duty – can not dissolve in bad faith Must bid fair price

OOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 5Spring 2009

14

Intro to Corporations Public (publicly-held) Public secondary market in which shares of the company are listed for trading Public companies: e.g., IBM or Microsoft Trading exchanges: e.g., NYSE or NASDAQ

Private (close or closely-held) Absence of a secondary market for its stock Usually, small number of shareholders, some who actively participate in the firm’s management May display many characteristics of partnerships (like “incorporated partnerships”)

Intro to Corporations – Other Types Professional Corporations (PC): Physicians, dentists, lawyer, accountants Increasingly use LLPs Non-profit corporations None of the surplus revenue (profit) may be distributed to shareholders (members) Often have members rather than shareholders Examples: Charities, Churches, Fraternal Organizations Quasi-governmental corporations E.g., Fannie Mae and Freddie Mac Government corporations Universities, hospitals, etc.

Corporate Attributes Legal “person” – corporation is a separate entity

separate legal existence from its owners (“legal fiction”) Possesses (some) constitutional rights Separate taxpayer Requirement for formal creation

Limited liability - MBCA § 6.22(b): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation

is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

Corporate Attributes (cont’d) Separation of ownership and control - MBCA § 8.01(b): “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors….” Owners = shareholders (stockholders) Managers = board of directors

15

Shareholders - limited control Shareholders entitled to vote on: Election of directors (MBCA §§ 8.03-.04) Any amendments to the articles of incorporation (certificate of incorporation, charter) - MBCA §§ 10.03 Usually, amendments to by-laws (MBCA §§ 10.20) Fundamental transactions (e.g., mergers; MBCA § 11.04) Odds and ends, such as approval of independent auditors

Consensus v. AuthorityConsensus (Partnership): Collective decision-making ¨ used when constituents have: Similar interests Comparable information Low collective action problemsAuthority (Corporation): Central decision-making body ¨ used when constituents have: Differing interests Asymmetric information Serious collective action problems

Rights of Shareholders Vote on limited range of issues Receive payment of dividends when and as declared by board Inspect corporate books and records Receive distribution upon termination File derivative suit to redress wrong suffered by the corporation. (Damages recovered belong to corporation)

Corporate Attributes (cont’d) Liquidity – sell/transfer shares Flexible capital structure

Many different types of securities: Stocks (common, preferred), options, warrants, convertible debt, bonds

Securities: claims (contingent) on the corporate assets and future earnings Issued through formal contractual instruments

Security Classes: Debt vs. Equity Debt (senior) – bonds, loans, notes Interest – paid over period of years Return of principal – after period of years Holder is a “creditor”, not an owner Holder does not share in corporate appreciation (or upside) Equity – stock or shares

16

No interest, no repayments of principal Rights to receive dividends if declared by board – “pro rata” share Rights to receive distribution in a liquidation (after creditors) Holder is an owner = shareholder Shareholders receive the benefits of corporate appreciation

Debt vs. Equity: “crossovers” Convertible Promissory Note (“bridge loans”) Looks like debt (is a note, gets interest), but: Can convert into equity – i.e., the principal amount is used to pay for future stock in the company Preferred Stock Looks like equity (is a stock), but: Gets “repaid” after debt, and before other (common) stockholders receive distribution Warrants (“next financing” type) Looks like equity (right to purchase stock in the future), but: May require an “interest-like” payment, until exercised

Capital structure terminology Authorized shares Total number of shares authorized is specified in the Articles Authorized but unissued shares: shares authorized but not yet sold Outstanding shares shares actually sold (and not repurchased by the corporation) Example Charter authorizes total of 20,000 common shares. Corporation sells 4,000 shares to investors. Corporation now has 4,000 outstanding shares and 16,000 authorized but unissued shares How many total authorized shares does the corporation have?

Issuance of stock Board of directors approves issuances Shareholders involved only if: Board wants to sell more shares than are presently authorized in its charter Board of directors wants to issue a new class of shares not authorized in the charter If charter (i) authorizes the class of shares in question and (ii) there are sufficient authorized but unissued shares to sell; then, the board can sell shares for “any valid purpose”, as long as the corporation receives adequate consideration for the shares.

Old Dominion – Case 1 Third-Party Sale A buys land for $125K, sells it to P for $200K No fiduciary duty between A and P Fraud – cannot misrepresent to buyer Avoiding Fraud (and answering)

17

“price I paid is not relevant - property is worth $200K” “no, that’s not entirely true” (2 mo vs. 1 mo) No recovery if no damages Even if A lies about purchase price, if property is worth $200K at sale, P has no damages to recover

Old Dominion – Case 2 Principal-agent Sale A represents P in acquiring land A owns land, does not reveal to P A sells land to P - $75K profit A must disgorge profit to P A has fiduciary duty to P A should have revealed to P his ownership

Old Dominion – Case 3 Promoter Sale P forms corporation C P is sole shareholder of C P is president of C A agrees to act for C (as agent) in sale of land to C A has fiduciary duty to C (but not directly to P) C can recover from A P has NO INDIVIDUAL cause of action against A

Old Dominion – Case 4 /#1 A forms corp. C P buy stock in C for $200K P is sole SH of C P’s are directors/officers of C A sells land to C for $200K BOD approves sale A is a promoter (incorporator) of C A owes fiduciary duty to C If all steps were part of single transaction (intended by A), A may have to disgorge profit Unless A disclosed profit, and BOD approved it

Old Dominion – Case 4 /#2 A sells land to P - $200K P forms corp. C – contributes land for stock (P is sole SH of C) Can P recover from A? If A acted as agent for P – yes. Otherwise, no (assuming no fraud)

18

Can C recover from A? No – C has no relationship with A

Old Dominion – Case 4 /#3 A forms corp. C A contributes $200K cash to C for shares A’s are directors and officers of C A sells land to C for $200K BOD approves purchase 5 days later (as planned), A sells shares to P for $200K P’s replace A’s as officers and directors

Old Dominion – Case 4 /#3 (cont’d) Should C be able to recover from A? Difficult issue Disclosure : A’s “knew” the price of the land, so C “knew” the price of the land => full disclosure was “given” – no “harm” to C SH approval : “Insider” transaction -> SH approval BOD has fiduciary duty to C, but SH can act in their own interest Who are the SH? A only, or should P be included? Ct. rulings differ: Mass Rule: IF later sale was contemplated at time of 1st sale, C can attack 1st sale US rule: C cannot attack 1st sale, because disclosure – all SH at the time (A) consented to 1st sale CA rule: follows Mass rule – promoter liable to C because 1st sale not approved by later SH (P – contemplated at time of 1st sale)

Old Dominion – Case 4 /#4 A forms corp. C A contributes $125K cash to C for stock C uses $125K to buy land A sells his shares in C to P for $200K Can C recover from A? A sold at “cost” to C – no profit. Nothing to recover Can P recover profit from A? Did P inspect corporate records before buying stock (books should show purchase price at $125K) If P did “due diligence”, then P had “notice” of sale price – bought shares with “knowledge” – no recovery

Promoters Represent corp. before it is formed – incorporate the entity Often enter into contract with potential SH (who will purchase stock) Called “Subscription Agreements” Enforceable by SHs and promoter Owe a fiduciary duty to corp. (and SH) Cannot make “secret profit” from corp. Liable for pre-incorporations contracts (entered into in corp.’s behalf) Promoter remains liable after corp. is formed, unless: Agreement expressly states that promoter is not liable OR, other party agrees to let corp. be liable instead (novation)

19

Corp not liable prior to incorporation Corp. becomes liable by adopting/ratifying pre-incorporation contracts Corp. relieves promoter of liability post-incorporation Corp. may indemnify promoter, post-incorporation

De Facto vs. Estoppel De Facto: Corporation was not properly organized Promoter tried in good faith to organize Promoter acted as if was corp. Example: You ask lawyer to form corp. You buy computer for corp. from IBM on credit IBM thinks it is selling to corp. Your business fails – you discover lawyer never filed corp. papers IBM sues for $$ of computer – tries to sue you individually Ct. could find “de factor” corp., and shield you from personal liability (as if you were a SH)

But – what if you did not make good faith effort to incorporate? No de facto corp. (no good faith effort) BUT, IBM dealt with you on premise (belief) that you were a corp. IBM may be estopped from denying that you are a corp.

20

BUSINESS ASSOCIATIONSBLaw 425 – Class 6Spring 2009

Shareholder Derivative Suits Corp. is a “legal person” (separate entity) Distinct from SH, directors, officers (D/O) Can sue and be sued If corp. is harmed, cause of action belongs to corp. (not SH) Derivative Actions arise from: Harm to corp. by 3rd party (3rd party could be a D/O, or related to a D/O) Corp. refuses to sue 3rd party – to recover (e.g., “lost” or “stolen” value) SH (who is “harmed”) wants to “compel” corp. to sue 3rd party If SH successful – recovery will be to corp. not SH (Corp. is “nominal” ∆)

Direct vs. Derivative suit (suit brought by SH of Corp): Direct: suit to benefit SH directly – SH is suing corp. for SH recovery Derivative: suit to compel corp. to sue 3rd party – to recover “loss”

Shareholder Derivative Suits Example 1 ABC Corp. has contract with Jane. Jane breaches, but ABC doesn’t sue. May SH sue Jane directly (or derivatively)? Example 2 ABC Corp.’s treasurer embezzles all its money and disappears. SH stock is now worthless. May SH sue treasurer directly (or derivatively)?

Derivative Suits (cont’d) Example 3 Tina was run over by cab operated by Sean Corp. Sean Corp. has little assets/insurance. Sam SH owns Sean Corp. Tina wants to pierce the corp. veil and sue Sam. Is this direct or derivative? Neither – it’s a trick question (why?)

Derivative Suits (cont’d) Example 4 Dan is a director, officer and SH of Acme, Inc. Dan is indicted by DOJ for antitrust violation (related to Acme product prices set by Dan)

21

Acme refuses to pay Dan’s legal expenses Dan sues Acme seeking payment (under DEL indemnification statute). Direct or derivative? Neither – it’s a trick question (why?)

Shareholders vs Directors If SH are unhappy about actions taken by Directors, what can they do? Sell their shares Elect new directors Sue

What is “The Demand”? Typically a letter from shareholder to the board of directors. Must request that the board bring suit on the alleged cause of action Must be sufficiently specific as to apprise the board of the nature of the alleged cause of action and to evaluate its merits Must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief.

Demand Shareholders must make “demand” before filing suit … unless it’s futile Demand required – unless excused Excused when futile Legal effect of making Demand Concession that demand was required May no longer litigate demand excusal issue Almost certain to lose – corp. dismiss demand

Business Judgment Rule The management of the business and affairs of a corporation is entrusted to its directors. Court will presume that in making its decisions, the directors acted: on an informed basis (due care) in good faith in (their belief that their actions were in) the best interests of the company and its stockholders Plaintiff will have to overcome this presumption Court will not examine reasonableness of board’s decisions Plaintiff can overcome this presumption by a showing of: Illegality, Fraud, or Self-dealing (conflict of interest) of BOD

22

Dodge v. Ford Motor Co. “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.” Page 292

Limited Liability Companies Cross between partnership and corporation Tax advantages of partnerships Limited liability of corporations None of the restrictions (e.g., number and type of shareholders) applicable to S corporations

Limited Liability Companies Funding Members typically contribute capital Contribution may be cash, property, services rendered, a promissory note, or other obligation to contribute cash, property, or to perform services. Liability Members stand to lose capital contributions, but their personal assets are not subject to attachment Tax Consequence Income passes through to members LLC does not pay taxes

Advantages of Pass Through (Partnership) Taxation Profits are not subject to double taxation (as in corporation tax) Losses flow through to owners Capital gains flow through to owners and retain their tax attributes (i.e., are subject to lower rates) There is no penalty tax for accumulating profits within the entity There are fewer negative consequences to transfers of assets between the entity and owner(s)

Check-the-Box Regulations Check-the-Box Regulations give LLC’s the ability to choose their tax status without regard to the entity’s nontax legal characteristics Can choose to be taxed as a partnership (flow-thru) or as a corporation (separate entity tax)

23

LLC Formation File articles of organization in the designated State office Other formation tasks: Choose and register name: LLC statutes generally require the name of the LLC to include the words limited liability company, the abbreviation LLC, or similar phrases. Designate office and agent for service of process Draft operating agreement – the basic contract governing the affairs of a limited liability company and stating the various rights and duties of the members Add need for annual report to tickler list

Conversion of existing entities: Partnerships ULLCA § 902 authorizes conversion of partnerships or limited partnerships to LLCs ULLCA § 903 (b)(2) converts debts of partnership to debts of LLC Per 902(g), however, members remain liable as partners vis-à-vis pre-conversion partnership debts IRS treats conversion as a nonrecognition event

Conversion of existing entities: Corporations No ULLCA provision for corp. conversion Need to structure it as a merger into a corp. IRS treats as a potential tax recognition event Tax free reorganization provisions do not apply

LLC Members’ Interest A member's rights include: Financial interest Right to distributions Liquidation participation Management rights

Financial Interests Profit and Loss Sharing Absent contrary agreement, most statutes allocate profits and losses on the basis of the value of members' contributions Withdrawal Member may withdraw and demand payment of his/her interest upon giving the notice specified in the statute or the LLC's operating agreement

Management Rights Management

24

Absent contrary agreement, each member has equal rights in the management of the LLC Most matters decided by majority vote Significant matters require unanimous consent E.g., merger, admission of new member, dissolution, etc...

Manager-managed LLC option available Can be structured as a “board of directors,” a CEO, or both Must be specified in articles of organization

Assignment of LLC Interest Unless otherwise provided in the LLC's operating agreement, a member may assign his financial interest in the LLC An assignee of a financial interest in an LLC may acquire other rights only by being admitted as a member of the company if all the remaining members consent or the operating agreement so provides. Analogous to partnership rules

Fiduciary Duties Manager-managed LLCs The managers of a manager-managed LLC have a duty of care and loyalty Usually, members of a manager-managed LLC have no duties to the LLC or its members by reason of being members Member-managed LLCs All members of a member-managed LLC have a duty of care and loyalty Derivative Actions Member may bring an action on behalf of the LLC to recover a judgment in its favor if the members with authority to bring the action refuse to do so

Liabilities No member or manager of a limited liability company is obligated personally for any debt, obligation, or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company But veil piercing in the LLC is possible

Dissociation v. Dissolution Dissociation: Withdrawal or expulsion of a member Dissolution: Winding up of LLC triggered Unlike Partnerships, dissociation does not necessarily lead to dissolution

Dissociation Without Dissolution

25

Dissociated member’s interest must be purchased by the LLC Buy-Sell Agreements may specify Judicial appraisal proceeding available Member’s right to participate in firm business terminates Exception for participation in a post-dissolution winding up process

JFK UNIVERSITYSCHOOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 7Spring 2009

Balance Sheet (B/S) Estimate of company worth on a given date Assets (A) – Liabilities (L) = Owner’s Equity (E): A – L = E Assets = economic resources equipment, cash, land, A/R (accounts receivable) Liabilities = creditors’ claims on company’s assets debts, notes, A/P (accounts payable) Owners’ equity = owners’ claims on company’s assets net worth, retained earnings, surplus

Income Statement (I/S) Profit or loss from a firm’s operations over a given period of time Sales (Revenue) – Expenses = Profits (Net Income) Revenue - from sale of product or service Expenses: Costs of producing product or service (Cost of Goods) Operating expenses (marketing, selling, general and administrative expenses, and depreciation) One time charges Financing costs (interest paid) Tax payments

Kamin or Dodge?

26

Kamin: “the question of whether or not a dividend is to be declared or a distribution of some kind should be made is exclusively a matter of business judgment for the Board of Directors” Dodge: Courts will intervene when “refusal to [pay a dividend] would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith which they are bound to exercise towards the stockholders”

Kamin: BJR Court says: “A complaint which alleges merely that some course of action other than that pursued by the Board of Directors would have been more advantageous gives rise to no cognizable cause of action. Courts have more than enough to do in adjudicating legal rights and devising remedies for wrongs. The directors’ room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact on profits, market prices, competitive situations, or tax advantages.” “We do not want to go there!”

Business Judgment Rule Liability Standard for Board No liability for negligence (“stupidity”) Liability based on: Fraud Illegal conduct Self-dealing Court Deference to Board Court will not review Board decisions Court will review Board processes

Business Judgment Rule Court will not interfere unless a clear case is made out of Fraud or illegal action Oppression, Self-dealing or collusive Bad faith or unconscientiously Errors of judgment – NOT sufficient for court to interfere BUT: Directors may be held liable for gross negligence in failing to make an informed decision Directors must inform themselves of “all material information reasonably available to them” Court will review the decision-making process

Van Gorkom Deal Terms $55 per share cash – all outstanding shares Merge TU in sub of Marmon Group Inc (wholly-owned by Jay Pritzker) 90-day “test” period – TU could receive bids (but not solicit) TU could only provide public info to bidders, not proprietary info JP could purchase 1M new shares of TU at $38/sh

27

Deal contingent on JP obtaining financing (for LBO) TU had one day to accept the deal

Merger – “normal” process Discussions with BOD about desirability of selling company BOD may agree to begin discussions; solicit offers Identify potential acquirers Begin discussions with potential acquirers Obtain LOI (Letter of Intent) from an acquirer Non-binding description of proposed deal terms (5-10 pages) Board considers LOI – may reject, accept, or recommend counter-offer Consult with experts, or accept contingent upon reports from experts If all goes well – proceed to full-fledged Merger Agreement (50-100+ pages) Board again considers agreements, consults with experts, approves Agreement is submitted to shareholders for approval If all goes well, Merger Agreement approved and signed Parties complete the closing tasks required by the Agreement Close Merger

VanGorkom - Issues Derivative vs. Direct? Price: Control Premium $55 vs. $38 – why is this not a “no brainer”? 90-day “test period” (limited “no shop”) Why not good enough? What happened to KKR and GE Credit? MBO vs. LBO – what’s the difference? 1 day for BOD to decide – “take it or leave it”? 20 minute presentation; never read the documents

VanGorkom – Players JP – big time wheeler-dealer/professional Why not liable? Why not a defendant? VG – retiring CEO/ “amateur” What were his motives? What did he do wrong? BOD – smart, sophisticated, knew TU’s value What did they do wrong? What happened to BJR? Senior Management – threatened to quit Why? What effect? SH – voted strongly in favor on the proposal Why didn’t that validate the price/deal? Officer/expert reports – attorney, CFO, COO Why weren’t their reports good enough? DGCL §141(e)

DGCL §141(e) “A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member’s duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation’s officers or employees, or

28

committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.”

Effect of Van Gorkom Outcome surprised everyone! Suddenly and unexpectedly imposed liability on directors (possibly millions) New legal standard: obtain all material information “reasonably available” Boards now spend $$$$ to insure process Reports from attorneys, accountants, experts Valuation Reports, Fairness Opinions, … Credible, contemporary evidence of deliberation Document in extensive minutes of board meetings

Outcome of Van Gorkom Over-informed? Information is costly Where is point of diminishing returns? Form over Substance: how much is 2 + 2? Shortly after sale to JP: Glut of rail cars – rates plummet Competitors of TU file for bankruptcy Is this relevant?

BJR and Duty of Loyalty BJR: presumes that, in making a business decision, the directors of a corporation act on an informed basis, in good faith, and in the honest belief that the actions taken are in the best interests of the company. Those presumptions can be rebutted if the plaintiff shows that the directors breached their fiduciary duty of care or of loyalty or acted in bad faith. If that is shown, the burden then shifts to the director defendants to demonstrate that the challenged act or transaction was entirely fair to the corporation and its shareholders.

Duty of Loyalty “The ‘business judgment rule,’ however, yields to the rule of undivided loyalty. This great rule of law is designed ‘to avoid the possibility of fraud and to avoid the temptation of self interest.’”

29

Burden of Proof – shifts to defendant Defendant must show what? Transaction was fair to the corporation

DGCL § 144 (a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if:

DGCL § 144 (1) The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders.

Quorum “. . . A majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. . . .” (§ 141(b)) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. (§ 144(b))

Disinterested Vote § 141(b): “The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number.” § 144(a)(1): “the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the

30

disinterested directors, even though the disinterested directors be less than a quorum” EXAMPLE: BOD has 5 authorized directors. 3 show up at a meeting. 1 is “conflicted” and required to abstain. The other 2 vote to approve. Did the action pass – under 141(b)? 144(a)(1)?

JFK UNIVERSITYSCHOOL OF LAWBUSINESS ASSOCIATIONSBLaw 425 – Class 8Spring 2009

Benihana: Del. §144(a) (1) “Safe Harbor” for interested transactions, if: The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum

Gantler v. Stephens (1st Niles) 1st Niles – holding company Owns Home Fed. S&L (“Bank”)

1st Niles: People Plaintiff Gantler – former BOD, current SH Defendants Stephens – COB, CEO/President (1st Niles and Bank) Kramer – BOD (1st Niles and Bank) Heating/air co – provides services to Bank Eddy – BOD (1st Niles and Bank) Csontos – BOD (1st Niles and Bank) Compliance officer/Corp. secretary (1st Niles and Bank) Shaker – BOD (1st Niles and Bank) – succeeds Zuzolo Principal of law firm in Niles, OH Safarek – Treasurer and VP (1st Niles and Bank)

31

1st Niles: Sales Process Depressed economy – low growth (2003) CEO/founder – beyond retirement (no heir) Good acquisition market for banks BOD sought advice on opportunities available August 2004 – BOD authorize Sale of 1st Niles BOD retain special Financial Advisor (investment bank) BOD retain special Legal Counsel (law firm) September 2004 – BOD meeting – a management propose Privatize Delist shares 1st Niles (from NASDAQ) Convert Bank to state charter (instead of federal charter) Reincorporate in Maryland No BOD action – Sales process continues

1st Niles: Sales Process (cont’d) December 2004 – 3 potential acquisition bids: Farmers NOT retain 1st Niles BOD BOD not consider bid further Cortland $18/share (stock & cash) – 3.4% premium Terminate BOD, but consider them for Cortland board First Place No statements regarding BOD retention $18-$18.50/share (stock swap) – 3.4%-6.3% premium December 2004 – BOD considers bids (at regular meeting) Financial Advisor – all bids within acceptable range (better than keeping 1st Niles shares) BOD – took no action on bids. Further discussed Privatization proposal.

1st Niles: Due Diligence January 18, 2005 – BOD directs due diligence for possible sale with Cortland or First Place Cortland due diligence Management/Advisor agree to Cortland’s due diligence request – schedule Feb. 6 meeting Fail to send materials to Cortland – Cortland cancel meeting; demand materials Materials never sent – Cortland withdraws bid Feb. 10 Management tells BOD after bid withdrawn – of due diligence “efforts”

1st Niles: Due Diligence (cont’d) First Place due diligence First Place diligence request – Feb. 7, 2005 Stephens not provide materials, resist setting due diligence date Agreed to diligence review (after Cortland withdrew bid) First Place revised offer – March 4th Improved exchange ratio – 11% premium Financial Advisor approved

1st Niles: Sales Process End

32

March 7, 2005 – regular BOD meeting Stephens presents First Place revised offer Financial Advisor suggest may increase offer BOD does NOT discuss offer - Stephens propose defer discussion until next BOD meeting Financial Advisor – First Place is unlikely to wait 2 weeks for response Stephens propose special meeting March 9 – to discuss March 8 – First Place increase offer March 9 – special BOD meeting Stephens presents revised offer to BOD Financial Advisor approves NO BOD discussion or deliberation BOD vote 4-1 reject offer (Gantler votes to accept offer) Stephens discuss Privatization – direct Legal Counsel to investigate

1st Niles: Privatization Proposal April 18, 2005 – Privatization Proposal Circulated to BOD Reclassify shares of holders with <300 shares From Common to new Series A (1-1 exchange) Series A pays higher dividends Other rights similar to common except limited voting rights (sale only) Claim Reclass. would achieve flexibility and lower cost April 20 – special committee for Reclassify Reincorporate in new state Change from federal to state charter bank Deregister from NASDAQ Delist shares

1st Niles: Reclassification Approval Dec. 5, 2005 – present Reclass. Proposal to BOD Special Outside Counsel present orally (no written materials) BOD vote 3-1 to proceed (Gantler dissent) Change in BOD Jan. 2006 - Shaker replace Zuzolo (passed away) April 2006 - Csontos replace Gantler June 2006 BOD determine Reclass. is “fair” to SH (both common and Ser. A) – based on advice of Management and counsel BOD vote unanimously to amend Certificate – reclassify shares

1st Niles: Proxy June 29, 2006 – Prelim. Proxy to SEC August 10 – amended Prelim. Proxy filed Gantler initiate lawsuit Proxy – false and misleading BOD corrected and file definitive Proxy – send to SH Nov 20 – Plaintiff amend complaint Proxy contains material misstatements and omissions

Dec 14, 2006 – SH approve Reclass 57.3% approval overall 50.28% approval – disinterested SH only

1st Niles: Complaint Breach of Fiduciary Duties

33

1) Sales Process: rejecting First Place merger offer (and Cortland due diligence process) 2) Proxy: False and misleading statements 3) Reclassification – structure Trial Ct. dismissed complaint – ð appealed1st Niles: Count I – Duty of Loyalty BJR: “a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” ð have burden of proof – to rebut presumption Directors breached duty of care or loyalty ð claim reason BOD reject merger: Want to retain BOD positions, pay, prestige No deliberations; disregarded Financial Advisor advice S. Ct.: 2-prong analysis Was BOD decision reached in good faith pursuit of legitimate corporate interest (Duty of Loyalty)? Did BOD reach decision advisedly (Duty of Care)? Need “yes” to both – for BJR presumption

1st Niles: Merger - BOD actions Merger will cause BOD to be terminated Not enough to show disloyalty to corporation Mergers always mean change in BOD – not all rejections are in bad faith Need to show more – to imply disloyalty Facts Establish Director Conflict Proxy admits D/O conflict – interests benefited differently than non-affiliated SH Majority BOD conflicted Stephens – sabotage Cortland and First Place bid Kramer – Heating co. services to Bank would be lost Zuzolo – Law firm, real estate firm provided services to Bank

Not need to show failure of due care (to act advisedly) Burden of Proof switches to ∆ - to show loyalty to company (Entire Fairness standard)

1st Niles: Merger - Officer actions Officers owe Fiduciary Duties – similar to BOD Stephens and Safarek Responsible for due diligence materials Stephens – violate duty as BOD, also as officer Safarek – aided and abetted Stephens Stephens was his boss – needed to keep job Could not act independently ¨ assisted Stephens to “sabotage” due diligence process

1st Niles: Count II - Proxy Duty to disclose all material info – in seeking SH approval Insufficient deliberations by BOD – in rejecting First Place bid Not disclosed in Proxy ¨ false and misleading BOD claimed they “carefully deliberated” First Place bid Materiality Standard ð has burden of proof to show

34

“a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available” FN 44 – SH would consider omitted fact important in deciding vote Does not require proof that SH would have changed vote But omitted fact would have been significant in SH deliberations Altered “total mix” of information available

1st Niles: Count II – Proxy (cont’d) ∆ claim deliberations occurred outside of BOD meeting rejecting bid Discussions at other BOD meetings Facts outside of the record Cannot be used for motion to dismiss S. Ct. reversed on Count II

1st Niles: Count III – SH ratify ð: BOD Recommend Reclass. Breach duty of loyalty Recommendation based on self-interest Stock buy-backs Trigger “put” and appraisal rights under ESOP Tr. Ct. – dismissed claim due to SH ratify S. Ct. – no SH ratification SH vote required to amend COI Cannot use vote to ratify BOD conflict of interests Proxy contained material misrepresentation SH vote not fully informed

1st Niles: SH ratification doctrine Common law doctrine – fractured Classic: SH approve BOD action – that does not otherwise require SH vote Expanded: Informed SH vote – on action that does require SH vote anyway Implies SH ratifies BOD decision anytime they approve any action

S.Ct. – SH ratification is limited to “Classic” form Applies only to (i) fully informed vote, (ii) not otherwise required (by statute) Ratification only applies to specific action voted by SH

In re Disney Hired Ovitz as new President – 5yr contract BOD compensation committee approved Expert (Crystal) advised Employment Agreement (OEA) was reasonable BOD approved OEA

35

14 months later – Ovitz fired Not get along with executives and BOD Severance: $38M cash; with options = $130M!!

Disney Claims Due Care – in approving OEA Not “best practices”, but not breach Committee & BOD knew value of options Duty to act in “Good Faith” Bad Faith examples: Act with purpose other than advancing corporate interest Violate known laws Fail to action in face of known duty to act (conscious disregard for duties)

Corporate Opportunities Objective of Doctrine: To deter appropriations of new business prospects “belonging to” the corporation Targets: Officers & Directors of corporation Dominant Shareholders who take active role in managing firm

Corporate Opportunity Test A corporate opportunity exists where: Corporation is financially able to take the opportunity Opportunity is in the corporation’s line of business Corporation has an interest or expectancy in the opportunity Embracing the opportunity would create a conflict between director’s self-interest and that of the corporation

eBay IPO “Initial Public Offering” The first sale of stock by a company to the public Underpricing of IPOs Refers to the phenomenon that IPO price is typically 5-15% below the closing price on the first day of trading, sometimes as much as 100-200% Spinning: Allocating hot IPOs to the personal brokerage accounts of top executives in return for company business Guaranteed profit due to consistent underpricing

Corporate Opportunity

36

37