Professional Documents
Culture Documents
1
Principal risk is that EDS fails to pay on the lease
Agency Relationship
Agency is the relationship which results from the
manifestation of consent by one person to another that the other
shall act on his behalf and subject to his control, and consent by
the other to so act
P and D agree that, in determining whether a contract
establishes an agency relationship, the critical test is the nature
and extent of the control agreed upon. Holiday Inn.
Actual Authority
Express Authority
o Where you expressly tell someone that they have the
authority to act on your behalf
o In order for the agent to lose his authority, the principals
revocation of authority must be communicated to the
agent
Implied Authority
o Actual authority circumstantially proven authority that
the principal actually intended the agent possess and
includes such powers as are practically necessary to carry
out the duties actually delegated
o Implied Authority history, job descriptions, circumstances,
or customs
2
Apparent Authority
Refers to a situation where a reasonable person would
understand that an agent had authority to act. This means a
principal is bound by the agent's actions, even if the agent had
no actual authority, whether express or implied
o The third person reasonably interpreted manifestation of
consent from the principal that the agent had authority to
act on the principal's behalf
If a person who is not an agent appears to an outsider (a
customer) to have been given authority by the principal, then
the principal is stuck for the acts of anyone he allows to appear
to have authority.
There has to be some action by the principal
Hoddeson v. Koos Bros. (28)
o Open the doors to the public is the action
Amazing thing about apparent authorityit is effective to bind
the principal even when actual authority is lacking
Apparent authority such as where the principal by words,
conduct, or other indicative manifestations has held out the
person to be his agent
Master-servant relationship
1. The servant has agreed to work on behalf of the master, and
2. Has agreed to be subjected to the masters control or right to
control the physical conduct of the servant (that is, the manner
in which the job is performed)
3. A master is subject to liability for the torts of his servants
committed while acting in the scope of their employment
3
o A provision requires Schneider (employee) to make
reports and perform other duties in connection with the
operation of said station that may be required of him from
time to time by Company.
o Humble pays 75% of the most important operational
expense items
o Humble had a strict system of control and supervision to
make sure its product was delivered to consumers
o Humble furnished all important station location and
equipment, the advertising media, the products and a
substantial part of the current operating costs.
o Hours of operation were controlled by Humble
o Schneiders only title to occupancy of the premise was
terminable at the will of Humble
o The agreement in effect required Schneider to do anything
Humble might tell him to do
Evidence against master-servant relationship
o Neither Humble, Schneider, nor the station employees
considered Humble as an employer or master
o Employees were paid and directed by Schneider
individually as their boss
o A provision of the agreement expressly repudiates any
authority of Humble over the employees
When Humble sells products through Schneider Apparent
authority
Essentially little difference between Schneiders situation and
that of a mere store clerk who happened to be paid a
commission instead of a salary
The court ruled that there was principal-agency relationship and
therefore Humble was liable
Schneider is completely reliant on Humble
o If Humble were to go out of business, Schneider would not
be able to survive
4
o Barone was prohibited from selling Sun products unless
they were under the Sunoco label and could not blend in
with products not supplied by Sun
o Advertisements all over for Sun
o Employees wore the Sun logo (however, uniforms were
owned by Barone)
o Barone (upon the urging of a Sun sales rep) attended a
Sun school for service station operations
o Weekly visits of Sun sales representative who inspected
the station, took orders, communicated complaints, and
offered suggestions for improvements
o Sale rep was in contact with Barone to help implement a
competitive allowance system
Evidence against Suns control
o Lease was subject to termination by either party
o Barone was allowed to sell competitive products
o Barone had no obligation to follow the advice of the sales
rep
o Barone made no written reports to Sun
o Barone alone assumed the overall risk of loss or profit
o Barone independently determined his own hours of
operation and the pay scale of employees
Barone was an independent contractor and therefore no master-
servant relationship existed
Franchise Agreement
Independent businesspeople use the brand name of a franchisor
Franchisor provides the franchisee with know-how and brand
identification on a continuing basis
Franchisee enjoys the right to profit and runs the risk of loss
Franchisor controls the distribution of goods/services through a
contract
Franchisor regulates the activities of the franchisee in order to
achieve standardization
What is the legal relationship between franchisor and franchisee?
o Depends, it can sometimes be an agency relationship and
sometimes it is not
Franchisor-Franchisee Relationship
Murphy v Holiday Inns, Inc. (41)
o The fact that an agreement is a franchise contract does not
insulate the contracting parties from an agency
relationship
5
o Here, the purpose of the contract provisions was to achieve
system-wide standardization of business identity,
uniformity of commercial service, and optimum public good
will, all for the benefit of both contracting parties
The regulatory provisions did not give D control over
the day-to-day operations
o TAKEAWAY: If a franchise contract so regulates the
activities of the franchisee as to vest the franchisor with
control within the definition of agency, the agency
relationship arise even though the parties expressly deny it
SCOPE OF EMPLOYMENT
Foreseeability Test
Ira S. Bushey & Sons v. United States (52)
Govt says Lanes (seaman) acts were not within the scope of
his employment
Restatement: conduct of a servant is within the scope of his
employment if, but only if it is actuated, at least in part, by a
purpose to serve the master
Judge Friendly uses a foreseeability test to determine whether
the seaman was acting within the scope of employment
o Lanes conduct was not so unforeseeable as to make
it unfair to charge the government with responsibility
o Not the same as negligence foreseeability
o However, the activities of the enterprise do not reach
into areas where the servant does not create risks
different from those attendant on the activities of the
community in general
6
i.e. if Lane had set a bar on fire, this would not be
foreseeable in the courts eyes
Here, it was foreseeable that crew members crossing the dry
dock might do damage, negligently or even intentionally
o It is immaterial that Lanes action was not to be
foreseen
7
Some of the factors used when considering whether an
employees acts are within the scope of employment are:
o 1) Time, place, purpose
o 2) Its similarity to acts which the servant is authorized to
perform
o 3) Whether the act is commonly performed by servants
The fact that an employee engages in an intentional
tortious conduct does not require a finding that the
employee was outside the scope of his employment
o 4) The extent of departure from normal methods
o 5) Whether the master would reasonably expect such act
would be performed
Court rejects the presumption that because Smith behaved in an
unacceptable manner that she was obviously outside the scope
of her employment
o Smiths position as a clerk, and her authorization from
Conoco to conduct sales allowed her to interact with
Arguello and Govea, and put Smith in the position to
commit the racially discriminatory acts
PARTNERSHIPS
8
o Revised Uniform Partnership Acts
o Groups of experts in a large variety of fields that try to
come up with uniform rules/acts
o This is useless unless State legislatures pass the acts
**Of course, many of the default rules laid out in the UPA can
be altered by an agreement or certain contract provisions
9
Irrelevant Factors
1. Duration - does not really matter how long the partnership lasts
2. Participation in other businesses while partners have a fiduciary
obligation to not compete with the partnership, absent an
agreement among the parties, partners are allowed to
participate in other businesses
10
FIDUCIARY OBLIGATIONS OF PARTNERS
11
manager and the opportunity brought to him as an incident of
management
o i.e. If Salmon had received form Gerry a proposition to
lease a building at a location far removed, he might have
held for himself the privilege thus acquired
Here, the subject-matter of the new lease was an
extension and enlargement of the subject-matter of the
old one
12
advantage over their former partners in breach of their
fiduciary duties.
13
National Biscuit Company v. Stroud (127)
If one partner goes to a third person to buy an article on time for
the partnership, the other partner cannot prevent it by writing to
the third person not to sell to him on time
o What either partner does with a third person is binding on
the partnership
Stroud, Freemans co-partner, could not restrict the power and
authority of Freeman to buy bread for the partnership as a going
concern, for such a purchase was an ordinary matter connected
with the partnership business
14
In Summers case, the decision was contrary to the
status quo
Fiduciary Duties
If you are a minority shareholder in a partnership, corporation,
etc. Usually the majority shareholders have fiduciary duties not
to screw over the minority shareholders
PARTNERSHIP DISSOLUTION
15
Dissolution:
Partnership DEFAULT rule is that it lasts for duration at-will unless
otherwise specified
You also dont want a discontinuance at-will
DEFAULT is to liquidate assets to pay people out, BUT liquidating
everything is NOT the best option
Probably want to negotiate and contract out ways to dissolve the
business where liquidation is the LAST option instead of the first
CORPORATIONS
Corporation
Perpetual life
Has individual constitutional rights
o Freedom of speech in connection with ability to make
campaign contributions
o Freedom of religion (Hobby Lobby Supreme Court case)
Ability to make contracts
Ability to be sued
Ability to own property
A creature of the state
o Usually have to file papers with the secretary of the state
and pay certain fees
Anybody can create a corporation
o You can be one shareholder
o You do not have to have any assets to create a corporation
Officers of the Corporation are typically a President, Treasurer,
and Secretary
Limited Liability
Two Main Documents:
o (1) Certificate of Incorporation
o (2) By-laws (governing documents)
Instructions on how the corporation will operate
Tells us about:
Annual meetings (both special and for
shareholders)
Voting
Books & Records
o Inspection procedures
How by-laws will be amended
o Super majority?
o Majority?
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Dissolution of the corporation
Where corporate offices will be located
What big decisions the Board of Directors
(chairman and board members) will make:
o Merge with another company
o Issue dividends
o Settle large lawsuits
o File bankruptcy
o Go into a different product line
o Build new factory/facility
How many people will be on the Board of
Directors
How Board members will be elected
o Shareholders usually vote for board
members
o Board appoints officers and senior
managers
Indemnification and Insurance of Corporate
Agents
o Board is indemnified by lawsuits from
shareholders
Basic capital structure
o What kind of stock there will be
Common stock voting rights
i.e. 1 share = 1 vote
i.e. only shareholders who
meet a certain threshold will
be able to vote
Collective Action Problem
Its hard for small
shareholders to get together
to do things and vote on
specific things
How to fix this problem 1
vote per shareholder (does
not matter if you own 1 share
or 1000 shares, you only get
1 vote)
o This empowers small
shareholders
Preferred stock generally no
voting rights
Preference in cases of
bankruptcy
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Paid dividends before
common stockholders
o How shares are distributed
Board of Directors itself will be required only to authorize the
most significant corporate acts or transactions: mergers,
changes in capital structure, fundamental changes in business,
appointment and compensation of the CEO, etc.
Section 952 of Dodd-Frank mandates that the compensation
committees of the board of directors of public companies must
be fully independent and that those committees be given
responsibility for setting CEO pay
Moral Hazard
18
Corporations (or the people who run them/own them) know they
will not be personally liable, so they have more incentive to act
risky
Limited Liability can create incentive to take risky actions
19
o Marchese (D) borrows substantial sums of money from
these corporationsinterest free, of course
o These corporations also borrow money from each other
when need be
o Marchese (D) uses the bank accounts of these corporations
to pay all kinds of personal expenses
20
o You must give the withdrawal some sort of title or
documentation
Dividend payments
Repayment of loans
Get all the necessary corporate documents in order
Passy by-laws and regulations that the corporation must adhere
too
Keep adequate and separate books & records for the corporation
Board of Directors
Usually given a lot of discretion on what actions to take and what
decisions they can make
If shareholders really dont like what is going on, they can sell
their shares
21
o Corporation wanted to donate money to Princeton
University. Shareholders sued board of directors claiming
they could not make the donation because: (1) the
certificate of incorporation does not expressly authorize
the contribution and under common-law principles the
company does not possess any implied or incidental power
to make it, and (2) the NJ statutes which expressly
authorize the contribution may not constitutionally be
applied to the plaintiff, a corporation created long before
their enactment.
Ultra Vires outside the power (corp. was not authorized to
perform something)
Court holds that the donation is valid
o Corporation has an interest in the community
o Corporation has an interest in donating to liberal arts
institutions of higher learning
o Statute allows for the donation
o Donation was modest compared to overall earnings
o Voluntarily made in the reasonable belief that it would aid
the public welfare and advance the interests of the plaintiff
as a private corporation and as party of the community in
which it operates
o This is in the best interest of the corporation itself
Creates goodwill
This case was decided at the heart of the cold war
Private institutions need to be built up
Must maintain the capitalist nature of the
United States
Private lending to private institutions should be
encouraged
22
benefit of shareholders and for the primary purpose of benefiting
others
o Ford was not concerned with benefiting his fellow
shareholders
o He wanted to benefit the community
Expand operations create more jobs
Lower price of automobiles more affordable to the
average working man
23
DUTIES OF OFFICERS, DIRECTORS, AND OTHER
INSIDERS
THE OBLIGATIONS OF CONTROL: DUTY OF CARE
24
The court will not overrule a business decision of the directors of
a company unless there is evidence of fraud or some other
dishonest dealing
o The only accusation of dishonest dealing was a general
assertion that four of the twenty directors had a financial
interest in the outcome. This was clearly not enough
Mere errors of judgment are not sufficient for there to be
a breach of a fiduciary duty
o As long as the BOD is making its decision in good
faith and it is not negligent, the decision will be
protected by the Business Judgment Rule
25
State Legislation that limits Liability of the BOD
A corporation can include in its certificate of incorporation: a
provision that eliminates or limits the personal liability of a
director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, provided that
such provisions shall not eliminate or limit the liability:
o For acts or omission which were not in good faith or which
involve intentional misconduct or a knowing violation of
law
o For any transaction from which the director derived an
improper personal benefit
o For any breach of the directors duty of loyalty
You cannot eliminate a breach of the duty of loyalty
Only the duty of care can you get rid of
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2. The decision must be made by the directors in the good faith
belief that it is in the best interest of the corporation and its
shareholders;
a. What is bad faith?
i. Directors actions primarily motivated by the desire to
remain entrenched in their positions of control
ii. BODs decision to mislead its shareholders by
intentionally withholding material information from
them
iii. Gross disparity between the price paid for assets and
their fair market value
3. The decision must be made with due care
a. Failure to satisfy due care is gross negligence
4. Must be made on an informed basis
a. Corporate directors must have informed themselves of all
reasonably available, material information about a
proposed business decision before making that decision
b. Dont need to personally investigate every possible source
of information concerns the decision
c. Corporate directors may rely on the corporation's records,
including financial statements, and on the reports, opinions
and statements of the corporation's executives and other
employees, as long as the directors' reliance on those
sources is itself reasonable
d. ALWAYS HIRE OUTSIDE EXPERTS TO CONDUCT AN
INVESTIGATION/RESEARCH AND GET AN OPINION FROM
THEM
DUTY OF CARE
Addresses the attentiveness and prudence of managers in
performing their decision-making and oversight functions
Judicial review of the BODs decision-making and oversight is
governed by the duty of care, which in turn is confined by the
Business Judgment Rule
A party challenging a business decision must show that directors
failed to act:
o (1) In good faith,
27
o (2) In the honesty belief that the action taken was in the
best interest of the company, or
o (3) On an informed basis
Facets of the Duty of Care: good faith, reasonable belief,
reasonable care
Directors must rely on information from others, but to claim
reliance, directors must have become familiar with the
information or advice, and must reasonably have believed that it
merited confidence
Directors, however, cannot hide their heads in the sand and
claim reliance if they have knowledge or suspicions that make
reliance unwarranted
DUTY OF LOYALTY
DUTY OF LOYALTY
Addresses fiduciaries conflicts of interest and requires fiduciaries
to put the corporations interests ahead of their ownthat is,
fiduciaries cannot serve two masters
Corporate fiduciaries breach their duty of loyalty when they
divert corporate assets, business opportunities, or proprietary
information for personal gain
EXAMPLES:
o Self-Dealing
28
o Usurping Corporate Opportunity when a fiduciary seizes
for herself a desirable business opportunity that the
corporation may have taken and profited from
Self-Dealing
Direct Interest
o It its classic form, self-dealing occurs when the corporation
and the director herself are parties to the same transaction
Sales and purchases of property
Loans to and from the corporation
The furnishing of services by a non-management
director (such as when the corporations outside
attorney sits on the board)
Indirect Interest
o Self-dealing also occurs when the corporate transaction is
with another person or entity in which the director has a
strong personal or financial interest
Corporate transactions with the directors close
relatives
Corporate transactions with an entity in which the
director has a significant interest (another eneity in
which the director is a director, partner, agent, or
employee)
Corporate transactions between companies with
interlocking directors
Inherent Fairness Test
o Objective Test: the self-dealing transaction must replicate
an arms length market transaction by falling into a range
of reasonableness.
o Value to corporation: the transaction must be of particular
value to the corporation, as judged by the corporations
needs and the scope of its business
Procedural Fairness
o Courts also inquire into the process of board approval,
showing various levels of deference if the transaction is
approved by informed, disinterested, and independent
directors
o In reviewing the process by which directors vote, courts
have focused on three procedural elements:
(1) Disclosure to the board,
some courts have said that full disclosure is a
factor bearing on the transactions fairness
29
some courts have require that there be
disclosure only of the conflict of interest to put
the board on guard
some courts have required full disclosure of all
material info including the profit the interested
director stood to make in the transaction
(2) Composition of the board (or committee)
that approved the transaction, AND
The directors who approve the transaction
must be both disinterested and
independent
o He is disinterested if he has no direct
or indirect financial interest in the
transaction
o He is independent if he is neither
beholden to nor dominated by the
interest director
(3) The role of the interested director in the
transactions initiation, negotiation, and
approval
An interested directors negotiation or
participation may evidence that the interested
director dominated the other directors,
undermining the advantage of disinterested
approval
30
Delaware statute 144(a)(1) provides a safe harbor for
interested transactions like this one
o Statute says if the material facts as to the directors
relationship or interest and as to the contract or
transaction are disclosed or are known to the BODand
the boardin good faith authorizes the contract or
transaction by the affirmative votes of a majority of the
disinterested directors after approval by disinterested
directors, courts review the interested transaction under
the business judgment rule
Delaware law allows disinterested directors to vote on a decision
if they know there is a conflict of interest, and the business
judgment rule will apply to the decision
What Benihana should have done to avoid litigation:
o Be informed, make the decision in good faith, disclose the
conflict upfront, only let disinterested parties vote on the
decision
Dilution of Shares argument
o It is settled law that corporate actionmay not be taken
for the sole or primary purpose of entrenchment
31
Broz could have presented to entire CIS Board and gotten himself
the safe harbor rule in Delaware by disclosing info to entire
Board and in voting not to go for it BUT this is NOT required
Directors only owe a duty to their CURRENT corporation and
CURRENT shareholders
Illegal Bribe
32
Where there is a quid pro quo between the investment bank and
the recipient of the share allocation, whereby the recipient
directs business to the bank in return for the allocation, the
transaction may be an illegal bribe
Corporate Jets
If a CEO uses the corporate jet for a weekend vacation to go
skiing, is he breaching his fiduciary duty to shareholders?
o No, but only under certain circumstances
o If there are corporate jets that have been bought for
business purposes, then CEOs can use the jet provided
that they pay the expenses for the trip (fuel, pilot costs,
etc.) AND provided that the jet is free to use that weekend
A decision to buy a corporate jet would most likely fall under a
business judgment rule
33
o Otherwise, their Class A stock would have been called by
the company and they would not have been paid in
liquidation
In Todays world, this would be considered a type of Insider
Trading (breach of loyalty)
34
Corporate Waste Claim
Rooted in the doctrine that a plaintiff who fails to rebut the
business judgment rule presumptions is not entitled to any
remedy unless the transaction constitutes waste
To recover on a claim of corporate waste, the Ps must shoulder
the burden of proving that the exchange was so one sided that
no business person of ordinary, sound judgment could conclude
that the corporation has received adequate consideration
o A claim of waste will arise only in the rare, unconscionable
case where directors irrationally squander or give away
corporate assets
DUTY TO MONITOR
In re Caremark
The core element of any corporate law duty of care
inquiry: whether there was good faith effort to be
informed and exercise judgment.
Thus, I am of the view that a director's obligation includes a duty
to attempt in good faith to assure that a corporate information
and reporting system, which the board concludes is adequate,
exists, and that failure to do so under some circumstances may,
in theory at least, render a director liable for losses caused by
non-compliance with applicable legal standards
In order to Show that the Caremark directors breached their duty
of care by failing adequately to control Caremark's employees,
plaintiffs would have to show either (1) that the directors knew or
(2) should have known that violations of law were occurring and,
in either event, (3) that the directors took no steps in a good
faith effort to prevent or remedy that situation, and (4) that such
failure proximately resulted in the losses complained of
35
A board has a duty to attempt in good faith to assure that a
corporations information and reporting system, which the board
concludes is adequate, exists, and that failure to do so under
some circumstances may, in theory at least, render a director
liable for losses caused by non- compliance with applicable legal
standards
36
Caremark had to do with activities that violated the law (paying
physicians for patient referrals)
Citigroup did not involve any illegal acts, it just involved the bank
taking on too much risk in mortgage-backed securities
DERIVATIVE LAWSUITS
Derivative Suits
Shareholders sue on behalf of the corporation to enforce
corporate rights that affect them only indirectly
This means any recovery in derivative litigation generally runs to
the corporation
Derivative suits generally enforce fiduciary duties of directors,
officers, or controlling shareholdersduties owed to the
corporation
It is the BOD who should be suing themselves, because they are
they ones representing the Company
Shareholder sues the company on behalf of all the shareholders
o However, a shareholder can sue directly on behalf of
himself
EXAMPLES:
o Typically breach of fiduciary duties
o Corporate waste
37
Demand
Shareholders are required to make demand upon the BOD
before they can commence a derivative suit on the
corporations behalf against either the corporations
officers, its directors or a third party
o Demand upon the BOD is required because the directors of
a corporation (not its shareholders) are charged with
primary responsibility for managing the corporations
business and affairs (including the business decision
whether to pursue a particular corporate COA)
Before you can sue a BOD you have to make a demand
o Usually the demand is about an issue of corporate injury
o The corporation will with no doubt say no, we are not going
to sue ourselves
o The decision by the BOD is protected by the business
judgment rule
Insulates the BOD
Incentives risk
Reasons a BOD might decline a shareholders demand even if a
COA strongly favors the corporation:
o Substantial expense of litigation
o Negative publicity such a suit might generate
o Distraction to employees and diversion of corporate
resources while the lawsuit proceeds to its resolution
Limited Liability and the Business Judgment Rule are substantive
rules that incentive risk
38
o The BOD is so conflicted, that there is no way they would
allow for a lawsuit
A demand is futile if:
o (1) A majority of the board has a material financial or
familial interest (not disinterested);
o (2) A majority of the board is incapable of acting
independently for some other reason such as domination
or control (not independent); OR
o (3) The underlying transaction, that is the subject of the
lawsuit, is not the product of a valid exercise of business
judgment
Put another way: the P shareholder must be able to allege
particular facts that, if true, raise a reasonable doubt as to the
Boards ability to reach a sound business decision with regard to
whether or not the derivative action should be dismissed
If the corporation is able to put together a Special Litigation
Committee, the SLC will have the authority whether to accept
the demand or not
Direct suit
Shareholders sue in their own capacity to enforce their rights as
shareholders
Direct suits generally vindicate individual shareholders
structural, financial, liquidity, and voting rights
Shareholders have been harmed in the rights that they possess
as shareholders not something that the corporation possessed
Suits involving dividends
Suits involving voting rights
Actions that are done to a particular class of shareholders
Generally when there is a claim of dilution of stock, it will be a
direct suit
39
You must, at the very beginning of your case, argue that demand
would have been futile
o So, once you have chosen to make a demand, you cannot
go back and argue futility
However, you can argue wrongful excusal
o If a demand is made and rejected, the board
rejecting the demand is entitled to the presumption
of the business judgment rule unless the stockholder
can allege facts with particularity creating a reasonable
doubt that the board is entitled to the benefit of the
presumption.
o If there is reason to doubt that the board acted
independently or with due care in responding to the
demand, the stockholder may have the basis ex post to
claim wrongful refusal.
As a plaintiffs lawyer, you do not want to make that demand.
o You just want to make the claim that the demand would be
futile
40
HOSTILE TAKEOVER/ACQUISITION
Hostile Takeover
Almost like the opposite of Van Gorkam
It is when we have a corporation that is sitting happy, and out of
nowhere another corporation comes in and says we want to
take you over
Why would a corporation do this?
o Competitor
o Liquidating
o Underlying assets that are very valuable
o Company could be worth a lot of money and the stock
could go way up, but the problem is the current
management
How does a takeover happen?
o Start buying the shares (if it is a publicly traded company
on the open market)
It might be tough to buy a majority of the shares
o Make a Tender Offer
To all shareholders saying we want to buy the stock
you own for market price + a premium
The current BOD will tell shareholder dont sell, and
this could potentially be a breach of the BODs
fiduciary duties the BOD is only saying this
because they want to retain control of the
corporation
What are some good defenses to a hostile takeover?
o Have something in the by-laws that says In the event that
a hostile takeover is occurring, we are able to call stock at
$X price Buy back provision
Must be careful, because if the corporation is buying
back stock at a price less than the tender offer, this
could be a breach of fiduciary duties
41
Also, if the buyback price is too high, a shareholder
could sue for corporate waste wasting the
corporations money
So this is NOT a good idea
o Poison Pill
If somebody tries to takeover this corporation, what
immediately goes into effect is a warrant so that
every shareholder has a warrant that is worth $X
This raises the price of the corporation so high, that
the offer to takeover no longer looks attractive
Set forth in the by-laws of the corporation
BOD has the right to waive the provision
i.e. if the BOD likes the takeover offer
However, if the BOD chooses to enforce this poison
pull there is still potential for liability for breach of
fiduciary duties because the shareholders were
denied the chance to sell shares for market price +
premium
In order to shield itself from liability, the BOD should:
Hire an outside consultant or investment bank
to value the company and its stock at the time
of the proposed takeover
o Want this outside consultant to say
whether the tender offer price was a
good price, excellent price, not a
very good price, etc.
Figure out if this corporation has any long-term
growth
Figure out if the current employees will get laid
off or not
Whether this corporation engages in activities
of social value
The fabric of the community in which the
corporation operates
Paramount Case
Only one bidder in this case
Court says that a BOD should primarily take
into account the shareholders interests, but
other outside interests might be valid as well.
But outside interests cannot be the top
interest.
Revlon Case
In a Paramount type of situation, in which you
are going against one other bidder, you can
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take outside considerations into account. But
in a situation where it is clear that the
corporation is going to be acquired one way or
another (multiple bidders have come in) then it
is okay to get the highest bid.
o A White Knight
Somebody, who you like, is going to come in and
acquire the corporation instead of the evil acquirer
BOD will remove the poison pill, but it will only
remove it for the White Knight
Courts usually hold that in the situation of a White
Knight, if the evil acquirer offers more money for
shares, then the corporation must go with the evil
acquirer or else subject itself to liability (shareholder
suits)
o Management Buyouts
Management takes over by buying the majority of
the shares
This presents more complications in regards to
breach of fiduciary duties
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otherwise the failure to do so might give rise to personal liability
of shareholders for corporate debts)
Delaware Law: close corporation status may be elected by
corporations with not more than 30 shareholders
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are generally considered unobjectionable, and are now
expressly validated in many jurisdictions
Officers & Employees
o The courts have had more difficulty with shareholder
agreements requiring the appointment of particular
individuals as officers or employees of the corporation,
since such agreements do deprive the directors of one of
their most important functions
Such agreements are enforceable, at least for closely
held corporations, as long as they are signed by all
shareholders
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o The terms of this agreement expressly state that failure to
adhere to the agreement constitutes an election by the
shareholder to sell his or her shares
The agreement has the characteristics of a shareholders voting
agreement expressly authorized by section 706, subdivision (a)
for close corporations
o Although the articles of incorporation do not expressly call
this corporation a close corporation, the arrangements of
this corporation, and in particular this voting agreement,
are strikingly similar to ones authorized by the Code for
close corporations
CONTRACT LAW:
o As long as the shareholders agreement does not violate
contract law, usually it will be upheld in close corporations
FREEZE OUTS
Isolate minority shareholders from corporation participation,
forcing the minority to sell to (or buy from) the majority on
unfavorable terms
o EXAMPLES:
Refuse to declare dividends
Drain off the corporations earnings in the form of
exorbitant salaries and bonuses to the majority
shareholder-officers and perhaps relatives
In the form of high rent by the corporation for
property leased from majority shareholders
Deprive minority shareholders of corporate offices
and of employment by the company
Cause the corp. to sell its assets at an adequate price
to the majority shareholders
The minority shareholders in a close corporation will bring suit
against the majority alleging a breach of the strict good faith
duty owed to them by the majority
Must be analyzed on a case-by-case basis
Two cases give us two different tests (Wilkes & Bordie):
Balancing Test Employed
o If the majority shows a legitimate business purpose for
its action and the minority shows the objective could have
been accomplished in a way less harmful to the minoritys
interest, THEN
o The court must balance the legitimate objective against
the practicability of the alternative
Reasonable Expectations Test
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o Look to shareholders reasonable expectation in
determining whether to grant relief to an aggrieved
minority shareholder in a close corporation
Remedies for a Freeze Out
o Brodie v. Jordan
The remedy in a corporate freeze out must match
the reasonable expectations that have been
frustrated
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The proper remedy for a freeze-out is to restore the minority
shareholder as nearly as possible to the position she
would have been in had there been no wrongdoing
o The remedy should restore to the minority shareholder
those benefits which she reasonably expected, but has not
received because of the fiduciary breach
If, for example a minority shareholder has a
reasonable expectation of employment by the corp.
and was terminated wrongfully, the remedy may be
reinstatement, back pay, or both
Here, the court ordered the D to buy out the P at the price of an
experts estimate of her share of the corp.
o Wrong remedy it had the perverse effect of placing the P
in a position superior to that which she would have enjoyed
had there been no wrongdoing
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To form an LLC requires an affirmative action of going to the
Secretary of States office to fill out the necessary forms
o Not like a partnership where it can be implied
Default rules of fiduciary duties
o Duty of loyalty and duty of utmost good faith
o Same as partnership
o These can change if you contract your own fiduciary duties
You can pretty much contract out of most of your duty of loyalty
o i.e. agreements that members to an agreement for an LLC
are allowed to compete with one another
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LLC agreement made clear that members were not prohibited
from in engaging in a venture that was competitive with CHLs
investing in and operating an NHL franchise
An LLC, like a partnership, involves a fiduciary relationship
o Normally, the presence of such relationship would preclude
direct competition between members of the company
o However, here we have an operating agreement that by its
very terms allows members to compete with the business
of the company
An operating agreement of an LLC may limit or define the
scope of the fiduciary duties imposed upon its members
Also no tortious interference with a business relationship
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