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1. Jesse by Reinecke v. Danforth, (1992); pg. 184, briefed 2/19/97

2. Facts: Danforth was part of a group of doctors who hired an attorney to assist
them in the creation of a corporation for the purchase of an MRI. Jesse sued
Danforth for medical malpractice unrelated to the activities of the MRI
corporation.

3. Procedural Posture: Jesse hired an attorney from the same office as the one
which incorporated the MRI corporation. Danforth moved to disqualify the
plaintiffs attorney alleging that the firm had a conflict of interest based on
Danforth being a former client of the firm.

4. Issue: Whether one of the founders of a corporation may be treated as a

present or former client of a firm for the purposes of the conflict of interest rule
when the founders only contact with the firm was for the purpose of
incorporation, and not for personal representation.

5. Holding: No.

6. Reasoning: The entity rule contemplates that where a lawyer represents a

corporation, the client is the corporation, and not the corporations constituents.
Thus, if a person who retained a lawyer for the purpose of forming a corporation
were considered a client, then there would be automatic dual-representation of
the person and the corporation once the corporation was formed. But this is the
exact effect that the entity rule is designed to avoid. Thus, the entity rule must
apply retroactively to the person who retained the lawyer, so long as the lawyers
involvement with the person was limited to matters of incorporation.

1. Cranson v. International Business Machines Corp., (1964); pg. 197, briefed

2/19/97

2. Facts: Cranson hired an attorney to incorporate a business. Cranson acted as

president of the corporation, and exercised corporate business observing all
formalities. Cranson contracted with IBM, on behalf of the corporation, to
purchase 8 typewriters. It was later discovered that the corporation was not
formally incorporated at the time of the making of the typewriter purchase
contracts due to an oversight on the part of the incorporating attorney.

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3. Procedural Posture: IBM sued Cranson personally for the balance due on the
typewriters. The lower court granted summary judgment against Cranson
holding that the constituents of a business that fails to file articles of
incorporation are personally liable, as a matter of law, for the debts of the
business.

4. Issue: Whether an officer of a defectively incorporated association may be

subjected to personal liability for the debts of the association under these facts.

5. Holding: No.

6. Reasoning: A de-facto corporation may be formed if there is a good faith effort

to incorporate, and actual exercise of corporate powers. Furthermore, under the
doctrine of estoppel, a person seeking to hold a corporate officer personally liable
may not do so if he has dealt with the association as if it were a legally-existing
corporation. IBM dealt with the business as if it were a legitimate corporation,
and relied on its credit rather than that of Cranson. Thus, it is estopped to assert
that the business was not incorporated.

1. Dodge v. Ford Motor Co., (1919); pg. 262, briefed 2/19/97

2. Facts: Ford Motor Co. had a surplus of almost $112 million. It declared a
dividend of $1.2 million. The Dodge Bros. were major shareholders, and wished
to get some money to open a competing business. Fords Board of Directors
refused to issue a larger dividend, claiming that the surplus was needed for
expansion and operating cushion.

3. Procedural Posture: Dodge sued to compel Fords board to declare a special

dividend equal to one-half of its surplus. The lower court awarded the dividend.

4. Issue: Whether the refusal of the Ford board of directors to issue such a
dividend in this case amounted to a willful abuse of discretion.

5. Holding: Yes.

6. Reasoning: It is well recognized that the power to declare a dividend, and the
amount of the dividend, is exclusively within the discretion of the board of
directors. However, a board may be compelled to pay a dividend if the failure to

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do so would be a willful abuse of their discretionary powers, or fraud, or breach

of the fiduciary duty. Here, the surplus is so large, that even if Ford were to
immediately spend all of the money it planned for expansion, there would still be
an obscene surplus.

1. Kamin v. American Express, (1976); pg. 267, briefed 2/24/97

2. Facts: Amexs board of directors decided to declare a dividend. However,

rather than distributing cash as a dividend, they distributed shares of a stock
(DLJ) which had declined in value since they had purchased it. For tax purposes,
Amex would be better of selling the stock and taking the capital loss. However,
the board knew that selling the stock would require that they reduce their
reported income for the year (hurting the stock price), whereas distribution by
dividend would only reduce the retained earnings by the book value of the stock,
and thus not be reportable against income.

3. Procedural Posture: Two shareholders sued to enjoin the board from declaring
the stock dividend.

4. Issue: Whether the declaration of the stock dividend in this case amounts to
abuse of discretion.

5. Holding: No.

6. Reasoning: Unless there is fraud or bad faith, the board of directors has the
exclusive discretion to make such a business judgment. The minority
stockholders are not in a position to question this right of the directors, unless
they act in bad faith. The directors board room, rather than the courtroom, is the
appropriate forum for arguing these purely business (and not legal) questions.

1. Walkovsky v. Carlton, (1966); pg. 338, briefed 2/24/97

2. Facts: Carlton owns several taxicab corporations. Each corporation owns two
taxicabs. Each taxicab corporation carries the statutory minimum of $10,000 of
insurance per cab. Each corporation is also highly leveraged. Carlton observed
all of the legal formalities of operating these corporations. Walkovsky was

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injured by one of the taxicabs, and the amount of insurance was not enough to
pay his medical bills.

3. Procedural Posture: Walkovsky brought this action to pierce the corporate

veil and hold Carlton personally liable for his damages.

4. Issue: Whether a claim that does not allege that the owners are conducting
business in their personal capacities through the corporation is sufficient to state
a cause of action for owner liability.

5. Holding: No.

6. Reasoning: It is a general rule that whenever anyone uses control of the

corporation to further his own rather than the corporations business, he will be
liable for the corporations acts upon the principle of respondeat superior. In
such a case, the corporation is merely and enterprise entity for the owners
individual business ends. However, in the present case, there was no allegation
that the owner was operating the corporation in his own personal capacity.
Whether the insurance coverage is sufficient is a matter for the legislature.

1. Brunswick Corp. v. Waxman, (1979); pg. 345, briefed 2/24/97

2. Facts: Waxman formed a no-asset corporation to act as a signatory on a series

of sales agreements for bowling alley equipment with Brunswick. The no-asset
corporation then leased the equipment to five separate partnerships which
operated five separate bowling alleys. The bowling alleys failed before the no-
asset corporation could pay the entire purchase price. The corporation held no
directors meetings, issued no stock, and adopted no bylaws.

3. Procedural Posture: Brunswick moved to collect against Waxman personally

for the liabilities of the no-asset corporation.

4. Issue: Whether the owners are personally liable under the instrumentality
rule for the liabilities of the corporation when the creditor knew that the
corporation had no assets at the time of contracting, and did not rely on the
owners personal guarantee.

5. Holding: No.

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6. Reasoning: The instrumentality rule has three factors: 1) domination and

control over the corporation by those who are held liable which is so complete
that the corporation has no separate mind will or existence of its own, 2) the use
of this domination and control to commit fraud or wrong or any other dishonest
or unjust act, and 3) injury or unjust loss resulting to the plaintiff from such
control and wrong. Here, there was no fraud, no misappropriation of corporate
funds, and consequently no fraud to Brunswick. Brunswick was under no
illusion than the no-asset corporation was merely and agent for its owners.
Brunswick, a sophisticated corporation, was not misled. It had full knowledge
that it was doing business with a no-asset corporation, and proceeded anyway. It
can not be heard to complain now that the corporation has defaulted.

1. Kinney Shoe Corp. v. Polan, (1991); pg. 350, briefed 2/24/97

2. Facts: Kinney subleased a building to Industrial, Inc., a no-asset corporation set

up by Polan. Industrial, Inc. in turn subleased half of the warehouse to another
of Polans corporations, Polan Industries, Inc. All of the assets were placed into
Polan Industries, Inc. Industrial thereafter defaulted on the sublease to Kinney.
Neither of Polans corporations observed the corporate formalities required.

3. Procedural Posture: The district court held that Kinney had assumed the risk
of Industrials undercapitalization and was not entitled to pierce the corporate
veil. Kinney appeals.

4. Issue: Whether there was sufficient unity of interest and other equitable
factors present to pierce the corporate veil under these facts.

5. Holding: Yes.

6. Reasoning: West Virginia has a two-pronged test: 1) is the unity of interest

and ownership such that the separate personalities of the corporation and the
individual shareholder no longer exist; and 2) would an equitable result occur if
the acts are treated as those of the corporation alone. Industrial was clearly
undercapitalized, and used solely as a shield layer to Polan Industries assets.
Combined with the fact that neither corporation observed any formalities such as
to give the corporation a separate existence from its owner (i.e. no stock, no

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meetings, no elected officers, etc.), it would be inequitable not to pierce the

corporate veil in this case.

1. American Trading and Production Corp. v. Fishbach & Moore, (1970); pg.
356, briefed 2/24/97

2. Facts: An exposition hall was destroyed by fire. The plaintiffs are exhibitors
who lost property. Defendants are the corporate parent of a wholly owned
subsidiary electrical contractor corporation which allegedly installed faulty
wiring in the exposition hall.

3. Procedural Posture: American Trading sued to pierce the corporate veil of the
subsidiary electrical contracting corporation to get at the assets of the parent
corporation. Defendants move for summary judgment on the grounds that they
are not liable under any theory.

4. Issue: Whether the wholly owned subsidiary corporation is a mere

instrumentality of the parent corporation, thus entitling the plaintiffs to pierce
the corporate veil.

5. Holding: No.

6. Reasoning: While stock control and common directors and officers are
generally prerequisites for application of the instrumentality rule, they are not
themselves sufficient to bring the rule into operation. There must also be some
direct intervention by the parent, and the actual exercise of control. Here, that
control is lacking. The undisputed facts clearly show that the subsidiary is a
separate corporational entity, and all formalities as to its operation have been
observed. The separation of the parent and the subsidiary is scrupulously
maintained. Furthermore, there are no equitable considerations that would
justify piercing the corporate veil here, even if the subsidiary were the mere
instrumentality of the parent.

1. Lee v. Jenkins Bros., (1959); pg. 381, briefed 2/24/97

2. Facts: Lee sued Jenkins Bros. to recover pension payments allegedly due under
an oral contract made on behalf of the corporation by the president.

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3. Procedural Posture: The lower court dismissed on the grounds that there was
insufficient evidence of the oral contract to enforce it. The court of appeals
affirmed, and went on to discuss the following issue:

4. Issue: Whether, as a matter of law, a president of a corporation does not have

the authority to secure employment of badly needed personnel by granting a
life pension.

5. Holding: No.

6. Reasoning: The actual authority (granted either implicitly or explicitly by a

corporation) of a corporate officer is augmented by his apparent authority to
third persons. As a general rule, the president only has the authority to bind the
corporation by acts arising from the usual and regular course of business, but not
for contracts of extraordinary nature. It is generally settled that a president
may hire and fire employees, but it is a question of fact as to whether the granting
of a life pension is so extraordinary as to defeat the apparent authority of the
president.

1. First Interstate Bank of Texas v. First National Bank of Jefferson, (1991); pg.
385, briefed 2/24/97

2. Facts: FIB and FNJ entered into a contract for the purchase of certain bonds.
On behalf of FNJ, their senior vice president, Boyd, signed the contract. When
the deal later fell through, FNJ refused to honor the contract, claiming that Boyd
did not have any authority to bind FNJ in such a manner.

3. Procedural Posture: The lower court held that as a matter of law, there was
insufficient evidence to show that Boyd had sufficient authority to sign the
contract, and directed a verdict for FNJ.

4. Issue: Whether sufficient evidence existed to present an issue of fact for

submission to the jury.

5. Holding: Yes.

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6. Reasoning: There are two types of authority, actual and apparent. There are
further two types of actual authority: express and implied. A principle can
confer express actual authority by writing or orally. There was evidence that
Boyd had spoken with the board of directors, and that they had given him
authority to sign this contract. Furthermore, Boyds position in the company
lends credence to his assertion that he was authorized to sign. With regard to
implied actual authority, an agent is vested with the implied authority to do all of
those things necessary or incidental to the agency assignment. However, a state
statute requires express agency. With regard to apparent authority, a corporation
may be bound if it 1) manifests the agents authority to the third party, and 2) the
third party reasonably relies on the agents purported authority as a result. By
the nature of Boyds position, the corporation holds him out as having authority.
Furthermore, the corporation sent Boyd specifically to close the deal. Thus, there
is sufficient evidence to create a jury question as to whether there was authority
to bind the corporation.

1. Hariton v. Arco Electronics, Inc., (1963); pg. 405, briefed 2/24/97

2. Facts: Plaintiff is a stockholder in the Arco corporation. Arco entered into an

exchange of stock for assets with Loral corporation whereby Arco (target) would
transfer all of its assets and liabilities to Loral (parent) in exchange for shares of
Loral common stock, pursuant to a Delaware exchange of stock for assets statute.
Thereafter, Arco was dissolved. Under the Delaware statute, such a transaction
does not allow a stockholder in the acquired corporation (the target corporation)
to have dissenters appraisal rights.

3. Procedural Posture: Hariton sued to have the transaction declared a de facto

merger, and therefore unlawful because the merger statute (a different statute)
had not been complied with.

4. Issue: Whether the transaction in question is a de facto merger, therefore

vesting dissenters appraisal rights in the plaintiff.

5. Holding: No.

6. Reasoning: Although the doctrine of de facto merger has some equitable merit,
the fact that a separate statute exists in Delaware to allow an exchange of assets
for stock defeats that argument. It would be up to the legislature to change the

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statute if desired. The various statutes of the Delaware corporation law are
independent of each other and a given result may be accomplished under one
section which is not possible, or is even forbidden under another.

1. Terry v. Penn Central Corp., (1981); pg. 408, briefed 2/24/97

2. Facts: Penn (parent) created a wholly owned subsidiary called PCC Holdings
(subsidiary). Penn then sought to merge Colt (target) with PCC Holdings, to
effect a triangular merger, thereby bypassing the right of Penn shareholders to
vote on, or dissent from, the proposed merger. Plaintiffs are Penn shareholders.

3. Procedural Posture: Terry sought to enjoin the triangular merger on the

ground that it was a de facto merger of the parent, entitling them to dissenters
rights.

4. Issue: Whether the merger of Colt into PCC Holdings is a de facto merger of
the parent, Penn.

5. Holding: No.

6. Reasoning: Although the doctrine of de facto merger is appealing, it is

directly contradicted by the state statute allowing triangular mergers. The parties
to a merger are only those that are actually combined into a single corporation.
Thus, Penn is not a party to the merger. Although a de facto merger might be
found in the presence of fraud, there is no evidence here of fraud. A corporation
is not a static entity. When a shareholder purchases a share, he is purchasing
rights in a dynamic entity, and has constructive knowledge, based on the
existence of statute, that the corporation may effect a triangular merger.

7. Note: The ALI forwarded a proposal that a shareholder is entitled to vote on

any transaction in control and is entitled to appraisal rights unless those
persons who were shareholders of the corporation immediately before the
combination own 60 percent or more of the total voting power of the surviving
corporation immediately thereafter.

1. Gimbel v. Signal Companies, Inc. (1974); pg. 413, briefed 4/11/97

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2. Facts: Signal is a large oil conglomerate which started as an oil company. At a

special meeting, the board of directors approved a sale of its oil subsidiary to
another company. The oil subsidiary accounted for 26% or Signals total assets,
41% of its net worth, and 15% of its revenues and earnings.

3. Procedural Posture: A stockholder brought an action to require shareholder

approval of the sale under Del. 271(a).

4. Issue: Whether the sale of the oil subsidiary was a sale of all or substantially
all out of the ordinary course of business of the assets of Signal, thus requiring a
shareholder approval.

5. Holding: No.

6. Reasoning: The critical factor in determining the character of a sale of assets is

generally considered not the amount of the property sold but whether the sale is
in fact an unusual transaction or one made in the ordinary course of business.
Also, if the unusual transaction strike[s] at the heart of the corporate existence
and purpose then it is beyond the power of the board of directors. Thus, the test
in Delaware is both quantitative and qualitative. Here, the sale is not
quantitatively substantially all of the corporate assets. Furthermore, it does not
affect the existence and purpose of the corporation, because although it used to
be primarily an oil company, it is now merely a conglomerate that ordinarily
buys and sells subsidiaries as part of its business.

1. Auer v. Dressel, (1954); pg. 421, briefed 4/11/97

2. Facts: Stockholders sought to hold a special meeting as provided by bylaws. At

this meeting, the stockholders sought to 1) recommend reinstatement of the
former President, 2) amend the articles of incorporation and bylaws to grant
shareholders the power to fill vacancies caused by their removal of directors for
cause, 3) to remove four directors for cause, and 4) to amend the bylaws to reduce
the quorum requirement. The President refused to call the meeting.

3. Procedural Posture: The lower court found for the stockholders.

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4. Issue: Whether the stockholders have the power to amend the bylaws to
authorize themselves to fill vacancies created by directors who have been
removed.

5. Holding: Yes.

6. Reasoning: It is settled law that stockholders who have the power to elect
directors have the power to remove them. Thus, it is not inappropriate that they
should use their existing power to amend the bylaws to elect the successors of the
directors that they remove. Any director illegally removed can have his remedy
in the courts.

1. Campbell v. Loews, Inc., (1957); pg. 423, briefed 4/11/97

2. Facts: Four of Loews directors resigned. The President called a special

shareholders meeting for the purpose of filling the director vacancies of the
resigned directors, to remove two other directors, and to fill the vacancies of the
removed directors.

3. Procedural Posture: The plaintiff brought an action to enjoin the special

shareholders meeting.

4. Issue: 1) Whether the stockholders have the power between annual meetings to
elect directors to fill newly created directorships. 2) Whether the shareholders
have the power to remove directors for cause.

5. Holding: 1) Yes. 2) Yes.

6. Reasoning: Del 223 provides that newly created directorships may be filled
by a majority of the directors then in office...unless it is otherwise provided in the
certificate of incorporation or the by-laws. Thus, the statute does not give the
directors the exclusive power to fill such vacancies. In Moon, the court held that
the stockholders do have the inherent right between annual meetings to fill newly
created directorships. The stockholders have the implied power to remove
directors for cause. Otherwise a director who is guilty of the worst sort of
violation of his duty could remain on the board and continue to inflict damage
on the corporation. However, the directors must be given notice and an
opportunity to be heard before removal for cause.

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1. Blasius Industries, Inc. v. Atlas Corp., (1988) pg. 428, briefed 4/11/97

2. Facts: Blasius acquired 9.1% of Atlas stock, and then delivered a written
consent to Atlas, adopting a resolution recommending that Atlas implement a
certain restructuring proposal, amending the bylaws to increase the size of the
board from 7 to 15, and electing 8 named people to fill the vacancies. In
response, Atlas directors called an emergency meeting to amend the bylaws to
increase the board from 7 to 9 and filling the two new directorships - thus
negating the effect of the Blasius written consents attempt to take control of a
majority of the board.

3. Procedural Posture: Blasius sued to have the boards actions set aside.

4. Issue: Whether Atlas board of directors action to increase the board size for
the principle purpose of defeating the shareholders from electing a new majority
of directors was valid

5. Holding: No.

6. Reasoning: It is clear that Atlas directors were acting in subjective good faith
to protect their control of Atlas because they thought that it was in the
corporations best interest. However, the board has a fiduciary duty to the
shareholders, in the nature of an agent to a principle. As such, the board bears a
heavy burden of demonstrating a compelling justification when it acts to thwart
the power of the shareholders as the principles. Here, the board had time to
present its case to the shareholders, and the shareholders did not need a
paternalistic protection of the board.

1. Lehrman v. Cohen, (1966); pg. 457, briefed 4/11/97

2. Facts: A corporation had two classes of voting stock, equally divided among
two families. To break deadlocks, they created one share of a third class of voting
stock, which had no right to dividends and a value of only $10 par, and issued it
to their corporate counsel. The corporate counsel proceeded to consistently vote
against the wishes of one of the families.

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3. Procedural Posture: The minority family brought this action to declare the
deadlock-breaking class of stock invalid as a voting trust. The lower court found
that the stock was valid.

4. Issue: Whether the third class of voting stock created here was valid.

5. Holding: Yes.

6. Reasoning: There are three tests that must be satisfied to establish that an
arrangement is a voting trust: 1) the voting rights are separated from the
beneficial ownership of the stock, 2) the voting rights are irrevocable, and 3) the
principle purpose is to acquire voting control of the corporation. Here, the
voting rights were not separated from the beneficial ownership. Although the
creation of the third class of stock diluted the voting power of the other two
classes, the other two classes still retained complete control of the voting power
of their own stock. Furthermore, since even non-voting stock is allowed by Del
151(a), it is not against public policy to separate voting rights from beneficial
stock ownership.

1. Triggs v. Triggs, (1978); pg. 467, briefed 4/11/97

2. Facts: A father and three sons were shareholders in a closely held corporation.
The father and one of the sons agreed to vote their shares together to maintain
control and employment at a guaranteed salary in the corporation. They also
entered into an agreement that the first son had an option to purchase the
fathers stock when he died. However, the father and son had a falling out, and
the father executed a codicil to his will that bequeathed his shares to the other
two sons, and declared the agreement with the first son to be null and void. At
the fathers death, the first son sought to have the estate sell him the fathers
shares under the option agreement, and the estate refused.

3. Procedural Posture: The defendant argued that the agreement was illegal as an
attempt to misappropriate the discretion of the board to manage the company.
The lower court granted specific performance of the stock option purchase.

4. Issue: Whether the stock option agreement, in combination with the share
pooling agreement is valid.

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5. Holding: Yes.

6. Reasoning: If the agreement was in any way illegal, it would only be to the
extent that it restricted the freedom of the board of directors to manage corporate
affairs. However, the evidence shows that the agreement did not fetter the board
of directors power. The other directors, which constituted a majority of the board
were unaware of the share pooling agreement or the option agreement.
Nevertheless, they voted to approve the salaries of the father and the first son
freely. Since the lower court only upheld the stock option agreement, and not the
agreement to guarantee each others salaries, it is affirmed.

7. Dissent Reasoning: The agreement to secure the appointment of the father

and the son at a specific position other than director at a guaranteed annual
salary are illegal. As such, although a share pooling agreement is not per se
invalid, it is not valid where there is the danger of harm to the general public or
to other shareholders. Here, the danger of harm, even if there was no actual
harm, is evident. The share pooling agreement can not be severed from the
option agreement, and thus both should be struck down.

1. Wilkes v. Springside Nursing Home, Inc., (1976); pg. 493, briefed 4/11/97

2. Facts: A minority stockholder was frozen out of the corporation by being

voted out as an officer and director, and having his salary terminated. However,
he was performing his duties well. He just didnt agree with the other directors.

3. Procedural Posture: The frozen out stockholder brought an action to recover

the salary he would have received had he continued to be an officer and director.
The action was dismissed.

4. Issue: Whether the majority stockholders breached their fiduciary duty to him
as a minority stockholder by freezing him out of the corporation.

5. Holding: Yes.

6. Reasoning: The stockholders in a close corporation owe one another

substantially the same fiduciary duty in the operation of the corporation as
partners owe to one another in a partnership. This is a duty of the utmost good
faith and loyalty. A guarantee of employment with the corporation was one of

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the basic reasons why a minority owner has invested capital in the firm. The
majority stockholders must demonstrate a legitimate business purpose for
frustrating the expectations of the minority, and also show that there was no less
harmful alternative. Here, mere disagreement is not a legitimate business
purpose for freezing out a minority stockholder.

1. Smith v. Atlantic Properties, Inc., (1981); pg. 510, briefed 4/11/97

2. Facts: Several investors formed a corporation for the purpose of buying some
land. One of the minority shareholders pushed for, and obtained, a clause in the
bylaws and the articles of incorporation requiring an 80% supermajority vote of
the directors for an action to be valid. This created the need for a unanimous
vote in order to declare a dividend, and the minority shareholder consistently
refused to vote for a dividend so as to avoid personal tax liability, even after
severe tax penalties were repeatedly levied on the corporation.

3. Procedural Posture: The corporation brought an action against the minority

shareholder to recover the tax liability from him personally. The lower court held
that the minority shareholder had breached a fiduciary duty.

4. Issue: Whether a minority shareholder may exercise or withhold his vote to

any extent which results in harm to the corporation without violating a fiduciary
duty.

5. Holding: No.

6. Reasoning: There must be a weighing of the legitimate business interests

advanced by the majority against those of the minority shareholder. Here, it is
clear that the primary purpose of the minority shareholder withholding his vote
to declare a dividend was for personal tax avoidance. As such, he ran reckless
and serious risks which were inconsistent with any reasonable interpretation of
the duty of utmost good faith and loyalty owed by the shareholders of a close
corporation to one another.

1. Matter of Kemp & Beatley, Inc., (1984); pg. 519, briefed 4/11/97

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2. Facts: Two long-time employees of the corporation were minority

shareholders. One resigned and the other was fired. After they were no longer
employees, the corporation made no further distributions of dividends to them
on their stock.

3. Procedural Posture: The former employee stockholders brought an action for

involuntary dissolution of the corporation as the only way to recover the value of
their stock since they had been effectively frozen out. The lower court granted
the dissolution based on oppressive conduct by the majority.

4. Issue: Whether involuntary dissolution of the corporation was appropriate

under these circumstances.

5. Holding: Yes.

6. Reasoning: The involuntary dissolution statute permits dissolution when a

corporations controlling faction is found guilty of oppressive action toward
the complaining shareholders. Oppression occurs when those in power have
acted in such a manner as to defeat the reasonable expectations of the minority
shareholders which formed the basis of their participation in the venture. The
majority here is not able to demonstrate the existence of an alternate remedy.
However, the order should be conditioned upon permitting the other
shareholders having an option to buy the oppressed persons share at fair market
value. This will prevent the minority from using the threat of dissolution as a
coercive tool.

1. Long Island Lighting Co. v. Barbash, (1985); pg. 582, briefed 4/11/97

2. Facts: A shareholder of a local utility acquired enough shares to call a special

shareholders meeting to consider his proposal to make the corporation public.
Prior to the meeting, the shareholder took out a newspaper advertisement
accusing the corporation of mismanagement and attempting to pass on
unnecessary costs to their consumers.

3. Procedural Posture: The utility company sued to have the ad declared an

unlawful proxy solicitation. The district court found for the shareholder on the
basis that the ad appeared only in a general circulation publication and could
only indirectly affect the proxy voting.

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4. Issue: Whether the newspaper ad was an unlawful unfiled proxy solicitation.

5. Holding: Yes.

6. Reasoning: The proxy filing rules apply even to indirect communications

which are designed ultimately to influence a shareholders vote. The question is
whether the challenged communication, in the totality of the circumstances, is
reasonably calculated to influence the shareholders votes. It would permit
easy avoidance of the proxy filing rules to exempt all general and indirect
communications to shareholders, even if they are addressed to matters of general
public interest.

7. Dissent Reasoning: In order to avoid a serious first amendment issue, the

solicitation of proxies rules should not be applicable to general newspaper
advertisements.

1. Amalgamated Clothing and Textile Workers Union v. Wal-Mart Stores, Inc.,

(1993); pg. 616, briefed 4/11/97

2. Facts: A group of shareholders sought to require a shareholder proposal to be

added to the Wal Mart proxy solicitation materials. The proposal would require
the corporation to report on various equal opportunity policies and statistics.
Wal Mart sought to omit the proposal.

3. Procedural Posture: The shareholders brought this action to enjoin Wal Mart
from omitting the proposal. Wal Mart moved to dismiss on the basis that the
proposal deals with ordinary business operations.

4. Issue: Whether the proposal sought by the shareholder group is omittable

under SEC Rule 14a-8 as dealing with the conduct of ordinary business
operations.

5. Holding: No.

6. Reasoning: A shareholder may offer a proposal as long as the proposal relates

to a proper subject matter on which the shareholders may vote. Most relevant is
SEC rule 14a-8 which must be interpreted in accordance with the SECs own

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interpretations. In a 1976 Interpretive Release, the SEC stated that where

proposals involve a substantial policy matter, they are not omittable under 14a-
8(c)(7). There have been contradictory rulings by the SEC since that time, but
these have been in the form of No-Action Letters, which are not subject to the
same critical analysis as an Interpretive Release. Thus, since equal opportunity
issues are substantial policy matters, they do not fall within the omission
exception for ordinary business operations.

1. Lovenheim v. Iroquois Brands, Ltd., (1985); pg. 627, briefed 4/11/97

2. Facts: A shareholder sought to have a proposal concerning the corporations

purchasing of force-fed geese products into the proxy materials. The
corporations sales of pate products derived from these force-fed geese amounted
to far less than 5% of the total assets or sales of the corporation. The corporation
wanted to omit the proposal.

3. Procedural Posture: The shareholder brought this action to enjoin the

corporation from omitting his proposal. The corporation argues that the
proposal is excludable under 14a-8(c)(5) for being relevant to less than 5% of the
assets and not otherwise significantly related to the corporations business.

4. Issue: Whether the proposal is excludable under 14a-8(c)(5) for being relevant
to less than 5% of the assets and not otherwise significantly related to the
corporations business.

5. Holding: No.

6. Reasoning: Rule 14a-8(c)(5) was interpreted in a 1976 Interpretive Release by

the SEC as not being hinged solely on the economic relativity of a proposal.
The SEC required inclusion when the economic significance was very small, but
the proposal raised substantial policy considerations important enough to be
considered significantly related to the corporations business. Thus, the
meaning of significantly related in the rule is not limited to economic
significance.

1. Francis v. United Jersey Bank, (1981); pg. 675, briefed 4/11/97

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2. Facts: The directors of a reinsurance brokerage corporation were a husband,

wife and their two sons. When the husband died, the sons took over control of
the corporation and began to divert assets to their personal use. The wife never
took any action to exercise even the slightest inquiry into the operation of the
corporation, even though she was a director. The corporation went bankrupt as a
result of the embezzlement.

3. Procedural Posture: The customers (now creditors) of the corporation brought

this action against the mother for breach of her directoral duties.

4. Issue: Whether the mother is liable for breach of her duties as director for her
failure to inquire into the operations of the corporation.

5. Holding: Yes.

6. Reasoning: Directors are under a duty to exercise reasonable care in the

performance of their directoral duties. This includes the duty to keep informed
about the activities of the corporation. This does not require a detailed inspection
of the day-to-day activities, but rather a general monitoring of corporate affairs
and policies.

1. Graham v. Allis-Chalmers Manufacturing Co., (1963); pg. 682, briefed

4/13/97

2. Facts: Several employees of the corporation were indicted for anti-trust

violations surrounding price-fixing activities. The operating structure of the
corporation makes the individual divisions fairly autonomous, and the directors
do not exercise direct supervision over the divisions' activities.

3. Procedural Posture: Shareholders sought to obtain damages as a result of these

anti-trust violations.

4. Issue: Whether the directors were liable for a breach of the duty of care for
failure to inquire more closely into the activities of the divisions.

5. Holding: No.

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6. Reasoning: The directors had no actual notice of the illegal activities. Prior
illegal activities that were 30 years prior did not put the directors on notice.
Directors are entitled to rely on the honesty and integrity of their subordinates
until something occurs to put them on suspicion that something is wrong. Del
section 141(f) protects a director who reasonably relies on his employees. There
is no requirement for a director, absent some triggering event, to make inquiry
into the activities of the corporations' employees without some justification.

1. Smith v. VanGorkam, (1985); pg. 698, briefed 4/13/97

2. Facts: The CEO of the corporation negotiated a leveraged buy-out plan with an
investor. The deal was made outside of the knowledge of the other directors, and
was proposed to them in a summary fashion in a relatively short board meeting
with no supporting data or figures. The buy-out plan was approved by the board
without significant investigation, and the price was approved at $55 per share
which was far above the stock market price.

3. Procedural Posture: Shareholders opposed to the sale commenced a lawsuit to

prevent the buy-out.

4. Issue: Whether the board's decision to approve the buy-out was protected by
the business judgment rule under these facts.

5. Holding: No.

6. Reasoning: The business judgment rule is based on the presumption that the
directors 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. The determination of
whether the directors were sufficiently informed turns on whether they have
informed themselves "of all material information reasonably available to them."
Here, the directors were grossly uniformed, and took no action to inform
themselves prior to approval of the sale. There was no crisis or emergency
justification. The board merely relied upon an oral 20 minute presentation
without any facts or figures or studies or reports on the actual value of the
company. Even though the sale was for a substantial premium over the market
price of $38, in the absence of other sound valuation information, this is not an
adequate basis for assessing the fairness of an offering price. There was no study

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of cash flow valuation. Also, there was no effective "public auction" of the
company to determine the market value to a potential buyer.

1. Shlensky v. South Parkway Building Corp., (1960); pg. 759, briefed 4/13/97

2. Facts: A corporation which owned and operated commercial property had

directors that also sat as directors of some of the businesses that rented from the
corporation. The property corporation entered into several transactions that
were very favorable to the businesses that had dual-directors, including low-rent
leases, and favorable asset purchases.

3. Procedural Posture: Minority shareholders of the property corporation sued to

require the defendant directors to personally account for damages suffered by the
property corporation as a result of the favorable transactions with the dual-
director businesses.

4. Issue: Whether the defendant directors of the property corporation are liable
for damages from a breach of a duty of loyalty to the property corporation.

5. Holding: Yes.

6. Reasoning: The directors of a corporation are subject to the same duty of

loyalty as trustees with respect to their corporation. They have the duty to
exercise the best care, skill and judgment solely in the interest of the corporation.
When one directors sits on the board of two corporations, transactions between
the two corporations will be subject to the closest scrutiny of fairness. The
burden is on the directors to show the fairness of the transactions, and they have
not done so. The factors of fairness include whether the corporation received full
value for the transactions, the financial position of the corporation, whether the
corporation could have obtained a better bargain elsewhere, and whether there
was full disclosure. None of the transactions in issue satisfy these fairness
factors. None of the transactions was approved by a disinterested majority of the
other directors. Thus, the transactions defendant directors are liable for
damages.

1. Remillard Brick Co. v. Remillard Dandini Co., (1952); pg. 765, briefed
4/13/97

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2. Facts: Two majority shareholders and directors of a manufacturing corporation

were also majority shareholders and directors of a sales corporation. The
manufacturing corporation's board voted, against the wishes of the minority
shareholders, to have the sales corporation perform the sales function for the
manufacturing corporation.

3. Procedural Posture: The minority shareholders brought this action to have the
sales contracts invalidated on the ground that they unfairly stripped the
manufacturing corporation out of the opportunity to gain profits that otherwise
went to the sales corporation.

4. Issue: Whether the contracts are valid based on their approval by the board of
directors.

5. Holding: No.

6. Reasoning: The business judgment rule does not automatically validate a

transaction simply because it was approved by a majority of the stockholders. It
does not permit an officer or director, by an abuse of his power, to obtain an
unfair advantage or profit for himself at the expense of the corporation. In this
type of situation, the dual-director is precluded from receiving any personal
advantage without full disclosure and consent of all persons affected.

1. Marciano v. Nakash, (1987)pg. 768, briefed 4/13/97

2. Facts: A jeans-manufacturing corporation had two principle shareholder

families. When the corporation fell into financial problems, the shareholders
deadlocked on the issue of how to proceed. One of the families, without
consulting the other, loaned the corporation $2.3 million of their personal funds
at an interest rate of 1% over prime. The loan was an interested transaction, and
was not approved by a disinterested majority of the directors or shareholders.

3. Procedural Posture: The other family brought an action to have the debt
declared void.

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4. Issue: Whether the loan, although an interested transaction not approved by a

disinterested majority of the directors or shareholders, was nonetheless fair and
therefore valid.

5. Holding: Yes.

6. Reasoning: Del. Section 144(a) provides a basis for immunizing self-interested

transactions. Its tests were not satisfied. However, section 144(a) merely removes
an "interested director" cloud, preventing invalidation "solely" because an
interested director was involved. Thus, the proper analysis is a two-tiered
analysis: first apply 144(a), then apply a fairness test. Here, the loans compared
favorably with what was available from market lenders. Thus, they were
objectively fair. Furthermore, the loans were made in the good faith effort to
keep the corporation alive. On the other hand, approval by fully informed
disinterested directors under section 144(a)(1) or disinterested stockholders
under section 144(a)(2) permits invocation of the business judgment rule and
limits judicial review to issues of waste with the burden of proof upon the party
attacking the transaction.

1. Farber v. Servan Land Company, (1981); pg. 794, briefed 4/22/97

2. Facts: A golf course was owned by the corporation. Some adjoining land was
available for sale, which, if acquired by the corporation, would increase the value
of the golf course and the adjoining land if they could be sold together. The
corporation was informed of the opportunity to buy the land, and expressed an
interest in it, but did not take any immediate action to buy it. Two of the
directors of the corporation bought the land in their individual capacities. The
land parcels were then sold together at a large profit, with a large share of the
profit going to the two individual directors.

3. Procedural Posture: The corporation brought an action for taking of a

corporate opportunity. The district court found that it was not a corporate
opportunity because real estate development bore no substantial relationship to
the corporations activities, and that the transaction actually increased the value
of the golf course and so benefitted the corporation. It also found that the
purchase was not antagonistic to the corporation.

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4. Issue: Whether the purchase of the adjoining land by the two directors was the
taking of a corporate opportunity.

5. Holding: Yes.

6. Reasoning: The directors occupy a fiduciary relationship to the corporation,

and have the duty not to acquire property in which the corporation has an
interest or a tangible expectancy and which fits into the present activities or
established corporate policy which the opportunity would forward. Here, there
was interest by the corporation, and it was an advantageous opportunity to the
corporation that would have furthered the corporate interests. The taking of a
corporate opportunity can not be ratified by a vote of interested directors. Also,
the fact that the transaction increased the value of the corporations remaining
property does not make the corporate opportunity doctrine inapplicable. The
corporation is entitled to all profits from the sales of both parcels of land.

1. Burg v. Horn, (1967); pg. 802, briefed 4/22/97

2. Facts: The Burgs and the Horns formed a real estate investment corporation
for the purpose of buying low rent housing in the city. The Horns already had a
corporation of their own that had the same purpose. The Burgs, who were new
to this kind of business, believed that the Horns would offer the joint corporation
any properties it came across, but there was no agreement to that effect. The
Horns separate corporations purchased several buildings that were of interest to
the joint corporation. The Burgs and the Horns later had a falling out.

3. Procedural Posture: The Burgs brought this action for a constructive trust on
the properties purchased by the Horns. The trial judge held that the Horns did
not have any obligation to offer the properties to the joint corporation, and thus
had taken no corporate opportunities.

4. Issue: Whether there was a taking of a corporate opportunity when the Horns
already had a preexsiting and competing corporation.

5. Holding: No.

6. Reasoning: Not all opportunities within a corporations line of business are

corporate opportunities per se. It is a factual determination based on all of the

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circumstances of the case. Since the Burgs spent most of their time in unrelated
businesses, and the Horns already owned a real estate investment corporation,
there was no duty to offer all buildings to the joint corporation without some
further evidence of an agreement to that effect.

1. Northeast Harbor Golf Club, Inc. v. Harris, (1995); pg. 40 supp., briefed
4/22/97

2. Facts: Harris was the president of the Golf Club corporation. Harris, in her
capacity as president, was approached by a real estate agent with an opportunity
to purchase surrounding land. Without disclosing the offer to the corporation,
Harris purchased the land with her own funds. Later, Harris informed the
board, but they took no action, apparently in reliance on her statement that she
would not develop the land. Later, Harris began to develop the land.

3. Procedural Posture: The corporation brought an action to enjoin the

development, and to put a constructive trust on the property in favor of the
corporation. The trial court found that Harris had not taken a corporate
opportunity because the real estate investment was not in the line of business
of the corporation, and also that it did not have the financial ability to purchase
the land.

4. Issue: What is the proper test for determining whether a corporate

opportunity existed.

5. Holding: According to the ALI Principle of Corporate Governance Seciton 5.05,

a corporate opportunity is one which a director 1) becomes aware of in his
corporate capacity, or 2) uses corporate information or property to acquire, or 3)
is closely related to a business in which the corporation is engaged or expects to
engage.

6. Reasoning: The ALI defines corporate opportunity broadly. There is evidence

that the property was offered to her in her capacity as president - making it a
corporate opportunity. If it is a corporate opportunity, then Harris must offer it
to the corporation first and have the board reject it after full disclosure, AND
either 1) have the rejection ratified by a disinterested majority of the directors, or
2) a disinterested majority of the shareholders. If these tests are met, then the
burden of proof is on the challenger to show that the transaction was unfair to

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the corporation. However, if Harris failed to offer the opportunity, then she loses
outright. Also, if Harris offered the opportunity, but it was not ratified by a
majority of disinterested directors or shareholders, then the burden of proof is on
her to prove that it was fair to the corporation. The case must be remanded for
application of these standards of law.

1. Perlman v. Feldman, (1955); pg. 1158, briefed 4/22/97

2. Facts: Newport Steel is a mid-sized steel company trying to expand its market
during the steel shortages of the Korean war. Feldmann is the chairman and
controlling stockholder of Newport. Feldman sold his controlling interest in
Newport for $20 per share to a customer company, Wilport, who needed to
secure a stable source of steel during the shortage. This enabled Wilport to
allocate more steel to itself by placing several people on Newports board. The
book value of the stock was $17 per share and the market value was $12 per
share.

3. Procedural Posture: A derivative action brought by minority shareholders

against Feldmann for an accounting and restitution of the profits that Feldmann
personally realized from the sale of his controlling interest. The trial judge found
that the $20 per share price was fair and was not the sale of a corporate asset.

4. Issue: Whether the sale of control under these facts was the sale of a corporate
asset which would entitle the corporation to the profit realized by Feldmann.

5. Holding: Yes.

6. Reasoning: A fiduciary has the fresponsibility to dedicate his uncorrupted

business judgment for the sole benefit of the corporation in any dealings which
may adversely affect it. The possibility that the corporation would have
benefitted is all that is required, not a showing of absolute certainty. Feldmanns
actions prevented the corporation from obtaining interest-free advances from
prospective purchasers to expand production. It also prevented the corporation
from building up its customer base. The defendant must show that there was no
possibility of any gain by the corporation and he has not met that burden of
proof. In a time of a market shortage, where the power to allocate a corporations
product commands an unusually large premium, a fiduciary may not
appropriate to himself the value of that premium.

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1. Jones v. H.F. Ahmanson & Co., (1969); pg. 1164, briefed 4/22/97

2. Facts: A savings and loan corporations majority stockholders transferred their

shares to a holding company. The majority stockholders then issued stock to
themselves in the holding company at a ratio of a 250 shares of the holding
company for every 1 share of the savings and loan they owned. They did not
offer the share exchange to the minority stockholders of the S&L. The holding
company then had a public offering, thereby destroying any potential market for
the remaining shares of the S&L. Thereafter, they caused the S&L to reduce their
dividend from about $50 per share to $4 per share.

3. Procedural Posture: A class action by the minority shareholders of the S&L for
damages, alleging that defendants had breached a fiduciary duty as controlling
shareholders by rendering the S&L stock unmarketable and locking plaintiffs out
of the share exchange.

4. Issue: Whether the majority stockholders breached a fiduciary duty to the

minority stockholders.

5. Holding: Yes.

6. Reasoning: Majority shareholders may not use their power to control corporate
activities to benefit themselves alone or in a manner detrimental to the minority.
Any use to which they put the corporation must benefit the shareholders
proportionally. Good faith and inherent fairness to the minority is required in
any transaction involving control of the corporation by the majority shareholders.
The majority shareholders could have accomplished the same result by effecting
a stock split of the S&L to make its stock more marketable without breaching
their fiduciary duty.

1. Weinberger v. UOP, Inc., (1983); pg. 1273, briefed 4/22/97

2. Facts: Signal Co. owned a majority of UOP stock, and wished to acquire the
rest of the stock by a tender offer, and then merge with UOP. Using UOP
resources, two of the UOP directors, who were also Signal directors, completed a
valuation study that indicated that a fair price for the tender offer would be up to

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$24 per share. Signal then made a $21 per share offer, and obtained a fairness
opinion from their banker, Lehman Brothers. However, the $24 per share study
was never disclosed to UOPs shareholders when they voted to approve the
merger at $21 per share.

3. Procedural Posture: A class action by the minority shareholders challenging

the fairness of the merger. The lower court found for the defendants.

4. Issue: Whether the burden of proof shifts to the plaintiff to prove the
unfairness of an action when it has been approved by a majority of disinterested
but not adequately informed shareholders.

5. Holding: No.

6. Reasoning: The burden always remains on the interested shareholders to show

that they made a full disclosure to the disinterested shareholders. The proxy
statement to the disinterested shareholders did not reveal the study assesing a
fair price at $24 per share. This was a matter of material significance, and the
interested shareholders (Signals) failure to disclose it prevented the minority
shareholders vote from being a valid ratification of the transaction, thus
requiring that it be subject to the intrinsic fairness standard. Fairness has two
aspects: 1) fair dealing, and 2) fair price. Here it was not fair dealing to use
UOPs resources to generate a report, and then fail to disclose that favorable
report. It was a breach of fiduciary duty for the dual directors to withhold this
information from the minority shareholders. Also, the price was not fair because
it was less than the amount indicated by the report, and the fairness opinion was
too hastily prepared to be relied on.

1. Unitrin, Inc. v. American General Corp., (1995); pg. 67 supp., briefed 4/22/97

2. Facts: American General wanted to initiate a tender offer for a sufficient

proportion of Unitrins stock to be able to take the second step of merging with
Unitrin. Unitrins board felt that the tender offer price was too low, and initiated
two defensive measures to prevent the takeover: 1) a poison pill shareholders
rights program, and 2) an open-market stock repurchase program.

3. Procedural Posture: American General and some of Unitrins stockholders

brought suit to enjoin Unitrin from instituting these defensive measures, alleging

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that they were a disproportionate response to the threat posed by American

General. The lower court found for the plaintiffs.

4. Issue: Whether Unitrins poison pill and stock repurchase programs were
disproportionate responses to the takeover bid by American General.

5. Holding: No.

6. Reasoning: The Unocal standard applies in this case because the boards
actions were defensive reaction to a threat. The first aspect of the Unocal test is
reasonableness, requiring that the board demonstrate that it made a reasonable
investigation of the threat in good faith. The Unitrin board passes the
reasonableness prong because it perceived two dangers: inadequate price, and
antitrust complications. The second aspect of the test is proportionality.
Unitrin may not use draconian means to prevent takeover. Here, the response
was not draconian because the share repurchase program was not a
mathematically significant deterrent to takeover. It was neither preclusive nor
coercive. Thus, the proper test for judging the boards action is the range of
reasonableness of its actions. The case must be remanded for determination of
whether Unitrins board acted within the range of reasonableness.

1. Paramount Communications, Inc. v. QVC Newtork, Inc., (1994); pg. 1247,

briefed 4/23/97

2. Facts: Viacom proposed a tender offer acquisition of Paramount, followed by a

second-step merger in an Original Merger Agreement which had several unusual
contractual provisions imposing extremely high penalties on Paramount if it
accepted a competing offer, and prohibited Paramount from soliciting competing
offers. QVC made a significantly higher per share tender offer, to which Viacom
counter offered in an Amended Merger Agreement. The Amended Merger
Agreement, although it increased the purchase price, did not eliminate the
penalty provisions. QVC then made a significantly higher final offer, and
commenced this action.

3. Procedural Posture: QVC seeks to prevent Paramount from merging into

Viacom, alleging that Paramounts board acted improperly by refusing to
negotiate with QVC even though its offer was much more valuable on its face.

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4. Issue: Whether the Paramount board of directors breached a fiduciary duty to

its shareholders in refusing to pursue the better offer from QVC.

5. Holding: Yes.

6. Reasoning: Where there is the approval of a transaction resulting in the sale of

control, or the adoption of defensive measures in response to a threat to
corporate control, the court must subject the directors conduct to enhanced
scrutiny to ensure that it is reasonable. Here, a sale of control to Viacom is
involved, placing a fiduciary duty on the directors that they pursue the
transaction offering the best value reasonably available to the stockholders. The
key features of the enhanced scrutiny test are: 1) the adequacy of the decision
making process, and 2) the reasonableness of the directors actions. Here, the
decision making process was inadequate because the Paramount board gave
insufficient attention to the consequences of the defensive measures demanded
by Viacom. To the extent that these measures were contrary to the boards
fiduciary duty to get the best offer for the shareholders, they were invalid and
unenforceable. Also, the decision was unreasonable and unjustifiable in light of
the $1 billion difference between the two competing offers.

1. Chiarella v. United States, (1980); pg. 958, briefed 4/28/97

2. Facts: A printer, in the course of his job, prints press releases from different
corporations. Several press releases from acquiring companies which announced
mergers passed through his hands, and from their information, he was able to
deduce the parties, and purchased the stock of the target company before the
information became public.

3. Procedural Posture: The printer was convicted of insider trading under SEC
Rule 10(b) for failing to disclose this non-public information, and trading on it.
The court of appeals affirmed stating that no person, whether or not a corporate
insider may trade on any illegally obtained non-public information.

4. Issue: Whether a person who learns from the confidential documents of one
corporation that it is planning to attempt to secure control of a second
corporation violates SEC rule 10(b) if he fails to disclose the impending takeover
before trading the in the target company stock.

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5. Holding: No.

6. Reasoning: A corporate insider must refrain from insider trading without

disclosure because the insider owes a duty to the corporation based on his
position. Specifically, the insider should not be allowed to profit personally from
his access to confidential information by virtue of his position. However, a
purchaser of stock who is neither an insider or a fiduciary has no duty to the
prospective seller to disclose non-public information because he does not stand
in a position of trust and confidence to the seller which would make the
transaction unfair. The jury instructions here were too broad, and thus the
conviction must be reversed. The court makes no opinion as to whether the
printer breached a duty to the acquiring corporation who hired him.

1. Securities and Exchange Commission v. Clark, (1990); pg. 966, briefed

4/28/97

2. Facts: The president of a subsidiary found out due to his position that his
parent company was planning on acquiring a target company. The president
then purchased stock in the target company, and sold it for a profit after the
announcement of the merger.

3. Procedural Posture: The lower court found the president guilty of violation of
rule 10b-5 under a misappropriation theory and ordered him to disgorge his
profits.

4. Issue: Whether when a person 1) misappropriates material non-public

information 2) by breaching a duty arising out of a relationship of trust and
confidence, and 3) uses that information in a securities transaction, 4) regardless
of whether he owed any duties to the shareholders of the traded stock, violates
Rule 10b-5 under a misappropriation theory.

5. Holding: Yes.

6. Reasoning: The classical theory of insider trading is based on a fiduciary or

other relationship between a company and an insider trading on the companys
stock based on non-public information. The classical theory does not apply here
because the president is an outsider with respect to the target company.
However, the misappropriation theory applies to a person who receives

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confidential information from another and misappropriates it for his own

personal benefit. Rule 10b-5 is a catchall provision which applies to any
purchase or sale by any person of any security. The legislative history shows
Congress intent to have Rule 10b-5 include the misappropriation theory.

1. United States v. Bryan, (1995); pg. 50, briefed 4/28/97

2. Facts: The director of the West Virginia state lottery was notified by the
Governor that he intended to award a video lottery company a single source
contract for the provision of statewide lottery machines. However, due to the
political unpopularity of such a move, the announcement was postponed until
after the Governers re-election. The director then purchased a block of the stock
of the video lottery company.

3. Procedural Posture: The lower court convicted the director of a securities

violation of Rule 10b-5 under the misappropriation theory.

4. Issue: Whether, in the 4th circuit, criminal liability under Rule 10b-5 may be
predicated upon the mere misappropriation of information in breach of a
fiduciary duty owned to one who is neither a purchaser nor a seller of securities,
or in any other way connected with or financially interested in, an actual or
proposed sale of securities, even when the breach is followed by a purchase of
the securities.

5. Holding: No.

6. Reasoning: The language of the statute, although broad, does not support the
misappropriation theory. The statute prohibits deception in the form of material
misrepresentations or omissions, to induce action or inaction by purchasers or
sellers. The misappropriation theory bases criminal conviction on simple breach
of fiduciary duty, without requiring deception. Therefore, the statute does not
include the misappropriation theory. Even if the misappropriation theory
reqired deception, it still does not require deception which violates a duty of fair
representation or disclosure owed to a market participant. Thus, the language of
Rule 10b-5 is not broad enough to cover this case, and the misappopriation
theory is not recognized in the 4th circuit.

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