Bus Org Outline

Sole Proprietor
• Advantages (5)
o No formalities, fees, paperwork, ect
o Proprietor is his own boss – no approval required for business decisions - owner has complete
control of business  not subject to risk of agent taking inappropriate risk
o Free to trade anywhere without formalities or qualification
 Foreign corporations need an agent for service so that you can be served in the
jurisdiction in which they are doing business
 Sole proprietor can do business anywhere without providing an agent within the
jurisdiction
o Owner entitled to all constitutional privileges and immunities accorded to citizens
 All residents of US are entitled to do business in the US as a sole proprietor
o Not subject to as many regulatory and reporting requirements  Only must file or zoning
requirements, or other local operating laws
o Business may receive credit not only on it’s balance sheet, but also to the extent of the owner’s
entire resources, including those outside the venture  Gains and losses from the business
included with any other personal gains and loses on individual’s tax return
 Double tax does not apply
• Disadvantages (6)
o No one other than owner can act on behalf of the business unless he is an agent
o Proprietor remains fully liable for business debts, even if business is dissolved
 unlimited personal liability
o No continuity of business- dissolves when proprietor dies
Partnership – simplest business -
• UPA §6 - association of two or more persons to carry on as co-owners of a business for profit
o a partnership agreement is like a contract - partners are free to set any terms, so long as they are
not illegal; UPA is just a default guideline, where a contract exists, its terms will control
o residual form of business- when people come together and run a business where they split profits,
and they don’t do something to form another type of business (such as register a corporation), they
have created a partnership, whether or not they so intend
 Does not require written agreement – oral understanding that people will work together
and split the proceeds will suffice to form partnership
• Types of Partnership:
o Partnership de jure – legal partnership
o Partnership de Facto – not explicitly intended by partners, but satisfies the UPA definition of
partnership
 receipt of a share of net profits is prima facie evidence that he was a partner, unless that
money was paid in the form of wages; UPA §7(4) (Zajac v. Harris)
• Use of the same name, declarations of co-ownership, equal withdrawals from
joint accounts, and complete failure to attempt separate accounting indicates that
a partnership did exist (Crawford v. State Bar)
o Partnership by estoppel – no partnership exists, but the actions of the parties involved in
suggesting one to third parties estops them from arguing that it does not exist UPA §16
• Evidence of a Parntership:
o one holding position of trustee within the firm, but not becoming a partner, does not have any
liability for the firm (Martin v. Peyton)
o To be considered a partnership, profits, in whatever form earned, must be the joint property of the
parties before division (Dority v. Driesel)
o That parties act in concert to achieve some economic objective, while relevant, is not sufficient to
create a joint venture that qualifies as a partnership (Dority v. Driesel)
• UPA provisions:

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 o UPA §9 - Partnership theory - whenever one partner does anything in the scope of the partnership,
the other partners are bound as he is their agent
 §9(2) - there must be express authority for acts of a partner which do not appear to be in
the usual course of business, and no part of this statute would overrule the statute of
frauds limitation that such express permission be in writing
o UPA §10 - only allows one partner to bind the others in sale of partnership realty where such
action falls under “normal course of business” as described in §9(2)
o UPA §11 – partnership bound by admission of partner- an admission or representation made by
any partner concerning partnership affairs within the scope of his authority as conferred by this act
is evidence against the partnership
o UPA §13 - partnership is bound by partner’s wrongful act
o UPA §14 – partnership is bound to make good the loss where: 1) partner acting within scope of
his apparent authority receives and misapplies money/property, and 2) partnership, in the course of
business, receives money/property, which is misapplied by any partner while in partnership
custody
o UPA §15 – all partners are joint and severally liable for the partnership’s debts  apparent scope
of partnership depends upon the conduct of the partners in presenting themselves to third persons
and suggesting their authority as partners
 A person dealing with a partnership is usually in no position to know of special
agreements between the partners and can, therefore, not be charged with knowledge of
agreements between partners absent specific notice
o UPA §8, §25 - Each partner does not have a separate share in the partnership’s assets, rather each
has a claim to interest in the undivided partnership as a whole
o UPA §18 (can be opted out of) - rights and duties of the partners in relation to the partnership shall
be determined subject to the following rules:
 each partner will be paid (or will owe) equally upon liquidation of assets, subject to any
agreements made between partners
 no partner is entitled to be paid for the services that they contribute to the business (but
they can agree to be paid)
• at some law firms, some lawyers opt to become permanent associates (where
they are guaranteed a salary) rather than becoming partners and gaining liability
for the actions of all partners
 UPA §18(e) - all partners have equal rights in the management of and conduct of the
business
 UPA §18(h) - any difference arising as to ordinary matters of the partnership may be
decided by a majority of the partners, but no act in contravention with any agreement
between partners can be done without the consent of all partners (can never have majority
without unanimity in partnership of 2 - one cannot be majority)
• Dissolution of Partnership:
o when rightfully dissolved, all partners have equal rights to liquidated assets
o when wrongfully dissolved, two types of partners
 rightful partners (nonbreaching)
• can liquidate and recover their assets and damages
• can continue operation, paying wrongful partners for their shares and removing
future liability from wrongful partners
 wrongful partners (breaching)
• if other partners chose not to continue business:
o can liquidate the assets
• if other partners do continue:
o can receive value of his assets, less damage he owes the rightful
partners
o Dissolution Provisions in UPA:

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  UPA §29- change in the relation of the partners caused by any partner ceasing to be
associated in carrying on the firm business
 UPA §31 - causes of dissolution - provisions for dissolution can be opted out of by written
agreement
 UPA §32 - Dissolution by Decree of Court
 UPA §33 - general effect of dissolution on authority of partner
 UPA §34 - Right of Partner to Contribution from co-partners after dissolution
 UPA §35 - Power of Partner to bind partnership to third persons after dissolution
 UPA §37 - Right to wind up - belongs to partner or partners who did not dissolve the partnership
wrongfully
 UPA §38 - rights of partners to application of partnership property  partners reduce all assets of
firm to cash, then apply those to partnership’s liabilities to third parties, then distribute the remainder
under §40
• (1)where dissolution is caused not in violation of the partnership agreement, the assets
should be liquidated to pay partnership liabilities, then distributed between partners
o where dissolution is caused wrongfully, breaching partner can receive only net
amount of cash due to him from partnership
• (2) - where dissolution caused by breach:
o (a) non-breaching partner may liquidate as in (1) and recover damages for
breach against breaching partner
o (b) non-breaching partner may maintain the business without the breaching
partner, providing a bond or cash for payment of breaching partner for his interests in
the partnership. less any damages recoverable for breach, and indemnify breaching
partner from any future liabilities of the partnership
o (c I) where business is not continued under (2b), breaching partner may exercise
liquidation as under section (1), less damages owed to the other partners
o (c II) where business is continued under (2b), breaching partner may have his
interest in the partnership ascertained and paid to him by cash or bond, and will be
released from all existing liabilities of the partnership; BUT, value of the business
good-will will not be considered in the value of the party’s interest
o UPA §19 - Partnership Books - right of inspection  every partner shall, at all times, have access to and
may inspect and copy the partnership books
o UPA §20 - duty of partners to disclose information - partners shall render on demand true and full
information of all things affecting the partnership to any partner or the legal representative of any
deceased/legally disabled partner
o UPA §21 - partner accountability as a fiduciary
o One partner cannot bring an action at law against a co-partner to recover an amount claimed by reason of
partnership transaction until there has been a final settlement (dissolution) of the partnership (common law rule)
because:
 a man cannot at the same time in the same suit, be both plaintiff and defendant
 it would be a waste of time to give a man a settlement which he might be compelled to refund
upon dissolution
 it would defeat the equitable right of other partners
 EXCEPTION - final accounting is not required before lawsuit where there are no outstanding
obligations of the partnership, and a legal decision would effect a final settlement between partners
(Pilch v. Milkin)
o Since the partnership isn’t a distinct entity, property used by it can either be 1) contributed to/acquired by
the firm as a capital, or 2) individual partner’s personal asset, loaned to the firm for its use
 Definition of partnership property - UPA §8 - (1) all property originally brought into the
partnership stock or subsequently acquired by purchase or otherwise, on account of the partnership, is
partnership property; (2) unless contrary intention appears, property acquired with partnership funds is
partnership property; (3) any estate in real property may be acquired in the partnership name is
partnership property

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  where one partner is acting as an agent of the other under UPA §9, statute of fraud’s writing
requirement does not apply
o UPA §24 - three property interests of each partner: (1) rights in specific partnership property (see §25 =
rights to property - cannot be claimed by individual creditors, upon death, goes to remaining partners, ect.); (2)
interest in the partnership (see §26 = share of profits and surplus); (3) right to participate in management of the
firm
o UPA §25 - nature of a partner’s right in specific partnership property - a partner is co-owner with
the other partners of specific partnership property holding as a tenant in partnership
 (2)(d) - on death of partner, right in specific partnership property vests in surviving
partners, who have no right to access the partnership property except for partnership purposes
 (2)(e) - partner’s right to specific partnership property is not subject to dower, curesy, or
allowances to widows, heirs, or next of kin
o UPA §26 - nature of partner’s interest in partnership - partner’s interest in the partnership is his
share of the profits and surplus, which is his personal property
 “good will” should, absent any agreement, be seen as a firm asset under UPA §9(3)(b)
o individual partners may not withdraw their share of firm assets while the firm continues to exist
 one result of partners holding an undivided interest in firm assets is that individual creditors
cannot levy upon and sell in execution the individual’s interest in firm assets
 property of partnership is like tenancy by the entirety - cannot be severed as long as the legal
relationship exists
• partners do not have a divisible interest in the property
o Partnership Duration
 death of a limited partner does not automatically lead to dissolution partnership under UPA §29,
if partner is silent, or where agreement specifies otherwise (opt out in partnership agreement, court
order, directed by will, agreement of executor)
 under §31, partners are free to define the duration of their partnership for a term, for a task, or at
will
• Under §31, if the partnership agreement provides for the distribution of partnership
property, the rights of the partners are governed by the agreement rather than by UPA (165)
 partners always have the POWER to dissolve, but the RIGHT to dissolve is dependant upon the
terms of the partnership agreement and §38
• any partner has the power to dissolve a partnership at any time, even if such dissolution is
in contravention of the partnership agreement; however
• where a partner exercises the power to dissolve the partnership without the right to do so,
he must suffer the penalties
 UPA §30 - dissolution does not terminate a partnership… it continues until the winding up of the
partnership affairs is complete
• winding up activities include: assignment of partnership property to repay partnership
debt, disposition of partnership property, maintenance of action for damages on behalf of the
partnership, execution of renewal notes after death of partner
 UPA §40 - Rules for Distribution
• first, determine what the assets are
• second, pay in this order:
o secured creditors - have lien on assets
o general creditors - don’t have guarantee of repayment (employees have claim
after tax liens)
o pay partners their loans
o pay partners capital
o pay partners profits
 if dissolution did not violate partnership agreement or UPA §31,:
• UPA §30 - partnership is dissolved but not terminated. the firm continues until
winding up of partnership affairs is completed

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 • UPA §37 - right to wind up affairs belongs to surviving partner(s) when dissolution
resulted from death of a partner, or to all partners who have not wrongfully dissolved
• UPA §38(1) - grants every partner the right to have partnership property sold and
reduced to cash
• UPA §40 - in absence of agreement to the contrary, determines manner in which
partnership assets will be marshaled with respect to third party liability claims
 If one or more former partners desire to continue firm’s business,
• UPA §41 - there is a right to continue business without settlement of accounts only
in event of expulsion or wrongful dissolution
• UPA §42 - retired/deceased estate stands in position of creditor with immediate
claim to partnership under §26, but can elect to renounce interest on that amount in
favor of a continuing stream of income as an investor
 If aggrieved partners do not desire to continue the business
• UPA §37 - non-breaching partners have right to liquidate and exclude breaching
partner
• UPA §38(2)(a) - non-breaching partners have right to have partnership property
applied to discharge liabilities to third parties and receive surplus in cash, and have a
cause of action against breaching partner(s)
• UPA §40 - breaching party has right to liquidation and dispersal of assets, less their
liability in damages for breach
 if the aggrieved partners desire to continue business
• UPA §38- aggrieve partners have cause of action for damages caused by breach, and
if they wish to continue business, they may do so after paying breaching party for fair
interest and releasing him for present and future liabilities of the business
 UPA §41(3) indicates that when any partner retires/dies, and the business is continued with the
consent of the retired partner/administrator of deceased partner, but without assignment of his right to
partnership property, the continuing partnership business shall be liable as if such assignment had been
made
• Agency – consensual relationship between two persons whereby the principal, upon whose behalf acts are to be
performed, agrees to accept another person as a legal extension
o Types of agents:
 Servant agent – someone who is both directed in his assignment and under the principal’s
physical dominion in performing his assignment
 Non-servant agent – principal may give assignments, but she exercises no actual or potential
physical control over the performance of those assignments
o All agents owe a fiduciary responsibility to their principals, so they must seek the principal’s
advantage in their actions, not their own
o Agency may generate both tort and contract liability for the principal
o Fidelity and Faithlessness
 agent bears no liability when principal breaches a contract made by an agent acting in the
scope of real authority
• Even where no real authority exists, principal may be bound to third party by
apparent authority, in which case the agent is liable to the injured principal
(principal’s action arises in the law of trusts)
 The liability of a faithless agent can be avoided, terminated, or reduced by a breach of
contract by the principal, his contributory fault, or his failure to mitigate damages – Andrews
v. Hastings Mut. Ins.
 Where apparent authority cannot be established to obligate the principal, the faithless agent
generally becomes personally liable for all of the terms of the contract
• Authority – agent’s ability to deliver the principal’s liability in contract
o express authority - the power which a principal has conferred directly upon an agent to take legally
binding action on his behalf

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 o Implied authority – power conferred by the principal upon the agent from the principal’s
manifestations of consent to third persons by formal or informal writings or spoken word
 principal gives agent authority to take an action which requires authority to do another thing
o Apparent authority – manifestation of consent for agent to take some action based on appearance,
generated by authority with which the principal has invested the agent to take some other action
 action of principal/failure to act creates idea for reasonable third party that agent authority
exists
 Apparent authority only required to be understood by a reasonable person (not one
“conversant in the business practices and customs)
 Apparent authority cannot be established by the agent’s own acts or declarations
o Authority by estoppel – power created when a principal allows an agent to act with apparent authority
despite his lack there of
 action of principal has caused third party to change position based on belief that authority
exists
 principal, by words or conduct, leads third party to believe that agent has authority to do
something which he does not have authority to do
o Liability after the fact
 Authority by estoppel – principal becomes subject to liability of faithless agent when he
carelessly permits third party to believe in agent’s authority leading to a change in that party’s
position based on the belief
• Generally only reparation damages are awarded (not expectation interest)
 Authority by ratification – exists where principal is guilt of knowingly accepting what he
realized to be the fruits of an unauthorized contract
• May be the express action of betrayed principal not wishing to contest third party’s
claim, or may be implied from the conduct to the principal
• Very low threshold requirements to find implied ratification – sometime acceptance
of the benefits alone suffices
o When principal learns of unauthorized action by an agent, he must
immediately either ratify it or repudiate it
 Quasi-authority – relationship where ignorant/innocent principal is responsible to third party
for contract made by faithless agent because principal has received unjust enrichment as a
result of the contract
• if principal becomes unjustly enriched by agent’s actions, principal becomes
responsible for agent’s actions
o Principal held responsible for (tort) actions of agent under Respondeat - the master is liable for the
torts of his servant which were committed in the course of employment
 liability will induce principal to greater care in administering his business and agents, which
will benefit the public
• he who gains the benefits of an agent’s acts should also bear the burdens
o where the principal and third party are both innocent, the law implies the cost on the person that could
have prevented the loss (principal - and principle can, theoretically, sue agent for breach of fiduciary
duty, although agent generally is insolvent at that point)
 Entrepreneur Theory – respondeat superior properly places cost on principal because
such cost is a business liability which must be accounted for (like a breakage cost for a
principal in the restaurant business)
• Allows burden of tort to be allocated to all purchasers of principal’s services, as
a cost of the business, so that those who benefit from the actions of the agent
also must pay for his torts- spreads the cost to many users, rather than burdening
a single individual  Results in allocation of loss which is fair and reasonable
• differences between general partnership and limited partnership
o §1 - partners not liable for partnership liabilities
o §20 - death of general partner = dissolution of partnership

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 o §21 - estate of limited partner has all of the rights of the limited partner, so partner’s death doesn’t
dissolve the partnership
 if the limited partner was the sole limited partners, than the partnership becomes general
rather than limited
o Limitations to which sections can be opted out of - CANNOT opt out of ULPA §7 (changing
limited partner to general partner for exerting control) Weil v. Diversified Properties (319 F.Supp.
778)
 ULPA §7 is for the benefit of creditors, not general partners
o §303- things that might look like exercising control, but actually aren’t because the general partner
is acting as an agent in a representative capacity, not in his personal capacity
o §12- you can be both a general and a limited partner in the same partnership
o depends on how you act toward each creditor
o §15 - limited partner can take a share of profits, so long as the company remains solvent (enough
money remains in the company for the liabilities to be paid)
o §17 - liability of a limited partner to partnership
o §20 and 21 - death, insanity, retirement, unless opted out of, dissolves the partnership
o §29 -
o UPA §17 - Goldman Sachs lawsuit
• joint venture - partners must specify who owns what out of the products produced
o partnerships more common than joint ventures because they are much less complicated
• limited partnership- two or more people doing business together
o people can shield their liability, but give up control of the business
• general partnership- two or more people doing business together
o maintain control, but have full personal liability
• neither partnership is ideal, but people didn’t want to incorporate because they wanted to avoid unfavorable
taxes
o also, don’t want to have to put together annual report or file 10-k or 10-q disclosures
o also, must file certificate of corporation and pay associated fees
JOINT VENTURE
• relationship between joint venturerers is a fiduciary one - generally governed by UPA - right to share in
profits, to share losses, and to exert some control over the business
o joint venturers are agents of one another within the scope of the venture
LIMITED PARTNERSHIP
• purpose of limited partnership - to allow partners to contribute capital as creditors, and receive a share of
profits from the company rather than interest (212)
• limited partnership is crated by statutory law; in the absence of compliance with an enabling act, it cannot
be created or maintained
o three sets of guidelines govern the limited partnership
 1916 Act - originally established concept of limited partnership; still important because:
• basis for statutory revisions
• substantial number of states adopting revised act have continued to apply the
UPLA to partnerships formed prior to the effective date of the revision
• provides foundation upon which nearly all decisional law in this area rests
 1976 Act - attempted to make revisions to clarify questionable tax issues
 1985 Amendments to the 1976 Act - originally was going to be a separate act, but
confusion of a new act so quickly after the 1976 one led to Amendments being made
instead of a new Act passed - sought to modernize, improve, and establish more
uniformity in the law of limited partnerships
• UPLA §1 defines limited partnership as a partnership formed under the provisions of §2, having one or
more general partners AND one or more limited partners
o limited partner like general partner except he must file a certificate and refrain from participation
in the conduct of the business
 failure to meet these requirements results in status as general partner

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  participation in limited partnership allows limited partners to take the tax-deductions due
to loss on their personal tax returns (which might be beneficial if they have extensive
income in other areas) where as they would be prevented from doing this if they had
invested in a corporation because a corp. is a separate entity for tax purposes  fulfills
quest for tax minimization
o §41-407 of D.C.Code indicates that a limited partner shall not become liable as a general partner
unless he takes part in control of the business
o §7 is intended to provide protection for creditors against a business, not to general partners against
limited partners
 so long as the partnership continues, general partner is in a relationship of trust with
limited partners and he may not invoke the provisions of the Act to enlarge the liability of
his partners
 in times of severe crisis all partners become actively interested in an effort to keep the
enterprise afloat and abnormal problems will arise that are not under the reach of day to
day matters
LLP (Limited Liability Partnership)
• like a combination of partnership and corporation - all partners have limited liability and all have right to
manage partnership directly
LLC (Limited Liability COMPANY) - allowed by state statute
• is an LLC actually just a partnership or corporation, or is it just treated that way for tax purposes?
• owners of an LLC are called “members”
o all members and managers of LLC have limited liability without loss of flexibility no member
of an LLC is required to have unlimited liability
o Unless the articles of organization or operating agreement provide otherwise, management of an
LLC is vested in the members in proportion to their ownership interest in the company
• LLC organized with “articles of organization”
• LLC can be either:
o member managed (default organization, unless articles specify otherwise)
o manager managed (potentially convertible into a corporation)
• LLC is taxed as a partnership by IRS as default (or can elect to be otherwise taxed)
• benefits of LLC over corporation:
o no general meeting requirement,
o no loss of owner power to board of directors,
o no double taxation
• Disadvantages of LLC
o many states impose a franchise tax on LLCs (still much less than corporate tax, though)
o relatively new classification - not well developed or consistent in law
• investment contract - contract in which 1) money is invested 2) in a common enterprise 3)with profits to
come solely from the efforts of others
o includes LLC with management groups [any LLC where all members do not manage]
o LLC where all members manage is called a “member managed LLC”
 just like a general partnership- every member is an agent of the entity and can control
management
o where articles of LLC have provision vesting management in managers
 only managers are agents of the entity; the non-manager members cannot control actions
of LLC, although all still have limited liability
• therefore, LLC can both be and not be a security, depending upon whether it is member managed (not
security b/c not investment contract) or manager managed (yes security b/c it is an investment contract)

CORPORATION
• what are the different fiduciary duties?

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• law recognizes corporation as an entity separate from shareholders, officers, and directors  can own
property, assert legal rights, and has potential of perpetual duration
• directors (142) (AT LEAST one required, generally more chosen)
o board of directors consists of:
 inside directors (normally includes CEO), provide informational link between corp. and
other directors; develop business plans and policies, AND
 outside directors (majority- usually employed by other firms), oversee board
• disinterested and independent
o duties: make major policy decisions, appoint and monitor officers, and determine when/if dividend
distribution occurs  control all corporate legal powers
 powers must be exercised collectively by majority rule - no individual has general agency
power to act on behalf of the corporation
o receive incentives, such as ownership shares, to ensure aligned financial interest with
shareholders, to whom they have a legal fiduciary duty, and salary for performance of duty- do
not get share of company income
o business judgment rule - judicial presumption that directors acted properly; indicates deference
given to directors by courts and regulators
 consists of decision making and oversight
 if not protected, courts scrutinize and look for overall fairness to corp. and shareholders
 Shlensky v. Wrigley (238)
• will not interfere w/ honest business judgment unless there is fraud, illegality,
or conflict of interest. Will not require directors to forego their
decision/judgment b/c of the decisions/judgment of other companies’ directors
 Joy v. North (300)
• BJR ≠ apply in cases 1) where Corp decision lacks a business purpose, 2) is
tainted by conflict of interest, 3) is egregious, OR 4) results from obvious +
prolonged failure to exercise oversight/supervision
• officers (143) (only Corporate Secretary legally required)
o responsible for day-to-day operations (with director oversight)
 act as agents of the corporation
o recent federal law regulates officers
 Sarbanes-Oxley Act (2002)- requires CEO and CFO to certify financial reports
o receive salary for their duties, not profit share
• shareholders
o provide capital and elect directors (bear greater risk, but residual profit beneficiaries/claimants)
o three main duties: vote, sell, and sue
o collectively have power to elect annually the corporation’s directors and approve fundamental
changes in governing rules/structure; individually, shareholders have very little power
 amendments to articles of incorporation can only be initiated by the directors (and
directors chair and control the agenda of shareholder meetings), so shareholders cannot
take action without their approval
 shareholders may amend bylaws on their own
o shares are fungible property- freely transferable; purchaser receives all voting power and rights
possessed by the seller  limited liability to all shareholders
o opting out - both MBCA and DGCL place limitations on ability to opt
• Regulations
o State Statute (two most used statutes for incorporation)
 MBCA (model business corporation act) and DGCL (Delaware general corporation law)
 internal affairs doctrine - court applies laws of state of incorporation
o federal law- ie Securities Exchange Act of 1934
o listing standards for national stock exchanges (self-regulating organizations)
• Formation - the articles of incorporation (MBCA §2.01-2.06; DGCL §101-102)

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 o MBCA §2.01 - Incorporators - one or more persons may act as incorporator by delivering articles
of incorporation to secretary of state for filing
o MBCA §2.02 - Articles of Incorporation
 must include:
• corporation name satisfying §4.01,
• number of shares corporation is authorized to issue,
• street address of initial registered office and name of initial registered agent
• name and address of each incorporator
 may include:
• provisions not inconsistent with the law regarding: incorporation purpose;
management and regulating of affairs; definition/limit/regulation of powers of
corp, directors, and stockholders; par value of shares; imposition of personal
liability on shareholders to specified extend and conditions;
• any provision that is required or permitted to be set forth in bylaws
• provision limiting/eliminating liability of directors or shareholders except in
specific cases
• provision permitting/obligating indemnification of directors for liability, except
in specific cases
 need not set forth any of the corporate powers enumerated in this act
o MBCA §2.03 - Incorporation - unless effective delayed date is specified, corporation exists when
articles are filed; Secretary of State’s filing of articles is conclusive proof that incorporators
satisfied all conditions, except that in a proceeding state can cancel or revoke incorporation
o MBCA §2.04 - Liability for Pre-incorporation Transactions - all persons purporting to act on
behalf of corporation, knowing no incorporation exists, are jointly and severely liable for all
liabilities created when so acting
 appropriate to impose liability only upon persons who act on be half of corporation
knowing that no corporation exists
o MBCA §2.05 - Organization of Corporation - after incorporation,
 if initial directors are named in articles, they shall hold an organizational meeting to
complete organization by appointing officers, adopting bylaws, and carrying out any
other necessary business;
 if initial directors are not named, at call of majority of incorporators, meeting shall be
held to 1) elect directors and complete organization of incorporation, or 2) elect directors
who shall then complete organization
 organizational meeting need not be held where required actions are taken as evidenced by
written consent signed by each incorporator
o MBCA §2.06 - Bylaws - incorporators or directors shall adopt initial bylaws for corporation,
which may contain any provision managing business and affairs that is not inconsistent with law
or articles
• Types of stock (MBCA §6.01; DGCL §151)
o one corp. may have several types/classes of shares, each with different rights under the articles of
incorporation
 there must be a class with authority to elect directors and exercise shareholder voting
rights, and a class that entitles the bearer to receive the corporation’s net assets upon
dissolution; shares that have both rights are “common shares”
 all shares in a given class are fungible- have identical rights, preferences, and limitations
 preferred shares often have dividend/liquidation preference over common shares, but also
have limited/no voting rights
• Voting
o state created default rules may be changed in shareholders’ agreements, arts. of incorp. or bylaws
 articles are public documents that can be changed only by directors and shareholders;
bylaws are private documents and can often be changed by directors alone
o Straight Voting (MBCA §8.04, 7.21, 7.28; DGCL §141(d), 212(a), 214, 216)

10
  default method -1 vote/share; number of directors specified in initial articles or bylaws;
each shareholder can cast their number of votes for the number of positions available
• shareholder with 51% interest controls 100% of the board seats
o Cumulative voting
 shareholder casts total votes = number of his shares X number of positions to be filled
 cans spread votes between as many or few candidates as desired
 to elect board members, a shareholder must have more than SX/(D+1) shares, where S is
the total number of shares voting, D is the number of directors being elected, and X is the
number of directors elected by the votes
o Class Voting
 corporation may divide shares into classes, allowing each class to select a specified
number of directors
 dual-class voting - divides shareholders into two classes and gives one class
disproportionate voting power compared to their capital contribution
• allows original founders to protect control of the corporation when going public
o Classified Board with Staggered Terms - Adaptability v. Stability (MBCA §8.06, DGCL §141(d))
 default - election of directors annually
 corporations may adopt longer and/or staggered terms to ensure that corporation will
always have experienced directors in office
• more stockholder meetings (more years) are required to replace entire board
limits shareholders’ ability to quickly name new directors
• where provision for staggered terms is in bylaws instead of articles of
incorporation, shareholders more easily return to default
o record date determines who receives dividends and who is qualified to vote
• shareholder meeting requirements:
o DGCL §228 - any action required to be taken at an annual or special meeting may be taken
without a meeting, without prior notice, and without a vote, if consent in writing is signed my not
less than the minimum number of votes necessary to authorize such action at a meeting at which
all voting shareholders were present
o DCGL §211 Immutable rule - annual meeting must be held
 voting can be held by written agreement, but annual meeting must occur
• removal of directors and other midstream private ordering
o shareholders today can remove directors with or without cause by a majority vote (162)
 under MBCA §8.08, no restriction on shareholders power to remove directors if
corporation provides for staggered terms, but,
• if corporation has cumulative voting, shareholders cannot remove director if the
votes cast against removal would have been enough to elect that director, or
• if director is elected by particular class of shareholders, he can be removed only
by a majority vote of that class, even if the majority of all shareholders favors
removal (163)
 under DGCL § 141(k), members of staggered boards cannot be removed except for
cause, but shareholders may remove even protected directors for cause, and majority
retains ability to change the default rules and thereby permit removal in any of these
situations by amending the articles (163)
o at common law, directors had a vested right to serve out their full term, so shareholders could
remove directors only for good cause
o where all holders of voting stock vote together, they do not form a “voting group” as contemplated
in section (b),
o a charter or bylaw provision which purports to alter statutory principle must be positive, explicit,
clear, and readily understandable, expressing the stockholders’ desire
• Business Judgment Rule - presumption that in making a business decision, directors acted on an informed
basis, in good faith, and in the honest belief that their actions were in the best interests of the company
(310)

11
 odirectors have a duty of care to inform himself of relevant information in order to make decisions
on behalf of the company
 standard of care is predicated upon concept of gross negligence - should be used to
determine whether business decision reached by board of directors was an informed one
o corporate directors owe stockholders fiduciary duty to disclose all facts germain to the transaction
at issue with complete candor  all information such as a reasonable stockholder would consider
important in deciding whether to sell or retain stock
o §141(e) amended to allow directors to rely on opinions of corporate officers, even if not made in
“report” form
o two part process to overcome business judgment assumption: (321)
 plaintiff’s burden of proving directors acted without requisite care or loyalty
 defendants then have burden of proving that transaction was intrinsically or entirely fair
to the corporation
• two elements to fairness: (322)
o fair dealing - when transaction timed, how initiated, structured,
negotiated, disclosed to directors, and how director and stockholder
approval was obtained
o fair price - economic and financial considerations which effect
intrinsic/inherent value of company’s stock: assets, market value,
earnings, future prospects, ect.
FIDUCIARY DUTIES
• Business Judgment Rule - judicial presumption that directors have met duty of loyalty, care, and good faith
o requires high burden of evidence to prove breach
 generally, fraud, illegality, or conflict of interest required to overcome BJR - simple
waste/mismanagement not sufficient Shlensky (lights on Wrigley Field)
o breach of any fiduciary duty sufficient to rebut BJR presumption, in which case directors are liable
unless they prove transaction was fair
o primary purpose of a corp. is to make profit for shareholders, so directors are obligated to act in
furtherance of this goal Dodge
• Duty of Loyalty - (general duty = act in best interests of corporation)
o 1) duty not to take corporate opportunities
o 2) duty to avoid conflict of interest
o Corporate Opportunity Doctrine - where corporate fiduciary cannot serve both self and
corporation at same time, must serve corporation; three potential tests, most use ALI, DE uses
Guth
 Guth/line of business - based on facts of situation; where director faces opp. that corp.
• 1) is in a financial position to take,
• 2) is in the corporation’s line of business,
• 3) is of practical advantage to the corp., and
• 4) the corp. has reasonable interest/expectancy in,
he may not seize the opportunity
 Dufree fairness test - unfair for director to take advantage of opp. where corp. interests
require protection
 ALI test - director/senior official may not take corp. opp. unless:
• 1) opp. is first offered to corp. and disclosure of conflict of interest is made,
• 2) opportunity is rejected by corporation, AND
• 3) such rejection is either:
o fair to corporation
o approved in advance, after disclosure, by disinterested directors, or
o approved in advance or ratified by disinterested shareholders and isn’t
waste
• Corp. Opp. exists where:
o 1) director is aware of it

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  a) in connection with performance as director, leading him to
believe it was intended to be offered to corp.
 b) through use of corp. info/property where he believes
resulting opp. would be of interest to corp.
o 2) opp. is to engage in business activity director knows is closely
related to business corp. is engaged in or expects to engage in
 where duty comes to director independently/individually, failure to present opportunity
doesn’t necessarily amount to usurpation, but disclosure = safe harbor (if he doesn’t
present it, and the opp. was a corp. opp., he is liable) Broz
o Conflict of Interest (§144) no conflicting interest transaction void or voidable solely by reason of
conflict, if: (includes candor requirement - must disclose all material facts)
 1) authorized by majority of disinterest directors, or
 2) approved in good faith by shareholders, or
 3) is fair to the corp. at the time of the transaction
o interested director - 1) party to the transaction, 2) has a business/financial/familial relation that
would affect judgment, 3) has a material pecuniary interest in transaction, 4) is subject to
controlling influence that could affect decision  ultimately, director is unable to exercise
independent judgment on the matter
o for director compensation issue, two prong test used to uphold its validity (not subject to BJR):
 benefit - must be identifiable to the corp.
 value - must be in reasonable relation to expected benefit
 plan must include safeguards to ensure value is received ; value assumed to be adequate
• Duty of Care - breach is rare; director conduct must have been egregious
o statutory exculpation provisions relive director liability for breach of duty of care (doesn’t extend
to breach of duty of loyalty or acts done in bad faith, however)
o 1) decision making
 so long as directors act in good faith, not liable for any losses suffered by unfortunate
outcomes Joy v. North
• directors not liable for anything less than gross negligence
• hindsight litigation detrimental to corporation because of chilling effect on risk
taking
 decision must be rationally made with all of the information reasonably available in order
for the protection of the business judgment rule to be applied Van Gorkom
• for shareholder ratification of director action, duty of candor to supply
shareholders with all germane facts Van Gorkom
• §141(e) allows directors to rely on reports of officers, even when not reports
o 2) oversight §102(b)(7) (combination of duty of care and good faith)
 director has obligation to manage/monitor/oversee actions of those within the company to
prevent corp. liability exposure Caremark
 breach = unconsidered failure to act where due attention would have prevented loss
 must have in place system of reporting/information to reasonably inform directors of
corporate compliance w/ law and business performance Casemark
• Duty of Good Faith/Fair Dealing - sometimes it’s own duty, sometimes implicit in Duty of Care
o sustained, systematic failure of board to exercise oversight establishes breach of good faith
Caremark
o Disney case (Brehm v. Eisner) - bad faith = deliberate/indifferent failure to act in the face of a duty
to act
 §141(d) - safe harbor for directors; §144(c) and §144(e)
• Indemnification/Insurance statutes - issue is whether good faith is involved - you don’t have to prevail on
the merits of the case, so long as the questioned action was in good faith, insurance will kick in  MBCA
§§8.50-8.59; DGCL §§102(b)(1), 145
o purpose of such provisions to protect against directors’ overuse of caution in performing duties
and refusal to serve as directors at all

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 o however, specifically exclude uninsurable acts such as willful misconduct, dishonest acts, and
receipt of improper personal benefits
o good faith ( a requirement under §141) may be generally assumed by corp. bylaws for purpose of
insurance indemnification under (a) and (b) Owens Corning
• officer oversight - **know how to kick officers out and what you need to file to do so

DERIVATIVE ACTION
• shareholder has right to bring action against corporation/directors where directors would not/should not
bring action on behalf of the company (ie in the case that they would be defendants in the case)
o 7th Amendment gives them right to jury trial
• dual parts of a derivative action: (368)
o 1) action against corporation for failing to bring specified suit
o 2) action on behalf of the corporation for harm identical to that which the corporation failed to
bring
• derivative actions universally require that the shareholders give the board a demand, outlining the cause of
action, and giving them 90 days to bring suit; after which time, the shareholder may state a cause of action
against board for wrongful refusal, alleging board did not act independently
o demand excused where futile  futile where plaintiff can plead with particularity that directors
are not disinterested or independent, and the action is not protected by the business duty rule
 Aronson rule - demand is futile where:
• 1) directors are not disinterested and independent, and
• 2) the challenged transaction is not otherwise protected by the BJR
 potential personal liability of all directors, without more, not sufficient to prove interest
 plaintiff must allege particularized facts indicating corp. conduct demonstrating
wishes/interest of the controlling individual in order to show control exists Aronson
 in order to prove interest for first prong of Aronson test, must show that: In Re Limited
• 1) financial interest in the transaction,
• 2) motivated by desire to remain on board (entrenchment), or
• 3) directors were controlled by someone with a direct interest in the transaction
• **court must apply subjective, actual person test for each director’s involvement
o MBCA requires universal demand (no futility exception)
o MBCA allows interested board to delegate authority to decide to disinterested committee in order
for demand decision to remain protected by BJR
o Zapata - DE allows appointment of disinterested committee where committee moves to dismiss
suit based on written record of investigation that suit is detrimental to corp. court must apply 2
step inquiry:
 1) committee acted independently/in good faith after reasonable investigation in
recommending suit be dropped, and
 2) court finds dropping suit to be appropriate in its own reasonable business judgment
• in order to satisfy “well pleaded complaint” shareholders must have access to company books/records,
which, under §220, they theoretically do, but generally actually don’t
PROXIES
• three meanings of proxy
o legal relationship/arrangement under which one person is allowed to vote for another
o the person or entity given the power to vote
o the document that evidences the relationship
• 5 activities trigger federal disclosure requirements:
o issuing securities
o periodic reporting (under §13 - 10-K’s, 10-Q’s, 8-K’s) - applies to companies registered on
national exchange and under §12 (500+ shareholders AND at least $10,000,000 in assets)
o proxy solicitations (§14(a)) - applies to companies registered on national exchange and under §12
(500+ shareholders AND at least $10,000,000 in assets)
o tender offers

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 o insider trading
• purpose of disclosure requirements is to help shareholders make informed decisions
• Disclosure requirement
• 14(a) includes implicit assumption that shareholders will be able to make use of information provided in
proxy solicitations in order to vote in corporate elections  based on premise that shareholder voting could
work so long as investors had enough information and procedural protections  did not attempt to regulate
stockholder choices
o Rule 14a-3 - requires proxy statement with time, date, and place of meeting, revocability of proxy,
solicitor’s name and funding source, and name/basic info of director candidates to be included
with proxy solicitation
 proxy statements by management for annual meeting must include annual report
o Rule 14a-4 - regulates form of proxy document
o Rule 14a-5 - regulates form of proxy statement
o Rule 14a-9 - catch all prohibition of false/misleading statements
o Rule 14a-7 shareholder communication  requires company to either give you a list of other
shareholders names/addresses. or to mail the proxy for you (but you pay costs)
 if provided with shareholder list- shareholder must use for proper business purpose -
can’t use as mailing list for something else Conservative Caucus
• proper purpose - reasonably related to shareholder’s interest as stockholder
o burden is on directors to show improper purpose
• where shareholders bring action for corp. wrong-doing, must have held stock at
time of wrong-doing in order to access corp. records, except where earlier
activities are reasonably related to the issue
o Rule 14a-8 - qualifying shareholder may require corp. to include her proxy statement/proposal in
corp. material - may not exceed 500 words
 qualifying shareholder = $2,000 market value or 1% of share; must have held stock for at
least 1 year, and through date of meeting; only 1 proposal/shareholder/year
• must be appropriate subject matter
• must not have too many words
• must be qualifying shareholder
 §14a-8(i) - ways corp. can get around including shareholder proposal:
• (5) - “economically irrelevant” info can be excluded if issue does not amount to
5% total assets, net sales, and gross sales, or is otherwise significantly related to
business (relation doesn’t have to be economic Lovenheim v. Iroquois Brand)
• (7) - “ordinary business” proposals are excludable, determined case-by-case
 No Action Letter - letter from SEC that it will not bring enforcement action against corp.
if it does not include a specific proposal
o purpose of 14a-2b is exception to allow shareholders to solicit from a small number of people so
that he does not have to bear the cost of a full proxy
o look at 14a-12 - rule that people rely on today when there is going to be a proxy battle
o most important rule- 14a-3 - Disclosure Requirements
• even if shareholder has winning proposal, the directors may (and generally do) ignore  creates no
obligation to act
• Sarbanes-Oxley requires CEO and CFO to certify 10-Q’s
• Business Roundtable - SEC’s authority limited to disclosure requirements can’t enforce 1 vote/share
o §14(a) assumes that shareholders will be able to use info provided in proxy statement
o under Rule 14a-9, plaintiff must show 1) misrepresentation/omission of material fact, 2) scienter,
and 3) resulting damage
• TSC Industries - definition of material fact requiring disclosure to shareholders - a “substantial likelihood
that a reasonable shareholder would consider it important in deciding how to vote”
o significant propensity to effect voting process - alter total mix of info available
o §

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 • Virginia Bankshares - director/officer’s statement of belief/purpose can be important material fact, but
plaintiff must prove that the belief stated was not the insider’s true belief/purpose
• Mills where full disclosure not made, no need to prove how people would actually have voted with the
different information, so long as change in votes could have made a difference; no scienter requirement -
negligence is sufficient for cause of action under 14a-9
• causes of action against corporation:
o §12 of 1933 private right of action
o §16 of the 1934 provides a derivative cause of action
o §21 provides cause of action for SEC
o §32 provides criminal liability for violation of SEA
o §14a provides implicit private cause of action, in order to guarantee shareholder interests
• §9, §16, §18 - cause of action for private parties
o §18 - false and misleading statements in any application/report/document filed pursuant to the title
or its rules/regulations
o private parties have right under §27 to bring suit for violation of §14(a), and that right of action
extends to both derivative and direct causes
• State Causes of action - under breach of fiduciary duty
• Stoneridge - whether third party participants in filing forms (lawyers, bankers,
ect) can be held responsible for false statements made on the forms
o all Enron class-action plaintiffs are awaiting decision  can potentially
recover $, then, since Enron went bankrupt, but the
law/accounting/bank firms are still viable
o ****know what happened in this case**** (Oct. 10, supreme court)
o could the lawyers just draft an indemnification clause? if the company
is defunct, it will not be able to indemnify the firms, because it is
bankrupt
 cannot limit liability against social policy - can’t limit liability
as to third party’s not parties to the agreement (such as
stockholders)

MERGERS
• Friendly Mergers:
o Board of Directors of each corporation must adopt a plan of merger specifying terms  must
provide notice of plan and obtain shareholder approval  must submit approved/certified plan to
state corporations commissioner to make it effective friendly merger generally requires simple
majority of all shares outstanding
o reasons why friendly transactions occur
 assets of combined corporations produce economies of scale synergistic gains
 current CEO may be nearing retirement  don’t want to leave the company without a
CEO and other company may have a good CEO
 managing team may anticipate personal benefits (ie lucrative employment contracts 
breach of fiduciary duty?)
 reduce taxes
o dissenter’s rights - protective device for shareholders opposed - right for cash purchase at “fair
value”
o cash-out merger - use of cash as consideration in merger; often majority shareholders receive
surviving company equity while minority shareholders receive the cash-value of their shares,
eliminating their interest in the surviving company
o generally any form of consideration is acceptable for canceled shares: new shares, cash, notes,
combo
o Key assumptions of shareholder participation in merger:
 shareholders can make informed decision to approve or reject merger

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 • participation of shareholders in decision making process adds value for
corporations and shareholders
 management will be able to provide sufficient, digestible, unbiased information for an
informed decision on the merger
 shareholder participation will not be unduly burdensome for corporations
o Business Purpose Test - transaction leading to cash-out merger must serve a valid corporate
business purpose and not be solely to freeze out minority owners
 Singer - required controlling shareholders to prove valid business purpose
 Weinberger overruled business purpose rule
o entire fairness test - where director sits on both sides of a merger, conflict between self-interest
and fiduciary duty to minority holders, so he must prove, considering the totality of the
circumstances, transaction was fair to minority Coggins (Patriots)
 director has burden of preponderance of evidence to show fairness; plaintiff must allege
specific acts of fraud/misconduct to demonstrate unfairness in challenge of cash-out
merger Weinberger
 Guth test - requires officer/director to 1) affirmatively protect corporate interests, AND 2)
refrain from causing injury to corporation
 Fair Dealing Standard - two aspects of fairness (must be considered as a whole, not
bifurcated)
• 1) fair dealing - duty of candor - timing, structure, initiation, negotiation,
disclosure…
• 2) fair price - all relevant factors to economic and financial considerations
• Hostile Takeovers
o potential acquirer who wants to seek control without board approval; two ways:
 1) tender offer - make offer to buy sufficient shares to take control of board
• 13(d)(1) reporting requirement for acquiring >5% of shares
 2) proxy - can seek proxy support of existing shareholders under Rule 14a-8
o tender offer [see pg. 1020 of text]- made to shareholders of a publicly held offer in exchange for
cash
 considered hostile b/c buyer goes directly to shareholders over objection of target board
 tender offers should be regulated b/c:
• danger of “prisoner’s dilemma” (have to sell now or receive “junk bonds” after
everyone else sells out) for shareholders
• “winner’s curse” whoever pay’s highest bid generally pays too much
o William’s Act - requires tender offer to be open for 20 days, best price rule, pro rata purchase,
must disclose identity, source, funding, and purpose of take over - eliminates the prisoner’s
dilemma
 ***see Rule 14e-1a, §14(d)(6), §14(d)(7), §14(d)(5)
o Board Defense Mechanisms:
 directors cause corp. to re-purchase own stock - Cheff v. Mathes
• directors must show: 1) good faith, and 2) reasonable investigation into purchase
• must demonstrate reasonable grounds for belief in threat to corporate policy
• directors must NOT have acted to solely/primarily to perpetuate office
• Unocal adds requirement that response must be proportionate/reasonable in
relation to threat posed AND directors must act in the best interests of the
corporation/stockholders
• BJR applies to board’s adoption of defensive mechanism where: Unocal
o 1) good faith/reasonable investigation leads to belief in threat, and
o 2) response reasonable in relation to threat
o decision is informed if not grossly negligent
 Poison Pill - Moran - where used as a preventive measure, rather than in response to
direct threat, does not prevent protection of BJR
 lock-up provisions, no-shop provisions, cancellation fee - Revlon

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 • where sale/bust-up is inevitable, directors’ Unocal requirement (to act in best
interests of corp.) creates duty to get best price possible
 Unocal/Revlon [enhanced scrutiny test] created framework that directors’ responsibility
is to act in best interests of shareholders/corporation  means getting best price where
sale is inevitable
• directors’ duty to manage business and affairs of corporation obliges them to
charter course in best interests of corporation without regard to a fixed future
time point, so not under any duty, per se, to maximize shareholder value in the
short-term, where company will survive Paramount 
o generally 2 circumstances which implicate Revlon duties:
 1) corporation initiates active bidding process
 2) in response to bidder’s officer, target abandons long-term
strategy and accepts break-up as inevitable
o if board’s reaction to hostile tender constitutes only defense response,
not abandonment of corp.’s continued existence, Revlon not triggered
o directors may use open-ended/flexible criteria where determining threat
posed by take-over bid - not limited to financially inadequate
o directors do not have to maximize shareholder profit unless clearly no
basis to sustain corporate strategy Paramount
• in sale/change of control transaction (Revlon duty invoked), board subject to
enhanced scrutiny, before application of BJR, mandated by: Viacom
o threatened diminution of current stockholders’ voting power
o fact that asset belonging to public stockholders (control premium) is
being sold and may never be available again
o traditional concerns for actions which impair/impede stockholder
voting rights
• key features of enhanced scrutiny test are judicial determination of: Viacom
o a) adequacy of decision-making process on which decision is based
o b) reasonableness of the directors’ action in light of circumstances
 **hallmark is reasonableness - not perfection in hindsight
• extends Revlon rule to all pending sales of control, not just break-up
• standard
 voting contest - Schnell v. Chris-Craft - application of BJR inappropriate where board
acts for primary purpose of impeding/interfering with effectiveness of shareholder vote
• situation requires enhanced scrutiny and directors bear heavy burden of
demonstrating compelling justification for their actions
• Blasius standard - requires heightened scrutiny where board acts with primary
purpose of interfering/impeding shareholder franchise and shareholders did not
have full and fair opportunity to vote
o board must first demonstrate compelling justification for action as
condition precedent to judicial consideration of reasonableness and
proportionality
 preclusive/coercive defensive mechanisms - Omnicare
• to the extent a merger contract requires directors to act/not act in violation of
their fiduciary duty to minority shareholders, it is invalid/unenforceable
• pages 762-765 - DEFINITIONS of terms
o front end loaded tender offer - consideration for tender offer (to get controlling interest) worth
more than consideration in second-step merger
o greenmail- target goes out and repurchases it’s own shares  bidder wasn’t really trying to take
over the company in the first place, it just wanted the company to buy the shares back at a
premium
o bidder/raider - acquiring party
o bust-up takeover - seeks to break up target and sell it in pieces

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 o junk bonds - bonds that are higher risk, therefore bear a higher interest rate
o target - company sought to be acquired
o white knight - second bedder, thought to be friendly
o white squire - friendly party who acquires large block of stock, but not control
o Arbs/Arbitragers - regular market participants seeking to make money by short-term purchases
o golden parachute/tin parachute - ease descent of former management
o termination fee - offered to white knight as incentive to continue bidding against raider, where
outcome is uncertain
o stalking horse - white knight used to bid up the price so raider must pay a premium
o lock-up option - gives whit knight right to purchase most valuable assets (crown jewels)
 make other bids unlikely b/c key assets now promised to white knight
o poison pill - stock right/warrant issued to potential target’s shareholders prior to takeover;
unusable until hostile acquisition, at which point holders can redeem for price well above market
or for acquiring company stock at reduced price after merger; generally written to exclude shares
held by acquiring company
 flip-in plan - allows shareholder to buy more shares in target company
 flip-over plan - gives shareholders contractual right to purchase shares in the acquiring
company
o Recapitalizations and leveraged buyouts by management (LBO’s and MBO’s) - rearranged
financial package offered by target management to shareholders offering immediate cash payout
for their shares, often financed by huge borrowing by corporation
o shark repellent amendment/porcupine provision s - in corporate charter/bylaws (address 2nd step):
 super majority amendments - raise vote required to approve merger
 fair price amendments - require payment of high “fair price” for 2nd tier stock purchase
 staggered board amendments - extends time required to replace entire board
 dual-class capitalization - provides management control insulation beyond shares by
multiplying votes/share of management stock

PIERCING THE CORPORATE VEIL/ALLOCATING RISK

• piercing veil is judicially created remedy for situations where corp. not operated as separate entity, so not
entitled to such treatment - applies to injustice, fundamental unfairness, or inequity
o court more likely to pierce to reach corp. than individuals, and unlikely to pierce publicly corps.
o more likely to pierce in tort cases than contract cases b/c opportunity for bargaining
o equitable subordination - less sever than piercing veil - subordinates secured loans of insiders to
unsecured loans of third parties, where appropriate for equity
o equitable cushion - capital stock - # of shares outstanding * par value - reserved for payment of
corporation debt/liabilities - un-reachable by shareholders
• Contract Cases:
o corporation separate identity/shareholder limited liability should not be maintained where such
division would accomplish fraudulent purpose, create a constructive fraud, or defeat a strong
equitable claim Consumer Co-op
 Piercing more likely in closely-held corp. b/c directors, shareholders, and officers usually
same
o fraud/misrepresentation are most important factors in contracts piercing cases - can’t bargain these
o alter ego theory/instrumentality rule: (case specific/not bright line) Consumer Co-Op v. Olsen
 1) complete dominion by individuals, so that corporate entity has no “separate mind” at
time of transaction (considers adherence to corporate formalities, adequate capital…)
(company is just a shell company)
 2) control used for fraud, violation of statutory/legal duty, or other dishonest/unjust act,
AND
 3) control proximately caused injury
o actual fraud not required for piercing where justice/equity require piercing (KC Roofing)
 where defendant uses corp. for unfair/inequitable purpose, veil should be pierced

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 • Tort Cases:
o proper to pierce veil where individuals where dominating force behind corporation, so proximately
caused damage Western Nook (negligent blasting operation)
o factors to consider in determining if individual is dominating force behind corp. (Baatz- bar):
 fraudulent representation by corporate directors/misrepresentation
 undercapitalization
 failure to observe corporate formalities
 absence of corporate records
 payment by corporation of individual obligations
 use of corporation to promote fraud/injustice/illegal activities
• do same factors/alter ego theory apply to both contracts and tort cases?
o proper to pierce the veil of LLC where
 1) unity of interest and ownership exists between individual and corporation, such that
separateness of corporation and individual has ceased
 2) continued adherence to fiction of separate entity would cause fraud or injustice
• Legally defective allocation of risk:
o reasons corporation may not be in existence: 1) not yet formed, or 2) dissolved (by voluntary
action of directors/shareholders, involuntary action of administrative decree, or involuntary action
of judicial decree)
 no corporation = cannot be agent = individual actions not protected by agency law
 corporation NOT bound by/party to contract made while legally non-existent, unless
contract subsequently adopted by corporation (expressly or implicitly)
• how individual is bound depends whether he tried to contract around personal liability
o where attempt made to avoid personal liability, but ambiguous contract resulted, 1) contract
construed against those who drew it, and 2) rational/probable interpretation preferred
 three results for individual when contract made when corp. didn’t exist: RKO-Stanley
Warner Theaters, Inc (promoter made contract on for non-existent corp.)
• 1) may take on offer on behalf of proposed corporation, which upon formation
of corporation, becomes a contract
• 2) make a contract binding at the time of formation on individual personally,
with understanding/stipulation that at formation of corporation he shall be
relieved of liability
• 3) may bind himself personally without more, and look to proposed company,
when formed, for indemnity
o where no attempt was made to avoid personal liability, all persons who act as corporation without
certificate of incorporation are jointly and severally liable for subsequent debts/liabilities
 “assume to act as corporation” includes those who actively participate in policy and
operation of organization (not limited to actual signer) - not strict investors Timberline
o corporation by estoppel - one who recognized the organization as a corporation cannot escape
liability by claiming that the organization technically does not meet the corporation requirements
 courts willing to recognize corporations by estoppel where defendant seeks to escape
liability by contending that plaintiff is no lawful corp., less willing to do so where
defendant seeks to escape liability by contending that debtor corporation, rather than
himself individually, should be liable b/c plaintiff recognized its existance Timberline
• ultra vires - an act that a corporation is unauthorized to do by its articles or the statutes that regulate it

INSIDER TRADING
• §10(b) makes it unlawful for any person to use interstate commerce (including a securities exchange) to
employ any deceptive/manipulative device (fraud/deceit) in sale/purchase of securities in contravention of
the rules created by the SEC for the protection of public interest and investors
o violation of §10(b) requires: 1) material misrepresentation, 2) scinter/recklessness, 3) reliance on
the representation, AND 4) damages caused by the representation
o purpose of §10(b) ensure fairness in securities trading Texas Gulf Sulphur (ore deposit discovery)

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• Rule 10b-5 - unlawful to use interstate commerce to: a) employ any device/scheme/artifice to defraud, or
b) make untrue statement/omission of material fact necessary for statements made not to be misleading, or
c) to operate fraud/deceit on any person, in connection with the purchase/sale of any security
• classic insider trading  fraud: individuals who are/get info from traditional insiders
o insider - one who has a statutory fiduciary duty to disclose under state law
o applies to officers, directors, permanent insiders, and temporary insiders such as attorneys
 breach of relationship of trust/confidence
o insider has duty to abstain or disclose material info, arising from: (Cady, Roberts)
 1) relationship afforded insider access to info intended only for corporate purposes, not
personal benefit, and
 2) unfair to take advantage of info, knowing it’s unavailable to those with whom dealing
o basic test of materiality: whether a reasonable person would attach importance to the
information in determining his choice of action in the transactions in question TGS
 any fact which reasonably might affect value of corporation’s stock TGS
 importance attached to fact by those who knew it is important indication of materiality
o disclosure must be in manner sufficient to insure availability to investing public - use media of
widest circulation TGS
o Individual not an insider/fiduciary has no duty/obligation to abstain/disclose Chiarella (printer)
 non-disclosure liability premised upon relationship of trust and confidence
 individual’s use of info/silence is not fraud (as required by Rule 10b-5) if no duty exists
o Stoneridge - §10(b) only applies to those who actually engage in the fraud, so Rule 10b-5 extends
only to those who actually make the fraudulent statement; others may only aid and abet
 anyone who does use manipulative device/make misstatement can be liable, including
lawyers, bankers, accountants, ect.
o Central Bank produced three governing principles:
 1) private plaintiff may not bring a 10b-5 suit against party for actions not actually
prohibited by §10b (this includes 10b-5(a)-(c))
 2) a device or contrivance is not deceptive absent some misstatement or failure to
disclose by one who has a duty to disclose
 3) the term “manipulative” has limited meaning - transactions to prevent the market price
of a security from reflecting the market’s true value of that security
 no private right exists for aiding/abetting tort claims
o special facts doctrine - ordinary insider relationship does not create duty to disclose, but
knowledge of special material facts pertaining to potential transaction creates such duty
• tippee liability/constructive insiders
o constructive insider - receives info from corp./insider for proper purpose, but uses improperly
o Dirks - tippee has assumes derivative fiduciary duty to abstain/disclose where 1) info obtained
from insider who breached fiduciary duty in disclosing info (tippee inherits fiduciary duty from
insider), and 2) trader knew or should have known of the breach
 test whether breach occurred - whether insider benefited from disclosure  insiders may
not use inside info for personal gain (whether they are trading stock themselves, or
creating valuable relationship by providing info to others); this is a question of fact
• Regulation FD - prohibits company and its senior officials from privately disclosing any material, non-
public information to analysts and institutional investors Siebel Systems (CEO comments at private event)
o issuer must make public information disclosed to market professionals Siebel
 where private disclosure is intentional, public disclosure must be simultaneous, where
inadvertent, must be prompt (as soon as reasonably practical; < 24 hours after senior
officer learns of disclosure) Siebel
 Likely material info includes:
• earnings info; mergers/acquisitions/tender offers/ joint ventures/change in
assets; new products/discoveries/developments; changes in control/
management; changes in auditors; events regarding issuer’s securities;
bankruptcies/receiverships

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 • misappropriation - when individual breaches duty owed to source of information (not to traders); must
satisfy §10(b) with both duty and breach (duty to source, breach by using info in securities trade) O’Hagan
o fraud results from unauthorized use of information
o to avoid misappropriation liability, must inform source of use of info, then no breach
o §14(e) was added to SEA by Williams Act, in order to prevent fraud in tender offers
o Rule 14e-3 disclose/abstain duty for anyone with material info about tender offer who knows/has
reason to know: 1) info is non-public, and 2) info came, directly or indirectly, from offering party,
issuer of securities involved, or any agent of the offering party Carpenter/O’Hagan
 does not require that trader owes pre-existing fiduciary duty to respect the confidentiality
of the information  designed to prevent fraudulent trading on material, nonpublic info
about tender offers b/c duty of confidentially generally exists, but hard to prove - strict
liability
o misappropriation duty applies to relationships of discretionary authority - one person must rely on
another to act for his best interests; doesn’t generally exist between family members, but does
with: attorney/client; executor/heir; guardian/ward; principal/agent; trustee/trust beneficiary;
senior corporate official/shareholder, ect.
o in response to anticipated dissent objection in O’Hagan, Ginsberg includes two safeguards:
 violation must be willful (intentional/with knowledge)
 individual must have knowledge of §10(b) and Rule 10b-5
• have to return profits, but won’t go to jail if safeguards not satisfied
o duty exists between trader and source, so §20 creates cause of action between traders
• §16(a) - required disclosure of becoming an insider/insider trades
o Sarbanes-Oxley requires beneficial exchange to be filed within 2 days (§16(a)(2)(B)
• §16(b) requires officers, directors, and 10% shareholders to disgorge profits on purchase/sale in 6-months
o 10% owner = beneficial owner; Rule 16a-8 extends beneficial owner to include trustee of trust for
trustee’s immediate family
o “officer” only includes policy making officers
o strict liability provision - applies to all 6-month profits, regardless of intent
 officer/director only has to be insider at buy OR sell; BO must be insider at BOTH
o four ways to calculate profits to be disgorged: Smolowe
 1) FIFO (first in, first out); 2) averaging; 3) tracing (matching the dates on the certificates
actually exchanged); 4) LIHO (lowest in, highest out)** court chooses (4)
o deputization - possible for an entity, such as partnership or corporation, to incur §16(b) liability as
a “director” by deputizing an individual to sit on the board on behalf of the entity Martin Marietta
 facts test - consider 1) indication of management’s intent/belief, 2) requirement of board
approval for individual to become outside director, 3) existence of other acts of
deputization by company
• insider trading actions generally brought under §10 rather than §16 because §10 has fewer restrictions:
o §10 allows plaintiffs to be anyone who engages/dissuaded from engaging in sale b/c of defendant;
§16 plaintiff must be corporation, brought by any shareholder of the corp.’s stock; SEC has no
enforcement authority under §16
 §16 plaintiff only must own 1) security in 2) the issuer Gollust
o §10 defendant - anyone with duty to disclose; §16 defendant - officer, director, 10% shareholder
o §16 doesn’t apply unless company is a §12 corporation; §10 has no such requirement
o §10 may provide penalty of jail or treble damages; §16 does not

study notes:
• stocks and bond definitions
• memorize all §14/Rule 14 provision
• piercing the veil - maybe subprime?

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 • Switzer 590…

Duty of Loyalty  conflicting interest transactions  corporate opportunity doctrine  line of business test (ALI
test)  BJR

Unocal sets up basic test, Revlon Rule adds that judicial scrutiny is going to be the main test

Enron lawyers - should have acted as gatekeeper “Enron, lawyers, fiduciary duty, current law suits”
lawyers representing directors in case shouldn’t be able to collect that amount of money - ***
lawyers that actually worked for Enron - weren’t all in house counsel, so should have known and acted as
gate-keepers  want to pierce the veil based on fiduciary duty

Proxy
• Memorize the 14a’s!!!!
•
§141 v. §142 (officers’ powers v. directors’ powers
§101, §102 (requirements for arts. of incorp)
§151- how to determine what shares to issue

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