Corporations Dibadj Fall 2009

Corporations Outline
I. Introduction to Corporations
- Developed from contract law, property law, wills and trusts and agency law.
- There are three forms of business organization: agency, partnership and corporations
- Goal of corporate law: create wealth and facilitate transactions.
1. Measuring Efficiency
How do we know if a transaction is efficient or has created wealth?
Pareto efficiency (Pareto-Optimal): system is efficient when resources are distributed in such a
way (within a given group or territory) that no reallocation of resources can make at least one
person better off without making at least one other person worse off.
Problem: there is no way to judge the effect the transaction has had on the rest of society.
Kaldor and Hicks: As long as there is a way in society to potentially compensate the people who
are worse off, then it is ok, and it is efficient.
Problem: the compensation is hypothetical and doesn’t say that the person needs to be made
whole.
2. Concerns
We are concerned with keeping down costs.
The most important transaction cost is agency costs (ex: CEOs and CFOs who have tastes in very
fine wine). Notion is that the agent (actor) will be doing something to benefit himself to the
detriment of the principle.
Struggle here: We want the agent to be productive and work to make money for the principle,
and we therefore want to give them incentives to work hard. At the same time, we don’t want
them to go crazy with their spending.
3. Debt, Equity and Economic Value

Capital Structure: made up of debt and equity  There are two ways that a company can raise
money:
1. Debt: have people lend you money: essentially a contract that allocates the relationship
between debtors and creditors with the company to get payments over the course of a certain
number of years, and then get it all back, plus interest.
Look at solvency: is the company going to make it or not? All you need is for the company to
make back their investment, how successful does not matter.
2. Equity: issue shares  there is no contractual relationship, since it is buying part of the
company. Once the debtors have been paid, shareholders get the rest. It is therefore riskier then
debt, but the risk of return can be much better.
 how do we value these assets? Use the Discounted Cash Flow
When you buy the share you are hopefully getting a return in some way: a cash flow. We then
use a “discount rate” to determine the return an investor would expect over time.
This is not an accurate reflection, since you are assuming a future cash flow, and choosing an
arbitrary discount rate.
 Risk and Return: the riskier the project, the greater the return, and therefore the higher
discount rate. Diversification can eliminate some of the risk, but some projects are so risky that
they cannot be diversified.
Corporations
Dibadj, Fall 2009 Page 1
II. Agency
1. Introduction
Agency problems have come up before in contracts and tort liability.
Agency is the simplest form of business organization: you are hiring someone to represent you.
This is not a contract: agency law imposes a fiduciary duty (higher duty) on the agent then that
which is imposed in contract law.
Agent, formally in restatement 3rd: “Agency is a fiduciary relationship that arises when one
person (a principal) manifests assent to another person (an agent) that the agent shall act on the
principal’s behalf and subject to the principal’s control and the agent manifests assent or
otherwise consents so to act”.
 the agent has authority to effect a legal relationship.
2. Vocabulary
Special agent: deals with one transaction (go by this house for me)
General agent: multiple transactions (here is some
Disclosed Principal: 3rd party knows that there is a principal
Undisclosed Principal: don’t know that there is a principal, think that the agent could be the
principal…  might want to do this because knowing who they are may drive up the price (eg: a
University wants to buy land next to the University. If the land owner knows that it is the
University, then they might want to drive up the price).
Partially disclosed Principal: 3rd party knows that there is a principal, but doesn’t know exactly
who it is.
3. Formation
An agency relationship can be expressly created, or implied.
1. Express: the fiduciary duty that arises when:
- one person (the principal) manifests assent to another person (the agent) that
- the agent will act on the principal’s behalf and subject to the principal’s control and
- the agent manifests assent as well.
2. Implied: don’t need an explicit contract to be an agent for an agency relationship to form, just
need the court to infer an agreement. Must find:
- principal assent
- agency assent
- principal control.
Jenson Farms Co. v. Cargill Inc. : An agency was implied when one party directed the other
implement its recommendations (principal assent), control through paternal guidance in
financing, etc, agent’s consent through getting products for the principal as part of normal
operation.
4. Termination
Either party can terminate at any time, but if the contract is for term then they other party can
collect damages. Otherwise, it can be terminated after a reasonable amount of time.
5. Principal’s liability
a. Liability in Contract
A principal can be held liable for the actions of the agent to a third party based on three theories:
Actual authority: that which the agent could reasonably assume from the principal: key thing is
Corporations
the relationship between the principal and the agent. Would the reasonable person standing in
the agent’s shoes assume from the principal’s action that they had authority.
There can be express or implied authority.
Apparent authority: the relationship between the principal and the third party. What a reasonable
third party would infer from the behavior of the principal. Designed to protect the third party…
look to the manifestations of the principal.
Inherent authority: relationship between the agent and the third party… looking for any action
from the agent to the third party to signal authority.
White v. Thomas: White hires Simpson to go and bid on a certain amount of land for him. She
over spends and then tries to sell part of it to the Thomas’. Court said that there was no reason
for Thomas’ to believe from her actions that she had authority to make a side deal.
Gallant Insurance Co. v. Isaac: Car insurance case. An agent had inherent authority because the
third party reasonably believed that it had authority to orally bind coverage, and the past dealings
went through and agent, and the agent filled out the paperwork.
b. Liability in Tort
If there is a master/servant relationship, then the master is liable for the tort of the servant.
Look at how much control the principal has control over the agent: the more control the principal
has over the agent, the more likely we are to find the principal liable for the actions of the agent.
Humble Oil and Refining Co. v. Martin: Man who ran the gas station for a large company was an
agent because the company had financial control, agent had so discretion. Principal was found
liable.
Hoover v. Sun Oil Co.: Guy who ran a gas station for a large company was not an agent because
he was under no obligation to follow the principal’s recommendations. Principal was not liable
for injuries that occurred at the station.
6. Agent’s Duties
The agent is a fiduciary: they are a category of legal actors upon whom we impose a higher duty.
We are trying to create legal rules that can advance the goals of the relationship: to help the
principal.
Three important duties:
1. Duty of Care: the agent must behave in the way that a reasonable person would behave under
the circumstances… This is similar to torts, except that it is more defendant friendly.
2. Duty of Loyalty: agent must advance the purposes of the principal’s and can’t “line their
pockets at the expense of the principal”.
Tarnowski v. Resop: Agent made a secret commission while selling juke boxes on behalf of the
principal; the court said he had to return those profits because he had a duty to advance the
interest of the principal over his own.
InRe Gleeson: agent running trust for the principal leased the principal’s land to himself; court
saud he could not deal with himself even though he was trying to keep the land in good shape.
3. Duty of Obedience: not as important.
Corporations
III. Partnership
1. Introduction
- Partnerships are a way to pool capital.
- There are two major problems with partnerships:
1. Liability: partners are personally liable, if you go into a general partnership, then
creditors can go after your personal assets.
2. Inadvertently get into a partnership, and if no control is specified both partners have
equal control, and it only takes one person to spoil the partnership.
2. Duty owed among partners
Partners owe to one another a duty of loyalty, and are held to a higher standard than one who
merely contracts.
Meinhard v. Salmon: Third party asked Salmon alone to re-lease a building. Salmon did not
mention this to his partner Meinhard. Court said that Salmon breached his duty of loyalty to
Meinhard by excluding him from the opportunity he had as a partner.
3. Problem of Joint Ownership

Partners are jointly and severally liable for the debts of the business  this is why people should
not go into partnerships.
4. Formation of Partnerships
A partnership can be formed expressly, or impliedly.
1. A partnership can be implied:
1. A voluntary contract of association for the purpose of sharing profits and losses.
2. Intent on the part of the individuals to share profits and losses
Factors to establish intent:
a. receipts showing share of profits and losses
b. furnishing skill instead of money: relevant
c. lack of involvement is not necessarily relevant.
 If you are share of the sales, the argument is that you are an employee but if you are getting a
share of the profits, then you are most likely a partner and have some control over the business.
Vohland v. Sweet: Sweet worked at Vohland’s nursery. He was paid a 20% commission that
came out of the profits, not the sales. The court found that had partnership could be implied.
5. Third Party Claims

a. Claims against departing partners
Policy concern: should we release departing partners from debt? If you release them from debt,
then they can bail when things get bad. If you hold them accountable, then creditors can go after
then years later for faults of their partners.
Rule comes from UPA Section 36
Corporations
(2) releases the departing partner of partnership debts if the courts can infer an agreement
between the continuing partner and the creditor to release the withdrawing partner.
(3) releases the departing partner from personal liability when a creditor renegotiates his debt
with the continuing partners after receiving notice of the departing partner’s exit.
b. Claims against partnership property
The partnership has a segregated pool of assets available for creditors.
c. Claims against partner’s individual property
When a creditor’s claim is not fully satisfied by the partnership property, the creditor can make a
claim to the assets of the individual partner’s assets as well.
When the UPA is state law, and it is not a §723 bankruptcy case: Jingle Rule applies: Creditors
of the partnership get assets of the partnership first, creditors of the individual get assets of the
individual first
When RUPA is state law or it is a §723 bankruptcy case: Parity Rule applies: creditors of the
partnership get first claim on both the assets of the partnership and the assets of the individual.
Creditors of the individual get first claim on the assets of the individual, and then second claim
on the assets of the partnership.
→ If you are giving benefits to the creditors then you are encouraging the formation of
partnerships.
6. Partnership Governance
• One partner’s action within the scope of ordinary partnership business is binding on
the other partner.
• The majority of the partnership has the ability to make the business decision, but 50%
is not the majority
 when choosing between these rules, chose the rule that will encourage business:
policy.
National Biscuit Co. v. Stroud: Two partners in a baker business. One partner tells Nabisco that
they will not accept anymore bread, the other partner tells them to send it. Court ruled that the
acceptance was binding on the partnership, even though it was 50%, since it was in the ordinary
course of business.
7. Termination
a. Partnership at will: a partnership with no time limit (at will), can be dissolved by either partner
as long as it is in good faith.
b. Partnership at term: a partnership at term cannot be dissolved until the term is up
1. Explicit: the term of the partnership is explicit in the contract.
If there is a contract in place regarding the terms of dissolution, the terms in the contract
trumps any state law to the contrary.
Corporations
 policy: we want parties to be able to negotiate, and we want to encourage the formation of
contracts.
Adams v. Jarvis: one partner withdrew from the partnership, under UPA that would result in
dissolution except there was a contract in place saying that such an occurrence would not result
in dissolution. Court said that the contract agreement trumped the UPA.
2. Implicit: the term of the partnership can be implied in some cases
A term can be implied when the partnership is for particular undertakings such as:
i. a certain sum of money is earned
ii. one or more partners recoup their investments
iii. certain debts are paid
iv. certain property can be disposed of on favorable terms.
Page v. Page: One partner wanted to terminate the partnership and cut the other partner out of the
business. Court found that the partnership was at will and therefore could be terminated since
there was no evidence of bad faith.
c. Sale of Assets in Parternship Dissolution:
There must be an actual sale of assets, not court-determined fair market value estimation and
sale (in kind)
Exceptions:
1. The partners have contracted for an in-kind distribution
2. An in-kind distribution can be ordered when
i. No credotrs would be paid off from the proceeds, or
ii. Ordering a sale would be senseless because only the partners would bid or,
iii. An in kind distribution is fair to all partners.
Dreifuerst v. Driefuerst: partnership was dissolved without any written agreement, parties could
not agree how the assets would be distributed. Court ordered an actual sale since the parties did
not agree otherwise, and none of the exceptions applied.
8. Modifications to the Partnership Form

a. Limited Partnership:
- the general partner has unlimited liability
- limited partners share in the profits without incurring personal liability for debts
- the limited partner is only liable for the money he put into the partnership
- the limited partner cannot participate in management or control
Corporations
b. Limited Liability Partnership
- intended to protect professionals
- same as a normal partnership, except partners have limited liability for tort of
colleagues
c. Limited Liability Company
- All members have liability limited to their contributions even when they exercise
control as a general partner would
- Can choose to be taxed as a partnership or corporation.
IV. The Corporation

A. The Corporate Form
The most common form is the publically traded corporation.
1. Terminology
Corporations
Closely held corporations: usually a small corporation where the shareholders and the board are
the same (usually family businesses) that incorporate for tax purposes rather than capital.
Public Corporation: corporations that traded publicly on stock exchanges for the purpose of
accumulating more capital.
 Either of the above can have a controlling shareholder or no controlling shareholder.
 Problem: minority shareholders lack power, and are liable for the controlling shareholder’s
action and decisions.
Public Policy: there is a tension between giving officers flexibility and power to make decisions
to make us money, and holding them accountable for their self-interested actions.
2. Creation of a Fictional Legal Entity
Corporations are legally treated as a person.
a. History of Corporate Formation
In past corporations were non-profits for the public good, their charters were from the state. To
make a corporation for profit, you had to get a special act from the legislature. This meant that
only the well connected were able to have corporations.
b. Process of Incorporating Today
- Individual called an “incorporator” drafts and signed the articles of incorporation/certificate of
incorporation (corporations “charter”). This includes the name of the company, the board of
directors, the number of shares, and value (usually one cent)
- The charter is filed with a designated public official, usually the secretary of the state (in
Delaware the corporations life begins then).
- Fee is due: calculated in part as a function of how many shares the new corporation is
authorized to issue (price discrimination).
- Secretary of state issues the corporation’s charter: copy of the articles + and a certificate of
good standing (in other jdx the corporations life begins then).
- Corporation elects directors, adopts bylaws, and appoints officers.
c. Articles of Incorporation or Charter
The articles can contain any provision that is not contrary to law.  overriding concept:
contractual freedom.
The corporate charter will contain the most important customized feature of the corporation,
should there be any. (Governance oddities will be covered in this).
Charter must name: the original incorporators, state the corporation’s name and (broadly) it’s
business, and fix its original capital structure.
Charter can establish the size of the board or include other governance terms.
d. Corporate Bylaws
Must conform to both the corporation statute and the corporation’s charter.
→ Bylaws fix the operating rules for the governance of the corporation.
Corporations
Under some statutes, shareholders have the inalienable right to amend the bylaws, while others
limit this power to the board of directors.
e. Shareholder’s Agreements
Formal agreements among shareholders play an important part in the legal governance structures
of many close corporations and in some controlled public corporations.
Corporation can be party to these contracts: specifically enforce these agreements where all
shareholders are parties as well.
Where some shareholders are not parties: will not always enforce it against everyone.
Voting Trust: shareholders publicly agree to place their shares with a trustee who then legally
owns them and is to exercise voting powers according to the terms of the agreement.
3. Limited Liability
Corporations have unlimited liability, and shareholders have no liability for the debt or
obligations of the corporations.
 shareholders cannot lose more than the amount they invest, but a shareholder can undertake
by contact to be a corporate guarantor.
Public Policy: Financial reasons why Limited Liability is good:
1. vastly simplifies the job of evaluating an equity investment
2. ability of the corporate form to segregate assets may encourage risk-adverse shareholders to
invest in risky ventures
3. may also increase the incentive for banks or other expert creditors to monitor their corporate
debts more closely.
 chief purpose of limited liability is to encourage investments in equity securities and thus to
make capital more available for risky ventures.
Easterbrook and Fischel on Limited Liability and Corporations
1. Limited liability decreases the need to monitor managers.
2. It reduces the cost of monitoring other shareholders.
3. By promoting free transfer of shares, limited liability gives managers incentives to act
efficiently.
4. Limited liability makes it possible for market prices to impound additional information about
the value of firms.
5. limited liability allows more efficient diversification.
6. Limited liability facilitates optimal investment decisions
4. Transferable shares
Corporations
Shareholders own a share interest, and their share may be transferred together with all rights that
it confers.  tied to limited liability: if shareholders were liable, then the creditability of the
company could change every time.
The ability of investors to freely trade stock encourages the development of an active stock
market.
Free transferability is a default provision: all jurisdictions can limit these agreements.
Free transferability compliments centralized management in the corporate form by serving as a
potential constraint on the self-serving behavior of the managers of widely help companies.
5. Centralized Management
The shareholders elect the board, and the board appoints officers and managers.
- Corporate Struggle: we want to give the board leeway so that they will go out and make money
for us, but at the same time we don’t want to give them so much room that act against
shareholder interests.
- The structure we have come up with to empower shareholders is that they can sell, sue and
elect the board.
a. Board of Directors
- We give immense amounts of power to the board.
- Directors have a fiduciary duty
Rule: the board is not required by duty to follow this wishes of a majority shareholder. This is
because the board must represent the interests of the majority and minority shareholders. If an
individual does not like it, then can sell their shares (Wall Street Rule).
Automatic Self-Cleansing Filter Syndicate v. Cunninghame: Controlling shareholder (55%)
wanted to sell the company’s assets. The directors refused to sell. The court said the board has
absolute power because the minority has to be taken into account.
Public Policy: there is a tension between protecting minority shareholders and letting the
controlling shareholder have control because he has the most invested. If the board does go
against the majority shareholders, then they can vote out the board.
Staggered Boards: A third of the board gets elected each year. If you are a majority shareholder,
it could take a while to get the whole board replaced. This prevents the board from turning over
every year. They are therefore good for stability.
Formality of Board Operations: Corporate directors are not legal agents of the corporation and
directors act as a board only at board meetings. A certain number of directors must attend the
meeting for it to be valid (a quorum). Minutes must be recorded at the meeting.
The formality of board meetings must be followed.
Corporations
Fogel v. US Energy Systems: board with 4 directors. Three meet before the meeting and
informally decide to fire the CEO. Court held that it was not valid since they did not follow the
meeting formalities.
b. Corporate Officers/Managers
The manager and the officers are the agents of the corporation.
Rule: Officers, unlike directors, are agents of the corporation and therefore a subject to the
fiduciary duties of agents.
Jennings vv. Pittsburg Mercantile Co.: Mercantile’s VP (officer) made a representation to a real
estate broker that if the broker made any offers, the board would accept them. The court ignored
inherent authority and said that the VP did not have apparent authority (3rd party would believe
based on dealing with the principal that the agent had authority) because the prior dealings with
the board were not the same and the fact that the company had an office for Egmore was
insufficient.
Grimes v. Altheon Inc.: CEO of a company enters into a verbal contract to sell 10% of the
company. Court says that he did not have the authority to do this.
B. The Protection of Creditors

Creditors get some protection: we do not want the corporation to falsify accounting, income or
assets for a loan, continue to operate while bankrupt, etc…
We are worried that companies are going to falsify their documents, and that ultimately creditors
are not going to want to lend anymore  policy-wise we are pro-business.
1. Mandatory Disclosure
Under Federal Securities Law: the general rule is that we force corporate debtors to disclose
information to creditors.
State corporate law in the US does not use mandatory disclosure laws, it leaves it to federal
securities law.
2. Capital Regulation talk to Dabaj
In the US we do not require corporations to have capital reserves (essentially a portion of money
in a separate account that you can’t touch until something goes wrong).
Policy wise we don’t do this because it ties up capital and creates barriers for individuals who
want to start a company.
3. Standard Based Duties
There are duties on individual participants in the corporation that provide for protection for
creditors.
Corporations
a. Director Liability
Director liability is to the shareholders, and in the unusual case when a corporation is insolvent,
they may have a duty to the creditors. Corporate law does not tell the directors where the first
duty is owed.
b. Fraudulent Transfers
Generally: If you are moving money around to avoid paying creditors, then those transfers are
void.
Under statutes and common law: we will void any transfers that were done to hinder and violate
the rights of creditors. If you are going to design any kind of transfer to defraud creditors, then
we will void it.
You can show this under fraud:
1. Actual Fraud: must show the intent to defraud: future or present creditors can void transfers
made with “actual intent” to defraud.  this is very hard
OR 2. Constructive Fraud: creditors can void transfers made without receiving a reasonably
equivalent value if the debtor is left with remaining assets unreasonably small in relation to its
business.
c. Shareholder Liability
i. Equitable Subordination
This is a doctrine where the court will use its equitable powers to subordinate the shareholder’s
assets.
You have a shareholder who has access to the workings of the company, and company is not
doing very well, and is insolvency is down the line. If the company goes bankrupt, the directors
is going to start paying off the creditors at the top (ie: the debt) and then work its way down to
the equity. The shareholder wants to be higher up in the creditor chain so that they can get paid
out, so they re-classify their equity as debt.
Court will determine that they are not being fair to the other debt-holders, and they will move the
debt back to equity: they subordinate the shareholder back to equity.
(Like being at the grocery store, and someone cuts in front of you at line. The court is telling
them to back it up, and get at the end).
Costello v. Fazio: Plumbing company with three partners who have debt and equity. Right before
the company declares bankruptcy the partners take the majority of their equity and move it to
debt. The court stated that they could not do this, and subordinated the shares back to equity.
ii. Piercing the Corporate Veil
Under this doctrine you are piercing the veil of the corporation and going directly to the assets of
the shareholders: This is an unusual doctrine at the margins of corporate law. We are essentially
ignoring limited liability.
Corporations
There is two part test to determine when the creditor can hold shareholders liable for a
corporation’s debts
1. There is such unity of interest and ownership that the separate personalities of the corporation
and the individual no longer exist. Consider the following factors:
- failure to comply with corporate formalities
- comingling of funds
- undercapitalization
2. Some kind of injustice or inequity: this injustice must go beyond not getting paid as a creditor.
Note: normally you must show both elements, but in some cases you only need to show one (eg:
cases where the corporation is obeying formalities, but you can still pierce the veil.)
Sea-Land Services v. The Pepper Source: Sea Land shipped peppers for Pepper Source, refused
to pay, and Pepper Source filed for bankruptcy. Sea Land attempted to pierce the corporate veil
to get to Marchese’s assets, the owner of Pepper Source. Court said the first prong was met
because corporate formalities weren’t followed, funds were commingled, and the company was
undercapitalized. The second prong was not met because there was no evidence that there were
wrongs past not getting paid.
Kinney Shoe Corp. v. Polan: Kinney leased a building to Polan’s company Polan Industries,
Polan Industries didn’t pay then went into bankruptcy. Kinney attempted to pierce the corporate
veil to get to Polan’s assets. Court said the first prong was met because the company as not
adequately capitalized, did not observe any corporate formalities, and Polan attempted to protect
his assets by moving them to a different company. The second prong was also met because not
piercing would cause a basic unfairness. Court ignored evidence that Kinney knew that the
Polan Industries was undercapitalized.
4. Veil Piercing on Behalf of Involuntary Creditors
Walkovsky v. Carlton: Walkovsky got hit by a cab owned by the Seon Cab Corporation, owned
by Carlton. Carlton also owns 9 other corporations, each of which has two cabs with minimum
auto insurance. Walkovsky attempted to pierce the corporate veil to get to Carlton’s assets.
Court said the first prong was not met because he wasn’t conducting the business in an individual
capacity. Also is not enough that a plaintiff can’t receive full recovery because of the insurance
limits.
C. Normal Governance: The Voting System

1. The Roles and Limits of Shareholder Voting
Voting is the shareholder’s most basic right: however there is still a collective action problem:
shareholders don’t vote.
2. Electing and Removing Directors
Corporations
a. Electing Directors
- Basic shareholder voting right: they elect the board of directors.
- Annual election of directors: each year voting stockholder elect either the whole board, or some
fraction of the board (staggered board). Corporations notice period, quorum requirement, record
date are established by the charter and the bylaws.
b. Removing Directors
- A director can be removed anytime for good cause (fraud, unfair self-dealing) at common law.
Limitations on the common law rule: based on due process that director is entitled to the job, bad
business judgment is not good cause.
- Directors cannot be removed by other directors without express shareholder authorization.
- 141 (k) confers broad removal power on the shareholders.
- Staggered board: the idea is that it limits a controlling shareholder’s power to appoint the whole
board.
3. Shareholder Meetings and Alternatives
i. Annual Meetings
In addition to electing directors, shareholders can vote to adopt, amend and repeal bylaws, to
remove directors and to adopt shareholder resolutions.
The meeting is mandatory, if the board fails to convene an annual meeting within 13 months of
previous meeting, courts will entertain shareholder petition and require that a meeting be held.
ii. Special Meetings
-These are meetings other then the annual meeting. They are often to allow shareholders to vote
on fundamental transactions.
- This is the only way that a shareholder can intitate action between annual meetings.
- Revised Model Business Corporate Act section 7.02 allowed for special meetings when it is
called by the board of directors, or when the holder of at least 10% of the stock demands a
meeting in writing.
- Delaware 221(d): it can be called by the board, or by people designated in the charter.
Policy: should shareholders be able to call a special meeting over the board’s objection?
- Must balance the need to manage with the costs of calling a special meeting
Pro special meetings: monitor corporate management, lower wasteful agency costs.
Con special meetings: shareholder meetings are costly, both money and time of the senior
executives.
iii. Shareholder Consent Solicitations
Corporations
This is an alternative to special meetings: statutory provisions allow them to act in lieu of a
meeting by filing written consents.
- This is through of as primarily than a cost-reducing measure for small corporations.
- This can also assist in hostile takeovers.
Delaware 228: any action that may be taken at a meeting of shareholders may also be taken by
the written concurrence of the holders of the number of voting shares required to approve that
action at a meeting attended by all shareholders.
RMBCA: requires unanimous shareholder consent.
4. Proxy Voting and Its Costs
i. Purpose
Shareholder meetings require a quorum to act (there must be a certain number of people present).
This involves a lot of time and expense, therefore the board and its officers are permitted to
collect voting authority from shareholders in the form of proxies.
ii. Costs
Soliciting proxies requires someone to incur the initial expenses. For annual meetings, costs of
soliciting proxies are a matter of normal governance, since subsidizing costs is essential to
holding annual meetings as required.
Froessel Rule: when there is a proxy contest the incumbent directors are reimbursed by the
corporation for the costs of defending a win or loss; the insurgent directors are reimbursed for
costs of attacking only if they win, unless they act in bad faith or the proxy battle is not over
policy as opposed to being over pure power.
Rosenfeld v. Fairchild Engine & Airplane Company: corporation paid 28k to incumbent
directors for their defense in a proxy battle. The corporation also paid 127k to the insurgents in
their bid for the seats. Shareholder wanted the money returned to the corporation. Court said no,
because the insurgent won, and therefore could be reimbursed for this costs in the proxy war.
5. Class Voting
Companies have different classes of shares. Generally you need a majority of each class of the
shares to approve or void a transaction.
Transactions that are subject to class voting:
- RMBCA Section 10.04: a class vote is required only if the transaction alters legal or economic
rights. (example???)
- Delaware Section 272(b)(2): a class vote is needed if a transaction would alter legal rights.
6. Shareholder Information Rights
Shareholders have the right to inspect:
Corporations
- The company’s books and records: plaintiff has a high burden to show proper purpose.
- The company’s stock list: plaintiff has minimal burden to show proper purpose. The
corporation has the burden of showing improper purpose.
7. Techniques for Separating Control From Cash Flow Rights
Baseline Rule: control and cash flow go hand in hand. When you buy a share, you get the right to
vote. In these cases we are talking about situations where people are violating this baseline rule
by trying to get control of the company (ie: the vote) without investing their money fully.
a. Circular Control Structures
Idea is that directors will want to “vote the company’s shares” on transactions within the
company itself without actually paying for them. Since they cannot do this directly, it is possible
for them to set up a second company which then buys stock in the original company.
- Essentially a way the director can control the company.
- Delaware 160(c) is meant to enforce this baseline: DGCL § 160 (c): Shares of its own capital
stock belonging to the corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or indirectly, by the
corporation, shall neither be entitled to vote nor be counted for quorum purposes.
Speiser v. Baker: HealthChem owns 100% of the shares of Medallion. Medallion has 9% voting
right in HealthMed, which turns into 95% voting right. HealthMed owned 42% of HealthChem,
with Speiser and Baker owning the rest. Court said that because the stock could be converted to a
majority, HealthChem could not vote its share in HealthMed.
b. Vote Buying
Baseline rule is still that you cannot separate control from cash flow.
- Blatant way around this: allow people to sell their shares to unmotivated shareholders.
Policy for why we do not want this: this would allow for people to take very high risks since they
do not have a lot invested in the company. This is would be unfair to the other shareholders.
We do not allow for blatant vote buying.
Vote buying is not illegal per se, unless the purpose was to deceive or disenfranchise the
shareholders. Look at the intrinsic fairness to see if the process was fair or if there is a reason
to see it as unfair.
Policy: Easterbrook & Fischel (Re-Read)
(a) Vote buying is not a good public policy.
(i) Selling votes will not protect the other shareholder’s equity.
(ii) Want individuals to have a stake in what voting for.
(b) Why not create a market for votes?
Corporations
(i) Will never be able to get back what the vote is actually worth.
(ii) Person selling the vote attaches almost no value so will not charge what it is actually
worth. (Anything is better than nothing mentality).
(c) Efficiency: Valuing stocks not hard science, valuing right to vote even more complicated.
Schreiber v. Carney: Jet owns 35% of TIA. There is a plan for a merger between TIA and Texas
Air, but in order for it to go through TIA needs Jets votes. Jets also owns warrants in TIA that
they want to exercise since the stock price will go up. They need a loan to do so. TIA loans Jet
the money so that they will vote for the merger. The court found that this was not illegal per se,
unless the purpose was to deceive or disenfranchise the shareholders.
Cryo-Cell: Angry shareholder had 6% stake in the company and threatened a proxy fight for
control. Company they would add him to the management slate in order for him to back down.
Court said this is not traditional vote-buying, but is more subtle, and that intrinsic fairness test
should not be used.
c. Controlling Minority Structures
- Controlling minority structures are ways to separate control from cash flow.
- Since this is, in effect, doing away with some of the rights to vote, it places a lot of pressure on
the right to sue and sell.
- Idea is to allow a shareholder to control a firm while only holding a small part of its stock.
- Three kinds of structures:
i. Dual Class Shares: situations where you have one class of shares that have a disproportionate
amount of voting rights (eg: Martha Stuart has 10 votes per share in her company). This is not
common outside of the US.
ii. Stock Pyramid: if you want majority control of the company, the best way to do this is to buy
51% of the company without buying all it. You stack this power by buying 51% of the company
that owns the original company. This is used outside of the US.
iii. Cross Ownership: this is when subsidiaries of a holding company own shares in one another:
it is the horizontal version of the stock pyramid. This leaves the public shareholders with very
little control.
8. Collective Action Problem
The Problem: When many are entitled to vote, none of the voters expect his/her vote to decide
the contest. None of the voters has appropriate incentive to study firm’s affairs and vote
intelligently.
9. Federal Proxy Rules
The federal government had moved to regulate the way that voting is done through the federal
proxy rules under 14(a). These SEC rules apply only to publicly traded companies.
a. Disclosure and Shareholder Communication
Corporations
§ 14(a): Unlawful for any person, in contravention of any rule that the commission may adopt, to
solicit any proxy to vote any security registered under §12 of the Act.
i. Central Regulatory Requirement
§14(a)(3): No one may be solicited for a proxy unless they are, or have been, furnished w/ a
proxy statement containing the information specified in Schedule 14A.
→ This is the general rule.
ii. Limits and Exemptions
→ If you don’t want to comply with the general rule (14(a)(3)), then look for limits and
exemptions so that you don’t have to go through the steps.
§14(a)(1): definitions of critical terms. These definitions are very broad.
Proxy: any solicitation or consent whatsoever
Solicitation: Any request for a proxy.
§14(a)(2): Two exemptions from the general rule.
1. Newer Exemption: solicitations by persons who are ordinary shareholders who wish to
communicate with other shareholders but do not intend to seek proxies.
 exception to this exemption: if you want to oppose a merger, then you have to follow
the general rule even if you are not soliciting a proxy.
2. Traditional exemption: solicitation of 10 shareholders.
iii. Mechanics
§14(a)(4): regulates the form of the proxy.
§ 14(a)(5): regulates the presentation of the proxy.
§14(a)(6): must file the solicitation with the SEC
§14(a)(7):
iv. Special Rules for Elections
b. Shareholder Proposals
§14(a)(8): Townhall Meeting Provision: Shareholders can include certain proposals in the
company’s proxy materials, however they must be excluded if:
- approval of the proposal would be improper under state law OR
- the proposal is about ordinary business as opposed to social policy
Hewlett Packard Case Study: Carpenter’s pension fund want to include a statement to move the
board to use a plurality vote. SEC denies the request to have it excluded, and HP places the
proposal on the ballot. Shareholders vote down the proposal.
Corporations
14(a)(11)
CA Inc. v. AFSCME Employees Pension Plan
c. The Anti-Fraud Rule: §14(a)(9)
Definition of Fraud:
- Material misstatement or omission: easier to get defendant for misstatement then omission.
Test for materiality: would a reasonable shareholder consider it important when deciding
whether or not to vote?
- Made with the intent to deceive (scienter)
- Upon which there is reliance
-Causing
-Injury
You must meet all of these elements.
Virginia Bankshares v. Sandberg: In a proxy solicitation regarding a merger, VBI stated that a 42
buyout price for the shareholders, who were against the merger, was a high value. Court said that
the proxy solicitation was fraudulent because: it was material in that the statement made by a
director will be relied upon, however there was no causation because the merger could have gone
forward without these minority shareholders.
10. State Disclosure Law: Fiduciary Duty of Candor
Obligation of corporate insiders to be candid when talking with their shareholders.
 use this if you can not bring a 14(a)(9) anti-fraud case.
Rule: Whenever directors communicate publicly with shareholders about shares with or without
request for shareholder action, directors have a fiduciary duty to exercise care, good faith, and
honesty.
- This seems limited to the facts of Malone v. Brincat.
D. Normal Governance: The Duty of Care

1. Duty of Care and the Need to Mitigate Director Risk Aversion
ALI’s principle of Corporation Governance: Duty of Care: a corporate director and officer is
required to perform his or her functions…in good faith, in a manner reasonably believed to be
in the corporations best interest, with the care of an ordinarily prudent person acting in
similar circumstances.
- The duty of care standard is not actually a negligence standard, since the doctrine is more
defendant friendly.
Corporations
- Policy behind the rule: we don’t want to discourage directors and officers from taking risky
decisions, we want to create a system that will allow for directors and officers to take risks this
is why the negligence standard is relaxing into being defendant friendly.
- Directors’ and Officers’ personal assets are protected through a set of the barriers that a
plaintiff would have to overcome: indemnification, director and officer insurance, the business
judgment rule, and 102(b)(7).
Gagliardi c. TriFoods International Inc. “In absence of motive, D and Os are not legally
responsible for losses incurred in good faith.”
2. Statutory Techniques for Limiting Director and Officer Risk Exposure
a. Indemnification
- Indemnification statutes authorize corporations to reimburse any agent/employee/O or D for
reasonable expenses for losses (attorney’s fees, investigation fees, settlement amounts,
judgments) arising from actual or threatened judicial proceeding or investigation.
DGCL §145: (a) Limits to indemnification: this has to be in good faith and it cannot involve
criminal activities.
(c): if the officer has been successful on the merits or otherwise, he can be indemnified.
Successful on the merits is escape from an adverse judgment or other detriment.
(f): allows for other indemnification but doesn’t set aside good faith requirement.
Waltuch v. Conticommodity Service Inc.: Waltuch was VP of Conticommodity where he traded
silver. The silver market crashed, and speculators sued him. He had legal expenses from
multiple suits that he settled. Court said the company had to indemnify him because the
settlement showed that he acted in good faith. If he had been found guilty, it would have shown
bad faith and therefore no indemnification.
b. Director’s and Officer’s Insurance

Corporations can pay the premiums for D and O liability insurance. The only difference from
indemnification is the pot where the money is coming from (in this case it is coming from the
insurance company rather than the corporation itself).
Policy: Why do we allow corporations to buy D and O insurance?
- If the company is a central purchaser: it is cheaper
- Will provide uniform coverage across the company
- When the company buys it, it can use it as a deduction.
- More cynical view: it is a disguised bump in the D and O’s salaries (if the corporation did not
buy it, it would come out of D and O’s pay check).
Corporations
Enron and WorldCom: company was going down, and the indemnification was wobbly. The
extent of the fraud was so great that it exceeded the D and O insurance, individual D and Os
were forced to pay out of their own pockets.  this is the exception.
3. Judicial Protection: The Business Judgment Rule
a. The Business Judgment Rule
Courts should not second guess good faith decisions made by independent and disinterested (no
loyalty claim) directors.
 The boardroom not the court room is the place to resolve purely business questions.
Directors are entitled to exercise honest business judgment based on information before them
as long as they act in good faith.
Courts will not interfere unless there is fraud, oppression, arbitrary action, or breach of trust.
Policy reasons why the BJR is good: encourages risk taking, avoid judicial meddling, encourages
smart directors to serve, and makes director conduct a matter of law so it can be dealt with
quickly in court.
Kamin v. American Express: Am Ex bought out of BLJ for a loss. The Am Ex shareholders
wanted Am Ex to take the loss and deduct from their taxes. Am Ex instead passed out the shares
to the shareholders. Court said that this decision fell under Am Ex’s business judgment and
should be decided in the board room.
b. Duty of Care in Takeover Cases
You can defeat the BJR if one can show that the D and O’s were grossly negligent: establish
that the directors didn’t take proper process to become duly informed.
If the plaintiffs can show duty of care and breach of the that duty of care, the burden shifts to the
defendants to show that the transaction was entirely fair.
Smith v. Van Gorkom: Merger between two companies. Shareholder sued, alleging that the
directors breached their duty of care in approving the deal without being informed about it. The
board essentially rubber stamped a personally negotiated deal between the two CEOs. Court said
the directors were grossly negligent because they didn’t follow proper process to make sure they
were informed, so there was a breach of the duty of care.
c. Charter Provisions Waiving Liability for Due Care Violations
§102(b)(7): a waiver in the charter for monetary damages that says a director has no liability for
losses cause by transactions in which the director had no conflicting financial interest or
otherwise didn’t violate the duty of loyalty. This essentially eliminates the possibility of a duty of
care claim.
 if you want monetary damages and there is a 102(b)(7), you have to try a duty of loyalty
claim.
If there is a 102(b)(7) provision and there is a claim for money, it will not be actionable, unless
there is an equitable remedy, like an injunction.
Corporations
4. Delaware’s Unique Approach
Technicolor:
Emerald Partner:
5. The Board’s Duty to Monitor: Losses “caused” by Board Passivity
A duty to monitor is a subset of a duty of care.
- A board may have breached its duty to monitor when there is a failure to act. Directors must
acquire at least a rudimentary understanding of the business, particularly financial
performance (as opposed to detailed knowledge).
- You have a much better chance of getting an officer for inaction then for bad decision making.
- These are chases where the board members are not directly stealing, but have an inability/lack
of monitoring those who are.
Francis v. United Jersey Bank: Mrs. Pritchard was a director along with her sons, who were
taking money from the small company. She was sued by someone claiming that she breached
her duty of care for failure to monitor her son’s activity. Court said Mrs. Pritchard breached her
duty to monitor because she didn’t know anything about the company and should have known
her sons were stealing.
Graham v. Allis-Cahlmers Manufacturing: Allis-Chalmers was a large manufacturer of
equipment. A particular department manager was fixing prices, and the directors were sued
because they didn’t take action to learn of the price fixing. Court said they did not breach the
duty to monitor because they were relying on their employees and they were not given any
reason to be suspicious.
You can be liable for failure to monitor under federal securities law.
In the Matter of Michael Marchese: Marchese never reviewed any of the accounting procedures,
or the controls of the company. He backdated an acquisition, and approved multi-million dollar
consulting fees. Court found that you can be liable for failure to monitor under federal securities
law.
In Re Caremark: Caremark is a health care provider that had some employees who were paying
doctors to prescribe drugs, which is illegal. Government sued Caremark’s directors for failure to
monitor their employees. Court said they were not liable because they tried to exercise oversight
by providing a guide to govern compliance with the law.
Sarbanes-Oxly Act of 2002
We do not hold financial experts to higher standards to monitor.
In Re Citigroup: plaintiff is saying that the board did not monitor and failed to pay attention to
red flags. Citigroup had a 102b7, the Court found that they were not liable for lack of monitoring
since experts are not held to a higher standard.
Corporations
E. Conflict Transactions: The Duty of Loyalty
Corporate directors and officers’ have to place the corporation’s interests above their own.
1. Duty to Whom
Shareholder Primacy Norm: The duty is primarily owed to shareholders, the court found that
you can be liable for failure to monitor under federal securities law.
However, if the corporation is insolvent then the duty can also be owed to creditors.
Constituency statutes.
Dodge v. Ford: Dodge wants a special dividend paid out the shareholders. Ford says that instead
they are going to use the money to cut their costs of production for consumers. Court said that
Ford cannot do this, they must put the needs of the shareholders before the needs of the public.
Corporations can make donations by applying the shareholder profit maximization broadly: if
the directors decide that a donation can maximize the corporation’s profits, then it’s ok.
A.P. Smith Manufacturing v. Barlow: A.P. Smith made a donation to Princeton. Shareholder
sued, claiming that the company’s donation did not advance the interests of the company and
therefore breached the duty of loyalty. Court said the donation did benefit the corporation
because corporations need learning institutions to have educated people as employees, aid public
welfare, respect.
2. Self-Dealing Transactions
This is a transaction where the director and officer is on both sides of the deal.
If you engaged in a self-dealing transaction, and you owe a fiduciary duty, you must:
1. disclose all information
2. get approval by a disinterested board or shareholders
If you do not do this, then the transaction is reviewed for fairness.
a. Early Regulation of Self-Dealing
- Historically a bright line prohibition of self-dealing transactions developed from trust law.
- Now corporate law has softened the bright-line rule where the transaction is:
1. Disclosed for approval by disinterested directors or shareholders AND
2. Intrinsically fair.
Policy: Self-dealing transactions can be beneficial to a corporation (eg: a corporation gives a
talented CEO a loan to make sure that they stay with the company).
b. The Disclosure Requirement
Corporations
An interest director must make full disclosure of all material facts of which she is aware at the
time of authorization of the conflicted transaction.
Disclosure is only a pre-requisite to trying to get disinterested director or shareholder approval. If
they have not disclosed, then the approval is not meaningful.
Hayes Oyster Co. v. Keypoint: Verne Hayes was a director of Coast as well as a director of
Hayes Oyster. Coast needed cash, so they sold some beds to Keypoint, which was partially
owned by Coast. Therefore Verne was on both sides of the dealing. He did not tell anyone
about Hayes Oyster’s interest in Keypoint. The court held that Verne breached the duty of
loyalty by not disclosing his interest in Keypoint.
c. Controlling Shareholders and the Fairness Standard
i. Controlling shareholders
A shareholder has control if they essentially control corporate machinery: this is someone who
has enough stock to be able to control the board.
General problem: some controlling shareholders engage in self-dealing transactions that hurt
minority shareholders.
Policy: controlling shareholders will argue that they should be able to do what they want, since
they are in control. Minority shareholders say that control does not mean you can disregard all
other shareholders.
Controlling shareholders still owe a fiduciary duty when engaged in self-dealing transactions.
If you are a controlling shareholder and you prove that you have gone through the necessary
procedures, then the burden shifts back to the plaintiff to show that the transaction was unfair.
Sinclair Oil v. Levien: Sinclair owned Sinven and Sinven was paying out dividends while the
company needed cash. Court said there was no self dealing at all because minority shareholders
were also receiving a benefit from the dividends being paid, so Sinclair did not meet the
threshold for a duty of loyalty violation. Court then applied business judgment rule, which
Sinclair passed because no gross negligence or waste.
ii. Fairness Standard
If you are an entity with a fiduciary duty, and you are engaged in self-dealing transaction,
then the baseline standard to evaluate is fairness.
Fairness = fair price and fair process.
Sinclair Oil v. Levien
3. The Effect of Approval by a Disinterested Party
a. Safe Harbor Statutes
DGCL 144 (a): these statutes make self-dealing transaction OK if:
Corporations
1. You get disinterested board approval or
2. Unaffiliated shareholder approval
OR/AND 3. Fairness.
Disclosure is a pre-requisite for prongs 1 and 2, although the second prong is hard to determine.
The baseline is already fairness, so the third prong is not really there.
Cookies Food Products v. Lakes Wherehouse: Herrig owned Lake and Speed. Cookies sold
barbeque sauce, and made an agreement with Herrig to sell their sauce through Lake, resulting in
great sales. Herrig eventually purchased enough stock of Cookies to become a majority
shareholder. In this position he extended the dealership agreement with Lake for the sauce.
Court said there was self dealing, no safe harbor, but Herrig did not breach his duty of loyalty
because there was full disclosure of the arrangement so it was fair.
b. Approval by Disinterested Members of the Board
- Approval by a disinterested board reverts to the business judgment rule.
- Approval by disinterested directors shifts the burden of proving fairness in a controlled
transaction to the plaintiff challenging the deal. Is this because of BJR, which makes it necassaey
to show gross negligence to prevail?
Cooke v. Oolie: Oolie, a director, wanted to make an acquisition, which two other disinterested
directors voted for as well. Court said there was self dealing, but because he had disinterested
director approval, business judgment rule applies which was passed because no gross negligence
or waste.
c. Approval by a Special Committee
Approval by a special committee has the same effect has approval by a disinterested board.
d. Shareholder Ratification of Conflict Transactions
Shareholders can ratify conflicted transactions under the theory that the shareholder is the
principle, and the principle can always ratify the actions of the agent.
Shareholder ratification must be informed, not-coerced, and disinterested.
- Even if the transaction is wasteful, if you have unanimous shareholder vote, then the
transaction can still be ratified.
Policy: these requirements are necessary because of the collective action problem.
Lewis v. Vogelstein: Board established their own compensation. Court said the compensation is
subject to the business judgment rule.
Corporations
In Re Wheelabrator Technologies Inc.; Review: if you have a self-dealing transaction between a
corporate officer or director: then the BJR applies. If it is a controlling shareholder, then you
have the fairness standard with a burden shift.
4. Director and Management Compensation
Perceived Excess Compensation
- CEO’s now make 500x the average worker, BUT it is difficult to estimate the market price for
unique talents that make a good executive.
- Often directors will appoint a separate compensation committee. Will use benchmarking
studies to show arms length transaction.
Lewis v. Vogelstein
5. Good Faith Standard
A breach of good faith is established when there is an intentional dereliction of duty, which is a
conscious disregard for responsibilities by a director.
→ this is an even more defendant-friendly standard, than business judgment rule.
→ if you can prove this, you can overcome a 102(b)(7)
In Re Walt Disney: Eisner, CEO of Disney, made the decision to hire Ovitz with minimal board
input. Ovitz was fired without cause and therefore received a large severance package. The
dismissal was approved by the board without research. Disney had 102(b)(7) waiver so only
option was a duty of good faith suit or a duty of loyalty suit which was not at issue because no
self dealing. Court said Eisner did not breach the duty of good faith because had no obligation to
continuously inform the board of his actions, and his actions were of the belief that hiring Ovitz
would be good for the company.
6. Corporate Opportunity
i. Is the opportunity corporate?
Three tests to determine this:
Expectancy or Interest Test: The opportunity is corporate if there is an existing legal right that
the corporation could act on.
Line of Business Test: Anything that falls into the line of business belongs to the corporation.
Factors: 1. How this matter came to the attention of the D and O or employee
2. how far removed from the “core economic activities” of the corporation the opportunity lies.
3. Whether corporate information is used in recognizing or exploiting the opportunity.
Fairness Test: More modern test. Factors: how the manager learned of the disputed opportunity,
whether he or she used corporate assets in exploiting the opportunity, and other fact-specific
indicia of good faith and loyalty to the corporation, in addition to a company’s line of business.
ii. Even if the opportunity is corporate, could the fiduciary have still taken the opportunity?
Corporations
- Corporation does not have the financial resources to take the opportunity (hard to argue unless
the corporation is insolvent).
- Corporation did not want to take the opportunity.  if this is the case then you want to
disclose, but it is not required Broz v. Cellular Information Systems.
iii. Waiver of Corporate Opportunity
Under DGCL 122(17): explicitly authorizes a waiver in charter of the corporate opportunity
constraints of officers, directors or shareholders.
F. Shareholder Lawsuits
1. Direct v. Derivative
Test to determine if the suit is direct or derivative:
1. Who suffered the alleged harm
2. Who would receive the benefit of any recovery or other remedy
Tooley: delay in closing a merger by 22 days.
a. Direct
Suit in which the shareholders allege that the corporation did something to directly harm them.
The recovery goes to shareholder. It can be done individually or in a class action.
b. Derivative
Alleging a harm to the corporation, so the recovery would go back into the corporation.
- When you bring a derivative suit, it is bifurcated: it is divided into two parts.
1. Shareholder must compel must either the directors or officers to take action, or they
must get it out of their hands.
2. Substantive claims: underlying claims and violations (ie: violate duty of loyalty or
care).
2. Collective Action Problem
- Problem of a small number of corporate insiders and a large number of dispersed shareholders,
but who are too busy to monitor the actions of the insiders.
- One of the main issues here is that plaintiffs don’t really care: it is more that plaintiff’s lawyers
are making a lot of money off of a lot of disinterested shareholders.
You don’t necessarily need a common fund or monetary damages to get your attorney’s fees,
all you need is for the litigation to provide a “substantial benefit” to the corporation.
Corporations
Fletcher v. A.J. Industries, Inc.: derivative suit, and they get a settlement. Settlement doesn’t
involve monetary damages, it is mostly around equitable relief. Even though there is no
monetary damages, the lawyers sue and the court awards them their attorney’s fees. Dissent said
that the trouble the corporation would have to go through the pay these fees will outdo the
substantial benefit.
3. Standing Requirements
Under 23.1 there are four things that a plaintiff must show to bring a derivative suit:
1. They must be a shareholder for the duration of the action
2. They must be a shareholder at the time of the alleged wrongful action or omission:
“contemporaneous shareholder”.
3. “Fair and Adequate”: represents the interest of shareholders, meaning that there are no obvious
conflicts of interest.
4. Demand Requirement: the complaint must specify the action the plaintiff has taken to obtain
satisfaction from the company’s board, or state with particularity the plaintiff’s reason for not
doing so.
i. The Demand Requirement
In order to show the demand requirements, and plaintiff has the burden of showing:
1. The board is not disinterested/independent
- This is mainly just counting for a majority.
- You need to point particular directors when making this claim
- This should be analyzed at the time the complaint is filed
2. OR that the underlying transaction is not within the business judgment rule
- This should be analyzed at the time of the underlying transgression
→ It is almost impossible to prove the second prong, so you want to hang your hat on the first.
Policy: Pro: this weeds out frivolous/strike suits.
Con: you are asking for particularized pleading before discovery.
Levine v. Smith: Transaction in which a director of GM sold his stock back to GM at a
premium; part of the consideration was that he wouldn’t criticize. Shareholders brought a
derivative action, and claimed demand futility. Court said the suit could not be brought because
the demand futility requirements were not met. Under the first prong, at least 12 of 21 directors
were independent, and under the second prong, the fact that the directors acted quickly is not
enough to show gross negligence.
Corporations
Rales v. Blasband: Adds timing aspects to demand futility requirements
ii. Pre-Suit Demand
Universal Non-Demand: In Delaware, if you make a demand on the board, you are conceding
that they are disinterested (presumes the first prong is met).
Universal Demand: ALI, you should always make a demand, and it is does not mean that they
are disinterested.
iii. Special Litigation Committees
This a way to stop a lawsuit once it is underway. The corporation can appoint a special litigation
committee made up of disinterested directors that can decide if the litigation is with merit.
- New York: as long as the committee is independent, then their decision is ok, and cases can be
dismissed.
- Delaware: Zapata Two Step

1. Committee is independent and exhibited Good Faith
- Corporation has the burden of showing this
2. Court should use its business judgment to decide of it is fair.
Courts tend to avoid using this test by saying

1. Their business judgment lets them decide the first prong without analysis.
2. They only have to use their business judgment at their own discretion, and therefore chose not
to.
Zapata Corp. v. Maldonado: Maldonado brought suit and satisfied all standing requirements.
Zapata appointed four new directors as a special litigation committee, which found that the
action should be dismissed. Court set forward the test above and remanded the case to see if the
committee was sufficient.
In Re Oracle Corp. Derivative Litigation: Oracle’s directors were sued for insider trading. After
the plaintiffs filed suit successfully, Oracle formed a special litigation committee made of
Stanford professors. The court found that the first prong of the test was failed because the new
committee was not independent. Even though they had tenure and therefore had freedom to
make decisions adverse to Stanford, Oracle made a lot of contributions to the school.  This is
exceedingly rare, and is the exception.
Courts sometimes use a balancing test to determine what business judgment looks like
(Second Prong of Zapata): look at the relative cost benefit of allowing the litigation to go
forward, and based on that to decide whether or not to dismiss. Joy v. North.
Corporations
 An alternative to Zapata might be a more rigorous effort to ensure the independence of the
directors who sit on the SLC: Michigan has tried this.
iv. Settlement and Indemnification
Directors and Officers have great incentives to settle. Since they have indemnification and
insurance, their personal assets aren’t really at issues: it is more a concern of bad publicity.
→ It is a nuisance to be involved in litigation.
Courts usually apply the Zapata test to decide if the settlement should proceed.
Policy: should courts be policing settlements?
To what extent do wants suits to proceed?
Pro: these allow individuals to police the corporation
Con: saying that these are rich plaintiff lawyer driven suits at the expense of the shareholders.
Carlton Investment v. TLC Beatrice: Shareholder sued the directors based on a payout package
they approved. The corporation put together a committee to decide what to do, and they decided
to settle. Court applied the Zapata test and found that both prongs were met, and the settlement
could be approved.
SELL
A. Transactions in Control
i. Intro
Generally we do not care about when shareholder’s sell, but there are some situations where the
selling of shares involves some kind of transactions that corporate law is concerned about.
 One of these areas is when the selling shares changes the control of the corporation: these
called transactions in control. They are typically sold as a premium.
There are two ways that you can get controlling stock:
1. Buy someone’s block of controlling stock
2. Amass a large amount of smaller shares from lots of minority shareholders
ii. Seller’s Duties
a. Control Premium
Market Rule: “Absent looting of corporate assets, conversion of a corporate opportunity, fraud,
or other acts of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy,
that controlling interest at a premium price.”  defendant friendly.
→In the US, as a matter of state corporate law, minority shareholders do not have the right to sell
their shares at a premium.
Zetlin v. Hanson Holdings, Inc.: Hanson Holdings sold their interests in Gable to Flinkote for a
Corporations
premium price of $15 per share; the shares were trading at about $7 per share. Court said that
the premium was valid because the market offered it and there was no evidence of looting, etc.
Feldman Exception to the Market Rule: In a time of market shortage, where a corporation’s
product commands unusually large premium, a fiduciary may not appropriate to himself the
value of the premium, it must be spread to the shareholders.
 this is very much an exception.. plaintiffs will want to use this.
Perlman v. Feldman: Newport was in the steel business. Wilport wanted to get a source of steel
in a tight market. Newport was controlled by Feldman, who sold his shares to Wilport for $20
per share, when the market price was at $12. Along with the sale went Newport’s unique
business plan. Court said the premium must be spread around because Feldman sold a valuable
business plan (corporate machinery) along with control of the corporation.
Equal Opportunity Alternative: minority shareholders can sell their shares at the same premium
as the control shares.
Policy in Support of the Market Rule:
Easterbrook & Fischel: Proposed alternatives to the Market Rule would inhibit transfers of
control to the detriment of minority shareholders. The market will adjudicate.
If pay premium to corporation rather than the shareholder, controlling shareholder’s will not
agree to the sale.
If minority shareholders can sell on the same terms as controlling shareholders, potential buyers
may not want to buy.
Digex p. 428: you had effectively a controller in a subsidiary. The controller decides to sell
themselves, and only their control block. Plaintiff lawyer argued that in order to make the sale,
they had to use the corporate machinery. By needing to abide by Delaware 203 and needing to
get board approval, you had to have access to the corporate machinery, and you therefore owed a
fiduciary duty.
 Problem: if you apply this broadly it can eviscerate the Zetlin/Market rule. Plaintiff’s are
going to want to do this every time. This is the same transaction, just pleaded differently.
b. Sale of Corporate Office

The greater the percentage of shares sold and the lower the premium paid, the more likely to
court is to say that the sale is ok. (Carter)
The small the percentage of shares sold, and the greater the premium paid, the more likely the
court is to think that there is a side deal going on and that it is not OK  worried about selling
offices. (Brecher)
Carter v. Muscat p. 428: management who sells about 10% of their stock. The premium was
slightly above market
Brecher v. Gregg p. 429: sale was for 4% of the shares, and the premium was over 35%
The greater the percentage of shares and the lower the premium, the more likely to court is going
to say that it is ok.
c. Looting
If a reasonably prudent person would think that they were selling to looters, then they have a
duty to investigate the buyers’ acts.
Corporations
Harris v. Carter: Carter controlled Atlas with 52% of its stock. Carter sold this block of stock to
Mascola, who diverted much of the value from Atlas to Mascola and his friends. Court said that
the baseline argument that Carter could sell his stock as he wished was no good because he had a
duty to investigate the buyer. Case was remanded to see if he met that duty.
ii. Buyer’s Duties

a. Williams Act
Federal Statute passed: this was designed to slow down the process, and make it so that
shareholders were able to look at the offer before they accepted.
→ has had the unintended effect of reducing transfers in control.
Elements of Tender Offers
1. Early Warning System 13(d): if you cross the 5% ownership status, you have to file a form
with the SEC. Essentially declaring to the world that you are crossing a certain threshold.
2. Disclosure 14(d): if you are going to actually make an offer you must disclose identity, future
plans, financing, etc…
3. Anti-Fraud 14(e): Specific anti-fraud statute: prohibits misrepresentations, nondisclosures, and
“any fraudulent, deceptive or misrepresentative practice”. This also prohibits insider trading.
4. Substantive terms: how long must the offer be held open: at least 20 business days 14e1, and
under 14e10, you must offer the same price to all shareholders (you can put conditions on it,
like I will only buy 20,000 shares).
→ Although the Williams Act was intended to govern Tender Offers, it does not define what a
tender offer is.
There are two different tests to determine what a tender offer is:
1. Southern District Test: look at whether there was solicitation, whether it was contingent on a
certain number of shares, and whether there was an offer at a fixed price.
2. Eight Factor SEC Test:
1. Active and Widespread solicitation of public shareholders
2. The solicitation is made for a substantial percentage of the issuer’s stock
3. A premium over the prevailing market price
4. The terms of the offer are firm rather than negotiable
5. Whether the offer is contingent is contingent on the tender of a fixed minimum number
of shares
6. Whether the offer is open only for a limited period of time
7. Whether the offerees are subjected to pressure to sell their stock
Corporations
8. Whether public announcement of a purchasing program . . . precede or accompany a
rapid accumulation.
Brascan Ltd. v. Edper Equities Ltd.: Edper had a 4% stake in Brascan and wanted to increase his
influence. Edper had its investor contact potential offerees, informing them that Edper would
purchase 3 or 4 million shares at several dollars above the market price. By the end of the day,
Edper had purchased 6.3 million shares at the price mentioned by the investor. Court said there
was no tender offer because only 50 of 55,000 shareholders were contacted; only slightly above
market price; terms were negotiable (just trying to “find the right level”); number of shares
desired was not fixed; offer was open; no pressure because of time constraints; and only a few
scattered announcements.
b. Hart-Scott-Rodino (HDR) Act
Imposes a waiting period before a bidder can commence to offer. HSR filings must be disclosed
immediately to target companies and bidders may not close a deal until the relevant warning
period has elapsed.
Cash offer: 15 days
Stock Offer: 30 days
B. Mergers and Acquisitions (M and A)

1. Intro
M and A is a particular subculture of corporate law that has extreme intensity.
Three ways to do this:
1. Merger: unites two existing corporations in to
2. Asset Acquisition: you are essentially going and buying the assets of the corporation.
3. Share Acquisitions: you go out and buy all the stock of the company.
2. Motives
Why do people do M and A?
PROs:
economy of scope: you can spread you costs across a variety of areas, by not increasing the scale
of production but instead by spreading costs across a broader range or related business activities.
economy of scale: when a fixed cost of production is spread over a larger output , thereby
reducing the average fixed cost per unit of output.
Diversification: allows the companies to be more competitive and manufacture a variety of
products.
Corporations
Synergy: you can do a lot more if you are working together
Superior Competition, Tax Reasons, Agency Costs are lowered
→ it is much easier to build up through M and A rather than organically.
CON: risk of monopoly, Clash of cultures, Over-paying for the company, Ego/Empire-Building
“Squeeze out”: controlling shareholder acquires all of the company’s assets at a low price, at the
expense of its minority shareholders.
3. History
Voting: there has been a decrease in regulation. It has gone from requiring a unanimous vote by
shareholders, to a super majority, to a majority.  this is very pro M and A.
Appraisal Right: additional right to voting. You can say “I didn’t vote for the merger”, and go to
a judge and have him appraise how much your shares are worth.
4. Allocation of Power
To whom do we want to allocate the power to decide mergers and acquisitions?
 Do we want shareholders to vote, or do we want the board to decide.

There is a continuum of importance of shareholder vote: we do not need shareholders to vote on
the placement of the flowers in the lobby, but we do want them to decide if the corporation is
going to be dissolved.
Rule of Thumb: look after the transaction and if the shareholders will still have power, or a say
in running the company, then we tend not to give them a vote on the transaction.
If you look after the transaction, and the shareholder will not longer have power: they will
probably have a vote.
Mergers require a shareholder vote on the part of both the target and the acquiring company,
expect the acquiring company’s shareholders do not vote when the acquiring company is much
larger than the target.
Sale of assets: need a shareholder vote if you are going to be selling all, or substantially all of
their assets. Purchases of assets do not require a vote.
If you are issuing additional shares: under state corporate law does not get the right to vote.
5. Transactional Forms
i. Asset Acquisitions
When you do an asset acquisition, you are not stuck with the company’s liability  this is not
the case with share acquisitions or mergers.
Problem: there are very high transaction costs, it is very lengthy, and due diligence is required.
Corporations
Delaware 248 governs asset acquisition: if you are selling “all or substantial all” of your assets.
Problem  What does “substantial all” mean?
Two ways to look at this:
a. Qualitative approach: You look at whether the transaction is out of the ordinary
course and substantially effects the existence and purpose of the corporation.
Katz v. Bregman: Plant sold several subsidiaries including one which was their only income
producing facility to raise cash. Court said that 51% of assets was substantially all, so the sale
required shareholder approval.
Thorpe: Controlling shareholders were also the directors and CEOs. If you put it to shareholder
vote, then the controlling shareholder is the insider who can veto the deal.
Also looking at the qualitative effect on the corporation  they still put it to shareholder vote:
whether a transaction is out of the ordinary course and substantially affects the existence and
purpose of the corporation.
b. Literal approach: substantially all would therefore be essentially everything
Hollinger, Inc. v. Hollinger Intl.: Hollinger Intl. sold the Telegraph Group of its newspapers,
which constituted 56% of the company. Court said this was not substantially all of its assets, so
no shareholder vote was needed.
→ now there is a movement away from qualitative approach towards share acquisitions.
ii. Share Acquisitions
This is when you purchase all, or a majority of, the company’s stock.
- To fully acquire a company, much purchase 100% of outstanding shares  this is the only way
to change the company’s legal status.  this does not require shareholder approval.
There are ways to get stock even if some shareholders refuse to sell:
Short Form Merger: if the acquirer gets 90% of the stock, then the
remainder can be cashed out.
Compulsory “Share Exchange Transactions”: this is a tender offer
negotiated with the board that, once it is approved by the majority of
shareholder, becomes compulsory for all shareholders.
Two Step Merger: 1. Make a tender offer for most or all of the target’s
shares.
2. Merge the target and a subsidiary which squeezes out minority
shareholders.
iii. Mergers
Corporations
-Mergers legally collapses one corporation into another.
- The corporation that survives is the surviving corporation (still maintains its legal identity).
This surviving corporation generally assumes the liabilities of both corporations.
Voting for mergers:
Preferred Stock:
- In Delaware: DGCL § 25 Generally preferred stock holders to not have the legal right to vote.
- DGCL § 242(B)(2): They do however, have the right to vote if their legal rights would be
formally altered.
Common Stock:
- Target Company: always have voting rights
- Surviving Company: Generally get a vote unless 3 things are met:
1. Surviving corporations charter is not modified
2. The security held by the surviving corporation’s shareholders will not be exchanged or
modified and
3. The surviving corporation’s outstanding common stock will not be increased by more
than 20 percent.
→ these are actually proxies for determining how much power the shareholder is going to have
after the transactions, and whether it is a “whale-minnow” situation.
Triangular Mergers
- Triangular mergers are a way around liability: surviving corporations create a subsidiary with
little money or assets that then acquires the target: only the assets of the subsidiary are exposed.
6. Structuring the Mergers and Acquisitions Transactions
M and A are actually commercial contracts, and the parties are trying to protect themselves
through contracts.
a. Timing
It will always be desirable to close a deal as quickly as possible.
→ the quickest way to make sure that a sale is complete: all cash tender offer to the shareholders
(under the Williams Act, the deal can be closed in 20 days).
Stock acquisitions are slower since you should put it to a shareholder vote (since this will
dramatically reduce your chances of getting sued.)
b. Due Diligence
Corporations
You want to investigate the potential merger to make sure that you are not being defrauded: look
to acquire reliable information about the target company.
→ this is made easier by representations and warranties: the companies represent their assets and
liabilities, and warrant that they are legitimate, and that you own them.
7. Taxation of Corporate Combinations
This is rarely the driving motivation behind corporate control transaction, but always important.
a. Basic Concepts
- Federal taxes levied on income (includes gains in the value of investments).
- Gain: Excess of the net amount realized on sale over adjusted cost basis.
- Cost Basis: Cost after reduction for the depreciation made against the asset’s cost in
calculating annual income taxes.
- Gains or losses recognized as either capital gains/losses or ordinary income/loss.
b. Tax-Free Corporate Reorganizations
- No taxable gain recognized for reorganization of ownership interests w/o changing
identity of owners.
c. Internal Revenue Code § 368: Save Harbor for Tax-Free Reorganizations
- Exempts Stock-for-Stock Mergers in which consideration is voting stock.
- Exempts transactions in which at least 80% of all shares of voting stock (and 80% of
each class of nonvoting stock) acquired in exchange only for voting stock of acquirer.
- Exempts reorganizations in which acquirer gets assets only in exchange for voting stock
of the acquirer.
If qualify for exemption, no recognition of gain by sellers for tax purposes.
Policy: Tax law shouldn’t interfere w/ capital in the market any more than necessary.
8. Appraisal Remedy
An appraisal remedy is given a qualifying merger: a minority shareholder can go to a judge, and
say that since they did not vote for the merger, they would like the fair going concern value for
their shares.
DGCL 262: governs appraisal rights  Market Out Rule

1. If you are a shareholder in a private firm with fewer then 2,000 shareholders, you always get
an appraisal right  proxy for liquidity
2. If you are a shareholder in a public firm or with more than 2,000 shareholders, you do not get
an appraisal right if you are getting stock.
 you do get an appraisal right if you are getting cash, unless you are getting cash for a fraction
of your shares, in which case you do not get an appraisal right.
Fair Value: what you can get is your pro rata rate for the fair value of your shares.
1. You do not get the value of the merger.
2. Technique used is the discount cash flow model.
 with no appraisal rights there is more freedom for business arrangements.
Corporations
Hariton v. Arco Electronics, Inc.: Loral purchased all the assets of Arco. Dissenting
shareholders in Arco wanted a judicial appraisal. Court said no because even though the
purchase of assets had a similar effect to the merger, the DE statute says appraisal is only
available for mergers specifically.
9. De Facto Merger
Functionalist: if it looks like a merger, and it feels like a merger, then we are going to treat it
like a merger.
Formalist: even if it looks like a merger, it is not one unless it is a merger in form  most jdxs
follow this, including Delware.
 corporate law is already very formal.
Hariton v. Arco: the Court ultimately said that the shareholders should have known that section
271 does not give you appraisal rights, therefore there was no de facto merger, so no appraisal
rights.
10. Duty of Loyalty in Controlled Mergers
There is a tension with the controlling shareholder: they can vote their shares for their benefit,
but they still owe a fiduciary duty.
Baseline rule: a controlling shareholder on both sides of a transaction has the burden of proving
entire fairness.
a. Freeze Outs
Basic steps for a freeze-out: majority shareholder has control over board, they have the board or
a committee come up with a price, they may ask the shareholders to vote on it (it would be the
majority of the unaffiliated shareholders), they then give them the money for their shares.
Generally, once the board and the majority of the shareholders have voted on it, it becomes
mandatory for all shareholders.
Standard: Entire Fairness (Fair Price and Fair Dealing) when directors of a DE corporation are
on both sides of the transaction.
Fair Dealing: Obvious Duty of Candor (Kahn v. Lynch) and may not mislead SH’s.
Initial BoP on ∆ to prove entire fairness. If valid independent committee approves
transaction, BoP shifts to Π to show it was not fair.
What Remedies are Available for Breach of Duty of Loyalty in controlled merger?
(i) Weinberger: Appears to say appraisal remedy is the only available
remedy b/c transaction cannot be undone.
1. If there is no evidence of fraud, etc. – Monetary damages limited to
appraisal.
2. If there is fraud etc. – Court can award other remedies.
(ii) Rabkin: Court found Fiduciary Duty Remedy available as well as
appraisal remedy. Upheld in Cede v. Technicolor.
(iii) In Practice Today: You can Raise Both.
1. If you ask for appraisal rights, don’t have to show breach of fiduciary
duty but you won’t get as much money as w/ a fiduciary claim.
Corporations
2. If seek an appraisal remedy, have to permanently opt out of merger.
3. Entire fairness actions (not appraisals) are the principal means used
today for SH’s attacking the fairness of price in a self-dealing
merger.
(vi) Weinberger was the first case that said that when determining the fair
price of the shares, you look to the discounted cash flow.
Weinberger v. UOP, Inc.: Signal is the majority owner of UOP. Signal elected 6 of UOP’s 13
directors. Signal then merged with UOP, eliminating minority shareholders. Disclosed report
was given that said that a fair price for the dissident shares would be up to $24. Signal settled on
$21 per share. Action brought for a duty of loyalty claim. No safe harbor statutes met, so
subject to fairness. Disclosure of the report was flawed, so still stuck in fairness. Court said no
fair dealing because no negotiation, poor disclosure; also said price may or may not be fair
depending on judicial appraisal on remand.
b. Control
Baseline rule is still: a controlling shareholder on both sides of a transaction has the burden of
proving entire fairness.
 BUT an approval of the transaction by an independent committee of directors or an informed

majority of minority shareholders shifts the burden of proof on the issue of fairness from the
controlling/dominating shareholder (plaintiff). This is like duty of loyalty.
If the shareholder is in control: Entire fairness If not in control: BJR
Kahn v. Lynch Communications Systems: Alcatael is a subsidiary of CGE. Alcatel bought
43.3% of Lynch. Lynch wanted to merge with Celwave, which Alcatel opposed. Lynch
established an independent committee to negotiate with Celwave, who declined. Alcatel then
offered to buy up the rest of Lynch at $15.50 per share. Court said this was a conflicted merger,
so entire fairness is the standard when a controlling shareholder is involved. Alcatel was
effectively a controlling shareholder even though it had only 43% of the shares because it
had authority. Even though there was a disinterested committee, the burden did not shift
because the majority shareholder, Alcatel, dictated the terms of the merger by threatening to
proceed with a hostile offer if the original offer was rejected. Court says they did not meet their
burden of showing fairness.
Western National: In another merger setting, court said Western was not a controlling
shareholder because they were only allowed to have 2 of 8 directors, therefore they had business
judgment standard which they met.
c. Special Committees of Independent Directors in Controlled Mergers
Court’s Possible Approaches if Independent Committee Approves Transaction:
- Treat Special Committee’s decision as disinterested and independent Board (BJR)
- Continue to Apply Entire Fairness Test b/c court can’t evaluate whether subtle pressure
unduly affect outcome of committee’s decision.
Approaches in Delaware:
Corporations
- Kahn v. Lynch: Entire Fairness should always be the standard but shifts burden of
showing fairness → Π if independent committee approves.
 Idea that committee of independent directors deserves some judicial recognition still
seems to have some weight in Delaware. Apply BJR if looks like it approximates an
arms-length transaction (Form over Function).
Again w/ the accordion analogy. Keep it broad so that it can open/close w/ facts.
Another function: Accordion allows DE courts to avoid overruling each other.
d. Controlling Shareholder Fiduciary Duty on the First Step of a two step tender offer
The Duty: Controlling Shareholder who sets the terms of a transaction and effectuates it
through his control of the board has a DUTY OF FAIRNESS to pay a fair price.
(a) Two Possible Approaches: Kahn and Solomon
(i) Kahn: Entire Fairness should always be the standard (w/ possible shifting).
1. Recognizes an “inherent coercion in controlling SH status.
2. Even majority of minority SH approval will not shift review all the
way to BJR.
(ii) Solomon: Controlling shareholder owes no duty to pay a fair price. Only
use judicial review to ensure disclosure and prevent coercion.
1. Coercion is defined as a “wrongful threat,” no inherent coercion.
2. Barring coercion → BJR.
(b) Rule: No fiduciary duty applies to non-coercive controlling stockholder
tender offers.
(i) Can avoid the Kahn line of cases by going to the SH’s directly.
(ii) Controlling Stockholder Tender Offer non-coercive only if . . . (Solomon
Standard)
1. Subject to a non-waivable majority of the minority condition
2. Controlling stockholder promises to consummate §253 merger at
same price if obtains more than 90% of the shares
3. Controlling stockholder makes no retributive threats
ii) Policy-ish: Reconciling Kahn and Solomon Line of Cases
(1) Under Kahn cases: Where using the board and corporate machinery, Entire
Fairness.
(a) In re Pure Resources limits Kahn standard, refuses to extend to SH tender
offer.
(b) Policy: Recognize the inherent coercion structural bias that favors controlling
SH’s provides the basis for higher level of review.
(2) Under Solomon cases: Unless there is coercion in the offer, no duty applies.
(a) Only remedy available is the appraisal remedy, and only if can show coercion.
(b) Policy: Emphasize right of willingly buyers/sellers of stock to deal w/ each
other freely. Only permit judicial intervention to ensure fair disclosure &
prevent structural coercion.
In re Pure Resources: Unocal owned 65% of pure and made an offer for the rest of Pure’s shares
at a 27% premium. A special committee was appointed and decided not to recommend Unocal’s
offer. Unocal launched its offer directly to minority shareholders. Court said the offer was not
coercive because it did not threaten any retribution if it was turned down.
Corporations
C. Public Contest for Corporate Control
1. Intro
 The issue is who do we want to favor: the insurgents or the managers? Corporate law is torn.
Political way to try and get control: mount a proxy contest.
Economic way to try and get control: make a tender offer.
Main issue: these cases are really about the standard of review to apply: should there be an
intermediate standard in between fairness and business judgment.
Examples:
Cheff v. Mathes: as long as the board’s primary motive was to advance the interests of the
shareholders and the company, then its defenses are fine.  favoring the managers
Schnell v. Chris-Craft: found a breach of fiduciary duty when a disinterested board advanced the
date of the company’s annual meeting solely in order to make a hostile proxy solicitation
impossible to mount.  favoring the interests of the shareholders.
Mini Attack Plan:
1. No threat, preventative: Business Judgment Rule (Moran)
2. Threat, defensive measure: proportional, then draconian (Unocal/Unitrin)
3. Company up for sale: must get the highest price (Revlon)
2. Defenses
The defensive measures used by a corporation must be reasonable in relation to the threat
posed.  this standard is used when a defense has be adopted as a response to a threat. This
has a proportionality principle to it.
Unocal v. Mesa Petroleum Co.: Mesa owned 13% of Unocal’s stock. Mesa then made a cash
tender offer for the rest of the shares. Unocal rejected the offer and decided to make a self tender
for its own stock at a much higher price, making it unappealing for Mesa to try to outbid it.
Court said the defensive measure was legal. In this case, there was a threat and the defense was
proportional because Mesa’s officer was coercive, and Mesa had a history of being a
greenmailer.
The defense adopted must not be draconian (coercive or preclusive), and within the range of
reasonableness.  Under this standard there is no proportionality as elaborated in Unocal,
although you still must show that it was a threat to the corporation.
Unitrin v. American General Corp.: AmGen owns part of Unitrin. AmGen does a hostile offer
for more Unitrin shares, and Unitrin rejects the offer as inadequate, and adopt defensive measure:
poison pill, advance notice bylaw. This also make a tender offer to repurchase shares, which will
make the board of Unitrin the owners of 28%, effectively giving them the power to veto any
Corporations
deal, and vote against the AmGen deal. Court says that this was not draconian and was
reasonable.
 Neither case has been overrules: general standard to go by is still draconian: look to see if it is
coercive or preclusive, then see if it is within the range of reasonableness.
i. Poison Pill: Shareholder’s Rights Plan
- Capital instruments including the right to buy a capital asset at a discounted price.
- Purpose: Defense mechanism against hostile takeovers. Dilutes the stock market by triggering
rights in shareholders that will be financially devastating to acquiring company.
i) How It Works:
(1) Rights to buy company’s stock at a discounted price are “distributed to all
shareholders.
(2) Rights are only triggered if someone acquires more than a certain percentage of
company’s outstanding stock w/o Board’s blessing.
(3) Person whose acquisition is the triggering event is excluded from buying
discounted stock.
(4) Result: Person whose acquisition triggered the event’s stock is severely diluted
when a lot of cheap stock floods the market (Other shareholders not adversely
affected b/c have a lot more stock even though each individual stock is worth
less).
Flip-In Plans: when triggered the poison pill creates a right to buy some number of shares of the
stock in the corporation being acquired (the target).
Flip-Over Plans: when triggered the poison pill creates a right to buy some number of shares in
the corporate acquireror.
Policy For Shareholders:
PRO: protects shareholder from hostile takeovers and corporate raiders… long term best interest
of the company since managers can focus primarily on the corporation.
CONS: it is sometimes misused to protect the status quo, it insulates management, can be the
source of scandals.
Poison Pill is a proper defense, and if you adopt a poison pill before there is any kind of threat
then you get business judgment rule deference.
Moran v. Household International Inc.: Household adopted a poison pill before there was an
actual threat because they were concerned about even the possibility of a takeover. Court said
the poison pill plan was legal and because it was before the threat, the defense was accorded
business judgment treatment which was passed.
Summary:
If you adopt a poison pill with no threat: BJR
If you adopt a poison pill as a defense: Unocal/Unitrin
3. Choosing a merger or buyout partner

Courts elaborated a new standard for change in control transactions.
Corporations
Smith v. Van Gorkom: Van Gorkom, CEO of Trans Union, talked about selling to Pritzker.
Pritzker made an offer at $55 per share, which Trans Union immediately accepted. Court said
that because the company was for sale, the directors had a duty to get the highest price which
they failed to do because they accepted the merger immediately based only on Van Gorkom’s
presentation. Fact that the price was very high was good, but not enough.
When there is an auction in progress, the board has the duty to try and get the highest bid for
the shareholders… effectively, if your company is up for sale, you have a duty to get the
highest price.
Revlon Inc. v. MacAndrews and Forbes Holding Inc.: Pantry pride wanted to take over Revlon.
Revlon opposed it with a poison pill, but Pantry just kept raising the bid price. Forstmann came
in to try to outbid Perelman, but Perelman just kept outbidding him. Revlon decided to assure
Forstmann’s victory by creating an option that would allow him to buy their most valuable assets
if another bidder (i.e. Perelman) bought more than 40% of Revlon’s stock. Court said that the
arrangement was invalid because the company was up for sale, and therefore Revlon had a duty
to get the highest price which they couldn’t do with this plan because it ended the bidding war.
4. Pulling together Revlon and Unocal

When a corporation undertakes a transaction which will cause (a) a change in corporate
control, or (b) a break-up of the corporate entity, the director’s obligation is to seek the best
value reasonably available to the stockholders.
Differences from Revlon: “price” becomes “value”, and “break-up” is also “change in control”.
When we are in Revlon Land: when there is a change in corporate control or a break-up of the
corporate entity.
Paramount v. Time: Time initiated a merger with Warner. Paramount launched its own bid.
Time’s board rejected Paramount’s bid as inadequate and instituted a poison pill. Court said that
the pill was reasonable and proportionate, and there was no change in control because Time had
not abandoned their strategic plan or made a sale of Time inevitable so duty to get the highest
value was not triggered.
Paramount v. QVC: Paramount wanted to merge with Viacom, but QVC also wanted to merge
with Paramount. Paramount adopted a poison pill to deter QVC. Paramount and Viacom
announced their merger as a certainty, but QVC kept upping their bid. Court said there was a
change in control so there was a duty to get maximum value. The defense mechanisms were
blocking the best value, which was offered by QVC. The defensive measures were not
proportionate to QVC’s threat because they limited Paramount’s directors’ fiduciary duties.
Only Revlon duty is to get the best price: no Court can tell directors how to accomplish that
goal , they just have to accomplish it reasonably essentially have to prove violation of a duty
of loyalty. Unless you can’t show a loyalty claim, they must show that there was an utter
failure to get the best price.
Corporations
Lyondell Chemical Co. v. Ryan: Sale of Lyondell shares (owned by Smith) to a company called
Basel, which was owned by Blavatnik. Blavatnik sends an initial letter to the board, saying that
he is interested in the company, and would be willing to buy it for 26.50-28.50. Board says that
they are not interested. In May 2007, Blavatnik files at 14d saying that they have the right to
acquire a large portion of the shares. By filing this, the company is supposedly up for sale.
Lyondell decides to wait and see… Blavatnik then starts raising the bid: goes up to $48/share.
Board finally agrees to go with the Blavatnik price, and put it to shareholder vote. 99% of the
shareholders approve the deal. The Court found that Revlon did not create new fiduciary duties,
and that all that was left was to prove that they did not get the best price and there was a
violation of the duty of loyalty. Neither claim was present in this case.
Policy: Control is key in determining the level of protection.
→ if shareholders are losing significant control, greater fiduciary duties imposed
→ if shareholders continue to have control, lesser protection.
Why have Revlon Duties? In most circumstances board are better able to able to value
companies than shareholders are but then shareholder are or might be cashed out of post-merger
enterprise, the board must maximize the short-term value because it is all shareholders are likely
to receive.
5. Proxy Contest for Corporate Control
There are two ways to change the management of the corporation:

1. Negotiate with the Incumbent Board
- might be able to convince them that change in management is a good thing
- can entice them with lucrative offers.
2. Put out a tender offer (“sell”), but make it contingent on a proxy contest (“vote”).
- this will certainly meet certain defensive tactics from the management.
Some theories say that anytime your defensive maneuver interferes with shareholder voting, then
an alarm goes off, and you should be held to a higher standard.
Obstructing the efforts of dissent insurgents to mount a proxy contest is not ok: legal powers
held by a fiduciary may not be deployed in a way that is intended to treat a beneficiary of the
duty unfairly.
→ There is a duty not to disenfranchise voters, especially if it just an effort to keep incumbents
in office.
Corporations
Policy: Cannot use the corporate machinery to perpetuate yourself in office.
Schnell v. Chris-Craft Industries, Inc.: Plaintiffs launched a proxy contest to remove incumbent
directors. The board moved the annual stockholders meeting to defend against it. Court said the
change in the meeting date was illegal because it was a blatant attempt to keep themselves in
office.
Unocal standard does not apply to the shareholder franchise: instead the board bears the
heavy burden of demonstrating a compelling justification after the plaintiff has established
that the board has acted for the primary purpose of thwarting the exercise of a shareholder
vote.
→ If the defense is primary purpose is to interfere with the shareholder franchise, the board
needs to have a compelling justification.
Compelling Justification: there must be a good reason for the maneuver as opposed to merely
showing that what you did was not draconian. This is a higher level than Unocal/Unitrin.
The more that you can argue that the maneuvers are for long term value, the further you might be
able to get from Blasius.
Classis Blasius example: moving the meeting date.
Blasius Industries v. Atlas Corp.: Blasius owned 9% of Atlas. Blasius launched a proxy contest
to increase Atlas’s board from 7 to 15 members, then fill those seats with Blasius nominees.
Atlas responded by amending bylaws to add two new board seats and filling those seats with its
own candidates. Court said this defense was legal because the board saw a real threat from
Blasius’s policies and made a good faith effort to avoid it.
Standard Summary:
BJR Unitrin Unocal Revlon Blasius Fairness
<-|----------|------------|------------|--------------|----------------|>
6. The Takeover Arms Race Continues

a. Dead Hand Pills
This is a pill that cannot be redeemed for a certain amount of time, or by only a certain board.
→ they permit a board to limit the ability of shareholders to designate those with board power, or
stated differentially, they would recognize a power in the current board to restrict the authority of
future boards.
Delaware says that you cannot have dead-hand pills, but other Courts have come out differently.
Corporations
(redeem means remove when talking about pills).
b. Mandatory Pill Redemption Bylaws

This is a shareholder bylaw that requires the board to redeem an existing Pill and refrain from
adopting a pill without submitting it to shareholder approval.
If bylaws give authority to the shareholders to redeem or refrain from redeeming a poison pill
it cannot be taken away.
Unisuper v. News Corp.: News Corp. implemented bylaws that said any poison pill adopted by
the board would expire after one year, but said it may or may not stick to the one year limit. The
board then refused to remove the pill after a year. Court said they had to stick to the agreement
because it gave power to the shareholders; rejected the argument that boards have managerial
authority because shareholders give boards their power.
Policy: I’m a manager and I say WAAAAHHH!

Two Controversial Issues . . .
1. Is a bylaw that mandates Board to exercise judgment in a particular way a valid bylaw?
2. Must managers include in co’s proxy solicitation materials respecting any such proposal?
For Defense counsel arguing against Mandatory Pill Redemption Bylaw . . .
1. DE § 141: Board manages, Board Knows Best, Board we Trust. Butt out SH’s!
2. Can it be excluded under Rule 14(a)-8 (Town Meeting Rule for Proxy Voting)?
a. Request No Action letter from SEC so don’t have to include in
proxy materials.
b. Argue to SEC that you don’t have to include b/c management
allowed to exclude things that have to do w/ day to day governance
of corporation.
D. Trading in the Corporation’s Securities
This deals with the obligations of directors, officers and issuing corporations when dealing the
corporation’s own securities. For publicly financed corporations this is primarily an area of
federal law.
Two Federal Acts that govern this area: The Securities Act of 1933 and the Securities Exchange
Act of 1934.
1. Common Law of Director’s Duties When Trading in The Corporation’s Stock
The 19th century was a time of caveat emptor: buyer’s beware. The remedy available was
common law fraud.
Elements: 1. A false statement
2. Of Material Fact
3. Made with the Intent to Deceive
Corporations
4. Upon which one reasonably relied and which
5. Caused injury
Problems with this remedy for inside trading:
- Fraud was not generally available for losses in person trading because it was difficult to prove
reliance on statement made by an unknown counterparty.
- Common law state duties are not well designed to prevent again insider trading: the real issue is
often an omission, which is not one of the elements.
- Causation and reliance are also problems.
Director’s only duty is to the corporation, no duty of disclosure to those with whom director
traded shares.
Goodwin v. Agassiz: Where a director personally seeks a stockholder for the purpose of buying
his shares w/o disclosing material facts, transaction will be closely scrutinized. NOT if on an
open market.
Strong v. Repide: Where special facts exist a director has an obligation to disclose these material
facts or refrain from buying corporate stock in a face-to-face transaction.
Insider Trading: Good or Bad
PROS: informs the market; investors monitor insiders; efficient
CONS: perverse incentives to engage in insider trading; shareholders do not receive any benefits
2. The Corporate law of Fiduciary Disclosure Today

a. Corporate recovery of profit from insider trading
Freeman v. Decio
b. Board disclosure obligations under state law
Recent Delaware cases creates a common law duty of disclosure.
Director’s duty of candor: requires the director to exercise honest judgment to assure disclosure
of all material facts to shareholders.  historically the duty of candor has been very weak.
Bottom line: state law is NOT going to provide a remedy for insider trading even though it is
technically a violation of a fiduciary duty.
3. Exchange Act Section 16(b) and Rule 16
Congress passed statutes to deal with insider trading: Section 16, and Section 10.
SEC passed regulations to deal with the insider trading: Rule 16, and Rule 10b5
i. Section 16(a) and (b)
Corporations
16(a): requires “designated persons” to file petitions public reports of any transactions in the
corporation’s securities.
1. Designated Persons: directors, officers, 10% shareholders
2. Timing of Reports: you must report that you are doing the trade.
16(b): strict liability rule designated to deter statutory insiders from profiting on inside
information.
→ requires statutory insiders to disgorge profits made on short-term turnovers to corporations.
Mergers are not a purchase or a sale.
Kern County Land Co. v. Occidental Petroleum
1. Occidental purchases 20% of Kern shares
2. Kern merges with Tenneco
3. Kern shares convert to Tenneco shares
4. Occident sells a repurchase option to Tenneco
5. Tenneco exercises the plan.
Kern is saying that either #3 or #4 was a sale. Court said that selling an option is not actually a
sale, it is instead the option of having a sale. Court said you need to look at it in terms of the
statutory provisions, have to look at it in the context: with that in mind, it was not a sale.
ii. Rule 16
4. Exchange Act Section 10(B) and Rule 10b-5
Rule 10(b): [It is unlawful] to use or employ, in connection w/ purchase or sale of any security
registered on a national securities exchange or any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may proscribe as necessary or appropriate in the public interest or for the protection
of investors.
→ This broadly empowers the SEC to create rules and regulate securities trading on national
exchanges or through the means of interstate commerce.
a. Evolution of a Private Right of Action under Section 10
Purpose of 10(b)-5: Intended to empower the SEC’s Enforcement Division to enjoin
fraudulent/misleading conduct in federal court.
- Did NOT intend to create a private right of action.
- Kardon v. National Gypsum Co.: First recognized private right of action for 10(b)-5.
b. Elements of a 10b-5 claim
1. material misstatement or omission
Corporations
Three theories for omission: equal access, fiduciary, misappropriation
2. in connection with the purchase or sale of securities
2. with intention to deceive
3. upon which there is reliance
4. causation
5. injury
Courts have effectively read the elements of reliance and causation to be a fraud on the market
theory. The Supreme Court has recently gone back to a stricter standard of reliance and
causation.
i. False or Misleading statement or omission
There are three theories for false or misleading statement or omission: equal access, fiduciary
duty theory and misappropriation.
- Equal Access
If you have material non-public information, you wither have to disclose it, or you have to
abstain from trading. Disclose or Abstain.
Materiality: if a reasonable investor would find the information to be important, then it is
material. More texture: probability and magnitude → very fact specific.
SEC v. Texas Gulf Sulphur Co.: Company was doing mineral exploration. They were keeping it
quiet while they were buying stock, and then would presumably sell it when the deposits are
revealed. They instead issue a press release saying that the rumors are not true, etc…
Shareholders sue, saying that the insiders knew that there was this big mineral deposit, and that
they were trading on this information. Court said that there was a violation.
Federalism: Plaintiffs cannot bring suits for corporate mismanagement under 10b5 if the
causes of action are traditionally brought under state law.
→ the Supreme Court is trying to limit the number of corporate plaintiffs that are trying to get
into federal court.
Santa Fe Industries Inc. v. Green: Dissident shareholders who were cashed out in a short form
merger brought a 10b-5 claim because they thought the shares were worth more. Court threw
them out because the claim had nothing to do with manipulation or deception; case sent to state
court.
- Fiduciary Duty Theory

The Supreme Court has actively rejected the Equal Access theory.
Corporations
NO Duty to Disclose when person trading on info was not corporation’s agent, fiduciary, or a
person in whom sellers of securities placed trust/confidence.
→ No affirmative duty to disclose unless you have a special responsibility.
Chiarella v. United States: Printer saw documents from the acquiring company regarding a trade
that was going to happen and purchased stock in the target companies. Court said he did not
have a fiduciary duty to the target company so not liable.
There has been a breach when:

Tippee: knows or should have known of a breach of fiduciary duty (+ someone trades on it)
Tipper: breach of fiduciary duty and receives a personal benefit.
Dirks v. SEC: Dirks received information about potential fraud from a former employee of
Equity funding. Dirks then discussed the information he obtained with clients who then sold
their stock. Court said the former employee did have a fiduciary duty as a former director of
Equity, but did not receive a personal benefit from giving the information out. If this prong was
met I think Dirks would have been liable.
- Misappropriation Theory → current law
Misappropriation theory:
An insider may have a duty to disclose or abstain when -
1. Initial person with information (Tipper)
2. Must have a fiduciary duty to the SOURCE of information; AND
3. Personal benefit from giving out the information
Liability may extend to a person who learns of the information (Tippee) if:
1. Must have known or should have known about the breach; AND
2. Traded upon it
Policy: Good b/c doesn’t swing all the way to the TGS/Equal Access Standard (which the
Supreme Court rejected as over-inclusive) but still allows you to get at people who are not
technically ‘insiders’ (which is not possible under the fiduciary duty standard that the Supreme
Court found to be under-inclusive).
→ Reaches all forms of insider trading even if doesn’t involve ‘insiders.’
(Better than Fiduciary Duty Theory)
Corporations
→ Based on actual fraud instead of a fictional relationship b/t insiders trading and uninformed
market participants
(Better than Equal Access Theory)
Recognizes the Real Problem w/ Insider Trading: It is NOT wrong b/c of the informational
disparities in the market (which ALWAYS exist) it is wrong b/c it involves the private
appropriation of information rights belonging to someone else.
U.S. v. Chestman: Loeb was the husband of the granddaughter of a director. Granddaughter
learned of a coming merger and told him. He then told his stockbroker, Chestman, who bought
stock in the target. Court said that Loeb had no duty to the source of the information, the
director, as just a family member. Therefore liability can’t extend to Chestman.
U.S. v. O’Hagan: O’Hagan was a partner at a firm that was representing a company who was
doing a merger. At the time they were representing, O’Hagan purchased stock of the target
company. Court said that O’Hagan had a duty to the source of information – the acquiring
company because he represented them, met all other requirements, so he was liable.
ii. Of Material Fact

A statement or omission is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote. Look at the probability the
event will occur and the possible magnitude of the event.
Basic Inc. v. Levinson: Combustion and Basic were in talks of merging. Basic made three
statements denying that there would be a merger. Defendants sold their stock after the first
denial and before an announcement of merger. Court set forth this rule and remanded the case to
find out if the denials were material.
iii. Scienter: intent to deceive another

Evidence of Intent
The United States Supreme Court has gone back to requiring strict common law intent (specific
intent).
Recklessness has suggested as going towards the intent.
Second Circuit: motive and opportunity are enough.
Pleading Requirement
Higher pleasing standard than the normal civil procedure short and plain statement: because it is
hard to prove their intent.
Policy: thought that higher standard has curbed litigation, but this is open to debate.
iv. Standing
To recover monetary damages, you must be an actual seller or purchaser of securities → speed
bump to avoid strike suits.
Corporations
Circuits are split as to whether this is a requirement for injunctive relief.
v. Reliance
Fraud on the Market Theory: reliance is presumed even though the parties do not interact face
and face.
→ This presumption is rebuttable: can argue that the person know about the fraud, and therefore
could have relied.
Basic Inc. v. Levinson
vi. Causation
Must show that you loss was caused by the fraud, and not by another element.
Two kinds of Causation:
- Transactional Causation: a misstatement or omission must cause the plaintiff to enter into the
transaction.
- Loss Causation: a misstatement or omission must cause the plaintiff’s loss.
Must show both of these.
Dura Pharmaceuticals: Dura announces that the profits will be lower than anticipated, stock
prices go down. Then the FDA does not approve their drug. Plaintiffs are individuals who
purchased shares before the announcement that profits will be down. Under Levinson, this would
be fraud on the market. Court effectively says that just because you bought at an inflated price
does not necessarily mean that it caused the loss. Court said you have to show that your loss was
caused by the fraud, and not by another element.
Policy Rationale: when you buy stock on the market you take the risk that the stock will go up
and then back down.
vii. Remedies
Two options:
1. Out of pocket measure – difference between price paid and the value of the stock when
bought.
Calculation: price paid – the value had their been no fraud.
Problems: value were there no fraud is hard to calculate, and plaintiffs may get a windfall.
Note: preferred by defendants
2. Disgorgement measure – can recover post purchase decline in market value of his shares up
to a reasonable time after he learns of the information.
→ make the defense disgorge any profits they made.
Corporations
Note: preferred by plaintiffs, and used most regularly.
Elkind v. Liggett and Meyers: shareholders initiated a class action against Liggett for insider
trading Plaintiffs made their case, and the sole issue was how to calculate damages. Second
circuit decides the disgorgement method is appropriate.
Corporations

Corporations Dibadj Fall 2009

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporations Dibadj Fall 2009

Uploaded by

Copyright:

Available Formats

Corporations Outline

3. Debt, Equity and Economic Value

3. Problem of Joint Ownership

5. Third Party Claims

8. Modifications to the Partnership Form

IV. The Corporation

B. The Protection of Creditors

C. Normal Governance: The Voting System

D. Normal Governance: The Duty of Care

b. Director’s and Officer’s Insurance

ii. Pre-Suit Demand

iii. Special Litigation Committees

- Delaware: Zapata Two Step

- Corporation has the burden of showing this

2. Court should use its business judgment to decide of it is fair.

Courts tend to avoid using this test by saying

b. Sale of Corporate Office

ii. Buyer’s Duties

B. Mergers and Acquisitions (M and A)

 Do we want shareholders to vote, or do we want the board to decide.

DGCL 262: governs appraisal rights  Market Out Rule

 with no appraisal rights there is more freedom for business arrangements.

 BUT an approval of the transaction by an independent committee of directors or an informed

3. Choosing a merger or buyout partner

4. Pulling together Revlon and Unocal

Policy: Control is key in determining the level of protection.

→ if shareholders are losing significant control, greater fiduciary duties imposed

→ if shareholders continue to have control, lesser protection.

5. Proxy Contest for Corporate Control

There are two ways to change the management of the corporation:

6. The Takeover Arms Race Continues

b. Mandatory Pill Redemption Bylaws

Policy: I’m a manager and I say WAAAAHHH!

2. The Corporate law of Fiduciary Disclosure Today

- Fiduciary Duty Theory

There has been a breach when:

- Misappropriation Theory → current law

An insider may have a duty to disclose or abstain when -

1. Initial person with information (Tipper)

2. Must have a fiduciary duty to the SOURCE of information; AND

3. Personal benefit from giving out the information

ii. Of Material Fact

iii. Scienter: intent to deceive another

Calculation: price paid – the value had their been no fraud.

Note: preferred by defendants

→ make the defense disgorge any profits they made.

You might also like