Pizzano Outline

Corporations Outline - Prof.
Pizzano / Spring 2002
Corporations Outline Prof. Pizanno Spring 2002 Chapter 1: Agency Section 1. Introduction The Most Common Forms of Business Organization 1. Sole proprietorships 2. Corporations 3. General and Limited Partnerships 4. Limited Liability Companies Sole Proprietorship: A business organization that is owned by a single individual A sole proprietorship is a business organization for 2 reasons: 1. A business enterprise owned by an individual is likely to have a psychological and sociological identity separate from that of the individual. As a matter of law, however, a sole proprietorship has no separate identify from its owner. 2. A sole proprietor typically will not conduct the business by himself, but will engage various people - salespersons, mechanics, managers, etc. to act on his behalf and subject to his control in conducting the business Agent: An agent is a person who by mutual assent acts on behalf of another and subject to the others control. The person for whom the agent acts is a principal. Agency Law Governs: 1. The relationship between agents and principals 2. The relationship between and third persons with whom an agent deals, or purports to deal, on a principals behalf 3. The relationship between principals and third person when an agent deals, or purports to deal, with a third person on the principals behalf Agency: Is a legal concept which depends upon the existence of required factual elements: The manifestation by the principal that the agent shall act for him The agents acceptance of the undertaking, and The understanding of the parties that the principal is to be in control of the undertaking
Corporations Outline - Prof. Pizzano / Spring 2002
Section 2. Authority Morris Oil Company v. Rainbow Oilfield Trucking Inc. P.C.: Defendant Dawn appeals from judgment against it in favor of Morris Oil, based upon a determination that Rainbow was Dawns agent when it incurred indebtedness with Morris Facts: Dawn is in the business of oilfield trucking in the Farmington area Rainbow was an New Mexico corporation established for the purpose of operating an oilfield trucking business in the Hobbs area Dawn & Rainbow entered into contracts whereby Rainbow was permitted to use Dawns certificate of public convenience & necessity in operating a trucking enterprise in the Hobbs area Dawn reserved the right to full and complete control over the operations of Rainbow in New Mexico Rainbow was responsible for payment of all operating expenses, including fuel - and all operations utilizing fuel were to be under the direct control and supervision of Dawn The agreement between Dawn and Rainbow recited that Rainbow was NOT to become an agent of Dawn and was NOT empowered to incur or create any debt or liability of Dawn other than in the ordinary course of business relative to terminal management Rainbow established a relationship with plaintiff, Morris Oil, whereby Morris installed a bulk dispenser at the Rainbow terminal and periodically delivered diesel fuel for use in the trucking operation Rainbows enterprise was unprofitable and it declared bankruptcy, owing Morris approximately $25,000 on an open account Issue: Whether Dawn is liable to Morris for Rainbows debt of $25,000? Reasoning: Trial court found that Dawn retained the right to direct control and supervision of Rainbows New Mexico operations, and that in the course of those operations Rainbow incurred a balance of almost $25,000 on an open account with Morris Oil for fuel used in the New Mexico operations Rainbow was at all times in its dealings with Morris Oil the agent of Dawn, and therefore, Dawn was responsible for the account balance Dawns reliance on the specific language stating that Rainbow was NOT to become an agent is unpersuasive because (1) the agreement states that Rainbow may create liabilities in Dawn in the ordinary course of business of operating the terminal and (2) the recitation of the parties in the contractual documents need not bind third parties who deal with one of them in ignorance of those instructions Holding: Yes. This is a case of undisclosed agency. It is well established that an agent for an undisclosed principal subjects the principal to liability for acts done on his account if they are usual or
necessary in such transactions. It is undisputed that Morris thought it was dealing solely with Rainbow when it sold fuel. Even assuming that Dawn was not responsible for Rainbows indebtedness to Morris, it is clear that Dawn ratified the open account after learning of its existence when Morris contacted Dawn regarding payment. It is well established that a principal may be held liable for the unauthorized acts of his agent if the principal ratifies the transaction after acquiring knowledge of the material facts concerning the transaction. Disposition: Holding of the trial court is affirmed Notes 1) Terminology Agent: is a person who acts on behalf and subject to the control of another o General agent: is an agent who is authorized to conduct a series of transactions involving continuity of service o Special agent: is an agent who is authorized to conduct only a single transaction, or only a series of transactions not involving continuity of service Principal: is a person on whose behalf and subject to whose control an agent acts. Principals are divided into the following 3 classes: o Disclosed Principal A principal is disclosed if at the time of the transaction between the agent and a third person, the third person knows that the agent is acting on behalf of a principal and knows the principals identity o Partially Disclosed Principal A principal is partially disclosed if at the time of the transaction the third person knows that the agent is acting on behalf of the principal, but does not know the principals identity o Undisclosed Principal A principal is undisclosed if the agent, in dealing with the third person, purports to be acting on his own behalf Liability: An undisclosed principal is liable for her agents authorized activities, even though, because the agent does not disclose his agency, the third person believes the agent is acting strictly on his own behalf
Agent/Principal in Torts Master: is a principal who controls or has the right to control the physical conduct of an agent in the performance of the agents services Servant: is an agent whose physical conduct in the performance of services for the principal is subject to the control of the principal o Respondeat Superior: The liability of a master for the tort of a servant is referred to as liability in respondeat superior 3
2) Liability of Principal to Third Person Under the law of agency, a principal becomes liable to a third person as a result of an act or transaction by another, A, on the principals behalf, if A had actual, apparent, or inherent authority, or was an agent by estoppel, or if the principal ratified the act or transaction a. Actual authority: An agent has actual authority to act in a given way on a principals behalf if the principals words or conduct would lead a reasonable person in the agents position to believe that the principal had authorized him so to act * Actual authority may be express or implied Incidental authority: is a common type of implied actual authority to do incidental acts that are reasonably necessary to accomplish an actually authorized transaction, or that usually accompany it b. Apparent authority: An agent has apparent authority to act in a given way on a principals behalf in relation to a third person, T, if the words or conduct of the principal would lead a reasonable person in Ts position to believe that the principal had authorized the agent to so act c. Agency by estoppel: Restatement (Second) of Agency 8B: (1) A person who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if (a) he intentionally or carelessly cause such belief, or (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts * The concept of agency by estoppel is so close to the concept of apparent authority that for most purposes the former concept can be subsumed in the latter d. Inherent authority: Under the doctrine of inherent authority, an agent may bind a principal in certain cases even when the agent had neither actual nor apparent authority. Restatement (Second) of Agency 8A provides that, inherent agency power is a term usedto indicate the power of an agent which is derived not from actual authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. e. Ratification: Even if an agent has neither actual, apparent, nor inherent authority, the principal will be bound to the third person if the agent purported to act on the principals behalf, and the principal, with knowledge of the material facts, either (1) affirms the agents conduct by
manifesting an intention to treat the agents conduct as authorized, or (2) engages in conduct that is justifiable only if he has such an intention i. Express Ratification Manifesting an intention to treat the agents conduct as authorized is sometimes known as express ratification ii. Implied Ratification Engaging in conduct that is justifiable only if the principal intends to treat the agents conduct as authorized is sometimes known as implied ratification A common example of implied ratification: Where, as a result of the purported agents transaction, the principal, with knowledge of the facts, receives or retains something to which he would otherwise not be entitled * Ratification need not be communicated to the third person to be effective, although it must be objectively manifested Effective Ratification: To be effective, a ratification must occur before either (1) the third person has withdrawn, (2) the agreement has otherwise terminated, or (3) the situation has so materially changed that it would be inequitable to bind the third person, and the third person elects not to be bound f. Acquiescence: If the agent performs a series of acts of similar nature, the failure of the principal to object to them is an indication that he consents to the performance of similar acts in the future under similar conditions g. Termination of agents authority: As a general rule, a principal has the power to terminate an agents authority at any time, even if doing so violates a contract between the principal and the agent, and even if it had been agreed that the agents authority was irrevocable 3) Liability of Third Person to Principal The general rule is that if an agent and a third person enter into a contract under which the agents principal is liable to the third person, then the third person is liable to the principle. Exception: The third person is NOT liable to an undisclosed principal if the agent or the principal knew that the third person would not have dealt with the principal if she had known the principals identity 4) Liability of Agent to Third Person a. Where the principal is bound Where the agent has actual, apparent, or inherent authority, so that the principal is bound to the third person, the agents liability to the third person depends in part on whether the principal was disclosed, partially disclosed, or undisclosed i. Undisclosed principal: If the principal was undisclosed, the general rule is that the agent is bound, even thought the
principal is bound too. Under the majority rule, if the third person, after learning of an undisclosed principals identity, obtains a judgment against the principal, the agent is discharged from liability even if the judgment is not satisfied. Similarly, the undisclosed principal is discharged if the third person obtains a judgment against the agent. Under the minority rule, neither the agent nor the principal is discharged by a judgment against the other, but only by satisfaction of the judgment ii. Partially disclosed principal: If the principal was partially disclosed, the general rule is that the agent as wells as the principal is bound to the third person. The theory is that if the third person did not know the identify of the principal, and therefore could not investigate the principals credit or reliability, he probably expected the agent would be liable, either solely or as a co-promisor or surety iii. Disclosed principal: If the principal is bound by the agents act because the agent had actual, apparent, or inherent authority, or because the principal ratified the act, the general rule is that the agent is not bound to the third person. The theory is that in such a case the third person did not expect the agent to be bound; he did expect the principal to be bound; and he gets what he expects b. Where the principal is not bound If the principal is not bound by the agents act, because the agent did not have actual, apparent, or inherent authority, the general rule is that the agent is liable to the third person Liability-on-the-Contract Theory: Under this theory, the third person will recover the gains that he would have derived under the contract - essentially, expectation damages Implied Warranty Theory: Under this theory, it might seem the third person would recover only losses he suffered by having entered into the transaction - essentially, reliance damages - However, the Restatement (Second) of Agency provides for an expectation measure of damages, just as if it had adopted the contract theory. Therefore, the third person can recover in damages not only for the harm caused to him by the fact that the agent was unauthorized, but also for the amount by which he would have benefited had the authority existed 5) Liability of Agent to Principal If an agent takes action that she has no actual authority to perform, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to the principal for any resulting damages
6) Liability of Principal to Agent If an agent has acted within her actual authority, the principal is under a duty to indemnify the agent for payments authorized or made necessary in executing the principals affairs Section 3. The Agents Duty of Loyalty Tarnowski v. Resop P.C.: Plaintiff brought suit due to sellers refusal to comply with his rescinded sale Plaintiff alleges 2 causes of action: 1) The defendant while acting as his agent collected a secret commission from the seller for consummating the sale - which the seller seeks to recover, and 2) Plaintiff seeks to recover for damages for losses caused by defendants wrong Facts: Plaintiff desiring to make a business investment engaged defendant as his agent to investigate and negotiate for the purchase of a route of coinoperated music machines On advice of defendant, plaintiff purchased such a business Defendant, as a matter of fact, conducted only a superficial investigation and had investigated only 5 of the alleged 75 locations Upon discovering the falsity of defendants representations and those of the sellers, plaintiff rescinded the sale - offering to return what he had received, and demanding the return of his money the sellers refused to comply Issue: Can plaintiff recover under both causes of action from defendant? Reasoning: With respect to the first cause of action, it is a well recognized and established principle that all profits made by an agent in the course of an agency belonging to the principal, whether they are the fruits of performance or violation of an agents duty (It matters not that the principal has suffered no damage or even that the transaction has been profitable) The right to recover profits made by the agent in the course of the agency is not affected by the fat that the principal, upon discovering a fraud, has rescinded the contract and recovered that with which he parted As to the second cause of action, if an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds, and also the amount of damage thereby caused, except that if the violation consists of the wrongful disposal of the principals property, the principal cannot recover its value and also what the agent received in exchange therefore 7
The principal is entitled to be indemnified by the agent for any loss which has been caused to his interest by the improper transaction It is generally held that where the wrongful act of the defendant has involved the plaintiff in litigation with others or placed him in such relation with others as makes it necessary to incur expense to protect his interest, such costs and expenses, including attorneys fees, should be treated as the legal consequences of the original wrongful act and may be recovered as damages Holding: Yes. Plaintiff had an absolute right to the secret commission received by the agent, and Disposition: Affirmed Section 4. An Introduction to Financial Statements The Balance Sheet A balance sheet is a parallel listing of assets and their sources The Income Statement Note on Balance Sheets The fundamental accounting equation is: Assets - Liabilities = Owners Equity (or Proprietorship or Net Worth) Assets = Liabilities + Owners Equity Because balance-sheet net worth is simply balance-sheet assets minus balance-sheet liabilities, actual net worth may be much higher or much lower than the figure for owners equity recorded on the balance sheet
Chapter 3: The Corporate Form Section 1. The Characteristics of the Corporation Publicly Held Enterprises The corporation has traditionally been the preferred choice of form for business enterprises that are to be publicly held (that is, whose ownership interests are to be held by members of the public, as opposed to ownermanagers). This preference results from 5 attributes of the corporate form. 5 Attributes of the Corporate Form a) Limited Liability o Shareholders are not personally liable for corporate obligations o Shareholders have limited liability o Managers of a corporation are also normally not personally liable for corporate obligations: As long as corporate managers act on the 8
corporations behalf and within their authority, they are treated like agents, not like principals, for liability purposes b) Free Transferability of Ownership Interests o Ownership (equity) interests in corporations - represented by shares of stock - are freely transferable c) Continuity of Existence o The legal existence of a corporation is perpetual, unless a shorter term is stated in the certificate of incorporation o Thus, a corporation is relatively secure against early termination (This may have a beneficial impact on long-term planning) d) Centralized Management o Under the corporate statutes, a corporation is normally managed by or under the direction of a board of directors, and a shareholder as such has no right to participate in management e) Entity Status o A corporation is a legal person or legal entity o Thus, a corporation can exercise power and have rights in its own name o Example: A corporation can sue or be sued, and can hold property Privately Held Enterprises If an enterprise is not to be publicly held, then the firm might either be a close corporation, a general partnership, a limited liability partnership, a limited partnership, or a limited liability company. Section 2. Selecting a State of Incorporation Note on Competition Among the States for Incorporations A firm can incorporate wherever it chooses, and a corporations internal affairs are governed by the law of its state of incorporation - even if the corporation has no business contacts with that state Close Corporation: is a corporation with only a few owners o A close corporation will almost invariably incorporate locally, in the state where it has its principal place of business o If a corporation does business in a state, the state will impose a doingbusiness tax on the corporation on a basis that reflects the amount of business o If a corporation is incorporated in a state, the state will impose a franchise tax for the privilege of incorporation, even if the corporation does not do business in that state Publicly Held Corporation:
o Publicly held corporations usually do business in a great number of states and the cost of incorporation in any state are likely to be inconsequential in comparison with the corporations total revenues o Delaware is the most successful state in attracting publicly held corporations Section 3. Organizing a Corporation How to Organize a Corporation? Once a decision has been made to incorporate, and the state of incorporation has been selected, the next step is to create or organize the corporation To begin this process, an incorporator files a certificate of incorporation, articles of incorporation, or charter with a designated state office - usually the office of the Secretary of State Note on Authorized & Issued Stock & on Preemptive Rights Certificate of Incorporation An important function of the certificate of incorporation is to designate: o The classes of stock & the number of shares of each class that the corporation is authorized to issue If the corporations authorized stock consists of one class of common stock, the certificate need only designate the number of authorized shares If there is to be more than one class of stock, and particularly if there is to be one or more classes of preferred stock (that is, stock that carries a preference as to dividends, on liquidation, or both, over common stock), the certificate of incorporation must either: Designate the terms of each class, or Authorize the board to issue portions of the authorized class in series from time to time and to designate the terms of each series as it is issued Issuance of Stock: a sale of stock by the corporation o Only stock that has been authorized in the certificate of incorporation can be issued o Authorized stock that has not yet been issued is known as unauthorized but unissued stock o Authorized stock that has been issued is known as authorized and issued stock, or authorized and outstanding stock o Stock repurchased which has previously been issued may be referred to as treasury stock or unauthorized and issued but not outstanding stock Power to Issue: o The power to issue authorized but unissued stock and the price at which the stock will be issued is in the hands of the board, subject only to certain very limited constraints
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o Preemptive Right: Each existing shareholder has the right to subscribe to her proportionate part of a new issue of stock of the class she held Modern statutes: Provide that shareholders have no preemptive rights unless the certificate of incorporation provides such a right Even where shareholders have no preemptive rights, the board may not issue stock for the purpose of reallocating or perpetuating control Quasi-Preemptive Right: The right to prohibit a non-pro-rata stock issueance for an improper purpose Note on the Basic Modes of Corporate Finance 3 Major Modes of Corporate Finance 1. Common Stock Traditionally, shares of common stock are conceived as ownership or equity interests in the corporation, so that the body of common shareholders are the corporations owners Normally, common stock carries the right to vote in the election of directors and certain other matters Typically, dividends are paid on common stock, but many corporations do not pay dividends, and in any event whether dividends are paid, and if so in what amount, is generally in the discretion of the board As a result, common stock has no fixed claim on the corporation Modern financial theory often conceives of common stock in terms other than ownership, for example, common stock is regarded as ultimate or residual ownership Common Shareholders: Are often thought of as the owners of the firm or as the holders of the equity interest in the firm o The equity interest is sometimes usefully thought of as the residual interest - the claim to what is left after all senior claimants have been satisfied 2. Debt Debt is a fixed claim against the corporation for principal interest. The major types of corporate debt are, trade debt, bank debt, bonds debentures, and notes i. Trade debt When a business purchases goods or services, payment is typically not due for 30, 60, or 90 days Trade debt consists principally of amounts that a corporation owes for such goods and services at any point in time Trade debt appears on a corporations balance sheet as Accounts Payable
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ii. Bank debt A business will often be financed in significant part by commercial-bank loans Bank loans appear on a corporations balance sheet under captions such as Loans Payable iii. Bonds & Debentures Another method of financing a corporation is to issue bonds or debentures Bonds and debentures are promises, embodied in an instrument, to repay amounts that the firm has borrowed on a long-term basis, typically, on the general market or on some special market Bonds appear on a corporations balance sheet under captions such as Bonds Payable, or Senior Debentures Unlike bank loans, bonds and debentures normally represent money borrowed from the public, or at least from a significant group of lenders or investors A bond or debenture is simply a promise by the borrower to pay a specified amount on a specified date, together with interest at specified times, on the terms and subject to the conditions spelled out in a governing indenture Bond: Is a generic term for all long-term debt securities Indenture: Is a contract entered into between the borrowing corporation and a trustee iv. Notes There is no legally recognized distinction between bonds and debentures, on one hand, and notes on the other However, traditionally, notes may be long term or short term obligations - but in either case they are not issued pursuant to an indenture Today notes often are issued pursuant to indentures as unsecured long term obligations 3. Preferred Stock Preferred Stock is a hybrid that combines the ownership element of common stock and the senior nature of debt Preferred stock is a type of ownership and thus takes a classification similar to that of the common stock Unlike a bond, preferred stock does not contain any promise of repayment of the original investment it must be considered as a permanent investment for the life of the company Common shareholders agree that preferred shareholders shall have preference or first claim in the event that the directors are able and willing to pay a dividend
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Straight Preferred Stock: (the most frequent type) the extent of this priority is a fixed percentage of the par value of the stock or a fixed number of dollars per share in the case of stock without a nominal or par value o The priority of preferred stock is only with reference to the common stock and does not affect the senior position of creditors in any way Difference between debt and preferred stock: Debtholders have a fixed claim on the corporation for interest and principal, while preferred shareholders normally have no fixed claims for distributions. The claims of preferred stock for distribution are only contingent if the corporation proposes to pay a divine on common, then it must first pay a designated dividend to the preferred. If the corporation liquidates, then before it distributes anything to the common it must satisfy the preferreds liquidation preference. The preferreds dividend preference is cumulative that is, no dividend can be paid on common unless all prior dividends on the preferred have been paid
4. Convertibles, Classified Stock & Derivatives Preferred stock is often issued in several classes and common stock may be issued in several classes as well (classified common) In such cases, each class enjoys somewhat different rights than the others in respect of voting, dividend, or liquidation rights, or all three Note on Initial Directors Once a corporation is under way, its board of directors is elected by the shareholders, however, a corporation has no shareholders until stock is issued and the function of issuing stock is normally vested in the board Thus, there must be a mechanism either for naming initial directors before stick is issued or for issuing stock before directors are elected by shareholders 2 Basic Mechanisms for Establishing Initial Directors 1. Under the law of some states, the corporations incorporators have the powers of shareholders until stock is issued and the powers of directors until directors are elected Under such statute, the incorporators will typically adopt by-laws, fix the number of directors, and elect initial directors to serve until the first annual meeting of shareholders 2. Under the law of other states, the initial directors can be named in the corporations certificate of incorporation If the initial directors are named in the certificate of incorporation, the functions of the incorporators pass to the directors when the certificate is filed and recorded
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Once initial directors are named, they will hold an organizational meeting
Note on Subscriptions for Shares Subscription Agreement: a would-be shareholder enters a subscription agreement under which he agrees to purchase a corporations stock when it is issued to him at some future date Pre-Incorporation Subscription Agreements: In such cases, where the corporation has not yet been formed - the agreement is then made on the would-be corporations behalf by incorporators, agents or trustees o General Rule: was that pre-incorporation subscription was only a continuing offer by the subscriber and that subscriber therefore was not bound if he made a timely revocation Under this rule, a subscriber could revoke his agreement until the moment of incorporation, or, in the alternative, until the corporation, once formed, issued stock to the subscriber o In addition, subscription agreements entered into after the corporation was formed were treated as ordinary contracts and raised no special problems of enforceability o Modern Rule: Most statutes now provide that pre-incorporation subscriptions are irrevocable for a specified period of time unless all the subscribers consent to a revocation or the agreement otherwise provides Section 4. Pre-incorporation Transactions by Promoters Promoter Promoter: A promoter is a person who transforms an idea into a business bringing together the needed persons and assets and superintending the various steps required to bring the new business into existence o A promoter often makes contracts for the benefit of a corporation even before the corporation has been formed o If the corporation is later formed, and benefits form such a contract, issues may arise regarding who is liable under the contract a) Liability of the Promoter General Rule: is that when the promoter makes a contract for the benefit of a contemplated corporation, the promoter is personally liable on the contract and remains liable even after the corporation is formed Exception to the General Rule: is that if the party who contracted with promoter knew that the corporation was not in existence at the time of contracting, and nevertheless agreed to look solely to the corporation for performance, the promoter is not deemed a party to the contract 14
Such an agreement may be express or implied Goodman v. Darden Goodman (G) proposed to renovate an apartment building owned by Darden, Doman & Stafford Associates (DDS) During negotiations G told DDS that he would be forming a corporation to limit his personal liability In 1979 a contract was made between DDS and Building Design & Development Inc (In Formation) John A. Goodman, President DDS knew that the corporation was not yet in existence Nov. 1st Goodman filed articles of incorporation Between Aug. & Dec. DDS made 5 progress payments on the contract - the first check was made to Building Design and Development, Inc - John Goodman G struck out his name and endorsed the check in the name of the corporation, John A. Goodman, Pres. G instructed DDS to make checks payable to the corporation ONLY The court held that G was liable on the contract The fact that a contracting party knows that the corporation is not existent does not indicate any agreement to release the promoter - to the contrary, such knowledge would show that DDS intended to make G a party to the contract, because who else could it hold liable if default occurred The evidence does not show by reasonable certainty that DDS intended to contract only with the corporation Company Stores Development Corp v. Pottery Warehouse, Inc. Company Stores leased a store to Pottery Warehouse for 5 years - PW was not incorporated at the time of the lease - the lease recited that the corporation was to be organized and was signed as: The Pottery Warehouse, Inc. a corporation to be formed under the laws of the state of Tennessee by Jane M. Vosseller - Its President The court held the promoter was not liable because the lease imputes no intention on the part of Vosseller to be bound personally b) Liability of the Corporation A corporation that is formed after a promoter has entered into a contract on its behalf is not bound by the contract without more The reason is that the corporation was not in existence when the contract was made and therefore did not authorize - and
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indeed could not have authorized - the promoter to enter into the contract on its behalf After the corporation has been formed, it may become bound in one of several ways: Ratification, adoption, novation, and that the proposition made to the promoters is a continuing offer to be accepted or rejected by the corporation when it comes into being and upon acceptance becomes an original contract on its part Liability has also been sustained on the ground that the corporation, by accepting the benefits of a contract takes it and is estopped to deny its liability on the contract If a promoter is liable under a contract under the law of promoters liability, the fact that the corporation also becomes liable on the contract, by adopting it, does not relieve the promoter of liability - instead, the promoter and the corporation are jointly and severally liable
Section 5. Consequences of Defective Incorporation Cantor v. Sunshine Greenery, Inc. Facts: Cantor (C) brought suit for damages for breach of the lease against Sunshine Greenery (SG) and Brunetti (B) C prepared the lease naming SG, Inc. as tenant and it was signed by Brunetti as president of that named entity C knew that B was starting a new venture as a newly formed corporation SG - however, he did not request a personal guarantee from B, nor did he make inquiry as to his financial status or background C knew and expected that the lease agreement was undertaken by the corporation, not by B individually At the time of the lease signing (Dec. 16, 1974) C asked B to give him a check for the first months rent and security deposit On Nov. 21, 1974, the name SG, Inc. had been reserved for B by the Sec. of State and on Dec. 3, 1974 a certificate of incorporation for that company was signed by B as an incorporator - but for some unexplained reason it was not officially filed until Dec. 18, 1974 (2 days after the execution of the lease) Issue: Whether there was a de facto corporation in existence at the time of the execution of the lease? Reasoning: In light of the late filing, SG, Inc. was not a de jure corporation when the lease was signed - however, there is ample evidence that is was a de facto
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corporation in that there was a bona fide attempt to organize the corporation some time before the consummation of powers by the negotiations with plaintiffs and the execution of the contract for the lease Because plaintiffs knew they were dealing with a corporate entity, and not with B individually, it is evident that the de facto status of the corporation suffices to absolve B from individual liability Plaintiffs are estopped from attacking the legal existence of the corporation collaterally because of the non-filing in order to impose liability on the individual when they have admittedly contracted with a corporate entity that had de facto status The act of executing the certificate of incorporation, the bona fide effort to file it and dealings with plaintiffs in the name of that corporation fully satisfy the requisite proof of the existence of a de facto corporation To deny such existence because of a mere technicality caused by administrative delay in filing runs counter to the purpose of the de facto concept and would accomplish an unjust and inequitable result in favor of plaintiffs contrary to their own contractual expectations Holding: Yes Mclean Bank v. Nelson Reasoning: It is the corporate form that provides limited liability. Without the corporationpersonal liability exists. The limited liability provided by a de jure corporation is the exception, not the rule If a group of individuals have not done everything necessary to secure or retain de jure corporate status, then they will not have corporate protection they will be exposed to personal liability NOTE: The Case of Defective Incorporation 3 Requirements for the Application of the De Facto Corporation Doctrine There must have been: 1. A statute in existence by which incorporation was legally possible 2. A colorable attempt to comply with the statute 3. Some actual use or exercise of corporate privileges 4. Good faith requirement These 3 requirements dissolve into 1 question: Whether defendants attempts to incorporate had gone far enough to be deemed colorable compliance For example, an attempt to file the articles of incorporation, if unsuccessful has frequently sufficed as the necessary attempt at statutory compliance Harris v. Looney Facts: 17
On Feb. 1, 1988 Harris (H) shold his business and its assets to J & R Construction The articles of incorporation for J & R were signed by the incorporators on Feb. 1, 1988 but were not filed with the Sec. of States office until Feb. 3. In 1991, J & R defaulted on its contract and promissory note and H sued the incorporators, Looney & Alexander for judgment, jointly and severally liable for the debt of J & R because its articles of incorporation had not been filed at the time Alexander, on behalf of the corporation, entered into a contract with H
Issue: Whether Alexander could be liable as promoters for J & R? Reasoning: Liability for Pre-Incorporation Transactions (Arkansas Business Corporation Act): All persons purporting to act as or on behalf of a corporation, knowing that there was no incorporation under this Act are jointly and severally liable for all liabilities created while acting so. This Act requires that in order to find liability, there must be a finding that the persons sought to be charged acted as or on behalf of the corporation and knew there was no incorporation under the Act The evidence shows that the contract to purchase and the promissory note were only signed by Alexander on behalf of the corporation Holding: The trial court denied appellant judgment against appellees because he found that appellees had not acted for or on behalf of J & R Construction as required by the statute Weir v. Kirby Construction Company To the extent that common law liability was based on what a person should have known, it is inconsistent with the Model Act, which imposes liability only on persons purporting to act as a corporation, knowing there was no incorporation Note on Estoppel 1. Estoppel Theory Compared with De Facto Theory In cases in which neither a de jure nor a de facto corporation has been formed, the courts have held that a party who has dealt with an enterprise on the basis that it is corporation is estopped from denying the enterprises corporate status Estoppel theory will normally turn heavily on the plaintiffs conduct De facto theory will normally turn on the defendants conduct in attempting to organize a corporation 2. Disaggregating Estoppel
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Estoppel theory is a cluster of different rules covering cases that fall into different categories, only one of which involves true estoppel, that is, reliance by one party on the others representation Categories of Estoppel a) Denial of corporate status by would-be shareholders An enterprise and its owners, who have claimed corporate status in an earlier transaction with a third party, T, later deny that status in a suit brought by T against the would-be corporation This is a true estoppel case, at least if T relied on the initial claim of corporate status b) Technical contexts The question of corporate status is raised in a technical, procedural context For example, in a suit brought by a would-be corporation, the defendant may seek to raise the defense that plaintiff is not really a corporation and therefore cannot sue in a corporate name The courts tend to reject such defenses by using estoppel c) Liability of would-be shareholders A third party who has dealt with an enterprise on the basis that it is a corporation seeks to impose personal liability on the would-be shareholders, who in turn raise estoppel as a defense The issue is whether, as a matter of equity, the claimant, having dealt with the enterprise as if it were a corporation should be estopped from treating it as anything else Leading case: Cranson v. IBM o IBM dealt with Cranson as if it were a corporation and relied on its credit, is estopped to assert that it was not incorporated at the time of the business transaction o In this case, estoppel theory is comparable in its function to de facto theory, however the 2 theories differ in 2 ways: 1. The nub of estoppel theory is that the third party has dealt with the business as if it were a corporation 2. The would-be shareholders would not need to resort to the estoppel theory if they could establish that their business had de facto status Note on Quo Warranto A quo warranto proceeding brought by the state is another method for testing the validity of a would-be corporations status An enterprise that fails to meet all of the statutory requirements for incorporation may be deemed a corporation de jure if the noncompliance is extremely insubstantial De jure status, unlike de facto status, is a good defense even against a quo warranto proceeding
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Section 6. The Classical Ultra Vires Doctrine 1. The Classical Ultra Vires Doctrine Under the classical theory of corporate existence, the corporation is regarded as a fictitious person, endowed with life and capacity only insofar as provided in its charter Transactions outside that sphere were characterized as ultra vires (beyond the corporations power) and unenforceable - unenforceable against the corporation because beyond the corporations powers and unenforceable by the corporation on the ground of lack of mutuality The original purpose of the ultra vires doctrine was to protect the public or the state form unsanctioned corporate activity 2. Powers & Purposes The classical ultra vires doctrine was applicable to 2 different questions: 1. Whether a corporation had acted beyond its purpose - that is, had it engaged in a type of business activity not permitted under its certification? 2. Whether the corporation had exercised a power not specified in its certificate? In practice, the 2 questions tended to merge 3. Recurring Problems The power of a corporation to guarantee a third partys debts o Early cases often held that such guarantees were ultra vires The problem of a corporation to be a general power o Early cases often held that a corporation had no power to enter into a partnership unless that power was explicitly granted by a statute or by the certificate of incorporation o The concern was that a corporate partner would be bound by the acts and decisions of co-partners who were not its duly appointed officers 4. Limitations on the Ultra Vires Doctrine i) It was established in early cases that corporate powers could be implied as well as explicitly ii) Generally speaking, ultra vires was not a defense to corporate tort or criminal liability iii) The doctrine was limited - under the majority view the non-performing party having received a benefit under the contract was estopped form asserting the ultra vires defense iv) Under American law, unanimous shareholder approval barred the ultra vires defense unless creditors would be injured
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v)
vi)
Another source of erosion for the ultra vires doctrine was the decreasing significance of the certificate of incorporation as a limit on the corporations purposes and powers Finally, the adoption in modern statutes of provisions that almost (but not quite) abolish the doctrine
Goodman c. Ladd Estate Co. Facts: Plaintiffs brought this suit to enjoin the defendant Ladd Estate Co. from enforcing a guaranty agreement executed by Westover Tower, Inc. in favor of Ladd Estate In 1961 the defendant Liles held all the common shares of Westover and he, Dr. Wheatley and Martin were its directors In September of 1961 Wheatley borrowed $10,000 from the Citizens Bank and gave a promissory note therefore, which was endorsed by Ladd Estate At the same time as this transaction, Liles, individually and Westover, by Liles as President and Martin as secretary, executed an agreement in writing by which they unconditionally guaranteed Ladd Estate against loss arising out of the latters endorsement of the Wheatley note to Citizens Bank Wheatley defaulted on his note, Ladd Estate paid the Bank and demanded reimbursement to Westover - upon their rejection Ladd filed this action upon the guaranty agreement against Liles & Wheatley Plaintiffs, Goodman, purchased all of the common shares of Westover & were fully aware of the guaranty agreement Plaintiffs conceded that the guaranty agreement was ultra vires the corporation Reasoning: The guaranty agreement recites that at the request of the Liles and Westover, Ladd Estate guaranteed payment of the Wheatley note Ladd Estate made good on its endorsement when Wheatley defaulted and now calls upon Westover to honor its obligation The agent of the plaintiffs, who purchased the shares for them, concluded the guaranty was not a valid obligation of the corporation - he guessed wrong Holding: If a shareholder himself has participated in the ultra vires act he cannot thereafter attack it as ultra vires The plaintiffs in this case are not entitled to equitable relief Inter-Continental Corp. v. Moody Facts:
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Inter-Continental Corp., a Texas corporation guaranteed a note given by Shively, its president, to Moody Moody knew or should have known that the guarantee was given for Shivelys personal benefit Shively lost control of IC Corp. and brought suit on the guarantee IC defended on the ground of ultra vires and also arranged for a minority shareholder to intervene for the purpose of enjoining payment of the note on the same ground The court held that a defense of ultra vires by the corporation is barred under the statute even if the third party actually knew that the corporation lacked authority to enter into the transaction The court also held that a shareholder can intervene to enjoin an ultra vires act even if he has been solicited to do so by the corporation, provided the shareholder is not the corporations agent
Kings Highway Corp. v. F.I.M.S Marine Repair Service, Inc. Facts: Kings Highway leased a movie theatre to Mariner Repair for 15 years, beginning July 1, 1966 Before July 1, Kings Highway brought an action for a declaratory judgment to invalidate the lease on the ground that it was void because it would be ultra vires for Mariner Repair to conduct a motion theatre business Holding: Ultra vires may not be invoked as a sword in support of a cause of action any more that it can be utilized as a defense Chapter 4: Corporate Structure Section 2. The Allocation of Legal Power Between Management & Shareholders Charlestown Boot & Shoe Co. v. Dunsmore Facts: Plaintiffs are a manufacturing corporation Dunsmore (D) was elected director in 1871 and Willard (W) in 1873 In Dec. 1874, the corporation voted to choose a committee to act with the directors to close up its affairs and chose one Osgood (O) for such committee O tendered his services, but defendants refused to act with him and contracted new debts to a larger extent than allowed by law By their neglect to sell the buildings and machinery of the corporation when they were urged to by O, the same depreciated in value to the extent of $20,000
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Issue: Whether the corporation can vote to choose a committee to act with the directors to close up its affairs? Reasoning: The provision of the statute is that the business of a dividend paying corporation shall be managed by the directors The only limitation upon the judgment or discretion of the directors is such as the corporation by its by-laws and votes shall impose The statute does not authorize a corporation to join another officer with the directors, nor compel the directors to act with one who is not a director Directors are bound to use ordinary care and diligence in the care and management of the business of the corporation, and are answerable for ordinary negligence When a statute provides that powers granted to a corporation shall be exercised by any set of officers or any particular agents, such powers can be exercised only by such officers or agents, although they are required to be chosen by the whole corporation; and if the whole corporation attempts to exercise powers which by the charter are lodged elsewhere, its action upon the subject is void There is no statute that makes it the duty of the directors of a corporation to keep its property insured Holding: The vote choosing O a committee to act with the directors in closing up the affairs of the plaintiff corporation was inoperative and void Section 3. The Legal Structure of Management Note on the Structure of the Corporation 1. The Traditional Legal Model o Under the traditional legal model of the corporation, the board of directors manages the corporations business, and the board is conceived as an independent institution, not as an agent of the shareholders o Shareholders have no legal power to give binding instructions to the board on matters within the boards exclusive power o Directors are normally removable by shareholders only for good cause 2. Modern Corporate Practice
Plaintiffs owned and possessed a certain shop of the value of $10,000 and a large amount of machinery and fixtures of the value of $10,000 - which defendants held it was their duty to insure While not insured the property was destroyed by fire at the loss of $20,000
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o Under modern corporate practice, in publicly held corporations, the management function is ordinarily located not in the board, but in the executives, and the central figure in the corporation is not the board, but the CEO a. Constraints of Time Boards of publicly held corporations meet an average of 8 times per year and spend approximately 157 hours a year on board matters including preparation time and travel. It is obvious by reason of time constraints alone the typical board could not possibly manage the business of a large publicly held corporation in the normal sense of the term - as such businesses are too complex to be managed by people who work the equivalent of 15 days per year b. Constraints of Information The distribution of information in a firm is highly asymmetrical: the officers typically not only have much more information than the board, but control much of the flow of information to the board - and thus officers heavily shape the decisions that the board makes c. Constraints of Composition The typical board includes a number of directors who are economically or psychologically tied to the corporations executives or CEO - in fact, a number of seats on the board are usually held by the corporations own executives 3. The Monitoring Board o The monitoring model of the board recognizes that in a publicly held corporation, the management function is exercised not by the board, but by the senior executives o This is the model accepted and adopted by most large publicly held corporations - and its success is based on the perceived economic advantage of having an additional system (the board) to monitor the efficiency of management Section 4. Formalities Required for Action by the Board Note on Formalities Required for Action by the Board The validity of an action by the board of directors is governed by rules concerning the formalities required for meeting, notice quorum, and voting. Level 1: The Governing Rules 1) Meetings A single director has NO power Directors can act only as a body Normally, directors must act at a duly convened meeting at which a quorum is present 24
2) Notice
Most statutes provide that a meeting of the board can be conducted by conference telephone, or by any other means of communication through which all participating directors can simultaneously hear each other Most statutes also permit the board to act by unanimous written consent without a meeting of any kind Regular Meetings Formal notice is NOT required for a regular board meeting If the meeting is a regular one, the directors are already on notice of its time, date, and place Special Meetings Formal notice is required for special meetings - it must include the time, date, and place and must be given to every director Waiver of Notice Most statutes provide that notice can be waived by: o In writing, before or after the meeting o Attendance at a meeting constitutes waiver unless a director attends merely to protest against holding the meeting
3) Quorum A quorum of a board consists of a majority of the full board, that is a majority of the authorized number of directors A majority of statutes permit the certificate of incorporation or the by-laws to requires a greater number for a quorum than a majority of the full board A minority of statutes permit the certificate or by-laws to set a lower number, but usually not less than one-third of the full board 4) Voting Assuming that a quorum is present when a vote is taken, the affirmative vote of a majority of those present (not simply a majority of those voting) is required for action Most statutes provide that the articles or by-law can require a super-majority vote for board action Level 2: Consequences of Non-Compliance The consequences of noncompliance with the rules that govern formalities required for board action in a publicly held corporation, will usually render the board action ineffective However, in closely held corporations, where formalities are seldom followed, the shareholders tend to make their own rules, the results of a failure to observe proper formalities are much less clear-cut 25
1) Unanimous explicit but informal approval Some older cases have held that informal approval by directors, that is approval without following the requisite formalities - is ineffective, even if the approval is explicit and unanimous In the context of a closely held corporation, explicit but informal approval by all directors is effective where a person who has contracted with a corporate officer has been led to regard his transaction with the corporation as valid, and all the shareholders either are directors or have acquiesced in the transaction or in a past practice of informal board action 2) Explicit majority approval coupled with acquiescence by remaining directors Where a majority of the directors explicitly approved a transaction, while the remaining directors knew of the transaction and took no action to disavow it, they may be said to have acquiesced in the transaction 3) Majority approval or acquiescence Some courts have refused to hold the corporation liable where a majority of directors of a closely held corporation approve a transaction, explicitly or by acquiescence, but the remaining directors lack knowledge of the transaction Other courts have held the corporation liable, a least if the shareholders acquiesced in the transaction or the shareholders or remaining directors acquiesced in a practice of informal action by the directors Note on Committees Boards of publicly held corporations accomplish much of their work through committees The board may delegate to a committee the power to make decisions about specific matters or a range of matters In general, the rules governing board procedures are applicable to committees as well Section 5. Authority of Corporate Officers Note on the Authority of Corporate Officers 1. President The modern rule is that the president has apparent authority to bind his company to contracts in the usual and regular course of business, but not to contracts of an extraordinary nature 26
2.
3.
4.
5. 6.
7.
o Elements of an extraordinary action The economic magnitude of the action in relation to corporate assets and earnings The extent of risk involved The time-span of the actions effect The cost of reversing the action o Generally, extraordinary actions are decisions that would make a significant change in the structure of the business enterprise, or in the structure of control over the enterprise, are extraordinary corporate actions and therefore normally outside the presidents apparent authority The president or any other officer may have actual authority that is greater than his apparent authority The presidents actual authority may be found in the certificate of incorporation, the by-laws, or board resolutions, or may derive from a pattern of past acquiescence by the board, or from the boards ratification of a specific transaction Chairman of the Board In some corporations this position is held by the CEO who has relinquished day-by-day operations to a younger man while still holding the reins of power; in others it is held by a retired CEO whose counsel and advice are still valued; in others it provides a formula for dividing between 2 relatively equal principals the control of the corporation Vice-Presidents In early cases, VPs had little or no apparent authority Today, courts may follow a more expansive approach to the authority of a VP Secretary The secretary of a corporation has apparent authority to certify the boards records of the corporation, including resolutions of the board - but no other apparent authority Treasurer The treasurer has virtually no apparent authority Closely Held Corporations In a closely held corporation, some cases have held that if the president has been exercising absolute authority over the corporations affairs and the board has never questioned, altered, or rejected his decisions, the president will have extremely wide actual and apparent authority Courts frequently recognize in officers of a close corporation the same powers that are possessed by partners in a firm under the general rule of partnership law Ratification
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Even if an officer lacks both actual and apparent authority, the corporation may be bound by the officers act in entering into a contract or other transaction on its behalf, if the board later ratifies the officers act Ratification may occur where a corporation, knowing all of the facts, accepts and uses the proceeds of an unauthorized contract executed on its behalf
Schoonejongen v. Curtiss Wright Corp. Holding: In general, an officers powers stem from the organic law of the corporation, or a board delegation of authority which maybe express or implied Authority will be implied when it is reasonably necessary and proper to effectuate the purpose of the office or the main authority conferred
Section 6. Formalities Required for Shareholder Action Note on Formalities Required for Shareholder Action 1. Meeting and Notice Notice of place, time and date is required for the annual meeting of shareholders and for any special meeting Notice of a special meeting must describe the purpose for which the meeting is called Under most state statutes, the notice of an annual meeting must describe the matters to be acted upon only in certain cases Because the identity of the shareholders in a publicly held corporation constantly undergoes change, only those persons who were record holders on the record date are entitled to vote at the meeting The record date is normally fixed in the by-laws or by the board & will be the day of, or the business day preceding, the day on which the notice of the meeting is sent 2. Quorum Under most of the statutes, a majority of the shares entitled to vote is necessary for a quorum, unless the certificate of incorporation sets a higher or lower figure A substantial majority of statutes provide that the certificate cannot set a quorum lower then one-third of the share entitled to vote Most of the remaining statutes set no minimum 3. Voting a. Ordinary Matters
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Under most statutes, the affirmative vote of a majority of shares represented at a meeting is required for shareholder action on ordinary matters Under some statutes, only the affirmative vote of a majority of those voting is required b. Fundamental Changes Fundamental Changes - such as amendment of the articles of incorporation, merger, sale of substantially all assets, and dissolution, usually require approval by two-thirds of the outstanding voting shares, rather than a majority of those present or voting at the meeting c. Election of Directors The election of directors requires only a plurality vote that is those candidates who receive the highest number of votes are elected, up to the maximum number to be chosen d. Written Consent The statutes typically permit the shareholders to act by written consent in lieu of a meeting (usually only if the consent is unanimous) Section 7. Cumulative Voting Note on Cumulative Voting 1. Straight Voting & Cumulative Voting Straight-Voting: A shareholder can cast, for each candidate for election to the board, a number of votes equal to her number of shares o Under straight-voting, a minority shareholder or faction can never elect a director to the board over the opposition of the majority Cumulative-Voting: A shareholder can cast for any single candidate, or for two or more candidates, as she chooses, a number of votes equal t the number of shares she holds times the number of directors to be elected o Under cumulative-voting, a single shareholder can distribute all of his votes to one candidate & thus has a better chance of electing a director to the board 2. Mathematics 2 Formulas in Cumulative Voting 1) Used to determine the minimum number of shares needed to elect a particular number of directors 2) Used to determine how many directors can be elected by a group controlling a particular number of shares 3. Mandatory Cumulative Voting 29
The percentage of stock that minority shareholders must hold to elect at least one director under cumulative voting varies inversely with the number of directors to be elected Classified Boards o When cumulative voting is mandatory, a corporation can have a classified board, in which the directors are divided into classes and each class serves for a term of years. o Where a board is classified, the minority must hold more stock, to elect a single director, than if a board of the same size was unclassified Removal of Directors o Cumulative voting could be undercut if a director who is elected by a minority under cumulative voting could then be revoked by majority o Thus, some statue provide that under cumulative voting, a director cannot be removed if the number of shares voting against his removal would be sufficient to elect him
Section 8. Limited Liability Walkovszky v. Carlton Facts: Plaintiff alleges that he was injured when he was run down in NYC by a taxi cab owned by the defendant Seon Cab Corporation and negligently operated by defendant, Marchese The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon Cab Corporation, each of which has but 2 cabs registered in its name and it is implied that only the minimum automobile liability insurance required by law is carried on any one cab Although seemingly independent of one another, these corporations are alleged to be operated as a single entity, unit and enterprise with regard to financing, supplies, repairs, employees and garaging and all are named as defendants Plaintiff argues that he is entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt to defraud members of the general public who might be injured by the cabs Issue: Whether defendant is liable in his individual capacity? Reasoning: The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability but, manifestly, the privilege is not without limits
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Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, pierce the corporate veil whenever necessary to prevent fraud or to achieve equity In other words, whenever anyone uses control of the corporation to further his own rather than the corporations business he will be liable for the corporations acts upon the principle of respondeat superior applicable even where the agent is a natural person Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then it does not matter -insofar as his personal liability is concerned - that the enterprise is actually being carried on by a larger enterprise entity The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought Holding: The complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity
Minton v. Cavaney Facts: The Seminole Hot Springs Corporation (SHS) was duly incorporated in CA on March 8, 1954 It conducted a public swimming pool that it leased from its owner June 1954, the plaintiffs daughter drowned in the pool and plaintiffs recovered $10,000 for her wrongful death The judgment remains unsatisfied Cavaney (C) was a director/secretary/treasurer of SHS and applied for permission to issue stock - but the stock was never issued As far as C knew the corporation had no assets of any kind, though duly organized, it never functioned as a corporation C was an attorney - and was the attorney for SHS Issue: Is Cavaney personally liable for SHSs debt for the wrongful death? Reasoning: The Alter Ego Doctrine o Alter Ego or Disregard for the Corporate Entity is generally used to refer t the various situations that are an abuse of the corporate privilege o The equitable owners of a corporation are personally liable when they treat the assets of the corporation as their own and add or withdraw capital form the corporation at will; when they hold themselves out as being personally liable for debts of the corporation; or when they
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provide inadequate capitalization and actively participate in the conduct of corporate affairs The evidence is undisputed that there was no attempt to provide adequate capitalization Holding: Cavaney was not a party to the action against the corporation, and the judgment in that action is therefore not binding upon him unless he controlled the litigation leading to the judgment Arnold v. Browne Holding: Evidence of inadequate capitalization is, at best, merely a factor to be considered by the trial court in deciding whether or not to pierce the corporate veil --- but is its an important factor Slottow v. Fidelity Federal Bank Holding: Under CA law, inadequate capitalization of a subsidiary may alone be a basis for holding the parent corporation liable for acts of the subsidiary
Section 9. Equitable Subordination of Shareholder Claims Note on Equitable Subordination of Shareholder Claims 1. Equitable Subordination The Deep Rock Doctrine Under the doctrine of equitable subordination, when a corporation is in bankruptcy the claim of a controlling shareholder may be subordinated to the claims of others, including the claims of preferred shareholders, on various equitable grounds Taylor v. Standard Gas & Electric Co. - in this case, the court subordinated the parents claim, as a creditor of the subsidiary, to the claims of other creditors and of preferred stockholders, because of the parents improper management of the subsidiary for the parents benefit, and because the subsidiary had been inadequately capitalized 2. Comparison with Piercing The equitable remedy of subordination is much less drastic: it simply takes an investment already made, and denies it the status of a creditors claim on a parity with outside creditors, whereas imposing liability for corporate debts undermines the essential premise of limited liability -- that a shareholders risk is limited to the amount of his investment Courts hold that it is fair to subordinate a controlling persons claim based upon a lesser evidence of misuse of the corporate form than 32
what is required to impose affirmative personal liability for all corporate obligations If actual shareholder capital were so small as to result in treating a shareholder loan as equity, then the equity as supplemented by the subordinated loan may be deemed an adequate cushion to support limited liability Accordingly, inadequate capitalization may result in subordination when it does not necessarily require imposition of affirmative liability
Costello v. Fazio Facts: A partnership known as Leonard Plumbing & Heating was organized in October, 1948 by Fazio (F), Ambrose (A) and Leonard (L) who made initial capital contributions of $44,806.40 Later that year, they decided to incorporate the business In contemplation of incorporation, F & A withdrew all but $2,000 apiece of their capital contributions to the business This was accomplished by the issuance to them of partnership promissory notes (these were demand notes, no interest being specified) Based on the reduced capitalization of the partnership, the corporation was capitalized for 600 shares of no par value common stock valued at $10 per share 200 shares were issued to each of the three partners in consideration of the transfer to the corporation of their interests in the partnership F became President & A became secretary-treasurer of the new corporation both were directors The corporation assumed all liabilities of the partnership, including the notes to F & A In June 1954, the corporation filed a voluntary petition in bankruptcy At this time, the corporation was not indebted to any creditors whose obligations were incurred by the pre-existing partnership, saving the promissory notes issued to F & A Issue: Whether the claims of controlling shareholders will be deferred or subordinated to outside creditors where a corporation in bankruptcy has not been adequately or honestly capitalized or has been managed to the prejudice of creditors, or where to do otherwise would be unfair to creditors? Reasoning: The corporation was grossly undercapitalized Yet, despite this precarious financial condition, F & A withdrew over $45,000 of the partnership capital - more than 88% of the total capital The $6,000 capital left in the business was only 1/65th of the last annual net sales
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The depletion of the capital account in favor of a debt account was for the purpose of equalizing the capital investment of the partners and to reduce tax liability when there were profits to distribute It is therefore certain that in withdrawing this capital, F & A did act for there own personal and private benefit It is equally certain, that in doing so they acted to the detriment of the corporation and its creditors The likelihood that that business failure would result from such under capitalization should have been apparent to anyone who knew the companys financial & business history Where the claim is found to be inequitable, it may be set aside or subordinated to the claims of other creditors The question to be determined when the plan or transaction which gives rise to a claim is challenged as inequitable is whether, within the bounds of reason and fairness, such a plan can be justified - Taylor v. Standard Gas Where, as here, the claims are filed by persons standing in a fiduciary relationship to the corporation, another test which equity will apply is whether or not under all the circumstances the transaction carries the earmarks of an arms length bargain -- as per Pepper v. Litton Much more than under capitalization was shown here - as persons serving in a fiduciary relationship to the corporation actually withdrew capital already committed to the business, in the fact of recent adverse financial experience This was done for personal gain, under circumstances which charge them with knowledge that the corporation and its creditors would be endangered Taking advantage of their fiduciary position, they thus sought to gain equality of treatment with general creditors The fact that the withdrawal of capital occurred prior to incorporation is immaterial This transaction occurred in contemplation of incorporation, when the participants occupied a fiduciary relationship to the partnership; and expected to become controlling stockholders, directors, and officers of the corporation This plan was effectuated, and they were serving in those fiduciary capacities when the corporation assumed the liabilities of the partnership, including the notes here in question Holding: The inequitable conduct of appellees consisted of acting to the detriment of present or future creditors, whoever they may be Chapter 5: Shareholder Informational Rights & Proxy Voting Section 1. Shareholder Informational Rights Under State Law Inspection of Books & Records
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Security First Corp. v. U.S. Die Casting & Development Co. Facts: Defendant, Security First Corp. is a Delaware corporation, with its principal place of business in Ohio & its stock is publicly traded Plaintiff, U.S. Die Casting & Development Corp. is a closely-held Ohio corporation and is the record-holder of 5% of defendants stock Defendant & plaintiff entered into a merger agreement for approximately $78 million The termination provision required defendant to pay a termination fee of $2 million, contingent on the occurrence of certain events within 1 year after termination The merger fell through and plaintiff requested inspection of books & records Issue: Whether the plaintiff established a proper purpose for its request to inspect some of the books & records? Reasoning: Under the Delaware General Corporation Law permits a stockholder, who shows a specific proper purpose and who complies with the procedural requirements of the statute, to inspect specific books & records of a corporation A stockholders entitlement to inspection of corporate books & records depends on whether or not a credible basis to find probable wrongdoing on the part of corporate mismanagement has been establish The plaintiff must show the credible basis by a preponderance of the evidence In order to meet that burden of proof, a stockholder must present some credible basis from which the court can infer that waste or mismanagement may have occurred A mere statement of purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad inspection relief There must be some evidence of possible mismanagement as would warrant further investigation of the matter The stockholder is not required to prove by a preponderance of the evidence that waste and mismanagement are actually occurring The threshold must be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing The plaintiff bears the burden of proving that each category of books & records is essential to the accomplishment of the stockholders articulated purpose for the inspection Inspection of Stockholder Lists: When a stockholder complies with the statutory requirements governing the form & manner of making a demand to obtain a stockholder list, the corporation bears the burden of proving that the demand is for an improper purpose when a stockholder seeks to inspect a stockholder list
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Holding: Yes - but only for some A stockholder may demonstrate a proper demand for the production of corporate books & records upon a showing, by the preponderance of the evidence, that there exists a credible basis to find probably corporate wrongdoing Note on Shareholders Inspection Rights 1. Common Law - Interpretation of the Statutes At common law, a shareholder acting in good faith for the purpose of advancing the interest of the corporation and protecting his own interest as a stockholder has a right to examine the corporate books and records at reasonable time A common problem of interpretation is whether the statutes: i) Preserve the common law rule that the shareholder must prove a proper purpose ii) Discard the proper-purpose test iii) Preserve the proper-purpose test, but place on the corporation the burden of proving that the shareholders purpose is proper Another problem of interpretation is whether the statutes replace or supplement the common law Answer: Yes - the state statutes supplement the common law, so that a suit for inspection that does not fall within the relevant statute can still be brought under the common law 2. Proper Purpose Examples of Proper Purpose include: To determine the financial condition of the corporation To ascertain the value of the petitioners shares 3. Stockholder Lists Requiring the production of a stockholder list is almost a necessary step for shareholders to exercise their role in corporate governance, imposes only a minimum burden on the corporation & usually cannot injure the business of the corporation Note on Record Ownership & the Record Date Record Owners: the persons who are listed as shareholders on the corporations records o The persons who actually own shares - the beneficial owners - often differ from the record owners
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Normally, only record owners have the right to notice of a meeting & the right to vote Because publicly held corporations are constantly changing hands, the record owners on the date notice is given will differ form the persons who are record owners on the meeting date o Thus, the law permits corporations to set a record date - which is typically on or around the date that notice of the meeting is given - for determining the shareholders who will be entitled to vote at the meeting
Chapter 6: The Special Problems of Close Corporations Section 1. Introduction (A) A Brief Look Back At Partnership Note on Partnership Law & Corporate Law Close Corporations: One whose shares are held by a relatively small number of persons 1. Basic Partnership-Law Norms a. Internal Governance: Partnership law is facilitative rather than mandatory. The basic governance rules are: i. Absent contrary agreement, all partners have equal rights in the management & conduct of the partnership business ii. Absent contrary agreement, differences among the partners as to ordinary matters connected with the partnership business are determined by a majority of the partners, but matters outside the scope of the partnership business, or that would be in conflict with the partnership agreement, require unanimous approval b. Authority: Any partner has power to bind the partnership on a matter in the ordinary course of business c. Distributive Shares: Absent contrary agreement, partnership profits are shared per capita & no partner is entitled to a salary d. Transferability: Absent contrary agreement, no person can become a member of a partnership without the consent of all the partners e. Term: Partnerships are normally created for a limited term frequently a short term & dissolution is relatively easy f. Fiduciary Duties: Partners stand in a fiduciary relationship to each other g. Liability: Partners in a general partnership are individually liable for the partnerships obligations 2. Basic Corporation-Law Norms
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a. Internal Governance: As to many aspects of internal governance, the traditional corporate statutes were mandatory. b. Authority: Because shareholders, as such, have no right to participate in the management of the corporations business, they also have no apparent authority to bind the corporation c. Distributive Shares: Corporate distributions are not shared per capita, but in proportion to stock ownership d. Transferability: Shares of stock and the shareholder status they carry, are freely transferable e. Term: Corporations are normally created for a perpetual term, and dissolution is relatively difficult f. Fiduciary Duties: The traditional view was that shareholders do not stand in a direct fiduciary relationship t each other, although that view has now changed g. Liability: Shareholders are not individually liable for a corporations obligations * In close corporations, many of these norms can be overridden by agreement (B) An Introduction To The Close Corporation Donahue v. Rodd Electrotype Co. Facts: Plaintiff, Donahue (D) is a minority stockholder in Rodd Electrotype (RE) and brings this suit against the directors seeking to rescind REs purchase of Harry Rodds shares & to compel Rodd to repay the corporation the purchase price of the stock Plaintiff alleges that RE caused the corporation to purchase the share in violation of their fiduciary duty to her, as a minority stockholder, because the Rodds failed to offer he an equal opportunity to sell her shares to the corporation RE argues that there is no right to equal opportunity in corporate stock purchases for the corporate treasury Issue: Whether Reasoning: A close corporation is typified by: 1. A small number of stockholders 2. No ready market for the corporate stock 3. Substantial majority stockholder participation in the management, direction & operations of the corporation The close corporation bears a striking resemblance to a partnership - as the relationship among the stockholders must be one of trust, confidence, and absolute loyalty if the enterprise is to succeed The corporate form provides an opportunity for the majority stockholders to oppress or disadvantage minority stockholders through freeze-outs etc. 38
Stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another this is a more rigorous duty The standard owed is the utmost good faith and loyalty In MA, a corporation has the power to purchase its own shares & an agreement to reacquire stock is enforceable subject to the additional requirement that the stockholders who act as directors or controlling shareholders, have acted with the utmost good faith & loyalty to other stockholders If the stockholder whose shares were purchased was a member of the controlling group, the controlling shareholders must cause the corporation to offer each stockholder an equal opportunity to sell a ratable number of his shares to the corporation at an identical price Holding: The purchase of Harry Rodds shares by the corporation is a breach of the duty which the controlling stockholders owed to the minorities Plaintiff is entitled to relief Note on Legislative Strategies Toward the Close Corporation Traditional statutory rules were drafted with publicly held corporations in mind 1. Unified Strategies One strategy is to make no special provisions for close corporations, but to modify traditional statutory norms to meet the needs of close corporations 2. The New York & Model Act Strategies Add 1 or 2 important provisions that are applicable only to those corporations with defined shareholding characteristics 3. Statutory Close Corporations Delaware Delaware statutes contain provisions which are explicitly made applicable only to corporations that both qualify for & formally elect statutory closecorporation status Statutory Close Corporations: A corporation can qualify for statutory close-corporation status if its certificate provides that: o All corporate stock of all classes shall be held of record by not more than a specified number not exceeding 30 o All issued stock of all classes shall be subject to 1 or more restrictions o The corporation shall make no offering of any of its stock of any class in a public offering Significance of Statutory Close Corporations
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Only a small number of newly formed corporations elect to become statutory closed corporations - thus these statutory provisions dont mean much
Note on Non-Electing Corporations The special close-corporation statutes only provide a safe harbor under which close corporations do not have to rely on judicial understanding of their special needs, but can instead rely on specific statutory provisions Section 2. Special Voting Arrangements at the Shareholder Level (A) Voting Agreements Ringling Bros. - Barnum & Bailey Combined Shows v. Ringling Facts: Issue: Reasoning: Holding: Note on Irrevocable Proxies Proxy: Traditionally, a proxy has been treated as an agency relationship - in which the shareholder is the principal & the proxyholder is the agent It is a rule of agency law that a principal can terminate an agents authority at will, even if the termination is in breach of contract Exception: There is an exception to this rule in cases where the agent holds a power coupled with an interest Generally speaking, this exception is applicable to arrangements in which it is understood that the agent or power-holder has an interest in the subjectmatter to which the power is relates, and is therefore expected not to execute the power solely on the power-givers behalf - but on his own behalf as well Where a proxy is given pursuant to a voting agreement, normally the proxyholder is either an arbitrator, who has no proprietary interest in the shares or the corporation, or a shareholder, who has a proprietary interest in the corporation, but not in the shares that are the subject-matter of the proxy A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally (B) Voting Trusts Note on Voting Trusts 1. In General
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Voting Trust: A voting trust is a device by which shareholders separate voting rights in, and legal title to, their shares from beneficial ownership, by conferring the voting rights and legal title on one or more voting trustees A voting trust is a type of pooling agreement Creating a Voting Trust: Creating a voting trust normally requires: 1. The execution of a written trust agreement between participating shareholders and the voting trustees 2. A transfer to the trustee, for a specified period, of the shareholders stock certificates and the legal title to their stock During the term of the trust the trustee is the record owner of the shares, entitled to vote in the election of directors & other matters Purpose: A voting trust is an effective & simple way to separate control & beneficial ownership for a limited period of time Termination: Upon termination of the voting trust, the beneficial owners receive stock certificates which reinstate them as complete owners, registered as such on the corporations books 2. Validity Most states have statutes that both explicitly validate voting trusts & lay down requirements for their creation & content Most common limitations are a maximum time period of 10 years and a requirement that the voting-trust agreement be filed with the corporation & open to inspection 3. Overlap of Voting Trusts & Shareholders Voting Agreements In the context of close corporations, voting trusts may be used to allocate voting control in other than a pro rata manner, or to preserve the solidarity of a faction consisting of less than all the shareholders Note on Classified Stock & Weighted Voting Section 3. Agreements Controlling Matters within the Boards Discretion McQuade v. Stoneham Facts: This action is brought to compel specific performance of an agreement between parties Issue: Whether Reasoning: An agreement to continue a man as president is dependant upon his continued loyalty to the interests of the corporation Although it has been held that an agreement among stockholders whereby it is attempted to divest the directors of their power to discharge an unfaithful
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employee of the corporation is illegal as against public policy it must be equally true that the stockholders may not, by agreement among themselves, control the directors in the exercise of judgment vested in them by virtue of their office to elect officers and fix salaries Their motive may not be challenged so long as their acts are legal Directors may not by agreements entered into by stockholders abrogate their independent judgment Stockholders may combine to elect directors The power to unite, however, is limited to the election of directors and is not extended to contracts whereby limitations are placed on the power of directors to manage the business of the corporation by the selection of agents at defined salaries A trustee is held to something stricter than the morals of the marketplace Holding: A contract is illegal and void so far as it precludes the board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies or retaining individuals in office, except by consent of the contracting parties Note on Clark v. Dodge Facts: 2 Corporations manufactured medicinal preparations under a secret formula Clark owned 25% & Dodge owned 75% of the stock of each corporation Clark (C) & Dodge (D) entered an agreement which provided: 1. D would vote for C as a director 2. D, acting in his directorial capacity, would continue C as general manager, as long as C proved faithful, efficient, and competent 3. C would always receive a salary as or dividends one-fourth of the corporations net income 4. No salaries to other officers would be unreasonable in amount or incommensurate with the services rendered by those officers Reasoning: There can be no doubt that the agreement was legal & that the complaint states a cause of action There was no attempt to sterilize the board of directors (as in McQuade) If there was any invasion of the powers of the directorate under that agreement it is so slight as to be negligible; and certainly there is no damage suffered by or threatened to anybody Holding The court held the agreement was valid Galler v. Galler Facts:
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Plaintiff Emma Galler sued in equity for an accounting and for specific performance of an agreement made between plaintiff & her husband, Benjamin (B) and defendants - Isadore (I) Galler & his wife Rose B & I, brothers, were equal partners in the Galler Drug Co. - each owning one-half of the outstanding 220 shares In 1945, each contracted to sell 6 shares to an employee, Rosenberg, at a price of $10,500 for each block of 6 shares & they guaranteed to repurchase the shares if Rosenbergs employment was terminated After B died, I & his wife Rose arranged to purchase the 12 shares transferred to Rosenberg Plaintiff, Emma asserts an equitable right to 6 of those 12 shares In March 1954, B & I decided to enter an agreement for the financial protection of their families and to assure their families after the death of either brother, equal control of the corporation Defendants had decided prior to Bs death they would not honor the agreement, but never disclosed their intention to plaintiff and B The agreement states that each B & I own 47.5 % of the issued and outstanding shares & that if either brother decided to sell his shares, he is required to offer them first to the remaining shareholders and then to the corporation at book value, according each 6 months to accept the offer
Issue: Whether the contractual voting control agreement is valid? Reasoning: A close corporation is one in which stock is held in few hands or in a few families and wherein it is not at all, or only rarely, dealt in by buying or selling The shareholders of a close corporation are often also the directors and officers thereof Often the only sound basis for protection is afforded by a lengthy, detailed shareholder agreement securing the rights and obligations of all concerned The agreement at issue provided no specific termination date however, the court holds that it is operative only as long as one of the parties is living This agreement is not a voting trust, but a straight contractual voting control agreement which does not divorce voting rights from stock ownership Neither the period of time of the agreement, nor the clause providing for the election of certain persons to offices for a period of years invalidates the agreement Since there are no shareholders here other than the parties to the contract, any objection based on violation of the rights of shareholders and ultra vires is not here applicable, and the contracts effect, as limited, upon the corporation is not so prejudicial as to require its invalidation Holding: Yes - therefore the court holds that defendant must account for all monies received by them from the corporation, as plaintiff requested
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Adler v. Svingos Facts: Adler, Shaw & Svingos each owned 33% of the shares of 891 First Ave. Corp., a NY corporation that operated a restaurant The corporations certificate of incorporation was filed November 1978 In December 1978 Adler, Shaw & Svingos executed a Stockholders Agreement which provided that all corporate operations, including changes in corporate structure, would require unanimous consent of the 3 signatories Subsequently when Adler & Shaw sought to sell the business, Svingos objected, relying upon the Stockholders Agreement Adler & Shaw sought to strike the paragraph of the Agreement requiring that all corporate operations, including changes in corporate structure would require unanimous consent Issue: Whether Adler & Shaw can strike the unanimous consent provision within the Agreement? Reasoning: NY statutes require that a provision that restricts the board in the management of the business of the corporation must be located in the certificate of incorporation In Zion v. Kurtz the court held enforceable, as between the parties, a provision of a shareholders agreement between all shareholders, proscribing corporate action without the consent of a minority shareholder, even though the disputed provision was not incorporated in the corporate charter as required by Delawares statute Since there are no intervening rights of third persons, the agreement requires nothing that is not permitted by statute, and all of the stockholders of the corporation assented to it, the certificate of incorporation may be ordered reformed, by requiring Kurtz to file the appropriate amendments Holding: The principles of Zion are controlling here The court should grant the defendants motion & reform the certificate of incorporation to reflect the unanimity of the stockholders agreement Section 4. Supermajority Voting & Quorum Requirements at the Shareholder & Board Levels Sutton v. Sutton Facts: Petitioners seek (1) a declaration that an amendment to the certificate of incorporation of Bag Bazaar, Ltd. is valid and (2) to compel respondent
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Sutton, as director of the corporation, to sign and deliver a certificate of amendment to petitioners for filing Respondent has refused to execute the certificate, contending it is not valid because the amendment had the support of only 70% of the shareholders when the certificate of incorporation required unanimous approval The certificate of incorporation for Bag Bazaar provides that, unanimous vote or consent of the holders of all the issued and outstanding shares of Common Stock of the corporation shall be necessary for the transaction of any business of the corporation including amendment to the certificate of incorporation The corporation was run without incident for 30 years - until disputes arose between Soloman & David Sutton -- and culminated at a shareholders meeting where petitioners voted their 70% of the shares in favor of a resolution to strike the unanimity provision, while respondents 30% of the shares voted against the resolution Respondent refused to sing the certificate of amendment, thereby preventing it from taking effect
Issue: Whether the provision in Bag Bazaars certificate requires unanimous or two-thirds shareholder consent for the transaction of any business, including amendment to the certificate of incorporation? Reasoning: This appeal requires interpretation of the Business Corporation Law which states that, supermajority provisions in a certificate of incorporation may be amended by two-thirds vote unless the certificate specifically provides otherwise Petitioners argue that despite the unanimity provision in Bag Bazaars certificate, a two-thirds vote to amend is sufficient under this statute unless the certificate explicitly provides unanimous consent is required to amend the supermajority In Benetendi v. Kenton Hotel the court invalidated a unanimity provision adopted by unanimous shareholder vote, reasoning that such a provision was antithetical to the basic concept of corporate governance by majority rule and contrary to public policy However, the Business Corporation Law as finally enacted provides that an amendment of the certificate of incorporation which changes or strikes out a supermajority provision, shall be authorized at a meeting of shareholders by vote of the holders of two-thirds of all outstanding shares entitled to vote thereon, or of such greater proportion of shares as may be provided specifically in the certificate of incorporation There is nothing inherently unfair or improper about a voluntary organizations consensual decision to assure protection from minority shareholders, and shareholders are not without remedies where deadlocks do arise Holding:
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The provision in Bag Bazaars certificate is unambiguous: it requires unanimous shareholder consent for the transaction of any business, including amendment to the certificate of incorporation
Section 6. Valuation Note on the Delaware Block Method Under this method of corporate valuation, the court normally values a corporation first by determining the market value of the corporations stock, the value of the corporations net assets, and the corporations earning value Next, the court assigns weights to each of the values, depending on such factors as the comparative reliability of each factor in a particular case Finally, the court sums the elements of value, as adjusted by their relative weights Piemonte v. New Boston Garden - the court reasoned that market value may be a significant factor, even the dominant factor, in determining the fair value of shares of a particular corporation. Shares regularly traded on a recognized stock exchange are particularly susceptible to valuation on the basis of their market price. Where there is no established market for a particular stock, actual market value cannot be used. In such cases, a judge might undertake to reconstruct market value but he is not obliged to do so In this case, the Garden Arena stock was traded on the Boston Stock Exchange, but rarely However the judge concluded that the volume of trading was sufficient to permit a determination of market value and expressed a preference for actual sale price over any reconstruction of a market value, which he concluded would place undue reliance on corporations, factors, and circumstances not applicable to Garden Arena stock The court held that the Delaware case law, which is instructive, but not binding, has established a method of computing value based on earnings The Delaware Block Method has fallen out of favor & the trend is to use the valuation methodologies that are in use by the financial community at the relevant time Lebeau v. N.C. Bancorporation Inc. Facts: This case concerned the valuation of a publicly held corporation, MGB MGB had 2 bank subsidiaries Greenwood & WBC In this case, 3 distinct methodologies were used to value MGBs 2 operating bank subsidiaries: (i) the comparative publicly-traded company approach,
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(ii) the discounted cash flow method (DCF), and (iii) the comparative acquisition technique The control premium was then added to the values of the 2 subsidiaries to reflect the value of the holding companys (MGBs) controlling interest in those subsidiaries o The control premium is based on the principle that the market value of stock includes a minority discount - that is, a discount for the fact that shares traded on the market are not controlling shares o However, a minority discount, applicable to non-controlling stock, is irrelevant when valuing the corporation MGBs remaining assets were then added to the sum of the valuations of the 2 subsidiaries, to arrive at an overall fair value of $85 per share for MGB Contemporary Methods of Valuation 1. Comparative Company Approach This comparative publicly-traded company approach involves 5 steps: 1. Identifying an appropriate set of comparable companies 2. Identifying the multiples of earning as book value at which the companies traded 3. Comparing certain of MGBs financial fundamentals to those of comparable companies 4. Making certain adjustments to those financial fundamentals 5. Adding an appropriate premium control 2. Discounted Cash Flow Approach This valuation analysis involves 4 steps: 1. Projecting the future net cash flows available to MGBs shareholders for 10 years after the merger date 2. Discounting those future cash flows to present value as of the merger date by using a discount rate based on the weighted average cost of capital 3. Adding a terminal value that represented the present value of all future cash flows generated after the 10 year projection period 4. Applying a control premium to the sum of steps (2) & (3) 3. Comparative Acquisition Approach This approach focused on multiples of MGBs last 12 months earnings and its tangible book value These multiples were determined by reference to the prices at which the stock of comparable companies had been sold in transactions involving the sale of control 4. MGBs Remaining Assets Having valued MGBs 2 subsidiaries, the court then determined the faire value of MGBs remaining net assets Basically subtracting the companies liabilities from its assets - which result is the net asset value for MGBs remaining assets 47
5. Fair Value Computation The values from all of the above valuations were added together Section 7. Restrictions on the Transferability of Shares & Mandatory-Sale Provisions Allen v. Biltmore Tissue Corp. Facts: The by-laws of defendant corporation give it an option to purchase, in case of the death of a stockholder, his shares of the corporate stock Biltmore Tissue Corp. (BTC) was organized with an authorized capitalization of 1,000 shares without par value, to manufacture and deal in paper products The by-laws adopted by the incorporators-directors, contain provisions limiting the number of shares available to each stockholder and restricting stock transfers both during the life of the stockholder and in case of his death Whenever a stockholder desires to sell or transfer his shares, he must, according to one by-law give the corporation or other stockholders an opportunity to repurchase the stock at the price that was paid for the same to the Corporation at the time the Corporation issued the stock However, if the exercise is not optioned within 60 days, the stock may be sold by the holder to such person and under such circumstances as he sees fit The by-laws also state that the corporation is to have the right to purchase its late stockholders shares for the price it originally received for them Harry Kaplan, purchased 5 shares from BTC at $5 per share, and later purchased an additional 10 shares for $100 on each of these certificates it read, issued subject to restrictions in sections 28, 29, and 30 of the by-laws After Kaplan died, his executors declined to sell the corporation, contending that the by-law is void as an unreasonable restraint Issue: Whether this option to purchase is enforceable? Reasoning: The Uniform Stock Transfer Act provides there should be no restriction upon the transfer of shares, by virtue of any by-law of such corporation, or otherwise, unless the restriction is stated upon the certificate Since the certificates in this case meet the statutes requirements, the court looks to the validity of the by-law restriction The tendency in law has been to sustain a restriction imposed on the transfer of stock if reasonable and if the stockholder acquired such stock with requisite notice of the restriction Thus the issue in this case is whether the provision according the corporation the right or first option to purchase the stock at the price which it originally received for it amounts to an unreasonable restraint
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The court has held that the first option provision is valid and enforceable as it is in the nature of a contract between the corporation and its stockholders and as such it is binding upon them The validity of the restriction on transfer does not rest on any abstract notion of intrinsic fairness of price to be invalid, more than mere disparity between option price and current value of the stock must be shown Since the parties have in effect agreed on a price formula which suited them, and provision is made freeing the stock outside sale should the corporation not make, or provide for, the purchase, the restriction is reasonable and valid Holding: The court holds that the restraint provision is reasonable and valid Evangelista v. Holland Facts: This case involves a shareholders agreement which allowed the corporation to buy out, for $75,000 the estate of any deceased shareholder The corporation brought suit against the estate of a deceased shareholder to enforce the agreement There was strong evidence that the decedents stock was worth at least $191,00 Issue: Whether this shareholders agreement is valid and enforceable? Reasoning: The executors argue that to require them to part with their interest for so much less than the value of the stock violates the duty of good faith and loyalty owed one another by stockholders in a closely held corporation Questions of good faith and loyalty do not arise when all the stockers in advance enter into an agreement for the purchase of stock of withdrawing or deceased stockholder That the price established by the stockholders agreement may be less than the appraised or market value is unremarkable Such an agreement many have purposes When the agreement was entered into, the order and time of death of stockholders was an unknown, therefore there was mutuality of risk Holding: Yes - this agreement was valid because there was mutuality of risk Note on Restrictions on Transferability & Mandatory Sales 1. Restrictions on Alienability Early cases held that all restrictions on the transferability of shares constituted illegal restraints on alienation, the modern cases hold that reasonable restrictions are valid and enforceable 3 Basic Types of Restrictions Commonly Used In the Context of A Close Corporation
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1. First Refusals: which prohibit a sale of stock unless the shares have been first offered to the corporation, the other shareholders, or both, on the terms offered by the third party This is the least restrictive in its impact on a shareholder who wants to sell his stock and such provisions are widely upheld 2. First Options: which prohibit a transfer of stock unless the shares have been first offered to the corporation, the other shareholders, or both, at a price fixed under the terms of the option The restrictiveness on the relationship between the option price and a fair price at the time the option is triggered 3. Consent Restraints: which prohibit a transfer of stock without the permission of the corporations board of shareholders These are the most restrictive of the 3 basic types, and at one time such a restraint was almost certain to be deemed invalid Colbert v. Hennessey - MA case in which the court held a consent restraint valid. The agreement was a means of securing corporate control of Bay State to those whose enterprise sponsored it and who contributed to the daily operation of the business. This was not a palpably unreasonable purpose. However, the validity of consent restraints remains uncertain in the absence of statute or authoritative precedent 2. Mandatory Sales The 3 basic types of restraints discussed above limit the shareholders power of transfer Other types of arrangements go further and give the corporation or the remaining shareholders an option to purchase a shareholders stock upon the occurrence of designated contingencies, even if the shareholder wants to retain the stock Buy-Sell or Survivor-Purchase Agreements: provide that on the death or retirement of a shareholder in a close corporation, his estate has an obligation to sell its shares to the corporation or the remaining shareholders at a price fixed under the agreement, and the corporation or the remaining shareholders have an obligation (rather than an option) to purchase the shares 3. Pricing Provisions Another problem concerns the pricing clause in first-option, repurchase, or buy-sell arrangements. Where shares are closely held, price cannot realistically be set on the basis of market value. Some alternative pricing provision is therefore required. a. Book Value o Reflects the historical cost of assets, rather than their present value, and usually ignores goodwill or going-concern value o Specific performance of an agreement to convey will not be refused merely because the price is inadequate or excessive 50
o The difference must be so great as to lead to a reasonable conclusion of fraud, mistake, or concealment in the nature of fraud and to render it plainly inequitable and against conscience that the contract should be enforced o Thus a book-value formula may be disastrous where goodwill represents the most valuable component of the business b. Capitalized Earnings o This approach is less likely than a book-value formula to produce an unfair price, but it involves a number of drafting or interpretation problems, such as: Defining earnings Over what period Without or without salaries paid to shareholder-officers Considering the possible impact of the transferors withdrawal on the value of the business c. Periodic Revisions o A third common approach is to agree on a dollar price when the provision is adopted, subject to periodic revision at agreed-upon intervals o This approach may lead to trouble when the parties fail to make periodic revisions through carelessness or inability to agree d. Appraisal o A fourth approach is to provide for appraisal by a third party at the time the option is triggered. o This approach has the advantage of flexibility Chapter 8: The Duty of Care & The Duty to Act Lawfully Section 1. The Duty of Care The Business Judgment Rule Kamin v. American Express Co. Facts: This is a stockholder derivative action, the individual defendants, who are the directors of AMEX move for an order dismissing the complaint for failure to state a cause of action The complaint is brought derivatively by 2 minority stockholders of AMEX, asking for a declaration that a certain dividend in kind is a waste of corporate assets, directing the defendants not to proceed with the distribution, or in the alternative, for money damages In 1972 AMEX acquired an investment in DLJ, a publicly traded corporation, valued at approximately $4 million
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The Board of Directors at AMEX, declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind Plaintiffs demanded that the directors rescind the dividend and take steps to preserve the capital loss which would result from selling the shares All allegations go to the exercise by the Board of Directors business judgment in deciding how to deal with the DLJ shares
Issue: Whether the exercise of business judgment by the board of directors is a cause of action for actionable wrongdoing? Reasoning: The complaint reveals that there is no claim of fraud or self-dealing and no contention that there was any bad faith or oppressive conduct In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive, and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with corporate management are largely discretionary Courts will not interfere with such discretion unless it be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose. The statute confers upon the directors this power, and the minority stockholders are not in a position to question this right, so long as the directors are acting in good faith Cardozo - The substitution of someone elses business judgment for that of the directors is no business for any court to follow It is not enough to allege that the directors made an imprudent decision All directors have an obligation, using sound business judgment, to maximize income for the benefit of all persons having a stake in the welfare of the corporate entity. The directors are entitled to exercise their honest business judgment on the information before them, and to act within their corporate powers That the directors may be mistaken, that other courses of action might have differing consequences, or that their action might benefit some shareholders more than others presents no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith The question of to what extent a dividend shall be declared and the manner in which it shall be paid is ordinarily subject only to the qualification that the dividend be paid out of surplus
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The court will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust Holding: The plaintiffs in this case have failed as a matter of law to make out an actionable claim Note on the Divergence of Standards of Conduct & Standards of Review in Corporate Law & on the Business Judgment Rule Standard of Conduct o A standard of conduct states how an actor should conduct a given activity or play a given role o The standard of conduct that states how an actor should conduct himself may differ from the standard of review by which courts determine whether to impose liability on the basis of the actors conduct o A divergence of standards of conduct and standards of review is particularly common in corporation law Standard of Review o A standard of review states the test a court should apply when it reviews an actors conduct to determine whether to impose liability or grant injunctive relief Duty of Care o Duty of care is a leading example of this divergence o The general standard of conduct applicable to directors and officers in the performance of their functions, in relation to matters in which they are not interested, varies somewhat in its formulation, but the basic standard is set forth in the Principles of Corporate Governance: A director or officer has a duty to the corporation to perform the directors or officers functions in good faith, in a manner that he or she reasonably believes to be expected to exercises in a like position and under similar circumstances o The application of this standard of conduct to the functions of directors results in several distinct duties, including: The duty to monitor The duty of inquiry The duty to make prudent or reasonable decisions on matters that the board is obliged or chooses to act upon The duty to employ a reasonable process to make decisions o The duties of directors are measured by reasonability in practice, however, the standards of review applied to the performance of these duties are less stringent than the standards of conduct on which the duties are based The Business Judgment Rule 4 Conditions of the Business Judgment Rule 1. The director must have made a decision 53
2. The director must have informed himself with respect to the business judgment to the extent he reasonably believes appropriate under the circumstances - that is, he must have employed a reasonable decisionmaking process 3. The decision must have been made in good faith - a condition that is not satisfied if, among other things, the director knows that the decision violates the law 4. The director may not have a financial interest in the subject matter of the decision If the 4 conditions of the business judgment rule are NOT satisfied, then the standard by which the quality of a decision is reviewed is comparable to the standard of conduct for making the decision - that is the standard of review is based on entire fairness or reasonability If the 4 conditions of the business judgment rule ARE satisfied, then the quality of a directors decision will be reviewed, not to determine whether the decision was reasonable, but only under a much more limited standard The Business Judgment Standard o The prevalent formula of the standard of review under the business judgment rule, if the 4 conditions of the rule have been satisfied is that the decision must be rational, or must have a rational basis, or the like. The standard of review may be referred to as the business judgment standard. The Rationality Test o This standard of review is very much easier to satisfy than a reasonability standard
Section 2. The Duty to Act Lawfully Miller v. American Telephone & Telegraph Co. Facts: Plaintiffs, stockholders in AT&T, brought a stockholders derivative action against AT&T The suit centered upon the failure of AT&T to collect an outstanding debt of some $1.5 million owed to the company by the DNC for communications services provided during the 1968 Democratic national convention Plaintiffs alleged that neither the officers or directors of AT&T have taken any action to recover the amount owed and sought permanent relief in the form of an injunction requiring AT&T to collect the debt, an injunction against providing further services to the DNC until the debt was paid in full Issue: Whether the complaint states a claim upon which relief can be granted? Reasoning:
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The business judgment rule provides that courts will not intervene in corporate decision-making if the judgment of directors and officers is uninfluenced by personal considerations and is exercised in good faith The underlying rule is the assumption that reasonable diligence has been used in reaching the decision which the rule is invoked to justify However, in this case, the decision not to collect a debt owed the corporation is itself alleged to have been an illegal act, different rules apply - and the business judgment rule cannot insulate the defendant directors from liability if they did in fact breach as plaintiffs have charged The alleged violation of the federal prohibition against corporate political contributions not only involves the corporation in criminal activity, but similarly contravenes Congressional policy and efforts to (1) destroy the influence of corporations over elections through financial contributions and (2) to check the practice of using corporate funds to benefit political parties without the consent of the stockholders Holding: Since the plaintiffs have alleged actual damage to the corporation form the transaction in the form of the loss of $1.5 million increment to AT&Ts treasury, the court concludes that the complaint does state a claim upon which relief can be granted sufficient to withstand a motion to dismiss Chapter 9: The Duty of Loyalty Section 1. Self-Interested Transactions Marsh, Are Directors Trustees? -- Conflicts of Interest & Corporate Morality a) Prohibition In 1880, the general rule was that any contract between a director and his corporation was voidable at the instance of the corporation or its shareholders, without regard to the fairness or unfairness of the transaction b) Approval by a disinterested majority of the board In 1910, the general rule was that a contract between a director and his corporation was valid if it was approved by a disinterested majority of the fellow directors and was not found to be unfair or fraudulent by the court if challenged; but that a contract in which a majority of the board was interested was voidable at the instance of the corporation or its shareholders without regard to any question of fairness c) Judicial review of the fairness of the transaction By 1960, the general rule was that no transaction of a corporation with any or all of its directors was automatically voidable at the suit of a shareholder, whether there was disinterested majority of the board or not; but that the courts would review such a contract and subject it to rigid and careful
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scrutiny, and would invalidate the contract if it was found to be unfair Lewis v. S.L. & E., Inc. Facts: Plaintiff Donald (D), a shareholder of SLE filed a derivative claim against his brothers, the directors of SLE for wasting the assets of SLE by causing SLE to lease business premises to LGT at an unreasonably low rental Defendants, Alan (A), Leon (L), and Richard (R) are brothers of D - who were directors of SLE and officers, directors & shareholders of LGT On appeal, D argues that the district court improperly allocated to him the burden of proving his claims of waste & that since the defendants failed to proved that the transactions in question were fair & reasonable, he was entitled to judgment For many years Leon Sr. was the principal shareholder of SLE & LGT. LGT operated a tire dealership and SLE owned land & complex buildings in the same city - this property was SLEs only significant asset Before 1956 LGT occupied SLEs property without benefit of a lease & in 1956 SLE granted LGT a 10-year lease for a rent of $1200 per month In 1962, Leon Sr. transferred SLE stock to all his children - at that time, R, A, and L were already shareholders, officers and directors of LGT LGTs lease on the SLE property expired in 1966 and no new lease was entered into, yet LGT continued to occupy the property & pay SLE the old lease rate D argues that A, R & L ignored SLEs separate corporate existence and disregarded the fact that SLE had shareholders who were not shareholders of LGT and who therefore could not profit from actions that used SLE solely for the benefit of LGT Issue: Whether the defendant directors had wasted assets of SLE by grossly undercharging LGT for the latters occupancy & use of the property? Reasoning: The district court erred in placing the burden of proving waste upon the plaintiff because the directors of SLE were also officers, directors, and/or shareholders of LGT, the burden was on the defendant directors to demonstrate that the transactions between SLE and LGT were fair and reasonable Under normal circumstances, the directors of a corporation may determine, in the exercise of their business judgment, what contracts the corporation will enter into and what consideration is adequate without review of the merits of their decisions by the courts This business judgment rule places a heavy burden on shareholders who would attack corporate transactions The business judgment rule presupposes that the directors have no conflict of interest
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When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corporation, the directors may not escape review of the merits of the transaction Business corporate law expressly provides that a contract between a corporation and an entity in which its directors are interested may be set aside unless the proponent of the contract shall establish affirmatively that the contract or transaction was faire and reasonable as to the corporation at the time it was approved by the board Thus, when the transaction is challenged in a derivative action against the interested directors, they have the burden of proving that the transaction was fair and reasonable to the corporation Holding: The district court erred in placing upon plaintiff the burden of proving waste the burden was on the defendant director to demonstrate that the transactions between SLE and LGT were fair and reasonable Note on Remedies for Violation of the Duty of Loyalty Traditional Remedies: The traditional remedies for violation of the duty of loyalty are restitutionary in nature. As a practical matter, the legal sanctions for violation of the duty of loyalty are usually much less severe than the legal sanctions for the duty of care If a director ofrofficer violates his duty of care, he must pay damages although he made no gain from his wrongful action In contrast, if a director or officer violates his duty of fair dealing, under a restitutionary remedy he need only return a gain to which he was not entitled in the first place o However, in some cases, the remedies for violation of the duty of loyalty may make the director or officer worse off than he was before the wrong Other Remedies: Restoration of Compensation: The general rule for restoration of compensation is that a corporate officer who engages in activities which constitute either a breach of his duty of loyalty or a willful breach of his contract of employment is not entitled to any compensation for services rendered during that period of time even though part of those serves may have been properly performed Punitive Damages: Courts have sometimes awarded punitive damages against directors or officers who have breached their fiduciary duty of loyalty ALI: Provides that a director or officer who violates the duty of fair dealing should normally be required to pay the counsel
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fees and other expenses incurred by the corporation in establishing the violation Talbot v. James Facts: This equitable action was brought by the Talbots against James individually and as President of Chicora Apartments, Inc. for an accounting The Talbots owned land and entered into an agreement with James to form a corporation to construct & operate an apartment complex on the land Upon the formation of the corporation, the Talbots were to receive 50% of the stock of the corporation in consideration for their transfer of the land The corporation formed was called Chicora Apartments, Inc. In 1963, James Construction Co. entered into a construction agreement with Chicora Apartments Inc. --- this contract was executed by James as President and as sole proprietor for James Construction Co. The contract sum was to be the actual cost of construction plus a $20,000 fee The Talbots demanded to examine the corporate records, but James refused The record shows that James personally received $25,000+ from the proceeds of the mortgage loan Issue: Whether James as an officer and director of the corporation violated his fiduciary relationship to the corporation and the appellants as stockholders thereof, by diverting specific funds to himself? Could James enter into a contract with himself as an individual and make a profit for himself? Reasoning: James entered into a contract with himself, as sole proprietor of James Construction Co., without disclosing his identity of interest to the other officers or stockholders of the corporation and that such a contract has not been acquiesced in or ratified by the other director, officers or stockholders The issue is whether the fiduciary relationship existing between James as a stockholder, officer, and director of Chicora Apartments, Inc. prevented him from contracting with the said corporation for his profit without first having disclosed the terms of the contract to the disinterested officers and directors of the corporation The officers and directors of the corporation stand in a fiduciary relationship to the individual stockholders and in every instance must make a full disclosure of all relevant facts when entering into a contract with said corporation James did not reveal to the Talbots his entitlement to a fee of $20,000 and an allowance for overhead expenses in the amount of $31,589 Thus, he did not make a full disclosure of the profits or monetary benefits that he was to receive under the terms of the contract It was his duty to make such full disclosure and the burden of proof was upon him to show that such had been done
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Holding: James as President of Chicora Apartments, Inc. entered into a contract with himself as sole proprietor of James Construction Co. without making full disclosure of his identity of interest to the other officers and stockholders of the corporation therefore, Chicora Apartments, Inc. is entitled to judgment against James in the amount of the corporate funds received by or paid in behalf of James Note on the Duty of Loyalty In the corporate context, fairness requires not only that the terms of a self-interested transaction be fair, but that entering into the transaction, even on fair terms, is in the corporations interest For example, in the instance of alleged director enrichment at corporate expense, the burden to establish fairness resting on the director requires a showing of both a fair price& a showing of the fairness of the bargain to the interest of the corporation Only when a convincing showing is made in BOTH respects can fairness under the statute be established Section 2. Statutory Approaches Cookies Food Products v. Lakes Warehouse Facts: This is a shareholders derivative suit brought by minority shareholders of a closely held Iowa corporation specializing in BBQ sauce, Cookies Food Products, Inc. The target of the lawsuit is the majority shareholder, Speed Herrig and 2 of his family-owned corporations, Lakes Warehouse & Speeds Automotive Plaintiffs allege that Herrig, by acquiring control of Cookies and executing self-dealing contracts, breached his fiduciary duty to the company and fraudulently misappropriated and converted corporate funds Cookies board of directors authorized Herrig to purchase Cookies BBQ sauce for less than the wholesale price Under this arrangement, Herrig began to market and distribute the sauce to his auto parts customers and to grocery outlets form Lakes trucks as they ran delivery routes for Speeds Automotive Cookies executed an exclusive distribution agreement with Lakes, under which Cookies was responsible only for preparing the sauce Later, Herrig purchased enough of Cookies stock to become the majority shareholder and replaced 4 of the 5 board members Under Herrigs leadership, Cookies board extended the term of the exclusive distributorship agreement with Lakes and expanded the scope of services for which it compensates Herrig and his companies
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Issue: Whether Herrig breached his fiduciary duties to the corporation and its shareholders because he allegedly negotiated for these arrangements without fully disclosing the benefit he would gain? Reasoning: Herrig as an officer and director of Cookies, owes a fiduciary duty to the company and its shareholders -- the director must serve in manner believed in good faith to be in best interest of corporation Corporate directors and officers may under proper circumstances transact business with the corporation including the purchase or sale of property, but it must be done in the strictest good faith and with full disclosure of facts to, and the consent of, all concerned - and the burden is upon them to establish their good faith, honesty and fairness By statutory authority, a director may engage in self-dealing without clearly violating the duty of loyalty Self-dealing transactions must have the earmarks of arms-length transactions before a court can find them to be fair or reasonable Given an instance of alleged director enrichment at corporate expense, the burden to establish fairness resting on the director requires not only a strong showing of fair price but also a showing of the fairness of the bargain to the interests of the corporation Holding: No - Herrig breached no duties owed to Cookies or the minority shareholders, as all members of the board of Cookies were well aware of Herrigs dual ownership in Lakes and Speeds Automotive & as the compensation Herrig received from the agreements was fair & reasonable, the court is convinced that Herrig furnished sufficient information to Cookies board to enable it to make a prudent decision concerning the contacts Section 3. Compensation, The Waste Doctrine & The Effect of Shareholder Ratification Lewis v. Vogelstein Facts: This stockholders suit challenges a stock option compensation plan for directors of Mattel, Inc. This substantive liability theory is pressed as an entire fairness claim - as plaintiffs argue the Plan constitutes a self-interested transaction by the incumbent directors - thus, these directors must justify the Plan as entirely fair in order to avoid liability for breach of duty of loyalty
Herrig moved from his role as director and distributor to take on an additional role in product development & developed a taco sauce which was less expensive to produce - for which Herrig was paid a royalty fee The board further approved additional compensation for Herrig
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The Plan was adopted in 1996 and ratified by the companys shareholders at the 1996 annual meeting - it contemplates 2 forms of stock option grants to the companys directors 1) one-time grant options; 2) smaller annual grants When the shareholders were asked to ratify the adoption of the Plan, no estimated present value of options that were authorized to be granted under the Plan was stated in the proxy solicitation materials Shareholder approval was not required for the authorization of this transaction, but was sought only for its effect on the standard of judicial review
Issue: Whether the corporate directors had, in the circumstances presented, a duty to disclose the present value of future options as estimated by some optionpricing formula? Reasoning: The allegations of failure to disclose estimated present value calculations fails to state a claim upon which relief may be granted Where shareholder ratification of a plan of option compensation is involved, the duty of disclosure is satisfied by the disclosure or fair summary of all of the relevant terms and conditions of the proposed plan of compensation, together with any material extrinsic fact within the boards knowledge bearing on the issue The fiduciarys duty of disclosure does not mandate that the board disclose one or more estimates of present value of options that my be granted under the plan - such estimates may be an appropriate subject of disclosure where they are generated competently and disclosed in a good faith effort to inform shareholder action, but no case is cited in which disclosure of such estimates has been mandated in order to satisfy the directors fiduciary duty As this Plan contemplates grants to the directors that approved the Plan and who recommended it to shareholders, it constitutes self-dealing that would ordinarily require that the directors prove that the grants involved were, in the circumstances, entirely fair to the corporation However, the shareholders have ratified the directors action However, it has long been held that shareholders may NOT RATIFY a waste except by unanimous vote The idea behind this rule is that a transaction that satisfies the high standard of waste constitutes a gift of corporate property and no one should be forced against their will to make a gift of their property In all events, informed, uncoerced, disinterested shareholder ratification of a transaction in which corporate directors have a material conflict of interest has the effect of protecting the transaction from judicial review except on the basis of waste Waste: entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade Early Delaware Cases - Validity of Option Compensation - 2-Step Test
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1. Weighing the reasonableness of the relationship between the value of the consideration flowing both ways; and 2. Evaluating the sufficiency of the circumstances to insure receipt of the benefit sought Current Law on Ratification Effect on Option Grants: The relevant test where ratification had occurred, is that of gift or waste and plainly meant by waste, the absence of any consideration (when there are issues of fact as to the existence of consideration, a full hearing is required regardless of shareholder ratification) Holding: There is no legal obligation for corporate directors who seek shareholder ratification of a plan of officer or director option grants, to make and disclose an estimate of present value of future options under a plan of the type described in the complaints Note On Lewis v. Vogelstein Courts only seldom overturn the compensation of senior executives in publicly held corporations if the compensation has been approved by disinterested directors Section 4. The Corporate Opportunity Doctrine Northeast Harbor Golf Club, Inc. v. Harris Facts: Nancy Harris was President of the Golf Club form 1971-1990 the only major asset of the Club was the golf course The board occasionally discussed the possibility of developing some of the Clubs real estate in order to raise money, but the board tended to shy away from that type of activity In 1979 Suminsby informed Harris that he was the listing broker for the Gilpin property around the fairways of the golf course Suminsby approached Harris, because she was President of the Club and he believed the Club would be interested in buying the property to prevent development Harris agreed to purchase the property in her own name and she did not disclose her plans to buy it to the Clubs board Harris then sought out the heirs to other surrounding property - the Smallidge property - and purchased that parcel Harris formally disclosed that purchase to the members of the Clubs board In 1988, while still President of the board, Harris & her children began the process of obtaining approval to develop the property Harris resigned as President in 1990 Issue: Whether Nancy Harris breached her fiduciary duty to act in the best interests of the corporation, as president of the Golf Club by purchasing and developing property abutting the golf course?
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Reasoning: Meinhard v. Salmon - Cardozo, A trustee is held to something stricter than the morals of the marketplace. Not honestly alone, but the punctilio of an honor the most sensitive, is then the standard of behavior Line of Business Test - Guth v. Loft, Inc. o If there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporations business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself o The real issue under this test is whether the opportunity was so closely associated with the existing business activitiesas to bring the transaction within that class of cases where the acquisition of the property would throw the corporate officer purchasing it into competition with his company 2 Questions 1. Is the corporation financially able to undertake the opportunity? Making reasonable efforts to find the financing 2. Is the opportunity within the corporations line of business? Whether the opportunity was so closely associated with existing business activities as to bring the transaction within that class of cases where the acquisition of the property would throw the corporate officer purchasing it into competition with the company Fairness Test - Durfee v. Durfee & Canning, Inc. o The true basis of governing doctrine rests on the unfairness in the particular circumstances of a director whose relation to the corporation is fiduciary, taking advantage of an opportunity then the interest of the corporation justly calls for protection. This calls for application of ethical standards of what is fair and equitable in particular sets of facts o Fair & Equitable The Line of Business + Fairness Test - Miller v. Miller o 2-Step Analysis 1. Is it in the line of business? 2. Is it fair & equitable? Bottom Line a corporate fiduciary should not serve both the corporate & personal interests at the same time American Law Institute Approach (ALI - Approach) - Klinicki v. Lundgren
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o If you are a corporate fiduciary & a business opportunity comes to your attention, you should offer it to the corporation & if you do not you will NOT satisfy the standard of full disclosure o If the corporation does not take advantage of it - it is not a corporate opportunity & therefore the fiduciary may o Full disclosure to the appropriate corporate body is an absolute condition precedent to any action by the corporation and directly effects the issue of fairness Under the ALI standard, once the Club shows that the opportunity is a corporate opportunity, it must show either that Harris did not offer the property to the Club or that the Club did not reject it If Harris failed to offer the opportunity at all, however, then she may not defend on the basis that the failure to offer the opportunity was fair Holding: The courts follows the ALI Test - the requirement of disclosure recognizes the paramount importance of the fiduciarys duty of loyalty and at the same time it protects the fiduciarys ability pursuant to the proper procedure to pursue her own business ventures free from the possibility of a lawsuit Note on the Corporate Opportunity Doctrine 1. Tests The Line of Business Test - (Guth v. Loft) The Fairness Test - (Durfee v. Durfee & Canning, Inc.) The 2-Step Test - (Miller v. Miller) Interest-or-Expectancy Test - (Lagarde v. Anniston Lime & Stone): The corporate opportunity doctrine applies only when the director or officer has acquired property in which the corporation has an interest already existing or in which it has an expectancy growing out of an existing right or his interference will in some degree balk the corporation in effecting the purposes of its creation 2. Data Corporate opportunity cases usually occur in close corporations and the opportunities are often directly competitive to the business of the corporation 3. Different Types of Corporate Opportunities Whether a given individual owes such duties may depend in part on the individuals position. The higher up in the corporate hierarchy the individual is, the more plausible it is that she owes such duties, and the more demanding the duties will normally be In short, an opportunity that is discovered through the use of corporate property, information, or position should be a corporate opportunity, regardless of As position. 4. Ability of the Corporation to take the Opportunity
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Whether and to what extent a director, officer, and fiduciary can raise as a defense to a suit based on taking a corporate opportunity, that the corporation was unable to take the opportunity? o This issue usually arises in the context of whether the corporation had the financial ability to take the relevant opportunity o Klinicki v. Lundren - held that financial inability may serve as a justification for a corporations rejection of a corporate opportunity ALI, Principles of Corporate Governance o If an opportunity is a corporate opportunity, a fiduciary should always be obliged to offer the opportunity to the corporation in the first instances, and let the corporation decided whether it is, or can make itself, able to take the opportunity o Business enterprises can be very adaptable when faced with a profitable opportunity
Section 5. Duties of Controlling Shareholders Sinclair Oil Corporation v. Levien Facts: This is an appeal by the defendant, Sinclair Oil Corporation, from an order in a derivative action requiring Sinclair to account for damages sustained by its subsidiary, Sinclair Venezuelan Oil Company (Sinven) as a result of dividends paid by Sinven and a breach of contract between Sinclairs whollyowned subsidiary, Sinclair International Oil Company and Sinven Sinclair, operating as a holding company, is in the business of exploring oil an of producing and marketing crude oil and oil products -- at all times, it owned 97% of Sinven Sinclair nominates all members of Sinvens board of directors - the directors were not independent of Sinclair, almost without exception, they were officers, directors, or employees of corporations in the Sinclair complex Issue: Whether Sinclair International Oil Company (the parent corporation) was required to account for damages sustained by its wholly-owned subsidiary, Sinclair Venezuelan Oil Company (Sinven)? Reasoning: Sinclair owed Sinven a fiduciary duty A board of directors enjoys a presumption of sound business judgment and its decisions will not be disturbed if they can be attributed to any rational business purpose --- a court under such circumstances will not substitute its own notions of what is or is not sound business judgment However, when the situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shifting of the burden proof is applied
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The basic situation for the application of the rules is the one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings - however, this alone will not evoke the intrinsic fairness standard This standard will be applied only when the fiduciary duty is accompanied by self-dealing - the situation when a parent is on both sides of a transaction with its subsidiary Self-dealing occurs when the parent, by virtue of its domination of the subsidiary causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of and detriment to, the minority stockholders of the subsidiary The intrinsic fairness test is the proper standard in the case of a dividend declaration by a dominated board if such a dividend is in essences selfdealing by the parent Holding: As Sinclair received nothing from Sinven to the exclusion of its minority stockholders - these dividends were not self-dealing. Therefore, the intrinsic fairness test should NOT apply The motives for causing the declaration of dividends are immaterial unless the plaintiff can show that the dividend payments resulted from improper motives and amounted to waste However, Sinclairs act of contracting with its dominated subsidiary was selfdealing --- thus, under the intrinsic fairness standard, Sinclair must prove that its causing Sinven not to enforce the contract was intrinsically fair to the minority shareholders -- but Sinclair has failed to meet this burden Section 6. Sale of Control Zetlin v. Hanson Holidngs, Inc. Facts: Zetlin owned approximately 2% of the outstanding shares of Gable Industries, Inc. with defendants Hanson Holdings, Inc. and Sylvestri, together with members of the Sylvestri family, owing 44.4% of Gable Defendants sold their interests to Flintkote Co. for a premium price of $15 per share, at a time when Gable stock was selling on the open market for $7.38 per share The 44.4% acquired by Flintkote represented effective control of Gable Issue: Whether minority stockholders are entitled to an opportunity to share equally in any premium paid for a controlling interest in the corporation? Reasoning:
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Recognizing that those who invest the capital necessary to acquire a dominant position in the ownership of a corporation have the right of controlling that corporation, it has long been settled law that 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 Certainly, minority shareholders are entitled to protection against such abuse by controlling shareholders - they are not entitled however, to inhibit the legitimate interests of the other stockholders It is for this reason that control shares usually command a premium price The premium is the added amount an investor is willing to pay for the privilege of directly influencing the corporations affairs Holding: No - this would be contrary to existing law, as it would require that a controlling interest be transferred only by means of an offer to all stockholders Note on Harris c. Carter Facts: Donald Carter and others owned 52% of Atlas Corp. The Carter Group sold its stock in Atlas and transferred control of Atlass board, to Fredric Mascolo and others Plaintiff, a minority shareholder in Atlas claimed that the Mascolo group had looted Atlas by engaging in self-dealing transactions on unfair terms & that the Carter Group was liable for the resulting losses to Atlas because it had reason to suspect the integrity of the Mascolo group, but failed to conduct even a cursory investigation Issue: Whether a controlling shareholder or group may under any circumstances owe a duty of care to the corporation in connection with the sale of a control block of stock Reasoning: When transferring control of a corporation to another, a controlling shareholder may, in some circumstances, have a duty to investigate the bona fides of the buyer -- that is to take such steps as reasonable person would take to ascertain that the buyer does not intend or is unlikely to plan any depredations of the corporation It is established American legal doctrine that, unless privileged, each person owes a duty to those who may foreseeably be harmed by her action to take such steps as a reasonably prudent person would take in similar circumstances to avoid such harm to others That a shareholder may sell her stock is a right that exists, but it is not without conditions and limitations, some established by positive regulation, some by common-law
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In the typical instance a seller of corporate stock can be expected to have no similar apprehension of risks to others from her own inattention Holding: While a person who transfers corporate control to another is surely not a surety for his buyer, when the circumstances would alert a reasonably prudent person to a risk that his buyer is dishonest or in some material respect not truthful, a duty devolves upon the seller to make such inquiry as a reasonably prudent person would make, and generally to exercise care so that others who will be affected by his actions should not be injured by wrongful conduct Perlman v. Feldmann Facts: This is a derivative action brought by minority stockholders of Newport Steel Corporation to compel accounting for and restitution of, allegedly illegal gains accrued to defendants as a result of their controlling interest in the Corporation Defendant, Feldman was at that time the dominant shareholder and the chairman of the board of the directors and the president of the corporation The buyers, Wilport Company, consisted of end-users of steel who were interested in securing a source of supply in a market becoming ever tighter in the Korean War Issue: Whether the consideration paid for the stock included compensation for the sale of a corporate asset, a power held in trust for the corporation by Feldmann as its fiduciary? This power was the ability to control the allocation of the corporate product in a time of short supply, through control of the board of directors; and it was effectively transferred in this sale by having Feldmann procure the resignation of his own board and the election of Wilports nominees immediately upon consummation of the sale Reasoning: Both as director and as dominant stockholder, Feldmann stood in a fiduciary relationship to the corporation and to the minority stockholders as beneficiaries thereof Directors of a business corporation act in a strictly fiduciary capacity. They must not, in any degree, allow their official conduct to be swayed by their private interest, which must yield to official duty In a transaction between a director and his corporation, where he acts for himself and his principal at the same time in a matter connected with the relation between them, it is presumed, where he is thus potentially on both sides of the contract, that self-interest will overcome his fidelity to his principal, to his own benefit and to his principals hurt
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Absolute and most scrupulous good faith is the very essence of a directors obligation to his corporation. The first principal duty arising form his official relation is to act in all things of trust wholly for the benefit of his corporation The same rule should apply to Feldmanns fiduciary duties as majority stockholder, for in that capacity he chooses and controls the directors, and thus is held to have assumed their liability Fiduciaries always have the burden of proof in establishing the fairness of their dealings with trust property It is sound law that a fiduciary may not appropriate to himself the value of this premium --- the premium when the sale necessarily results in a sacrifice of the element of corporate good will through acquisition of a controlling block of stock, in a time of market shortage, where a call on a corporations product commands an usually large premium Holding: In this case, the violation of duty seems to be all the clearer because of this triple role in which Feldmann appears. Thus, to the extent that the price received by Feldmann and his co-defendants included such a bonus, he is accountable to the minority stockholders The burden of proof must rest on the defendants Note on the Theory of Corporate Action If a prospective purchaser wants to acquire complete control of the assets and business of a corporation he can either: 1. Try to acquire all of the corporations shares 2. Try to induce holders of sufficient shares to make the requisite majority needed to vote for a merger with or a sale of all assets to a corporation he controls The problem with the theory of corporate action is that a controlling shareholder cannot be compelled to sell his shares at a price he does not accept A knowledgeable seller therefore can avoid the application of the theory by simply voting down an offer to the corporation and waiting for an offer to buy his shares Essex Universal Corp. v. Yates Facts: Defendant Yates was president and chairman of the board of directors of Republic Pictures Corporation Essex Universal Corporation learned of the possibility of purchasing from Yates an interest in Republic
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Yates & Harris (president of Essex) signed a contract in which Essex agreed to buy and Yates to sell or cause to be sold at least 500,000 and not more than 600,000 share of Republic stock - at $8 per share ($2 over market price) The contract contained a provision on Resignations - in which seller promised to deliver to buyer the resignations of the majority of the directors of Republic - allow for a special meeting of the board of directors and the nominees of the buyer to be elected directors Such a procedure was in form, permissible under the charter and by-laws of Republic, which empowered the board to choose the successor of any of its members who might resign
Issue: Whether a contract for the sale of 28.3% of the stock of a corporation is, under New York law, invalid as against public policy solely because it includes a clause giving the purchaser an option to require a majority of the existing directors to replace themselves, by a process of seriatim resignation, with a majority designated by the purchaser? Reasoning: Under NY law it is illegal to sell corporate office or management control by itself (not accompanied by stock) The rationale for this rule is undisputable: persons enjoying management control hold it on behalf of the corporations stockholders, and therefore may not regard it as their own personal property to dispose of as they wish Essex however, was contracting for a substantial purchase of Republic stock Republics board had 14 members, divided into 3 classes and directors were elected in terms for 3 years thus, absent the immediate replacement of directors provided for by contract, Essex as the hypothetical new majority shareholder of the corporation could not have obtained managing control in the form of a majority of the board in the normal course of events until 18 months after the sale of stock There is no question of the right of a controlling shareholder normally to derive a premium form the sale of a controlling block of stock - thus, there was no impropriety per se in the fact that Yates was to receive more per share than the prevailing market price for Republic stock Perlman v. Feldman - a holder of corporate control will not, as a fiduciary, be permitted to profit form facilitating actions on the part of the purchasers of control which are detrimental to the interests of the corporation or the remaining shareholders There is however, no suggestion that the transfer of control over Republic to Essex carried any such threat to the interests of the corporation or its other shareholders Barnes v. Brown - a bargain for the sale of a majority stock interest is not made illegal by a plan for immediate transfer of management control by a program like that provided for in the Essex-Yates contract Because 28.3% - the amount of the Essex-Yates contract of the voting stock of a publicly owned corporation is usually tantamount to majority control -
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so the burden of proof on this issue on Yates as the party attacking the legality of the transaction Holding: Such a provision does not, on its face, render the contract illegal and unenforceable If Yates chooses to raise the issue - it will be necessary for him to prove the existence of circumstances which would have prevented Essex from electing a majority of the Republic board of directors in due course Chapter 11: Shareholder Suits Section 1. Introduction Background Note If the fiduciary duties owed by directors, officers, and controlling shareholders could be enforced only in suits by the corporation, many wrongs would never be remedied Directors will only seldom bring suit against one of their colleagues or top executives for such a breach To overcome these obstacles, and hold wrongdoing managers and controlling shareholders to account, the law permits shareholders to bring suit for breach of fiduciary duty on the corporations behalf Derivative Actions: provide redress against faithless officers and directors It is known as a derivative action, since the shareholders right to bring the suit derives from the corporation 2 Features of the Derivative Actions 1. The extraordinary procedural complexity inherent in such actions complexity involving for example, proper parties and their alignment, jurisdiction, demand on the boar, demand on the shareholders, right to sue, intervention, settlement, and dismissal 2. The difficult problem of social policy raised by such actions, particularly in the publicly held corporation Where the corporation is publicly held the plaintiff-shareholders gain is not only indirect, but usually very small and often infinitesimal The derivative action and the disclosure requirements of the securities acts constitute the 2 major legal bulwarks against managerial self-dealing Note on Who Can Bring a Derivative Action 1. Shareholder Status It is generally agreed that the plaintiff in a derivative action must be a shareholder at the time the action is begun and must remain a shareholder during the pendency of the action What constitutes shareholdership for derivative-action purpose?
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2. Creditors
The NY Business Corporations Law Statute: Provides that a plaintiff in a derivative suit must be a holder of shares or of voting trust certificates or of a beneficial interest in such shares or certificates The Courts Define Shareholdership: i. Record ownership is generally not required, an unregistered shareholder will qualify ii. Legal ownership is not required -equitable ownership suffices Parent/Subsidiary: A shareholder in a parent corporation can bring a derivative action on behalf of a subsidiary, despite the fact that he is not a shareholder in the subsidiary An implication from the rule that the plaintiff in a derivative action must be a shareholder at the time he brings suit is that a creditor (including a bondholder) ordinarily has no right to bring a derivative action However, if a corporation is insolvent in fact, the directors owe fiduciary duties to the creditors, whether or not there has been a statutory filing under bankruptcy law Occasionally a statute gives an officer or director the right to bring a derivative action
3. Directors
Note on the Corporation as an Indispensable Party It is well established that the corporation is an indispensable party to a derivative action, and therefore must be joined in the suit Section 2. The Nature of the Derivative Action Note on the Distinction Between Derivative & Direct Actions 1. The Impact of a Determination that an Action is Derivative A number of special procedural rules apply to - and set hurdles to - derivative actions, but not to direct actions 2. Reasons for Distinguishing Between Direct & Derivative Actions 2 kinds of reasons are advanced for distinguishing between a derivative action, which is brought on the corporations behalf against either corporate fiduciaries or the corporation itself 1. Since a corporation is a legal person separate from its shareholders, an injury to the corporation is not an injury to its shareholders (However, any injury to the corporation will have an impact on the shareholders) 2. A derivative action 72
a. Will avoid a multiplicity of suits by each injured shareholder b. Will protect the corporate creditors c. Will protect all the stockholders since a corporate recovery benefits all equally 3. Easy Cases Distinctions between direct actions & derivative actions Derivative Actions: A wrongful act that depletes or destroys corporate assets and affects the shareholder only by reducing the value of his stock, gives rise only to an action on the corporations behalf Direct Actions: A wrongful act that does not deplete or divert corporate assets, and interferes with rights that are traditionally viewed as either incident to the ownership of stock or inhering in the shares themselves, give rise only to a direct action by the injured shareholders The Right to Vote: The right to vote is basic and fundamental to most shares of stock and is independent of any right that the corporate entity possesses and the shareholder could enforce and protect such rights by bringing a direct action 4. Harder Cases Many cases fall between the 2 ends of the spectrum 5. Actions that can be Characterized as Either Direct or Derivative In many cases a wrongful act both depletes corporate assets and interferes with rights traditionally viewed as inhering in shares The general principle governing such cases is that a direct action is not precluded simply because the same facts could also give rise to a derivative action Proxy-Rule Violations: An important kind of case in which suit may be either direct or derivative is a proxy-rule violation Insofar as such a violation interferes with the individual shareholders voting right, suit can be regarded as direct Insofar as it involves a breach of managements fiduciary obligations, suit can be regarded as derivative Section 4. The Contemporaneous-Ownership Rule Note on the Contemporaneous-Ownership Rule Common-Law: At common law, the cases were divided on whether a shareholder was barred from bringing a derivative action if he was not a contemporaneous shareholder that is, if he did not hold his shares when the wrong occurred.
73
However, most jurisdictions have adopted some version of the contemporaneous-ownership rule 1. Devolution by Operation of Law A non-contemporaneous shareholder is normally allowed to bring a derivative action if his shares devolved upon him by operation of law 2. Continuing-Wrong Theory Under the continuing-wrong theory, a plaintiff can bring an action to challenge a wrong that began before he acquired his shares, but continued thereafter While the continuing-wrong exception is widely accepted in principle, in practice there is considerable divergence on the way it is applied Several statutes provide that the plaintiff must allege that he was shareholder at the time of the transaction or an part thereof Where there is a close question whether the continuing-wrong theory applies to a given case, such a statute might tip the scale in the plaintiffs favor
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Corporations Outline - Prof.

Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002

Corporations Outline - Prof. Pizzano / Spring 2002