Professional Documents
Culture Documents
Upa v. Rupa
Upa v. Rupa
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
BLaw 425
Spring 2009
Susan A. Morgan
Former Entrepreneur (MacInTax, TurboTax)
J.D. – Santa Clara University, School of Law
Fenwick & West, LLP – 7 years
Corporate Attorney
Start-ups and Private Companies
Equilytics, Inc. – private equity analysis
Katovich Law Group – Oakland (Virtual)
Contact Info:
smorgan@equilytics.com
925-935-7767
Available after class, for questions
Class Assignments
Texts – case book plus supplement
Statutes – recommended
Syllabus – rough cut, will be updated
Material increases in complexity later on
Briefing cases – recommend paper/written briefs for every case
Why is this case in this book?
Participation – expect to be called on and participate in class
Notify me, if you are unprepared
Grading
Final Exam – Essay (closed book)
Format (most likely):
2 longer, multi-part questions (1 hour)
3-4 shorter essay questions
Grading – Final will count for most of your grade
1
Up to +5 points, for class participation
Final Exam Date: Wed., May 13th, 10am-1pm
Pleasant Hill Campus, Room N271
Best practice – come to class prepared, and participate!
Class Mechanics
Roll Call
Sign-up Sheet
Attendance
Must attend at least 80% of class (to earn credit)
3 unit class = no more than 3 classes missed!
Tardy – same result if more than 1 hr late for more than 9 classes.
Seating – pick your permanent seat next week
Breaks – 3hr class
55 min, then 10 min break (each hour); OR
80 min (1 hr, 20 min), then 20 min break, then 80 min.
Class Content
Agency
Rules of agency
Actual and apparent agency
Inherent power
Principal’s liabilities
Agents duties
Partnership
Rules of partnership; creation
Partners’ rights and duties (property, each other)
Partnership dissolution
Corporations
Basics
Formation
Liability (limited)
Shareholder derivative actions
Role/purpose of corporations
Duties of Insiders (D&O, etc.)
Duty of Care and Duty of Loyalty
Ratification (by corporation of D&O actions)
2
Insider Trading (Rule 10b-5) and short-swing profits (Rule 16(b))
Indemnification and D&O insurance
Control
Proxy fights
Shareholder duties in closely-held corporations
Dissolution and transfer of control
Mergers and Acquisitions (M&A)
De facto mergers
Freeze-out mergers
Takeovers
Pre-emption (State vs. Federal law)
Skip Ch . 4 (LLCs) and Ch. 8 (Corporate Debt)
Agency
Restatement (3rd) of Agency
Authority
Actual Express Authority (AEA)
P tells A to act, A acts (A believes has authority)
Actual Implied Authority (AIA)
P tells A to act, A takes needed steps not expressed
Apparent Authority (AA)
P tells 3P that A is authorized, or P tells A to make statements to 3P that A is authorized
P tells A not to act, but fails to tell 3P that A has no authority
3P believes A authorized, based on P’s actions, or based on normal business customs
Ratification (R)
A has no authority to act, but does so anyway, P adopts act after the fact
Inherent Agency Power (IAP)
No explicit authority but A does act similar to those A does has authority for
FKJFK UNIVERSITY
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
BLaw 425 – Class 2
Spring 2009
3
Rest.2d §220 – Agent vs. non-agent
Scope of Employment (Employer/Employee)
Agency relationship exists (not at issue)
Was Employee acting with Scope of Employment
Rest.2d §219, 228; Rest.3d §7.07
Fiduciary Duties
Duty of Care, Loyalty
Kickbacks/secret profits, taking business opportunity, trade secrets
Rest.2d §387, 388, 389, 404
Rest.2d § 2
Master: principal who employs an agent to perform service in his affairs and
who controls or has the right to control the physical conduct of the other in the
performance of the service. [Employer]
Servant: agent employed by a master to perform service in his affairs whose
physical conduct in the performance of the service is controlled or is subject to
the right to control by the master. [Employee]
Independent Contractor: person who contracts with another to do something
for him but who is not controlled by the other nor subject to the other’s right to
control with respect to his physical conduct in the performance of the
undertaking. [non-agent contractor]
Rest.2d § 220(2)
Agent vs. non-Agent (Independent Contractor):
(a) the extent of control which, by the agreement, the master may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct occupation or business;
(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of
the employer or by a specialist without supervision; {WHAT vs. HOW}
(d) the skill required in the particular occupation;
(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the
person doing the work;
(f) the length of time for which the person is employed;
(g) the method of payment, whether by the time or by the job;
(h) whether or not the work is a part of the regular business of the employer;
(i) whether or not the parties believe they are creating the relation of master and servant; and
(j) whether the principal is or is not in business
4
(d) if force is intentionally used by the servant against another, the use of
force is not unexpected to the master.
Rest.3d § 7.07
(1) an employer is subject to vicarious liability for a tort
committed by its employee acting within the scope of
employment.
(2) An employee acts within the scope of employment
when performing work assigned by the employer or
engaging in a course of conduct subject to the employer’s
control.
Rest.2d § 229(2)
Scope of Employment – factors:
Time, place, purpose of act
Similarity to authorized acts
Act commonly performed
Extent of departure from normal methods
Would employer expect such an act?
Previous relations
Business apportioned
Act outside of employer’s business (or not performed by employees)
Employer provided instrument of harm
Act seriously criminal
Cases
Bushey v. U.S.
Forseeable (R.2d §228)
Arguello V Conoco
3 incidents, 2 issues:
Apparent Agency (branded stores)
Scope of Employment (owned stores – R.2d §229)
5
§388: Unless otherwise agreed, an agent who makes a profit in connection with
transactions conducted by him on behalf of the principal is under a duty to give
such profit to the principal. [disgorge]
§389: Unless otherwise agreed, an agent is subject to a duty not to deal with
his principal as an adverse party in a transaction connected with his agency
without the principal's knowledge.
Rest.2d §404
An agent who, in violation of the duty to his principal, uses for his own purposes
or those of a third person assets of the principal’s business is subject to liability to
the principal for the value of the use. If the use predominates in producing a
profit he is subject to liability, at the principal’s election, for such profit; he is not,
however, liable for profits made by him merely by the use of time which he has
contracted to devote to the principal unless he violates his duty not to act
adversely or in competition with the principal.
Fiduciary Duty Cases
Reading v. Regem
Secret profits
Position
Gen. Auto v. Singer
Secret profits
Disclosure
Town & Country v Newbery
Trade secret – customer lists
6
violation of duty. The agent is entitled to use general information concerning the
method of business of the principal and the names of the customers retained in
his memory, if not acquired in violation of his duty as an agent.
UNIVERSITY
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
BLaw 425 – Class 3
Spring 2009
Partnership Law
Sources of Law
Common Law / cases
Uniform Partnership Act (UPA) (1914)
Currently used by ~1/3 states
Revised Uniform Partnership Act (RUPA) (1997)
Adopted by ~2/3 states
CA adopted RUPA: CA Corp. Code §16100-16962
Partnership Basics
Types of Partnerships:
General Partnership (GP)
Limited Partnership (LP)
Limited Liability Partnerships (LLP)
Some Other Entities
Corporations (S-corp, C-corp)
Limited Liability Companies (LLC)
Professional Corporation (PC)
7
Flexibility of structure (standardized/flexible?)
Taxation
Flow-thru
Partnership pays no taxes (as an entity)
Gains and losses “flow-thru” to the partners
Are recognized on partners individual income tax returns
“Phantom income” – gains flow-thru, but not distributions
Dividend
Corporation pays taxes on gains and losses (as an entity)
Corporation cannot deduct dividends to shareholders
Shareholder must also recognize dividends as income, and pay taxes on them = DOUBLE TAXATION
How to get the $$ out?
Bonuses, perks, (problems with excess payments)
Buyback shares (capital gains tax - lower [15%])
Why get the $$ out?
Limited accumulations (personal holding company)
corporate tax – lower [35%]
What is a Partnership?
UPA (§6(1)):
A partnership is an association of two or more persons to carry on as co-
owners of a business for profit
No one-person partnership
No non-profit partnership
Person – can be entity (e.g., corp., partnership, LLC)
No written documents required
Partnership or Contract?
8
Commission – Employment Agreement
S. Ct. - Partnership:
Entered into written agreement - partnership
Called themselves Partners
App. Ct. – Reversed, Contract /employ
Fenwick (cont’d)
Management (community of power)
Fenwick – exclusive control!
Language of agreement
Called themselves Partners / Partnership
Chesire had no rights of partnership
Conduct toward 3rd parties
Filed partnership returns, Fenwick report indiv. tax
Held themselves out as partners to Commission
NOT claim partners to others (vendors, etc.)
Not file trademark registration for partnership
Fenwick (cont’d)
Rights of parties on dissolution
Fenwick received all partnership property
Same results as if Chesire quits employment
Burden of proof – partnership exists => party claiming partnership exists
9
Ct => NO partnership
NO authority / control
Not subject to losses
Not held out as partners
Definition: Co-ownership lacking (essential element)
Distribution vs. wages
Sharing profits =>prima facie evidence of partnership
Partnership by Estoppel
Young v Jones
PW entities: Franchise or Partnership?
No partnership in fact
Estoppel:
If two partnerships are partners by estoppel, then PW-US is
liable for negligent acts of PW-Bahamas
UPA §7(1) & 16(1)
Estoppel (cont’d)
Ifestoppel: joint and several liability!!
¶: PW held itself out as partners (brochure)
No distinction in advertising, TM, names, …
“common knowledge” – they are partners
10
∆: NO reliance
¶ did not rely on brochure to make their decisions
Brochure did not state that PW entities are liable for each other
CHJFK UNIVERSITY
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
BLaw 425 – Class 4
Spring 2009
Dissolution:
Effect on Partnership
11
After
dissolution, the partnership must be wound up, absent
agreement among the partners to carry on the business.
Assuming that the business will not be continued, the winding up process
generally contemplates that the firm’s assets will be distributed to the
partners.
Authority of partners to act on behalf of partnership terminated
except in connection with winding up of partnership business. UPA §
33; RUPA § 804.
Continuation per Agreement:
Effect on Partnership
Technically creates a new partnership
Recall confusing treatment of this issue in Putnam v. Shoaf
Creditors of former partnership automatically become
creditors of new partnership. UPA § 41.
Continuation per Agreement:
Effect on Departing Partner
Departing partner entitled to accounting
Fair value of partnership
Interest from date of dissolution in event of unreasonable failure
to pay
Departing partner remains liable on all firm obligations
unless released by creditors. UPA § 36; RUPA § 703.
Continuation per Agreement:
Effect on New Partners
Ifa new partner joins the firm when it continues after a
dissolution, the new partner is also liable for the firm’s old debts,
but such liability can only be satisfied out of partnership property.
UPA § 41(1); RUPA § 306(B).
The new partner can not be held personally liable for the old debts,
unless he or she expressly agrees to be so held.
The Right to Dissolve
“there always exists the power, as opposed to the right, of
dissolution”—Collins v. Lewis
Dissolution by act of one or more partners. E.g., UPA § 31(1)(b)
Dissolution by operation of law. E.g., UPA § 31(4)
Dissolution by court order. E.g., UPA § 32(1)(a)
12
Owen v. Cohen
UPA § 31(1)(b):
“Dissolution is caused … By the express will of any partner when no definite
term or particular undertaking is specified”
Potential for wrongful dissolution
UPA § 31(1)(b) v. § 31(2)
Dissolution of a “term partnership” (a.k.a. “partnership for a term”) prior to
expiration of the term is “wrongful”
Adverse consequences; see UPA § 38(c)
Hence, “there always exists the power, as opposed to the right, of dissolution
UPA § 18
“The rights and duties of the partners in relation to the partnership shall be
determined, subject to any agreement between them, by the following rules:
“(a) Each partner shall be repaid his contributions, whether by way of capital or
advances to the partnership property and share equally in the profits and surplus
remaining after all liabilities, including those to partners, are satisfied; and must
contribute towards the losses, whether of capital or otherwise sustained by the
partnership according to his share in the profits.”
UPA § 40
§ 40(b): subject to contrary agreement, upon dissolution partnership assets
should be distributed as follows: “(I) Those owing to creditors other than partners,
(II) Those owing to partners other than for capital and profits, (III) Those owing to
partners in respect of capital, and (IV) Those owing to partners in respect of
profits.”
§ 40(d): "partners shall contribute, as provided by [§18(a)] the amount
necessary to satisfy the liabilities [set forth in § 40(b)]. . . ."
Possible rules
All capital losses were to be borne by the capital partner
alone (Kovacik)
Sharing of capital losses in accordance with sharing of
profits (statute)
Allocate capital losses as per ratio of capital contributions
Exceptions
Courts do not apply the Kovacik rule where:
The service partner (Reed) was compensated for his work
The service partner (Reed) made a capital contribution, even if
that contribution was nominal
13
Limited partnerships
Defined: A partnership formed by two or more persons and having one or more
general partners and one or more limited partners.
Formation: The limited partnership is formed by filing documents required by
statute.
Typicallyfiled with Secretary of State
Taxaspects:
Pre-Tax Reform Act of 1986, significant tax shelter advantages
Post-TRA, those advantages eroded but still widely used to generate passive losses
OOL OF LAW
BUSINESS ASSOCIATIONS
14
BLaw 425 – Class 5
Spring 2009
Intro to Corporations
Public (publicly-held)
Public secondary market in which shares of the company are listed for
trading
Public companies: e.g., IBM or Microsoft
Trading exchanges: e.g., NYSE or NASDAQ
Private (close or closely-held)
Absence of a secondary market for its stock
Usually, small number of shareholders, some who actively participate in the
firm’s management
May display many characteristics of partnerships (like “incorporated
partnerships”)
Corporate Attributes
Legal “person” – corporation is a separate entity
separate legal existence from its owners (“legal fiction”)
Possesses (some) constitutional rights
Separate taxpayer
Requirement for formal creation
Limited liability - MBCA § 6.22(b):
“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is
not personally liable for the acts or debts of the corporation except that he may become
personally liable by reason of his own acts or conduct.”
15
Owners = shareholders (stockholders)
Managers = board of directors
Consensus v. Authority
Consensus (Partnership):
Collective decision-making チ¨ used when constituents have:
Similar interests
Comparable information
Low collective action problems
Authority (Corporation):
Central decision-making body チ¨ used when constituents have:
Differing interests
Asymmetric information
Serious collective action problems
Rights of Shareholders
Vote on limited range of issues
Receive payment of dividends when and as declared by board
Inspect corporate books and records
Receive distribution upon termination
File derivative suit to redress wrong suffered by the corporation.
(Damages recovered belong to corporation)
Corporate Attributes (cont’d)
Liquidity– sell/transfer shares
Flexible capital structure
Many different types of securities:
Stocks (common, preferred), options, warrants, convertible debt, bonds
Securities:
claims (contingent) on the corporate assets and future earnings
Issued through formal contractual instruments
16
Holder does not share in corporate appreciation (or upside)
Equity – stock or shares
No interest, no repayments of principal
Rights to receive dividends
if declared by board – “pro rata” share
Rights to receive distribution in a liquidation (after creditors)
Holder is an owner = shareholder
Shareholders receive the benefits of corporate appreciation
Issuance of stock
Board of directors approves issuances
Shareholders involved only if:
Board wants to sell more shares than are presently authorized in its charter
Board of directors wants to issue a new class of shares not authorized in the charter
If charter
(i)authorizes the class of shares in question and
(ii)
there are sufficient authorized but unissued shares to sell;
then, the board can sell shares for “any valid purpose”,
as long as the corporation receives adequate consideration for the shares.
17
Avoiding Fraud (and answering)
“price I paid is not relevant - property is worth $200K”
“no, that’s not entirely true” (2 mo vs. 1 mo)
No recovery if no damages
Even if A lies about purchase price, if property is worth $200K at sale, P has
no damages to recover
18
Otherwise, no (assuming no fraud)
Can C recover from A?
No – C has no relationship with A
Promoters
Represent corp. before it is formed – incorporate the entity
Often enter into contract with potential SH (who will purchase stock)
Called “Subscription Agreements”
Enforceable by SHs and promoter
Owe a fiduciary duty to corp. (and SH)
Cannot make “secret profit” from corp.
Liable for pre-incorporations contracts (entered into in corp.’s behalf)
Promoter remains liable after corp. is formed, unless:
Agreement expressly states that promoter is not liable
19
OR, other party agrees to let corp. be liable instead (novation)
Corp not liable prior to incorporation
Corp. becomes liable by adopting/ratifying pre-incorporation contracts
Corp. relieves promoter of liability post-incorporation
Corp. may indemnify promoter, post-incorporation
But – what if you did not make good faith effort to incorporate?
No de facto corp. (no good faith effort)
BUT, IBM dealt with you on premise (belief) that you were a corp.
IBM may be estopped from denying that you are a corp.
20
BUSINESS ASSOCIATIONS
BLaw 425 – Class 6
Spring 2009
21
Acme refuses to pay Dan’s legal expenses
Dan sues Acme seeking payment (under DEL indemnification
statute). Direct or derivative?
Neither – it’s a trick question (why?)
Shareholders vs Directors
IfSH are unhappy about actions taken by Directors, what
can they do?
Sell their shares
Elect new directors
Sue
22
Dodge v. Ford Motor Co.
“A business corporation is organized and carried on primarily for the
profit of the stockholders. The powers of the directors are to be
employed for that end. The discretion of directors is to be exercised
in the choice of means to attain that end, and does not extend to a
change in the end itself, to the reduction of profits, or to the
nondistribution of profits among stockholders in order to devote them
to other purposes.”
Page 292
Limited Liability Companies
Cross between partnership and corporation
Tax advantages of partnerships
Limited liability of corporations
None of the restrictions (e.g., number and type of shareholders)
applicable to S corporations
Limited Liability Companies
Funding
Members typically contribute capital
Contribution may be cash, property, services rendered, a promissory note, or other
obligation to contribute cash, property, or to perform services.
Liability
Members stand to lose capital contributions, but their personal assets are not subject to
attachment
Tax Consequence
Income passes through to members
LLC does not pay taxes
23
LLC Formation
File articles of organization in the designated State office
Other formation tasks:
Choose and register name: LLC statutes generally require the name of the LLC to include
the words limited liability company, the abbreviation LLC, or similar phrases.
Designate office and agent for service of process
Draft operating agreement – the basic contract governing the affairs of a limited liability
company and stating the various rights and duties of the members
Add need for annual report to tickler list
24
Significant matters require unanimous consent
E.g., merger, admission of new member, dissolution, etc...
Manager-managed LLC option available
Can be structured as a “board of directors,” a CEO, or both
Must be specified in articles of organization
Fiduciary Duties
Manager-managed LLCs
The managers of a manager-managed LLC have a duty of care and loyalty
Usually, members of a manager-managed LLC have no duties to the LLC or its members by
reason of being members
Member-managed LLCs
All members of a member-managed LLC have a duty of care and loyalty
Derivative Actions
Member may bring an action on behalf of the LLC to recover a judgment in its favor if the
members with authority to bring the action refuse to do so
Liabilities
No member or manager of a limited liability company is
obligated personally for any debt, obligation, or liability of the
limited liability company solely by reason of being a member
or acting as a manager of the limited liability company
But veil piercing in the LLC is possible
Dissociation v. Dissolution
Dissociation:
Withdrawal or expulsion of a member
Dissolution:
Winding up of LLC triggered
Unlike Partnerships, dissociation does not necessarily lead
to dissolution
Dissociation Without Dissolution
Dissociated member’s interest must be purchased by the
LLC
25
Buy-Sell Agreements may specify
Judicial appraisal proceeding available
Member’s right to participate in firm business terminates
Exception for participation in a post-dissolution winding up
process
JFK UNIVERSITY
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
BLaw 425 – Class 7
Spring 2009
Kamin or Dodge?
Kamin: “the question of whether or not a dividend is to be declared
or a distribution of some kind should be made is exclusively a matter
of business judgment for the Board of Directors”
Dodge: Courts will intervene when “refusal to [pay a dividend] would amount
to such an abuse of discretion as would constitute a fraud, or breach of that
good faith which they are bound to exercise towards the stockholders”
26
Kamin: BJR
Court says:
“A complaint which alleges merely that some course of action other than that pursued by the
Board of Directors would have been more advantageous gives rise to no cognizable cause of
action.
Courts have more than enough to do in adjudicating legal rights and devising remedies for
wrongs. The directors’ room rather than the courtroom is the appropriate forum for thrashing
out purely business questions which will have an impact on profits, market prices, competitive
situations, or tax advantages.”
“We do not want to go there!”
Business Judgment Rule
Liability Standard for Board
No liability for negligence (“stupidity”)
Liability based on:
Fraud
Illegal conduct
Self-dealing
Court Deference to Board
Court will not review Board decisions
Court will review Board processes
Business Judgment Rule
Court will not interfere
unless a clear case is made out of
Fraud or illegal action
Oppression, Self-dealing or collusive
Bad faith or unconscientiously
Errors of judgment – NOT sufficient for court to interfere
BUT:
Directors may be held liable for gross negligence in failing to make an informed decision
Directors must inform themselves of “all material information reasonably available to
them”
Court will review the decision-making process
Van Gorkom
Deal Terms
$55 per share cash – all outstanding shares
Merge TU in sub of Marmon Group Inc (wholly-owned by Jay Pritzker)
90-day “test” period – TU could receive bids (but not solicit)
TU could only provide public info to bidders, not proprietary info
JP could purchase 1M new shares of TU at $38/sh
Deal contingent on JP obtaining financing (for LBO)
TU had one day to accept the deal
27
Begin discussions with potential acquirers
Obtain LOI (Letter of Intent) from an acquirer
Non-binding description of proposed deal terms (5-10 pages)
Board considers LOI – may reject, accept, or recommend counter-offer
Consult with experts, or accept contingent upon reports from experts
If all goes well – proceed to full-fledged Merger Agreement (50-100+ pages)
Board again considers agreements, consults with experts, approves
Agreement is submitted to shareholders for approval
If all goes well, Merger Agreement approved and signed
Parties complete the closing tasks required by the Agreement
Close Merger
VanGorkom - Issues
Derivativevs. Direct?
Price: Control Premium
$55 vs. $38 – why is this not a “no brainer”?
90-day “test period” (limited “no shop”)
Why not good enough? What happened to KKR and GE Credit?
MBO vs. LBO – what’s the difference?
1 day for BOD to decide – “take it or leave it”?
20 minute presentation; never read the documents
VanGorkom – Players
JP – big time wheeler-dealer/professional
Why not liable? Why not a defendant?
VG – retiring CEO/ “amateur”
What were his motives? What did he do wrong?
BOD – smart, sophisticated, knew TU’s value
What did they do wrong? What happened to BJR?
Senior Management – threatened to quit
Why? What effect?
SH – voted strongly in favor on the proposal
Why didn’t that validate the price/deal?
Officer/expert reports – attorney, CFO, COO
Why weren’t their reports good enough? DGCL §141(e)
DGCL §141(e)
“A member of the board of directors, or a member of any committee designated
by the board of directors, shall, in the performance of such member’s duties, be
fully protected in relying in good faith upon the records of the corporation and
upon such information, opinions, reports or statements presented to the
corporation by any of the corporation’s officers or employees, or committees of
the board of directors, or by any other person as to matters the member
reasonably believes are within such other person’s professional or expert
competence and who has been selected with reasonable care by or on behalf of
the corporation.”
Effect of Van Gorkom
Outcome surprised everyone!
28
Suddenly and unexpectedly imposed liability on directors (possibly millions)
New legal standard: obtain all material information “reasonably available”
Boards now spend $$$$ to insure process
Reports from attorneys, accountants, experts
Valuation Reports, Fairness Opinions, …
Credible, contemporary evidence of deliberation
Document in extensive minutes of board meetings
DGCL § 144
(a) No contract or transaction between a corporation and 1 or more of its
directors or officers, or between a corporation and any other corporation,
29
partnership, association, or other organization in which 1 or more of its directors
or officers, are directors or officers, or have a financial interest, shall be void or
voidable solely for this reason, or solely because the director or officer is present
at or participates in the meeting of the board or committee which authorizes the
contract or transaction, or solely because any such director’s or officer’s votes
are counted for such purpose, if:
DGCL § 144
(1) The material facts as to the director’s or officer’s relationship or interest and as to the
contract or transaction are disclosed or are known to the board of directors or the committee,
and the board or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(2) The material facts as to the director’s or officer’s relationship or interest and as to the
contract or transaction are disclosed or are known to the shareholders entitled to vote thereon,
and the contract or transaction is specifically approved in good faith by vote of the
shareholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors, a committee or the shareholders.
Quorum
“.. . A majority of the total number of directors shall constitute
a quorum for the transaction of business unless the certificate of
incorporation or the bylaws require a greater number. . . .” (§ 141(b))
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a
committee which authorizes the contract or transaction. (§ 144(b))
Disinterested Vote
§ 141(b): “The vote of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the board of directors unless the
certificate of incorporation or the bylaws shall require a vote of a greater
number.”
§ 144(a)(1): “the board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum”
EXAMPLE: BOD has 5 authorized directors. 3 show up at a meeting. 1 is “conflicted” and
required to abstain. The other 2 vote to approve. Did the action pass – under 141(b)?
144(a)(1)?
JFK UNIVERSITY
SCHOOL OF LAW
BUSINESS ASSOCIATIONS
30
BLaw 425 – Class 8
Spring 2009
31
1st Niles: Sales Process (cont’d)
December 2004 – 3 potential acquisition bids:
Farmers
NOT retain 1st Niles BOD
BOD not consider bid further
Cortland
$18/share (stock & cash) – 3.4% premium
Terminate BOD, but consider them for Cortland board
First Place
No statements regarding BOD retention
$18-$18.50/share (stock swap) – 3.4%-6.3% premium
BOD does NOT discuss offer - Stephens propose defer discussion until next BOD meeting
Financial Advisor – First Place is unlikely to wait 2 weeks for response
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ð claim reason BOD reject merger:
Want to retain BOD positions, pay, prestige
No deliberations; disregarded Financial Advisor advice
S. Ct.: 2-prong analysis
Was BOD decision reached in good faith pursuit of legitimate corporate interest (Duty of Loyalty)?
Did BOD reach decision advisedly (Duty of Care)?
Need “yes” to both – for BJR presumption
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Cannot be used for motion to dismiss
S. Ct. reversed on Count II
1st Niles: Count III – SH ratify
ð: BOD Recommend Reclass.
Breach duty of loyalty
Recommendation based on self-interest
Stock buy-backs
Trigger “put” and appraisal rights under ESOP
In re Disney
Hired
Ovitz as new President – 5yr contract
BOD compensation committee approved
Expert (Crystal) advised Employment Agreement (OEA) was reasonable
BOD approved OEA
14 months later – Ovitz fired
Not get along with executives and BOD
Severance: $38M cash; with options = $130M!!
Disney Claims
Due Care – in approving OEA
Not “best practices”, but not breach
Committee & BOD knew value of options
Dutyto act in “Good Faith”
Bad Faith examples:
Act with purpose other than advancing corporate interest
Violate known laws
Fail to action in face of known duty to act (conscious disregard for duties)
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Corporate Opportunities
Objective of Doctrine:
To deter appropriations of new business prospects “belonging to”
the corporation
Targets:
Officers & Directors of corporation
Dominant Shareholders who take active role in managing firm
Corporate Opportunity
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