Business Associations Course Outline ___________________________________________________________________________ AGENCY AGENCY FORMATION Rule: An agency has formed when there is a manifestation

of consent from one to another that the other will act on their behalf and subject to their control and other consents to so act. (Allows for business to be conducted) [Elements of Agency] Manifestation of consent by Principal that Agent Principal must consent to Agent acting on their behalf. Agent must consent so to act. Act on the Principals behalf Subject to the Principals control & Agents consents to act. [Control] Principal must have ability to control agent (not actual control). Principal must specify task that Agent is to perform. Gorton v. Dotty: Football coach case By requesting that coach be only one to drive, she exercised control. Cargill: Farming grain case. [Side Notes] Rest. 1 The act of the servant is the act of the master --> promotes commerce (serving individual when having someone act on their behalf...exposes principal to liability. Ownership of something creates prima facie case of agency Burden of proof is on the individual claiming agency No consideration is required. Agreement does not need to be formal or in writing (Conduct and other circumstances can be inferred to create a relationship). The legal capacity needed to form a binding K is not necessary to form agency relationship. Principal cannot have his agent perform what the principal cannot perform (capacity). Parties neither have to intend nor have knowledge that an agency relation has formed. Results do not matter, its the expectation that acts are done on behalf of principal On behalf does not require any particular result (Loss, gain, etc.) Can be entirely gratuitous. Greasing the wheels of commerce. Combination should be as efficient as possible. [Purposes of Agency] Allocate risk and responsibilities Encourage Commerce Act has force multipliers Agent does not require production of benefit for Principal. [Side Note] Rest. 2d 387 Duty of Loyalty: Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency. [Case Law]

Gorton v. Doty Issue: Was the coach, Russell Garst, the agent of appellant while and in driving her car from Soda Springs to Paris, and in returning to the point where the accident occurred? Holding: Yes. Rule: Where one undertakes to transact some business or manage some affair or another by authority and on account of the latter, the relationship of principal or agent arises. (Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. [Distinguishing Creditor-Debtor from Agency] Rest. 14 A creditor who assumes control of his debtors business for mutual benefit of himself and his debtor, the creditor may become a principal, with liability for the acts and transactions of the debtor in connection w/ the business. A creditor who merely exercises veto power over debtors acts by preventing purchases or sales above specified amounts does not create principal agent relationship. However, if creditor takes over management either in person or through agent and directs what contracts may or may not be made becomes a principal, liable as any principal for the obligations incurred thereafter in the normal course of business by the debtor. Agreement --> Agency, although not called an agency & consequences are not intended, still an agency. [Case Law] Gay Jenson Farms v. Cargill: If factors of Res. 2d are present --> Agency exists. Issue: May a creditor who assumes control of his debtors business become liable as principal for the acts of the debtor? Holding: Yes. Rule: A creditor who assumes control of his debtors business may be held liable as principal for the acts of the debtor in connection with the business. ___________________________________________________________________________ GENERAL or SPECIAL AGENT A general agent is authorized to conduct a series of transaction involving a continuousness of services. A special agent is authorized to conduct a single transaction or series of transaction not involving continuous services. The distinction between two is a matter of degree; factors to consider are: Number of acts to be performed in accomplishing result; (> = general) Number of people to be dealt with; (> = general) Length of time to accomplish result; (> = general) Continuity of service; and (> = general) Need for authorization in making decisions on behalf of Principal. ____________________________________________________________________________ AUTHORITY There are three types of authority that an agent can have: actual, apparent, and inherent authority. [Actual Authority] Manifestation of principal that agent will act on his behalf and subject to his control and agents consents to so act. (EYES of AGENT!!) Does Agent reasonably believe he has authority to act for the principal. (Only exists if the Principal intends to confer it) Express: Some statement or writing (What a reasonable agent would think). Can be mistakenly given, all that matters is whether or not a reasonable agent would

believe he had authority to act. Implied Authority: Acts or conduct that occurred that give agent reasonable belief that they had authority to act (patterns of conduct, custom, incidental). Its actual authority circumstantially proven which principal intended agent to have and includes such powers as particularity necessary to carry out duties delegated. (1) Patterns of Conduct: Principal knows the Agent has acted in the past and does not object. (2) Custom / Prior Dealings: Its customary in industry that an individual has authority to bind a principal. (3) Incidental authority: Absent a clear contrary instruction an agent as incidental authority to use all reasonable means necessary to accomplish purpose. (Mill St. Church)

[Apparent Authority] Authority that exist when a third party reasonably believes an agent has actual authority (results when principal acts in such a manner as would lead a reasonable person to believe the agent has authority). LOOK through EYES of 3rd PARTY!! How Apparent Authority Arises: (1) Direct communication to 3rd party; (2) Conduct or inaction by principal; and (3) Custom (in given industry its customary that individuals has authority to bind principal). 3rd party has to know that principal placed person in given position; and It must be customary for the agent to have actual authority. Have reason to know: Look at ToC, if 3rd party knew or should have known that agent does not have power, then principal is not liable. [Notes] Manifestation to 3rd parties may be made directly or made to community (signs, advertising, authorizing the agent to state he is authorized, or continuously employing the agent. Third party must believe the agent to be authorized. Different from authority since an authorized agent can bind a principal to a transaction w/ 3rd person who does not believe the agent to be authorized. [Case Law] 370 Leasing Rule: An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner to lead a reasonably prudent person to suppose that the agent had the authority he purports to exercise. About the Case: Authority was expressed in document on 11/3/72; Appearance of authority of Kays to sell through eyes of 3rd party (370) Why did Ampex Reneg? --> Market value of equipment increased in value and they realized they could sell at a higher price to someone else. [Inherent Authority] --> PROTECTION FROM UNDISCLOSED PRINCIPLESInherent agency power used to indicate the power of an agent which is derived solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent. (Watteu v. Fenwick) Based on principal of economic efficiency that principal is the lowest cost avoider (cheaper for P to take measures to make known that the agent answers to principal). Generally arises when there is an undisclosed principal who entrust an agent to act on their behalf and whom the principal will be liable to third parties for transactions entered into by

their agent that are common to business and on principals account, although contrary to direction of principal. [Case Law] Watteau v. Fenwick Issue: When one holds out another as an agent, can that agent bind the principal on matters incident to such agency even if he was not authorized for a particular type of transaction? Holding: Yes. Rule: When one holds out another as an agent, that agent can bind the principal on matters normally incident to such agency, even if he was not authorized for a particular type of transaction. ________________________________________________________________ AGENT LIABILITY Rule: An agent will be subject to liability under K, if he does not disclose that he is working for a principal and the 3rd party has no notice that agent is acting on behalf of a principal. [Why Duty is Imposed] Principal is lowest cost avoider: It would be an extreme burden for 3rd parties to expose and analyze whether they want to conduct business with a certain principal. ___________________________________________________________________________ PRINCIPAL LIABILITY Rule: A master is liable for torts of his servants if committed while acting within scope of their employment. However, a master will be liable for acts committed outside scope if: (1) Master intended the conduct or consequences, or (2) Master was negligent or reckless, or (3) Conduct violated a non-delegable duty, or (4) Servant purported to act or speak on behalf of P and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of agency relation [Scope of Employment] Conduct of a servant is w/in scope of employment only if: (1) It is of kind he is employed to perform; (2) It occurs substantially w/in the authorized time and space & limits; (3) It is motivated, at least in part, by purpose to serve master; (4) If its intentional tort, the conduct was foreseeable to master. Conduct of a servant is not w/in scope if: (1) Its different in kind from the authorized; (2) Far beyond the authorized time or space limits, or (3) Too little motivated by a purpose to serve master.

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[Presently Interfering Test] Employees tortious acts must be in response to the plaintiffs conduct which was presently interfering with the employees ability to perform his duties successfulness.

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[Case Law] Manning v. Grimsely Issue: To recover damages from an employer for injuries from an employees assault, must the establish that the assault was in response to the s conduct which was presently interfering w. employees ability to perform his duties successfully? Holding: Yes. Rule: To recover damages from an employer for the injuries from an employees assault, the must establish that the assault was in response to the s conduct which was presently interferring w/ the employees ability to perform his duties successfully. ___________________________________________________________________________ EMPLOYEE OR INDEPENDENT CONTRACTOR Rule: In determining whether one is a servant or an independent contractor (one who is hired to produce a particular result, and is not subject to close control of principal), these factors are considered: Control Principal is in same business. Length of working relationship. Alone (regularly done under supervision) Instruments supplied Distinct (Is job unique) Belief of parties Regular Business of Employer Business (Is P in business) Control; Economic Relationship; Level of Skill Exercised; Risk vs. Benefit [Case Law] Humble Oil v. Martin Issue: May a party be liable for a contractors torts if he exercises substantial control over the contractors operations? Holding: Yes. Notes: Change in basic economic structure; *Humble retained risk of loss based on control* Control & Supervision: Humble set business hours; Humble held title to goods that the station sold. Schneider has no control over what is and is not sold there; Humble bears the risk of loss (unless risk of loss is taken on by the employee by K. Hoover v. Sun Oil Co. Risk vs. Benefit Issue: Will a franchise be considered an independent contractor of the franchisor if he retains control of inventory & operations? Holding:Yes. Barone retained the risk of loss. In addition to control --> Economic Relationship. ________________________________________________________________ AGENTS DUTY TO PRINCIPAL Rule: An agent owes a fiduciary duty to act primarily for benefit of the principal in matters connected w/ his undertaking. Fiduciary duties include: Loyalty & good-faith

Disclosure of all relevant info concerning relation. Account for profits arising out of employment; Not acting on account of adverse party w/out Principals consent; Not to compete with principal on own account or for another in matters relating to subject matter of agency; and To deal fairly with principal in all transactions between them.

[Case Law] Gm v. Singer Singer ran side operation selling parts that he believed GM didnt have capacity to sell. Singer breached duty owed as an agent to principal. Issue: Is an agent who draws business away from his principal for his own enrichment liable to the principal for his profits therefrom? Holding: Yes. Rule: Agent is liable. (Cannot compete w/ Principal) Notes: *The position of the agent is significant - the higher you are, the more loyal you should be*; FIduciary duty fell w/in scope of employment; breach occurred when Singer began farming out work a competitor of his principal. [Policy] Ct.s back in the day created this concept to promote economic efficiency of obligations for agents. Eliminates micro-management of agents by assuring principals that their agents will be loyal and deal with them in good-faith. ________________________________________________________________________ PARTNERSHIPS Issue: Whether a Partnership was Formed Rule: A partnership is the association of two or more persons to carry on as co-owners a business for profit forms a partnership. [Notes] The sharing of profits is prima facie evidence of partnership but no such inference will be drawn if profits were received in payment as wages of an employee. (Fenwick) Control is another major consideration in determining whether partnership was formed. Not necessary to show intent to form partnership. Other Factors: 1. Intention of parties (cannot be determinative - adds to analysis); 2. Obligations to share in losses; 3. Ownership and control of partnership property and business; 4. Community of power in administration; 5. Language used in agreement; 6. Conduct of parties toward third persons; and 7. Rights of parties on dissolution 8. Legal Personage (person RUPA 101(6) [Case Law] Fenwick v. Unemployment Beauty shop case. Agreement to split profits to ensure wages were paid was not prima facie evidence that a partnership was formed because they were shared to cover employment wages. Issue: Is a partnership an association of two or more persons to carry on as co-owners for

profit? Holding: Yes. Rule: A partnership is an association of two or more persons to carry on as co-owners for profit. Southex Exhibitionists v. Rhode Island Builders Assoc. Issue: Must the existence of a partnership normally be determined under a totality-of-thecircumstances test? Holding: Yes. Rule: Partnership? --> Look to totality of the circumstances in determination. (conduct = partnership?) [Partnership Agreements] Must Not: Eliminate the duty of loyalty; Unreasonably reduce the duty of care; Eliminate the obligation of good faith and fair dealing Vary the power to disassociate as a partner...except to require notice. Any agreement that violates these will be blue penciled. [Fiduciary Duty Partners] Punctilio of honor, the most sensitive (Mienhard v. Salmon) Managing partners owe even a greater duty to other partners Mere disclosure of an opportunity does not satisfy that duty, must be consent by other parter to forgo an opportunity. [Case Law] Mienhard v. Salmon: partnership to lease properties was entered, an option to renew was discussed with one of them and he didnt disclose it to his partner. Issue: Do joint adventurers owe to one another the highest fiduciary duty of loyalty while the enterprise is ongoing? Holding: Yes. Rule: Highest fiduciary duty of loyalty and good faith. Fiduciary duty is relentless and supreme, a virtue. Meehan v. Shaughnessy (Grabbing & Leaving) Issue: Does a partner have an obligation to render on demand true and full information of all things affecting the partnership to any partner? Holding: Yes. Rule: A partner has an obligation to provide true and full information of all things affecting the partnership to any partner. [Rights of Partners] Absent a partnership agreement to the contrary, partners have equal say in how the business is run. (Biscuit v. Stroud) Every partner is an agent of the partnership and an agent is liable to the principal. Actions need to be an ordinary matter connected to business. Once the partnership is liable, all partners are jointly and severally liable. [Case Law] National Biscuit v. Stroud: Partner tried to limit his partners power but this is invalid and thus each partner is jointly and severally liable for acts of their partners. Issue: May a partner escape liability for debts incurred by a co-partner merely by advising

the creditor, in advance, that he will not be responsible for those debts? Holding: No. Rule: The acts of a partner, if performed on behalf of the partnership and within the scope of its business, are binding upon all other co-partners. Notes: Partnership Deadlock Lawyer should have addressed the issue of dispute resolution; recommendation --> creating a reasonable & objective way of breaking the deadlock (designation of 3rd party [neutral, trustee, attorney] to achieve impartiality); every partner is an agent for the partnership, once the partnership is liable then every partner becomes jointly & severally liable.

[Ending a Partnership Winding Up] Duties of Partners for Winding Up Loyalty and care Must furnish to a partner any info concerning the partnerships business and affairs. Refrain from competing w/ partnership until dissolution In a law firm, the client, NOT the attorneys have the right to decide who represents them. [Case Law] Owen v. Cohen: Cohen believed he had control over the partnership and Owen sought dissolution. Issue: May a Ct. order the dissolution of a partnership where there are disagreements of such a nature and extent that all confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership? Holding: Yes. Notes: Owen is entitled to original capital investment. Uniform Partnership Act 32: a partnership may be dissolved on application of whenever a partner is guilty of prejudicing the business or breaches the partnership agreement. [Limited Liability Partnerships] Has a general partner who is responsible for the day-to-day activities. Partners are passive investors; Their only risk is losing their investment and further profits, but will not be personally liable. However, if limited partners begin involving themselves in the business then they will run the chance of exposing themselves to full liability as a partner. [Case Law] Holzman (Trustee of Estate) v. De Escamilla (Gen. Partner) Issue: May a party participate in or exercise control over a partnership business while retaining his status as a limited partner? Holding: No. Rule: If a limited partner participates in or exercises control over the partnership business, he becomes a general partner. Notes: All partnerships must have a general partner in a limited partnership in order for one to be in charge of managerial duties. Through conduct --> Russel & Andrews shifted from limited to general partners (control over $, control over employment [hiring & firing], control over what to plant [engaging in management of the firm]) If limited partner is engaging in managerial decision-making, they have converted themselves to a gen. partner. (Russel & Andrews likely viewed De Escamilla as a straw

man). ___________________________________________________________________________ CORPORATIONS NATURE OF CORPORATION: Issue: Whether Corporation exist. Rule: A corporation comes into existence when you file a certificate of incorporation with the secretary of state. [Liability of Corp. Promoter] Rule: A promoter who enters contract with 3rd party who does not know corporation exists will be able to hold promoter liable for K. However, if corporation is later formed, it may adopt the contract and relieve the promoter of personal liability. [Promoter] A person who identifies a business opportunity and creates a deal forming a corporation for investment by others. Owes a fiduciary duty to the to-be-formed corporation (cannot pursue his own profit at corporations expense). [Case Law] Southern-Gulf Marine v. Camcraft: Promoter entered K w/ C, Ps corp. was not yet created. C tried to back out of K claiming corp did not exist and thus the contract was void. Rule: Despite not being incorporated, C is estopped from denying existence of K because they treated corp. as if it Existed and did not suffer any detriment. Issue: Where a party has contracted with what he acknowledges to be a corporation, is he estopped from denying its corporate existence? Holding: Yes. Rule: Where a party has contracted with what he acknowledges to be a corporation, he is estopped from denying the existence or the legal validity of such a corporation.

CONSTITUENCIES OF A CORPORATION Shareholders: Owners of the corp., risk of losing what $$$ they have put into the corp. 2 major rights: (1) right to vote for directors; (2) right to residual value of the corp. Directors: Elected by SHs, then serve on B/D. Fiduciary duty to SHs. Watch over conduct of the business. Set strategic direction of the corp. Officers: Day-to-day management. CEO, COO, CFO, etc... Defined in certificate of corporation or by-laws of corporation. Other: environmental, customers, suppliers, communities where corp does business, etc... ___________________________________________________________________________ PIERCING CORPORATE VAIL Rule: Ct.s use the Van Dorn test which has two parts to determine whether vail should be pierced:

(i) whether the individual and the corp. are kept separate (unity of interest); and (ii) whether or not respecting the corp. shield would allow fraud or promote injustice. (i)There are two / four factors the Ct. will consider in determining whether there is a unity of interest: (i) failure to maintain adequate corporate records or to comply with corporate formalities; (ii) commingling of funds or assets; (iii) undercapitalization; and (iv) one corp. treating assets of other corp. as its own. (ii) Whether or not respecting the corporate shield would promote fraud or injustice: Must be some wrong: unjust enrichment, used corp. to avoid debts. Dont actually have to show fraud. More than inability to satisfy debts, or satisfy judgment for a plaintiff. [Parent Liable for Subsidiary Corps.] Generally, a parent will not be liable for the debts of its subsidiary; however, factors to be considered in determining whether vail should be pierced are: Fail to follow separate corp. formalities for the two corps. (same b/d) Operating same parts of business and subsidiary is undercapitalized Public is mislead as to who is doing what Commingling of assets Subsidiary is operated in unfair manner. [Case Law] Walkovsky v. Carlton: Carlton owned taxi company where he carried minimum level of insurance. Carlton followed all formalities and thus was protected by corp. vail. Issue: Did Walkovskys complaint state a sufficient cause of action so as to recover against each cab corporation, Carlton as shareholder, and each corporations shareholders? Holding: No. Rule: Whenever anyone uses control of the corp to further his own rather than the corp.s business, he will be liable for the corp.s acts. Upon the principle of respondent superior, the liability extends to negligent acts as well as commercial dealings. However, where a corp. is a fragment of a larger corporate combine which actually conducts the business, a Ct. will not pierce the corp. veil to hold individual shareholders liable. Sea-Land v. Pepper Marchase owned many corps. using them basically as his wallet (pulling money out of them for personal expenses). P pierced first vail by satisfying the Van Dorn test and was able to reverse pierce the rest of the corps. Marchase did nothing right and was unable to be protected. Issue: Will the corp. veil be pierced where there is a unity of interest and ownership between a corp. and an individual and where adherence to the fiction of a seperate corp. existence would sanction a fraud or promote injustice? Holding: Yes. Reverse Piercing: Not automatic, if corps. are treated as seperate personages then there can be no reverse piercing. Fridgidaire v. Union Properties

 Persons were limited partners of Commercial but also were officers of Union Properties. They controlled the day to day activities of Commercial and thus the Plaintiff wanted them to be held personally liable since they went beyond being limited partners. However, persons were acting on behalf of Union properties and for their benefit and thus were protected by the corp. shield. Issue: Do limited partners incur general liability for the limited partnerships obligations simply because they are officers, directors, or shareholders of the corporate general partner? Holding: No. Rule: Limited partners do not incur general liability for the limited partnerships obligations simply because they are officers, directors, or shareholders of the corporate general partner. Van Dorn Test (1) Unity of interest; (2) Fraud/Promote Injustice. Allows liability shield to be upheld. Cohen v. Beneficial Industrial Loan Corp. The corporation was directly harmed, and being defrauded; Cohen stepped into the shoes of the corp and sued derivatively. Issue: Is a statute holding an unsuccessful liable for the reasonable expenses of a corp. in defending a derivative action and entitling the corp. to require security for such payment constitutional? Holding: Yes. Such a measure will undoubtedly prevent a number of the harassment suits the statute was designed to target. Notes: Treating SHs differently based on number of shares owned is constitutional. ___________________________________________________________________________ NATURE & ROLE of CORPORATIONS Corporations are allowed to give donations, so long as there is reasonable argument for long term benefit. [Case Law] Ap Smith v. Barlow: Decided to give donation to Princeton Univ. and Ct. held that it was modest and w/in the interest of the people (Corp. will benefit from having intelligent work force). Issue: Can state legislation adopted in the public interest be constitutionally applied to preexisting corporations under the reserved power? Holding: Yes. Good will & making an investment can stand alone; Corps. are allowed to give donations so long as there is reasonable argument for long-term benefit. Dodge v. Ford: Ford decided to re-invest vs. paying dividends as he had. Ford was not protected by BJR despite there being an absence of fraud, illegality, or conflict of interest. If Ford had stayed quiet about wanting to help employee instead of speaking about furthering the interest of the corporation without a definite end, he probably wouldve been okay. Issue: Is a corps. primary purpose to provide profits for its stockholders? Holding: Yes. Business Judgment Rule...Leaves directors with discretion to make the decisions (why directors have been innovative / Accountability/Risk --> w/o this, bad decisions would be made) Notes: Ford was not returning residual value of corp. to SHs --> rather, he reinvested the $$$ back into the corp., returning the residual value to the employees. Deference & humility of Directors --> recognized by the Ct.s. ___________________________________________________________________________ RIGHTS & DUTIES of OFFICERS, DIRECTORS, & Other INSIDERS

Duties of Directors/Officers: Duty of Care Duty of Loyalty Duty of Good-Faith Directors/Officers Should: Have basic understanding of Corp. Maintain being informed General Monitoring of Corp. Affairs Maintain Familiarity w/ Corps. financial status.

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Business Judgment Rule: In absence of fraud, illegality, or conflict of interest; the Ct. will not substitute its own judgment of the notions of what is sound of that of the members of the board of directors so long as they were reasonably informed in making their decision. (dodge v. Ford) Substitute: wont review or substitute its judgment decision unless the plaintiff can prove illegality fraud or conflict of interest. So what is it that the court is reviewing? NOT the decision but the motivation behind the decision. Whether or not the court of the board of directors is in a better position to make the decision. Conflict between fiduciary responsibility and BJR: one side accountability hold corporate managers accountable when they arent doing what they are doing/ encourage: risk if they dont take risks then they will never make money. Business people need to be encouraged to take risks

[Reasonably Informed] Van Gorkom Consulting experts or other outside help to ensure they know all of the implications of their decision. A decision made without information will not be protected by BJR. [Outer Limits of Business Judgment Rule] Irrationality WASTE THEORY TEST: An exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. [Policy] Judges are not businessmen and dont necessarily have the skills to make sound business decisions. B/Ds are presumed to have the skill and diligence to make decisions. Encourages risk taking which leads to innovation. [Authority v. Accountability] Absence the existence of the business judgment rule there would be accountability for each and every decision a B/Ds make and this would hinder business operations. No one would be willing to make a decision or take a risk if they know they are going to be

second guessed or held accountable for their decisions. BJR gives B/Ds authority to make decisions so long as they are informed and there is no illegality, fraud, or conflict of interest they will be protected and not accountable for any thing that may go wrong. BJR allows businesses to prosper and reach new heights.

[Case Law] Kamin v. Amex Even stupid decisions will be protected by the BJR. Amex Corp. made a decision to hide a huge investment loss by masking it as dividends when they could have reported the loss and received a significant tax cut (ultimately would have saved corp. money). Ct. held that even though it was a stupid decision it is protected. Issue: Should the Ct.s interfere with a B/Ds good faith business judgment as to whether or not to declare a dividend or make a distribution? Holding: No. Rule: Whether or not a dividend is to be declared or a distribution make is exclusively a matter of business judgment for the board of directors, and the Ct.s will not, therefore, interfere as long as the decision is made in good faith. Note: The Ct. does not look at the decision that was made, but rather the process in which the decision was made. Smith v. Van Gorkom: A B/D must make an informed decision which includes considering all available material information to be protected by BJR. Especially in mergers, a B/D has duty to act in an informed and deliberate manner and determining whether to approve an agreement. Brief presentation and discussion by B/D of a merger. Ct. stated they must make informed decision to be protected and they failed to do so. Issue: Is a director or officer of a corp. shielded by the BJR when the director relied on the representations of other directors and officers? Holding: No. Rule: The BJR shields directors or officers of a corp. from liability only if, in reaching a business decision, the directors or officers acted on an informed basis, availing themselves of all material information reasonably available. Notes: Duty to get informed; the B/D must make an informed decision which includes considering all available material information to be protected by BJR; Especially in mergers, a B/D has duty to act in an informed and deliberate manner and determining whether to approve an agreement. B/D was grossly negligent. Francis v. United Jersey Bank: Ct. states that directors should: have basic understanding of Corp; maintain being informed; monitor corp. affairs; and maintain familiarity w/ corps financial status. Pritchard was not protected by BJR because she did not make any decisions. She was liable because she didnt fulfill her duties to the corp. by ensuring everything was being properly done. Only because you dont participate or you keep your eyes and ears covered will not shield you from liability. Issue: Does individual liability of a corps directors to its clients require a duty, breach, and a proximate cause? Did Pritchard Satisfy her fiduciary duty? Holding: Yes.

Rule: Liability of a corps directors to its clients requires a demonstration that: (1) a duty existed; (2) the director(s) breached that duty; and (3) the breach was a proximate cause of the clients losses. Notes: Pritchard had a fiduciary duty to the clients and a duty to be their eyes and ears of the SHs.

Bayer v. Beran Issue: May the Ct. question decisions of business management made by the corps B/D? Holding: No. Rule: Policies of business management are left solely to the discretion of the B/D and may not be questions absent a showing of fraud, improper motive, or self-interest. Notes: Directors carry the burden of proof w/no BJR. [LEGAL ADVICE in General for B/Ds] Retain outside expert that could give independent insight to the value of the firm. Be sure to be diligent (Due Diligence is required) in evaluating whether the firm should be sold. Make sure you stay up to date with the corps. dealings and affairs. ____________________________________________________________________________ CORPORATE OPPORTUNITIES (Usurpation= Wrongful taking) [Does Corporate Opportunity Doctrine Apply?] Rule: Must use four factor test, no factor is determinative: 1. financial capability; 2. line of business; 3. expectancy; and 4. whether self interest of the officer/director is in conflict with the corporation. [Broz 4 Elements] 1. Financial Capability 2. Line of Business 3. Expectancy 4. Self interest of director/officer in conflict w/ corporation. [Case Law] Broz. v. Cellular: [4 part test for usurpation] Officer and director at two companies. Was offered opportunity to buy rights, made sure the company he was an officer knew of opportunity and they rejected it. Old company had no $, and he wasnt in conflict since he was told that old company wasnt interested at all. Issue: Is the corp. opportunity doctrine implicated only in cases where the fiduciarys seizure of an opportunity results in a conflict b/w the fiduciarys duties to the corp. and the selfinterest of the director as actualized by the exploitation of the opportunity? Holding: Yes. The totality of the circumstances indicates that Broz did not usurp a corp. opportunity that properly belonged to CIS, because no opportunity existed for CIS. CIS did not have the financial capability to make use of this opportunity and CIS rejected it. Rule: (1) Where a corporation regularly and consistently invests in marketable securities, a claim for usurpation of corporate opportunity is stated where it is alleged that the

corporations officers and directors accepted IPO share allocations at the initial offering price instead of having those allocations offered to the corporation. (2) A claim of aiding and abetting a breach of fiduciary duty is stated where it is alleged that an investment banker has allocated lucrative IPO shares to a corporations not to profit personally at the corporations expense and that the corporation regularly invested in marketable securities. ____________________________________________________________________________ DOMINANT SHARE HOLDERS [Dominant Shareholder Duties] Generally, shareholders owe no fiduciary duties to one another. However, a dominant shareholder does owe a fiduciary duty to other shareholders since they possess the ability to control the B/D. [Business Judgment Rule vs. Intrinsic Fairness Test] Generally, the business judgment rule will apply to decisions made by the B/Ds. However, where there is self-dealing (dominating SHs received something at the expense of the minority SHs/company) than the Intrinsic Fairness Test will apply. Intrinsic Fairness Test: Transaction must be basically fair, taken in its entirety, to the outsider/minority SHs; and The transaction must be undertaken for some valid business purpose. Dominant party bears burden that it met the test. [Case Law] Sinclair Oil v. Levien (mixed victory) Sinclair was the parent of Sinvin (subsidiary). Sinclair was paying out excessive dividends from Sinvin, $ which Sinvin did not have. But since the minority was also receiving dividends the ct. stated the Intrinsic fairness test does not apply since there was no self dealing (everyone was being paid dividends). But, Sinclair owed a duty when they allowed other company to breach Ks with Sinvin and lose money. Issue: Should the intrinsic fairness test be applied to business transactions where a fiduciary duty exists but is not accompanied by self-dealing? Holding: No. Notes: Minority SHs got their proportionate share.

RATIFICATION [Case Law] Fleigler v. Lawrence Issue: Does ratification of an interested transaction by a majority of independent, fully informed shareholders shift the burden of proof to the objecting shareholder to demonstrate that the terms of the transaction are so unequal as to amount to a gift or a waste of corp. assets? Holding: Yes. Conflict of interest --> Intrinsic Fairness test (not BJR). ____________________________________________________________________________ DISCLOSURE, FAIRNESS & INSIDE INFO Rule 10b-5: Prohibits using any deception to defraud. Creates a private cause of action. MUST show MANIPULATION or DECEPTION

Four Elements: 1. Intent: person making the statement knew or should have known it was incorrect or deceptive. 2. Proximate cause of the harm; 3. Statement was Material; Total Mix Probability x Magnitude = Materiality 4. Reliance Fraud on Market creates a presumption of reliance on investors. [Total Mix] Does statement made or omitted change the total mix of information available? There is a substantial likelihood a reasonable SH would consider it important in deciding on how to act/vote. [Materiality] Probability x Magnitude Look at interest of Corp. at highest level Size of Corp. and premiums An omitted fact is material if: there is a substantial likelihood a reasonable SH would consider it important in deciding on how to act/vote. Materiality Bar: Too Low: too much information floods traders and thus too much info means nothing is important. Too High: Nothing is material enough to be released and thus no information is disclosed. [Fraud on Market Theory] A Presumption: FMT is a hypothesis that misleading statements will be represented in the market price of stock and thus purchasers even if they dont actually rely on the statement, FMT presumes they relied. A company may rebut this presumption if they can show a SH would have sold their shares anyway or regardless of the misstatement. [Inside Info] Disclose or abstain rule. An insider must disclose info before trading or abstain from trading or recommending another to trade. But, Disclosure is only available when there is no interest in corporate secrecy. Generally, there will always be an interest in keeping it a secret. [Case Law] Basic v. Levinson Corps. are required to disclose material information. Whether info is material depends on the Probability (look at interest of Corp. at highest level) x Magnitude (Size of Corp. and premiums) = Materiality function. Argued agreement in principal theory: Information does not become material until there is an agreed upon price and structure of transaction. Ct. adopted the total mix test that is quantifies materiality by looking at the probability and

magnitude of the information. Issue: (1) Does an inquiry into materiality in the merger context require a case-by-case analysis of the probability that the transaction will be consummated and its significance to the issuer of securities? (2) May an investors reliance on material public misrepresentations be presumed under a fraud-on-the-market theory for purposes of a Rule 10b-5 action? Holding: (1) Yes; (2) Yes. Rule: (1) Whether a company statement is material, in the context of merger discussions, requires a case-by-case analysis of the probability that the transaction will be consummated and the significance of the transaction to the issuer of the securities. (2) An investors reliance on material, public misrepresentations may be presumed under a fraud-on-themarket theory for purposes of a Rule 10b-5 action. Notes:1933 & 1934 Securities Act; If proper info had been disclosed, SHs would not have sold their stock; Argued: White Noise Concept --> (too low standard = bad) Wanted a high standard...Failed Argument Sunlight Kills --> If discussions of merger were disclosed, it would kill the merger opportunity...Failed Argument Bright-Line Rule Needed --> define what is and is not material (make it easier to understand and follow the mergers)...Failed Argument (being a corp. manager is not an easy job court stated that exercise of judgment is necessary)

West v. Prudential Securities Issue: May a class action be brought on behalf of everyone who purchased stock during a period when a broker was violating securities laws by providing material non-public information? Holding: No. Here, causation is shortcoming in this class certification. With many professional investors alert to news, markets are efficient in the sense that they rapidly adjust to all public information. if some of this information is false, the price will reach an incorrect level, staying there until the truth emerges. It is hard to see of Hofmans non-public statements could have caused changes in the price of Jeffersons Savings stock. Notes: Hofman was interested in customer trading, drum up business, and make himself to appear more important than he actually was; Because Hofman only lied privately it would not have been enough to artificially move the stock; Uninformed investors will think that stock is overpriced if Hofmans lie is not publicly known; This is a self-correcting environment. Sante Fe v. Green [Disclosure & Fairness] MUST show manipulation or deception to have 10(b)-5 motion. Corp. went for short form merger and minority stocks were appraised at $125 and Green offered them $150. Green fully disclosed all info and Ps were upset about compensation and filed 10(b)-5 in federal ct. Ps should have brought claim in DE where they could have gotten a re-appraisal. Despite that, ct. said for 10(b)-5 you MUST show DECEPTION or MANIPULATION which there was none here. Green disclosed every piece of info they had to minority. Issue: Is breach of duty alone, without a showing of deception or manipulation grounds for a 10(b) or Rule 10b-5 action? Holding: No. Rule: Before a claim of fraud or breach of fiduciary duty may be maintained under 10(b) of

the SEA or Rule 10b-5, there must first be a showing of manipulation or deception. SEC v. TGS TGS kept silent in a press release to quite rumors about a valuable ore strike. TGS had duty to disclose the ore strike if the ore strike was material (which ct. did conclude was). If there was no duty they could either chose to disclose or chose to be silent; However there was a duty and thus had to disclose the ore discovery. TGS had interest in silence about ore so they could acquire surrounding land for cheaper price. An insider must disclose info before trading or abstain from trading or recommending another to trade. Disclosure is only available when there is no interest in corporate secrecy. Issue: (1) Is it unlawful to trade on material insider information until such information has been disclosed to the public and has had time to become equally available to all investors? (2) Is a company press release considered to have been issued in connection with the purchase or sale of a security for purposes of imposing liability under the federal securities laws and will liability flow therefrom if a reasonable investor, in the exercise of due care, would have been mislead by it? Holding: (1) Yes; (2) Yes. Rule: (1) It is unlawful to trade on material inside information until such information has been disclosed to the public and has had time to become equally available to all investors. (2) A company press release is considered to have been issued in connection with the purchase or sale of a security for purposes of imposing liability under the federal securities laws, and liability will flow if a reasonable investor, in the exercise of due care, would have been misled by it. ____________________________________________________________________________ SHARE HOLDERS: Proposals & Inspection Rights [Proposal Rules] A corporation is allowed to exclude a proposal if: 1. Relates to political cause not associated w/ corp. 2. Not w/in corps power to effectuate. 3. Related to ordinary business operations. 4. Relates to operation that is less than 5% of total assets/earnings. [Inspections] Generally, SHs are given right to inspect a corps books and records. Must have PROPER purpose Example: a) Evaluation of investment b) Getting list of other SHs to solicit for proxies. c) SH carries burden of proof to show their purpose is proper. [Case Law] Lovenheim v. Iroquis Brand Under 14(a)-8 there is a 5% economic (sales and earnings) significance threshold that must be met in order for a company to accept a proposal. However, if the proposal deals with ethical or moral concerns than it meets the threshold for being significant. P wanted to form committee to make sure geese were being treated properly. Ct. said his proposal was significantly related even though it did not meet the 5% economic significant threshold.

 Issue: Can a SH proposal be significantly related to the business of securities issuer for noneconomic reasons, including social and noneconomic reasons, including social and ethical issues, and may it therefore not be omitted from the issuers proxy statement even if it relates to operations which account for less than 5% of the issuers total assets? Holding: Yes. Lovenheim will suffer irreparable injury without such relief, Iroquois will not suffer any undue harm, and the public interest is served by granting the injunction. Pillsbury v. Honeywell Under 220(b)- The SH must have the companies interest at heart to see SH lists and legitimate business purpose to gain access to records. 220(b) allows SH to look over the minutes of the board and other public filings. Ps purpose was a personal one over politics concerning the manufacture of weapons for the Vietnam War. Issue: Must a stockholder demonstrate that he is motivated by a proper purpose related to his economic interest in the corp. in order to inspect SH lists and records? Holding: Yes. Rule: In order for a stockholder to inspect SH lists and corp. records, the stockholder must demonstrate a proper purpose relating to an economic interest. Notes: SH inspection rights are creatures of state law; a proper purpose constitutes those relating to a SHs economic interest in the corp; s interest was anything but beneficial to the interest of corp. ____________________________________________________________________________ CLOSELY HELD CORPORATIONS [Duties Owed] Closely held corporations are treated a lot like partnerships when it comes to duties owed to other SHs. Owe a duty of strict good-faith. (Wilkes v. Springside) Wilkes rule applies to anyone that controls the firm. [Minority SH Challenges] If an action taken or proposed to be undertaken by the majority is challenged, the majority group MUST show a legitimate business objective for the actions it undertakes. Even if there is a legitimate business objective, a minority SH can still win if they can show that they could achieve their objective by hurting minority SH less. (Wilkes v. Springside) [Voting Agreements] Generally valid, allows SHs to agree upon who is going to do what and allocate other responsibilities, very important in small business. SH do not owe a duty to one another and thus these agreements will be upheld. Agreements between directors are not valid (McQuade) since directors must look out for the best interest of corp. and have fiduciary obligations to minority SHs. Any SH agreement that would limit the discretion of the B/D to act in the best interest of ALL the SHs is void. SHs have intangible right to elect directors. [Case Law] McQuade v. Stoneham Entered agreement to vote for one another to be officers (Valid). SH do not owe a duty to one another and are allowed to agree with one another to take certain actions. Also, agreed among directors that they would vote for one another (Invalid).

As directors, they do have a duty to minority SHs and any agreement that binds them as directors to act in a particular way will be deemed invalid. Must act in best interest of corp. & an agreement that binds you to act a certain way (vote for an individual) may not necessarily be in the best interest of corp. and thus invalid. Issue: Is a SH agreement precluding a B/D from changing officers salaries, or retaining individuals in office void and illegal? Holding: Yes. Rule: Void and Illegal absent express contractual consent. Notes: Agreements binding directors to future actions are void; morals and manners of the market place; agreement was against public policy (1) As SHs --> vote for directors [3 SH agreed to vote for each other], (2) As Directors --> vote to hire officers. Fiduciary Duty: manage corp. for benefit of SHs (not just a duty to SHs that voted for them but to ALL SHs); Directors cannot bind themselves to a particular decision in advance (dont have director independence to follow their proper business judgement.)

Clark v. Dodge Had similar agreement to one in McQuade. However, there were no minority SHs and thus even though they were wearing director hats they could bind each other to act a certain way. Had there been a minority SH, this agreement would be invalid. Issue: Where the directors are the sole stockholders of a corp., is a K between them to vote for specified persons as officers illegal? Holding: No. Rule: Where the directors are the sole stockholders of a corp., a K b/w them to vote for specified persons to serve as directors is legal, and not contradictory of public policy. Notes: and are the sole SHs --> their agreement does not harm public interest. Distinguished from McQuade: In McQuade the Ct. was protecting minority SHs that were not parties to the agreement. Galler () v. Galler () Issue: May SHs in a CHC contract in regards to the companys management? Holding: Yes. Rule: May contract regarding the management of the corp. absent the presence of an objecting minority, and threat of public injury. Notes: The general rule is that majority SHs in a corp. have the right to select its managers; SHs interests in publicly held corps. must be distinguished from those in CHCs; Triggering Event. Distinguished from Rosenberg: In Rosenberg, there was an objection by minority SHs. Wilkes (Director) v. Springside (Corp.) Four guys entered business deal and eventually decided to kick one guy out. Closed Corps are treated as partnerships, as far as duties owed to one another. If challenged by minority, majority must show legitimate business purpose for the action they are taken. Cant just fire someone or cut them out because you dont like them. When Wilkes lost his job, he lost his entire return on investment. Issue: May the minority SHs in a CHC charge majority SHs with a breach of fiduciary duty in terminating his employment or ousting from his position as officer or director? Holding: Yes. Rule: In a CHC, the majority SHs have a duty to deal with the minority in accordance with a good faith standard. Duty of strict good faith. Intermediate level fiduciary duty.

***Wilkes Doctrine --> The burden is on the majority to show a legitimate purpose for its decision related to the operation of the business. The minority may answer that the same objective could be reached through less harmful means. In reaching a determination, the court must balance the legitimacy of the intended purpose against the practicability of the less harmful alternative.*** Ingle v. Glamor Ct. states that only purchasing shares does not entitle you to job security. Alaska Plastics v. Coppock 3 investors, 1 got divorced and had to split his share w/ ex-wife. 3 directors paid themselves directors fees and dividends while leaving out the wife. Wife wanted dissolution. In order to dissolve corporation, ct. would have to find oppression or fraud. Ct. is reluctant to order a dissolution of a corporation (extreme remedy) Ct. said they can liquidate or force a buy back, but these options are only available if there is fraud or oppression or breach of fiduciary duties of B/D. Issue: Do majority SHs in a CHC owe a fiduciary duty of utmost good faith and loyalty to minority SHs? Breach of fiduciary duty by Donahue? Holding: Yes. K & by-laws provision did not compel a buy-out; SHs must show oppression or fraud, in this case did not show either so no dissolution. ____________________________________________________________________________ LIMITED LIABILITY COMPANIES [Nature] Essentially the best aspects of partnerships and the best aspects of corporations are combined to form LLCs. Members are only liable for the amount of their capital investment, even if the member actively participates in the business. Members can elect to have their LLC taxed as a partnership (thumbs up) or a corporation (double taxation). [Case Law] Elf v. Jaffari Operating Agreements are valid. Courts enforce freedom of K. Kaycee v. Flahive LLCs are protected by corp. vail, just as corporations are. Creature of state statutes (statutory interpretation) McConnel v. Hunt Agreements are valid that limit the duties of SHs. ____________________________________________________________________________ OTHER NOTES ***Ways to get money out of corporation: Compensation Salaries Bonuses Dividends Street Option (sell shares)

Buy-Outs Debt