Business Association Outline Prof Mock

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Fall 2017
Prof. Mock
Corporations
Corporations – A Contemporary Approach (2nd Edition)
OUTLINE
Chapter 1 – Introduction to the Firm(P.3-24)
INFO RIGHTS, DIVIDENDS RIGHTS, VOTING RIGHTS, CAPITAL APPRECIATION, LIQUIDATION RIGHTS
STAKEHOLDERS = OFFICERS, SHAREHOLDERS, CONSUMERS, CREDITORS, LABOR, COMMUNITY
A. This chapter introduces the roles played by the key actors in any business organization – investors and
managers.
B. First, what is corporations?
I. Analogy
II. Business entity
III. Ownership
C. The most famous case of U.S. business organization law case:
I. Meinhard v. Salmon (P.4)
a. Facts
i. Salmon's duty: sole power to manage, lease, underlet and operate the building.
ii. Meinhard's duty: pay Salmon half of the moneys requisite to reconstruct, alter, manage, and
operate the property. Salmon then would pay 40% of the net profit for the first five years and
50% thereafter.
iii. Salmon and Gerry went into a lease agreement for a term of 20 years. The leased property
included the Hotel Bristol
iv. Salmon did not inform of Salmon's new contract with Gerry
v. When Meinhard learned of the contract and demanded share of the new project, Salmon
refused and Meinhard brought a suit.
b. Issue
i. Whether their relationship extended to new business opportunities that arose from the initial
project.
ii. When a business partner fails to inform his co-partner of a business opportunity that arises as
a result of the partnership, does he breach his fiduciary duty?
c. Rule
i. Joint adventurer, like copartners, owe to one another, while the enterprise continues, the duty
of the finest loyalty.
d. Holding/Reasoning
i. Meinhard provided trust, capital to the work of Salmon.
ii. They share interest.
iii. Their behavior and duties to each other are alike to the partners, so they are partners.
iv. Even though the deal went on after the agreement with Meinhard, it would still be obligation
for Salmon to disclose because it is in bad-faith
v. “not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of
behavior” (P.5)
vi. ∴ held for Meinhard. [FIDUCIARY DUTY OF DISCLOSURE]
D. Business projects are involved with taking on risks.
I. "To be successful, business firms must identify and manage risk."
a. Types of risks:
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i. Non-controllable risks: like the U.S. economy, bank interest rates, market…
ii. Controllable risks: kinds of tenants for commercial building, building materials, advertising…
b. Expected Returns: calculating worst-case scenario, likely scenario, and best-case scenario…
c. Risk Tolerance:
i. Risk adverse: not risking losing money.
ii. Risk seekers: betting on investments even when safer returns are available.
iii. Risk neutrality: neutral; calculates probabilities and returns, then make a decision.
d. Methods to manage risks
i. Insurance: a person or business pays a fee (insurance premium), in exchange for the right to
payment if a specified event occurs.
ii. Diversification: a person or business can diversify by participating in different ventures as
well.
iii. Internal risk allocation: parties in a business may allocate risks to the person who is most
willing or best able to bear them.
iv. Risk externalization: to move the risk to others outside the firm.
v. Principal & Agent:
i. Principal: the role of investor/owner.
ii. Agent: the role of manager/employee.
Chapter 2 – Corporate Basics (P.25-54)
FEDERAL CONSTITUTION -> FEDERAL STATUTES -> FEDERAL REGULATIONS -> STATE CONSTITUTIONS - > STATE
STATUTES -> STATE REGULATIONS -> ARTICLES OF INCORPORATION -> BY LAWS
“Corporation is a complex structure.”

A. What are the reasons to have stock?
I. Capital appreciation rights
II. Voting rights
a. Voting for directors
b. For certain things before the shareholder
III. Dividend rights
a. “Share buyback”: second way of getting corporate money to shareholders
IV. Liquidation rights
a. You stand in line to get leftover assets. (what’s left after paying creditors)
b. Effective residual rights
V. Information rights
a. They have the right to have the information relating to the shareholders.
b. Proxy: somebody else vote behalf of a corporation shareholder
VI. Etc.
a. Right to sue: have rights to bring a suit against corporation for certain particular rights
B. Other ways to benefit from corporation
I. Community
II. Employees
III. Government (uncle Sam)
IV. Other Service corporations
V. Suppliers
VI. Customers
VII. In sum, they are considered as stakeholders. They have interest in corporation but they do not have
voting rights, or other shareholders' rights.
C. Creditors (Debt holders)
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I. Lender; one has given money to corporation but did not retain equitable rights as shareholders.
II. What protections do they have?
a. Secured debt? Unsecured debt?
b. A note is unsecured. A bond is secured (secured mortgage).
III. How would creditors protect themselves?
a. A signed contract (how much money, when it is due, what kind of protections…)
b. Collateral if you can
c. Sometimes there are provisions which debt can turn into the share…
D. Board of directors
I. Managers of the corporation
II. Collegiate body
III. The board is selected by shareholder's vote.
IV. Board names officers -> officers hire employees.
E. Cases:
I. Schnell v. Chris-Craft Industries, Inc. (P.45)
a. Facts
i. P: shareholders of Chris-Craft, D: directors of Chris-Craft
ii. D attempted to move the annual meeting day set by the by-laws in order to interrupt the
shareholders who planned to vote on the replacement of directors.
iii. The bylaws said that the Directors could move up the meeting if they gave proper notice,
which they did. So, the trial court found for D. P appealed.
b. Issue
i. Whether the director's annual meeting date change was reasonable?
c. Rule
i. SC reversed the decision
ii. Present management resisted the production of a list of its stockholders to P.
iii. D's attempt to utilize the corporate machinery and the Delaware Law for the purpose of
perpetuating itself in office which obstructed P's rights to undertake a proxy contest against
management.
II. Stahl v. Apple Bancorp, Inc. (P.48)
a. Facts
i. P: Stahl, Bancorp's largest shareholder; D: Bancorp directors
ii. Stahl proposed a tender offer to purchase the entire common shares of Bancorp, and elect 13
nominees (nominated by Stahl) as stockholders. The objective of Stahl is to control the
majority of the board (through proxy voting) so that the board (under his control) can decide
to sell the corporation (which is precisely the plan of Stahl).
iii. The board, being advised that Stahl’s proposal is inadequate, decided to withdraw the record
date for the meeting (in effect, postponing the meeting). The purpose of the postponement is
to allow the board to come up with other alternatives to Stahl's take-over proposal.
iv. Stahl filed a claim alleging that the shareholders' right to vote had been deprived.
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b. Issue
i. Whether the decision of the Bancorp board to postpone the stockholders’ meeting was a
reasonable response to the threat against the company?
c. Rule
i. YES; it is reasonable to postpone the stockholders' meeting when the board of directors
perceive a possible threat to the corporation and the interests of its shareholders.
ii. Footnote 3 on P. 49
Chapter 3 – Corporate Federalism (A,B,C)(P.57-80)
- Identifying where the corporation fits in our federal-state legal system.
- Corporations are largely creatures of state law.
A. Brief History of U.S. Corporate Law
I. Corporate personhood
a. Corporation is a “person”
i. A corporation could own property, enter into contracts, sue and be sued in its own name, and
be held liable for its debt.
b. Corporation is an “artificial being”
ii. Unlimited lifespan: Corporation can exist economically as long as possible.
iii. No political power (no power to vote, or become a President)
iv. No physical form (corporation cannot shake hands)
II. The Modern Corporation
a. Sarbanes-Oxley Act
i. Shift in corporate law from state law to federal level.
b. Dodd-Frank Act
B. Horizontal Federalism: State View of Corporate Law
- The horizontal competition among the states to obtain incorporations by offering an attractive set of
corporate law rules and procedures.
- Corporation’s external activities are regulated by any state. How about internal activities?
I. Internal Affairs Doctrine
a. The law of the state of incorporation should govern any disputes regarding that corporation’s
“internal affairs.”
i. EX) A business with shareholders in Florida, headquartered in CA, doing business
throughout the South, and incorporated in Delaware would be subject to the corporate
law rules of Delaware.
b. McDermott Inc. v. Lewis (P.67)
i. Facts
1. McDermott Delaware became a 92% owned subsidiary of McDermott
International, a Panamanian corporation.
2. Following the 1982Reorganization, the public stockholders of International
hold 90% of the voting power while Delaware holds about 10%.
3. At the time of the reorganization, International’s prospectus admitted the 10%
voting would be voted by International.
ii. Issue
1. Whether a Delaware subsidiary of a Panamanian corporation may vote the
shares it holds in its parent company under circumstances which are prohibited
by Delaware law, but not the law of Panama.
iii. Rule
2. Internal Affairs Doctrine requires that the law of the state of incorporation
should determine issue relating to internal corporate affairs.
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iv. Holding/Reasoning
3. Delaware’s well established conflict of laws principles require that the laws of
the jurisdiction of incorporation – here the republican of Panama – govern this
dispute.
c. “Pseudo-foreign corporations”: corporations incorporated outside the state, but conducting
most of their business and having most their shareholders in the state follow state regulation.
EX) Cal. Corp. Code § 2115
C. Vertical Federalism: Federal View of Corporate Law
I. There are areas where federal law applies such as federal securities law
Chapter 4 – Corporate Social Responsibility (A,B)(P.94-105)
A. Who does the corporation serve?
I. Shareholder primacy v. Corporate social; responsibility
a. There is one concept which argues that the only social responsibility of a corporation is to
maximize profits for its shareholders within the confines of the law.
i. Shareholder are the one who invested and they are the one who has interest in their
success and failure.
b. Another view is that the business corporation was properly seen as an economic institution
which has a social service as well as a profit making function.
II. CSR in Context
a. Dodge v. Ford Motor Co. (P.96) (shareholder primacy view)
i. Facts
4. The Dodge brothers brought suit against Ford Motor Company to compel the
payment of a special dividend and to enjoin Ford’s plan to purchase iron ore
mines in the Northern Peninsula of Michigan, transport the ore to smelters to
be erected in the company’s River Rouge property, and construct steel
manufacturing plants to produce steel to be used in the manufacture of cars in
the company’s factories.
5. P argued that the corporation is a business institution not a semi-eleemosynary
institution.
6. Ford: I am intending to spread the benefits of this industrial system to the
greatest possible number.
ii. Issue
7. Whether the corporation could be compelled to pay a dividend
8. Whether the minority shareholders could prevent Ford from operating the
company for the charitable ends that he had declared.
iii. Rule
9. The purpose of the corporation is to make money for the shareholders, and
Defendant is arbitrarily withholding money that could go to the shareholders.
b. Theodora Holding Corp. v. Henderson (P.101)
i. Fact
10. Henderson had controlling interest in Alexander Dawson, Inc.
11. Mrs. Henderson formed the Theodora Holding Corp. and transferred to the
holding company her shares of Alexander Dawson common stock.
12. Henderson had caused AD to make annual corporate contribution to the
Alexander Dawson Foundation which Henderson himself formed.
13. Henderson proposed to gift company stock to Foundation to finance the camp;
however, Theodora Ives (the daughter of Mrs. Henderson) objected and
suggested the gift be made instead to a charitable corporation supported by her
mother and herself.
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14. Henderson reduced board of directors into three and thereafter approved his
proposal of gift to the Foundation.
15. Theodora Holding Corp. then brought suit.
ii. Issue
16. Whether the gift was reasonable?
iii. Rule
17. Title 8 Del. C. § 122: every corporation has the power to make donation for the
public welfare or for charitable…
18. Reasonable
19. the Foundation is recognized as a legitimate charitable trust by the Department
of Internal Revenue.
20. Corporations can support charitable organization in which doing so would not
carry a burden on the corporation making the gift.
Chapter 5 – Corporation As Political Actor (P.111-132)
- A corporation is a “person” for many, but not all, purposes. It can own property, enter nto contracts, sue and
be sued, and even have a social conscience.
- A corporation is entitled to equal protection and due process under the law, can seek fair compensation
when gov takes its property, and even has free speech rights.
- However, a corporation cannot adopt a child, or vote for preseidnet… So, is it an artificial being? Creature of
the state?
A. The World Before Citizens United
I. Corp as a “Constitutional Person”
a. Before the Civil War, the question of corporate personhood was first addressed, and Justice
Marshall stated that the corporation is an artificial being created by the state. Therefore, states
could regulate, or even keep out, out-of-state corporations.
b. After the Civil War, the SC expanded the rigths of corporations. The Corp was protected by the
Equal Protection and Due Process Cl of 14th Amend. Corporations were constitutionally
protected as “perosns.”
II. Regulation of Corp as “Political Actor”
a. There were lots of corporate political corruptions, and even brives, were at the center of
allegations of political corruption.
b. So, the Congress prohibited corp from contributing to or supporting the campaign of any
candidate or party in connection with any federal election.
c. Then, Congress passed the Federal Elections Campaign Act (FECA), which allowed political
action committees (PACs). PACs receive voluntary contributions from people with ties to the
corp.
III. Pre-Citizens United Case Law – whether corporations could spend their funds for or against their funds
for or against ballot issues.
a. In 1978, the Court held that the state had no compelling justifications for targeting the
corporate speech when the state allows lobbying by corporations.
b. In 1986, the Court held that the states could not ban politically advocacy by non-profit
corporations.
c. In 1990, the Court reversed and upheld the power of states to ban for-profit corp from
spending their treasury funds for or against political candidates.
B. Court’s Decision in Citizens United
I. The corporation is an artificial entity created by the state, which can regulate its creations when there
are “compelling justifications” or simply “reasonable” concerns about corporate participation in
political speech.
II. The corp has personhood and the state must provide “compelling reasons” to silence its speech.
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III. The corp is a voluntary association in which participants understand that management will speak and
act on behalf of their collective interests.
IV. Case:
a. Citizens United v. Federak Election Commission (P.117)
i. The government may not, under the 1st Amend, suppress political speech on the basis of
thespeaker’s corporate identity.
ii. The disclaimer and disclosure provisions of Bipartisan Campaign Reform Act of 2002
did not violate 1st Amend, as applied to a non-profit corp’s documentary and
advertisements for the documentary.
V. Shareholders can influence management decisions about political expenditures through “through the
procedures of corporate democracy.”
Chapter 6 – Organizatinal Choices (choices of corporation)
A. Alphabet Soup – the principal business forms available today
I. Partnership
a. General Partnership (GP)
i. “association of two or more persons to carry on as co-owners a business for profit.”
ii. Each partner possesses an equal voice in management and the authority.
iii. Each can be held personally liable for all debts of the partnership, as well as torts
committed by other partners within the course of the partnership’s business.
iv. General Partnership is taxed as a pass-through entity
b. Limited Partnership (LP)
i. “partnership formed by two or more persons and having one or more general partners
and one or more limited partners.”
ii. A limited partners have no voice in the active management, general partners have
active voice.
iii. Every general partner is personally liable for business obligations, but every limited
partner’s liability is limited to the capital he has contributed to the partnership.
iv. GPs can limit their liability to whatever amount they have invested, though they are still
liable for tortious conduct.
v. Only General Partners have agency in the business; Limited Partners have NO agency in
the business
vi. Must file certain documents to form a Limited Partnership
vii. A Limited Liability Partnership lifespan is as long as the lifespan of the General Partner
[Corporations can act as General Partners]
viii. Limited Partnership is taxed as pass-through entities
c. Limited Liability Partnership (LLP)
i. Each partner has equal management rights and is an agent for the business.
ii. Only the LLp is liable for business obligations.
iii. Partners personally liable for own tortious conduct or those they supervise.
iv. Must be set up through the state
v. Typically must have liability insurance
d. Limited Liability Limited Partnership (LLLP)
i. The general P has management rights; limited P have restricted governance rights. Only
GP are an agent for the business.
ii. All partners have limited liability.
II. Corporation
a. A legal entity.
b. The management is centralized in the board of directors.
c. Shareholders are liable for the amounts they have agreed to contribute to the corp.
d. S-Corp and Close Corp
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III. Limited liability company

a. Partnership + Corporation
b. a legal entity distinct from its owners, who are called members.
c. Members, like shareholders in a corp, have limited liability. But like partnership, management
in an LLC generally is specified in an operating agreement and can involve either decentralized
member management or centralized manager management.
d. Must be set up through the state, must be in written form [In Illinois recent law allows oral
company to be established]; However; if it is a ONE Member LLC then usually treated as a Sole
Proprietership for both Taxation and Liability purposes
e. Is usually taxed like a partnership unless the LLC elects to file as a corporation
f. Certain fiduciary duties can be waived via contract [but not GOOD FAITH and CARE]
g. Most states prevent professionals from creating LLC [doctors, lawyers, etc.] for professional
purposes [Usually they would form LLP]
B. Default Structures – basic rules of each corporation types
I. Formation
a. GP = no filing fee with the state.
b. Form by consent when two or more enter into a contract.
c. Can be formed without really knowing when two or more associate to carry on as co-owners
for profit.
d. CORP = requires a formal action with the state to incorporate
i. Must file articles of incorporation that contain required information about the
company.
e. Limited Liability = file with the state.
i. LP – a certificate providing the name, designated office, agent for service of process,
identifying general Ps.
ii. LLC – file articles of organization; members enter into an operating agreement that sets
forth the members’ rights and duties.
II. Liability
a. GP = jointly and severly liable for partnership obligations. Has the power to bind the other GP.
b. LP = GP face the same unlimited liability as partners in a GP. The financial exposure is limited to
the amount of their investment in the partnership
c. LLP = like a GP, liable for all tort and contract obligations. GP in LLP can be personally liable
only for partnership obligations.
d. LLC = limits the liability of its members and managers for all of its obligations. Members are
fully in management.
III. Management and Control
a. Corp is centralized in its board of directors.
b. GP has equal voice and management and control.
c. LP, limited partners could not participate in the management of the business without losing the
protection of limited liability.
IV. Financial Rights
a. Corp shareholders have no right to share in business profits, unless the board declares a
dividend based on profits or other distribution of corporate assets.
V. Continuity of Existence (and Withdrawal)
a. Corp = perpetual existence.
b. GP = definite period.
c. LP = continues til the death, bankruptcy or voluntary withdrawal of a limited partner, but the
LP agreement must specify the latest date upon which the partnership must be dissolved.
d. LLC = perpetuity unless operating agreement or articles of organization otherwise provide.
VI. Transferability of Interests
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a. Corporate shareholders are free to transfer their stock without obtaining the consent of the
corp.
i. In close corp, often, owners do restrict on the transfer.
b. In GP, all current partners must consent to the transfer since partners can bind the GP.
i. Allowed to transfer his financial interest.
ii. EX) partners can pledge their GP financial interest to obtain personal loans, without
having to obtain the consent of the other partners.
c. LP can transfer their financial interests, but the assignee may only exercise governance rights
of a limited partner with the consent of all the remaining partners.
d. LLC permits transferability only of the member’s financial interest.
VII. Mergers and Consolidations
a. Corp can combine through a technique called a merger.
b. The assets and liabilities of both corp in the merger are automatically combined in a surviving
corp.
c. Merger plan sets out the considerations paid to the shareholder and it must be approved by
shareholders of both corps.
C. Planning Considertions – the impact on the economics of the venture and the preferences of the ownership
- How does the business form handle majority and minority interst?
- How does the form haffect the firm’s ability to raise capital?
- What are the tex implications of the choice?
I. Balancing Ownership Interest
a. In GP, minority partners who disagree with decisions bu the majority can withdraw and
dissolve the partnership. The firm’s assets are liquidated or purchased by the majority to
pay share of minority. Often, at-will dissolution brings problems, so planning a partnership
should consider drafting provisions that reduce the risk of opportunism.
II. Economics of the Choice
D. Tax Conseuences – Tax implications of the choice
- The choice of business organization turns on the federal income tax consequences of the choice.
I. Corp v. Partnership
a. Internal Revenue Code classifies that a corp is treated as a taxpaying entity separate from its
shareholders. The corp pays taxes on business income.
b. On the other hand, partnership is treated as an aggregate of individuals rather than a
separate entity. So, the partners must file an information return so the partners know how
much business income or loss to include on the partners’ personal income tax returns.
c. Corp is subject to “double taxation” b/c corp pays taxes for the corp’s income and when it
pays dividends to shareholder, shareholders pay income tax as well.
II. Avoiding Corporate Double Tax
a. Subchapter S – Corp to elect flow-through tax treatment that is similar to that of partnership
b. Zeroing out income – corp pays shareholders deductible salaries, bonuses, rental payments,
or interest to reduce corp taxable income to zero.
Chapter 7 – Forming the Corporation (P.157-171) (how incorporated)
A. Process of Incorporation
I. There are formal requirements to incorporation:
a. Filing fee
b. Articles of incorporation (name of the corp, number of shares, name and address of
incorporator, and the name and address of the corp’s registered office and agent)
i. Provisions that insulate liability
ii. Indemnification provisions
II. After the corp comes into legal existence, an organizational meeting must be held.
a. Election of the board
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b. Adoption of bylaws
c. Appointment of officers
d. Designation of a bank as depository for corporate funds; and
e. Approval of the sale of stock to the initial shareholders
III. Normally, if the business is local, the place of incorporation is local; when business is expected to have
national operations or sell stocks to public incorporate in Delaware.
IV. When representing multiple parties in a business formation, the lawyer will want to help the parties
address fundamental issues of organization, control, governance, finance, and allocation of profit and
risk.
B. Corporate Powers (and the Ultra Vires Doctrine)
I. Under the common law of unltra vires, a corp could not engage in any antivities that are outside the
scope of its defined purposes.
II. Today, modern statute provides that “every corp incorpated under this Act has the purpose of engaging
in any lawful business unless a more limited purpose is set forth in the articles of incorporation.”
III. In close corp, investors use ultra vires doctrine to limit the scope of the corporation’s business and
thus limit management discretion.
C. Defective Incorporation
I. Both parties know there is no corporation
a. Rule: a promoter conracts for the benefit of a corporation that is contemplated but not yet
organixed -> personally liable on the contract in the absence of an agreement otherwise.
b. Further, when corp is later organizaed and receives the benefits of the contract, still in liability
unless the parties agree to discharge the promoter’s liability (novation)
II. Both parties mistakenly believe corporation exists
a. When both parties mistakenly thought there was corp?
i. Equitable Doctrines
b. Under the doctrine of de facto corporation, courts infer liability if 1) the promoters in the
would-be corporation had made a good faith effort to incorporate; 2) the promoters were
unaware that the incorporation had not happened; and 3) the promoters used the corporate
form in a transaction with a third party.
c. Under the doctrine of corporation by estoppel, courts prevent the third party from asserting
the promoter’s liability when the third party had dealth with the business one the assumption
the only recourse would be against the business assets.
Chapter 8 – Actions Binding the Corporation (P173-197) (authority)
A. Board Delegation of Authority to Coroprate Executives
I. Agency
a. Agency is a consensual relationship between two parties, the “principal” and the “agent.”
b. Principal selects agent.
c. Agent is a fiduciary of the principal.
i. Duties of care, loyalty, and obedience.
d. ACTUAL AUTHORITY [Actual express authority]
i. The principal manifests consent to the agent to bind the principal (by telling the
agent to sign a contract)
ii. Express, explicit words or conduct tranting the agent power to bind the principal.
iii. EX) JMLS gave actual authority to Prof. Mock to teach Corporations class.
e. IMPLIED AUTHORITY [Express authority is the authority which the principal has expressly
given to the agent whether orally or in writing. Implied authority (sometimes described as
usual authority) is the authority of an agent to do acts which are reasonably incidental to and
necessary for the effective performance of his duties. ]
f. APPARENT AUTHORITY
i. By written or spoken words or any other conduct, reasonable interpreted, causes a
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third person to believe that the principal has consented to the agent action for her.
ii. Saying to third party
iii. EX) Microsoft(Principal) makes the announcement that Y is its sale agent. Ulthough
Microsoft did not give actual authority to make sale, Y can sell.
g. INHERENT AGENCY POWER
i. The agency relationship to protect third parties, despite the absence of actual or
apparent authority.
ii. EX) a reasonable would think that the person in this position has certain authority.
h. Ratification[Principal says after the fact that the agent has not legitimate power; however, the
company accepts it and binds itself to actions of the false/unauthorized agent. (ONLY THE
PRINCIPAL CAN RATIFY)]
i. Menard, Inc. v. Dage-MTI, Inc. (P.181)
II. Basic Corporate Governance Structure:
a. Directors: manage the corp’s business.
b. Officers and Employees: carry on day-to-day operations under power delegated by the board
c. Shareholders: cannot bind the corp.
B. Formalities of Board Action
- The board is a collegial body. By consulting together, board members may draw on each other’s knowledge
and experience to produce better results than if the directors act w/o meeting.
- Unanimous director approval. When all the directors separately approce a transaction, a meeting will
ususally not serve any purpose.
- In emergency where the board must make very quick decisions to prevent great harm or to take advantage
of great opportunity.
- Unanimous shareholder approval: if all the shareholders meet, the conclusion they reach will likely bind the
corp.
- Majority shareholder-director approval.
- Notice and Quorum requirements apply!
- 1. Notice -> 2. Agenda [must have fair notice of any major item] -> 3. Quorum [once you have a quorum, you
are entitled to start the meeting] -> 4. Vote -> 5. Minutes
- Google Robert’s rule
C. Legal Opinions
Chapter 18 – Board Decision Making (A,B) (P.521-551)
 Essential Questions:
o How protected are directors from personal liability for Board decision?
o What are the Budiness Judgment Rule, the Duty of Care, and the Duty of Loyalty?
o How do these all relate to each other?
A. Business Judment Rule
I. Fiduciary Duties:
a. Duty of care: a duty to act honestly, in good faith, and in an informed manner.
i. Directors should reasonably believe they were acting in the best interest of the
corporation.
b. Duty of loyalty: a duty to avoid self dealing.
i. Directors cannot wear two hats – having a personal stake in a corporation that gives
conflict of interest.
II. BJR traditionally protects directors from liability for business decisions, even those that result in losses
to the corporation.
a. As a procedural matter, the BJR creates a rebuttable presumption that the directors exercised
reasonable diligence and acted in good faith.
b. BJR reflects the view that directors are better than courts at making business judgments.
c. Courts should not second-guess directors unless it is clear the court is in a better position to
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protect corporate interests.

III. Case:
a. Shlensky v. Wrigley (P.524)
B. Smith v. Van Gorkom
Chapter 9 – Numeracy for Corporate Lawyers (P.201-244) (A-F)
 Essential questions:
o What is the basic formula of corporate accounting?
o How is ownership expressed in financial statements?
o How do you read a balance sheet?
o How do you read an income statement?
o How do financial statements express, and sometimes hide, the realities of a corporation’s well-
being?
A. Financial Accounting for Lawyers
a. Stages of accounting
i. Recording and controls: a company records in its books information concerning every
transaction in which it is involved.
ii. Audit stage: the company with the assistance of independent accountants verifies the
accuracy of the information.
iii. Accounting stage: the company classifies and analyzes the audited information and presents
it in a set of financial statements.
B. The Fundamental Equation
a. ASSETS = LIABILITIES + EQUITY
i. Assets = the property, both tangible and intangible.
ii. Liabilities = the amount that the firm owes to others.
iii. Equity = the accounting value of the interest of the firm’s owners. When the firm makes
money, equity will increase; when the firm loses money, the equity will decrese.
C. Balance Sheet
a. Assets
i. Current assets: cash and other assets that in the normal course of business will be converted
into cash in the reasonably near futhre, generally within one year of the date of the balance
sheet.
ii. Cash: money actually in hand and deposited in the bank.
iii. Accounts receivable (A/R): amounts not yet collected from customers to whom goods have
been shipped or services delivered.
1. Two reasons for the increase of A/R: 1) sales might have increased; or 2) sales did
not increase but customers were paying slowly or not at all.
iv. Inventory: goods held for use in production or for sale to customers.
1. Increase in inventory could mean that sales are increasing or customers are buying
less now.
2. Inventory reporting:
a. Average cost: inventory is sold at radom from bin
b. FIFO: inventory is pushed through a pipeline
c. LIFO: inventory is added and sold from the top of a stack
3. *if the cost of inventory is increasing, a company using LIFO will record a lower
inventory value, lower profits, and lower taxes.
4. *the company using FIFO will record a higher inventory value, higher profits and
higher taxes. Higher costs reduce income and therefore reduce taxes, whereas lower
costs have the opposite effect.
v. Prepaid expenses: payments the corporation has made in advance for services it will receive
in the coming year.
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vi. Fixed assets (long-term assets): assets that are not expected to be overturned into cash into
cash within a year.
1. PP&E = Property, Plant and Equipment. You record purchase price of land.
Machinery can be misrepresented by not using the porper depreciation rate.
2. Depreciation: GAAP requires the firm charge a portion of the fixed assest’s costs
against the revenue received during the period the fixed assets are in use.
vii. Intangible assets: things like TV franchise, patent and trademarks. GAAP requires firms to
carry intangible asset at cost, less an allowance for depreciation.
b. Liabilities
i. Current liabilities: the debts a firm owes that must be paid within one year of the balance
sheet date.
1. Accounts payable: short term obligations
2. Expenses payable: short-term debts the firm has incurred but not yet paid.
ii. Long-term liabilities: debts due more than one year from the balance sheet date.
1. Mortgages and bonds
2. Off-balance sheet liabilities: transactions that involve longer-term financial
obligations, but which, because of their form, are not recorded as liabilities on the
balance sheet.
c. Equity
i. It represents the owners’ interest in a firm.
ii. Equity has 2 components:
1. Paid-in capital: reflects the total amount the corp has received from those who have
purchased its stock.
2. Retained earnings/earned surplus: reflects the cumulative results of the corp’s
operations over the period since it was formed.
d. Analysis
i. Current ratio: computed by dividing current assets by current liabilities.
1. At least 2:1 – current assets at least twice as large as current liabilities.
ii. Debt-equity ratio: dividing a firm’s long-term debt by the book value of its equity.
1. More than 1:1 – the firm is relying principally on borrowed capital.
iii. Interest-coverage ratio: dividing the firm’s annual earning by the annual interest payments
due on its long-term debt.
1. A ratio of at least 3;1 is typically a safe investment.
iv. Working Capital = Current Assets – Current Liabilities
v. Current Ratio = Current Assets / Current Liabilities
vi. Quick Assets -> Cash + Reliable Accounts Recievable
vii. Liquidity Ratio = Quick Assets / Current Liabilities
D. Income Statement
a. It is the bridge between successive balance sheets, in that it records whether the firm realized a
profit or loss during the period between successive balance sheets.
b. Net Income = the increase in the balance sheet value of equity
c. The GAAP requirement that most firms use accrual accounting to prepare their finantical
statements is central.
i. Realization Principle: a firm must recognize revenue in the period that services are
rendered or good are shipped, even if payment is not received in that period.
ii. Matching Principle, a firm must allocate the expenses it incurred to generate certain
revenues to the period in which those revenues are recognized.
d. Income statement items
i. Net Sales/revenue: the total value of the firm’s revenue during the relevant year.
ii. Operating expenses: deduct the cost of items sold from inventory (Cost of Goods Sold). Next
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deduct depreciation, a non-cash expense that represents the decline in the value of fixed
assets that we match (increasing b/c fixed assets’ depreciating increased). Next deduct
selling and admin expense, it can include things like salaries. Next deduct Reaserach and
development (R&D). Decline in R&D could mean it is not spending much in R&D which
could impact future sales, Decline could bring some increase in profit.
*Net Sales – Operating expenses = Operating Income
iii. EBITDA(Earning Before Interest, Taxes, Depreciation, and Amortization): it represents net
sales minus all operating expenses except depreciation. So, you would simply add
depreciation to operating income.
1. It gives a clearer sense of how much money the firm generated from its “core”
business, just taking into account operations, and not accounting for non-cash items.
iv. Interest expense and taxes: Interest expense represents the amount of interest the firm paid
on its debt during the year. Income before taxes is obtained by subtracting interest expense
from operating income.
v. Net income: It is the link between the balance sheet and cash flow statement. hatever is left
from net income, after a firm pays dividends, goes to the retained earning section of the
firm’s balance sheet.
1. Big jump in net income -> 1) increase in profit margin; 2) increase in sales; 3) or
reduced significantly either its interest expense or the percentage of income it was
paying as taxes.
e. Comparison of Income Statement to Balance Sheet Items.
i. Return on equity
1. Compute by dividing equity at the end of the previous year into the net income
reported for the current year.
E. Statement of Cash Flows
a. Cash is important in the sense that a firm has to pay its bills, repay its debts, and make distributions
to its owners.
b. The statement splits into three parts: operating activities, investing activities, or financing activities.
i. Operating act.: primary importance, b/c it is the best indicator of how much cash the firm is
generating from its core operations.
ii. Investing act.: reflects how much cash the firm invested.
iii. Financing act.: reflects gow much cash the firm borrowed.
F. The Basics of Valuation
a. The Old Man and the Tree Story: an old man owned an apple tree which produced each year apples
that the man sold for $100. He puts it for sale.
i. Asset Value: The value of the tree itself is $50 (selling it for firewood) or the purchase value
of the tree ($75) -> only looking at the value of asset and not looking at the apples it
produces. SO, the book value would give the value of the firm. However, we better adjust the
numbers so we are left with more liable numbers than book value’s static numbers.
ii. Earnings Method: $100 since that is what the tree can make each year or $3000 for thirty
years worth of producing. -> not considering the value of money in the future. So, use a
price-earnings ratio (P/E ratio -> net income x the ratio)
iii. Market comparables: you can consider an active market value to get the value.
iv. Captialization of earning: $100 - $expenses - $depreciation - $taxes -> net income. However,
there could be some other risks.
v. Discounted Cash Flow. Assumes that the value of a business is the sum of all of its future
cash returns, each discounted to present value. First, calculate the company’s expected
stream of cash flows (done by normalizing and adjusting accounting earnings)
Chapter 10 – Capital Structure(P.245-284) (A-C3)
A. Slicing up the Corporation: Some Details on Capital Structure
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- Capital structure = structure of the right hand side of the balance sheet. How the corporation raised its
capital?
- The value of the corp depends on its income-producing assets, not hether it bought those assets by issuing
equity or debt or some fraction of each.
- Corp can use securitieis to allocate control, profit, and risk to various investors.
- Corp securities into two broad categories: equity and debt.
o Equity: permanent commitments of capital to a corporation. Returns depend on corp’s earning a
profit. Might share in the corp’s assets in the event of liquidation. Exert more control over the corp
by electing the board.
o Debt: capital invested for a limited period of time or temporary contributions of capital. Priorty in
terms of payment if the fim becomes insolvent or liquidates voluntarily. Less risk, so only a fixed
return. Holders can place liens.
I. The Drama of Widget, Inc.
a. Justin, Kthy, and Lorenzo EXERCISE
II. Equity Securities
a. Two basic kinds of equity securities:
i. Common share
1. All corporations must have at least share of common stock and thus it is the most
common type of security. It has 1 dividend right, 1 voting right, and 1 liquidation
right.
2. Have the exclusive power to elct a corporation’s board of directors.
3. “residual claim” on both the current income and the assets of a corporation. They
are the las to claim any income. No income, then nothing.
4. Common shareholders can sell their shares to other investors and exit their
investment.
ii. Preferred share
1. Economic rights senior to those customarily assigned to common shares.
2. Always has dividend rights senior to those of common shares.
3. They usually the amount they get paid is typically fixed at the outset.
4. “cumulative” preferred – if a dividend is not paid when due, the right to receive that
dividend accumulates and all accrued dividend arrearages must be paid before any
dividends can be paid on common shares.
5. “participating” preferred – shares will receive dividends whenever they are paid on
common shares, either in the same amount a or as a multiple of the amount paid on
common shares.
6.
III. Debt Securities
a. It represents a corporate liabilities. They also can be labeled as notes, debentures, or bonds
i. Notes and debentures typically have shorter maturities than bonds, and debentures are
usually not secured by corporate assets.
b. Bond
i. Typically fixed by a contract known as a indenture.
ii. Certain fundamental terms are set forth in every debt contract.
iii. Interest must be paid at periodic intervals regardless of the corp earning a profit.
iv. If a corporation fails to make an interest payment, it results in a default and could
accelerate the due date of the principal to make it due immediately.
v. Convertible debenture: the right to convert bonds into common shares.
vi. A corp board has the authority to issue debt securities without shareholder approval.
However, in ase it is for bond’s conversion rights to common, then approval is needed.
IV. Options
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a. the right to buy securities, typically common shares, at a specified time and price.
b. Contigent claims b/c they are assets whose value and future payoff depend on the outcome of some
uncertain contingent event.
c. A party who owns an option has a contractual right but not any contractual obligation.
d. Call option: the right to buy; put option: right to sell
e. Strike price or exercise price: price specified in an option.
f. Maturity date or expiration date: date specified in an option.
B. Capital Structure in the Real World: Taxes, Bankruptcy, and Conflicts
I. Taxes
a. Internal Revenue Code gives corporations a powerful incentive to favor debt in their capital
structure.
b. Allows to deduct from their taxable income all interest paid on bonds they have issued.
II. Bankruptcy and Leverage
a. Leverage: financing business activities with borrowed money whenever it can earn more income
from those activities than it will pay in interet on the borrowed money.
b. If a corp earns less from the activities being financed than the intrest on the borrowed money, the
corp’s income will decline because the corp must pay interest on the borrowed funds whether or
not the investment is profitable.
c. Essentially, leveraging debt will increase the percentages gained and lost. Risk seekers will typically
leverage their debt due to the high upside.
III. Tension in the Capital Structure
a. the capital structure creates tension among the parties who contribute money to the corporation.
i. Ex) corp might use debt as a disciplining device to constrain managers, who might be less
likely to slack if they must be sure the corp repays its debts.
b. Equity is an option.
c. Qeuity-Linked Investors, L.P. v. Adams (P.265)
IV. Authorized Stock
a. The Articles of Incorporation must include how many shares the corporation is authorized to issue.
i. Shares that are authorized but not issued do not count towards the percentage of
ownership.
b. If a corporation wants to authorize more shares later on down the road the Articles will need to be
amended.
c. This is one of the areas where you need to consider the shifting of power between the board and
shareholders.
i. If a corporation initially authorizes an excessive amount of shares to avoid the amendment
process to increase authorized shares later on, the power is shifted to the Board because
they can unilaterally decide to issue them.
ii. If they authorize a small amount initially and need to issue more later on to raise capital,
the power shifts to the shareholders since they can make the Board go through hoops of
amending the articles.
d. Once they are issued to a shareholder, they are “issued and outstanding”. If they are bought back by
the corporation, they become “treasury stocks”.
e. Preemptive Rights- Any new issuance of stock from the company requires that shareholders get the
first opportunity to buy a proportionate amount to what they currently own.
i. If everyone exercises their preemptive rights, it is a way for a corporation to raise money
from the shareholders.
C. Capital Structure Law and Policy
I. Legal Capital (the payment of distributions to shareholder)
a. aks “stated capital”
b. representing a cushion of capital designed to protect debt holders.
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c. This is an outdated fiction based on “Par Value”

d. Legal capital = outstanding shares x par value
II. Par Value
a. An arbitrary number set by the corporation and is provided in the Articles of Incorporation.
a. Modern Par Value Notes
i. Corporate lawyers typically avoid problems by setting par value far below the price at which
the corporation plans to sell its shares.
ii. Now, states generally prohibit corporations from making distributions that will render them
unable to pay debts or make them essentially insolvent.
1. When an unlawful distribution leads to creditor losses, the directors who authorized
the distribution can be held liable.
Chapter 14 – Shareholder Voting Rights (P.3490395) (A-D)
- Voting is one of the central issues in corporate governance
- Shareholders frequently decide whether to approve certain fundamental transactions – such as mergers,
sale of the corporation’s significant business assets, voluntary dissolution of the corporation, and
amendments to the articles of incorporation.
A. Basics of Shareholder Voting
I. Shareholder Meetings
a. S/H act regularly at regularly scheduled annual meetings, and at special meetings.
b. At the annual meeting -> electing directors.
c. SH can act by means of written consent instead of a meeting.
II. Shareholder Voting Procedure
a. SH must receive written notice of the sh meeting.
i. At least 10 days but no more than 60 days before the meeting. Special meeting must have
the purpose of the meeting as well.
b. Most statutes require a quorum equal to the majority of shares entitled to vote.
i. The quorum can be increased or decreased in the articels or bylaws
ii. Delaware require a quorum of at least one-third.
c. SH can either vote in person or vote by proxy.
i. Proxy is simply the signed appointment in writing of an agent to appear and vote on
behalf of the SH.
ii. The proxy can be revoked by the SH at any time by submitting a notice of revocation,
signing a laterdated proxy, or appearing in person at the meeting.
III. Shareholder Voting Rights
a. One share – one vote (normally).
i. There could be more or less voting rights according to the articles of corp or different
class of shares.
b. Simple majority: which side gets more vote… (out of 100 SH, 60 came. -> 31 required)
c. Absolute majority: a majority of the outstanding stock of the corp (out of 100 SH, 60 came -> 51
required)
B. SH Rights in Fundamental Transactions
I. Shareholder Voting and Appraisal Rights
a. Certain fundamental corporate changes must be approved by a SH majority.
i. It is like a veto power; they cannot initiate the action, but they can block the changes.
b. Appraisal Rights- A shareholder can dissent from certain transactions and demand that the
corporation pay him in cash the ‘fair value’ of his shares as determined by a court in an appraisal
proceeding, even though the majority shareholders approve the transaction.
II. Shareholder Rights in Corporate Combinations
a. A corp combination places the business operations of two or more corporations under the control
of one management.
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i. Statutory Merger
1. Parent corp and Target corp begin as separate legal entities and end up as one entity.
P and T adopt a plan of merger that designate which copr is to survive the merger;
describes the terms and conditions of the merger; specifies how shares of T will be
converted into shares of P; and sets forth any amendments to P’s articles of
incorporation necessary to effectuate the plan of merger.
2. Then, SH from both P and T approve. (Delaware require absolute majority)(MBCA
requires simple majority of T)(if dilutive share issuance where P is to issue new
shares with voting power, vote by P SH required)
3. All of T’s assets move to P as well as liabilities.
4. Appraisal rigths
i. Current MBCA –> available only to T SH who are entitled to vote on
the merge and not subject to a “market out” exception. (same as
Dela)
ii. Market out exception assumes SH dissatisfied with the terms of a
merger do not need a judicical valuation remedy if there is a public
market for their stocks.
ii. Triangular merger
1. P creates a subsidiary corp, S, and S and T then engage in a statutory merger, with T
merged into S.
i. It is S not P that distributes its shares or cash to T
ii. P SH do not vote on the merger b/c P sis not a party to the merger
agreement.
iii. S is the owner of T’s property and assumes liabilities.
iii. Sale of assets
1. P can buy the assets of T
2. Appraisal is not an option for T if the corp is in Dela.
iv. Tender offer
1. P can also acquire of T by offering to purchase T shares directly from T SH.
2. P can acquire T w/o T’s board approval.
III. SH Power to Initiate Action
a. Three SH power:
i. To make recommendations
1. Auer v. Dressel (P.364)
ii. To remove and/or replace directors
1. The power to remove directors for cause is inherent to the shareholders.
2. The directors must be given notice of the charges, however, and be able to answer
the charges before or at the same time as the proxies are sent out to shareholders to
vote.
3. Campbell v. Loew’s, Inc. (P.367)
i. Delaware law on removal of directors on page 372. DGCL §141
iii. To amend by-laws
1. Granted by DGCL. 8 Del. C. §109(a). (pg. 375). This power is not coextensive with the
board’s concurrent power and is limited by the board’s management prerogatives
under Section 141(a).
2. CA, Inc. v. AFSCME Employee Pension Plan (P.373)
i. A proposed Bylaw is proper shareholder action if it pertains to
process rather than substantive mandates
ii. A proposed Bylaw is invalid if under any situation it would require
mandated action that would require a director to breach a fiduciary
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duty
IV. Board Responses to SH Initiatives
a. DGCL § 228 Consent of Stockholders in Lieu of Meeting (P.385)
b. Blasius Industries, Inc. v. Atlas Corp (P.386)
i. interference with shareholder voting is not per se a violation, but board action like that
will be invalidated if there is not compelling reasons to thwart a shareholder vote.
ii. Board action that delays the ability of subsequent boards to manage the corporation
under §141 is beyond the power of the board
Chapter 11- Piercing the Corporate Veil (P.287-318)
- The shifting of costs created by the corporation to persons outside the corporation.
- PCV arises when the corp lacks sufficient assets to satisfy a P’sclaim, and the P seeks to hold insiders with
deeper pockets responsible fore their losses.
A. Piercing Scorecard
- PCV is an equitable doctrine created by the courts to prevent fraud and achieve justice. PCV allows you to go
after the assets of the shareholder of the corporation
I. Corp is closely-held.
a. Close corporation shareholder-managers typically have more to gain personally by taking risks that
shift losses to creditors than public companies.
II. Insiders deceived creditors
III. Insiders failed to observe corp formalities
a. Whether failed to hold regular corp meetings, obtain board authorizations, or keep proper
minutes…
IV. Insiders commingled business and personal assets.
V. Insiders did not adequately capitalize the business
a. Courts are reluctant to permit insiders to externalize the risks of the business and place them on
outsiders.
b. Was a question in the Walkovsky case, court declined to PCV.
VI. D actively participated in the business
a. Passive shareholders are less likely to have acted to disadvantage creditors.
B. Piercing Policy
I. First, why would states allow SH to limit their liability? Why give them such “gift”?
a. Meant to encourage capital formation from many smaller investors.
b. Permitting to have the firm to be centrally managed.
c. Promotes the organization of large, publicly-held corps.
II. Alternative Exceptions to Limited Liability
a. Different options outside of PCV:
i. Fraudulent Conveyance
1. Courts can set aside transactions that defraud creditors
2. The Uniform Fraudulent Conveyance Act (UFCA) protects creditors from: (1)
transfers with the intent to defraud creditors; and (2) transfers that constructively
defraud creditors.
3. Limitations: UFCA requires a specific finding of a fraudulent transaction (may be
difficult to establish); It only allows for specific transactions which may not be
enough to satisfy creditor’s claim.
ii. Equitable Subordination
1. Applicable only in federal bankruptcy; it subordinates some creditor’s claims to
reach an equitable result.
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2. It allows outside creditors to receive payment before insiders

3. Limitation: Before it is invoked, there must be a showing of fraudulent conduct,
mismanagement, or inadequate capitalization
i. Also, it does not increase the overall size of the pie to creditors; and it
does not hold shareholders personally liable.
C. Piercing in Tort Cases
- P seeks to PCV of the corporate tortfeasor and get to a sharehold who has sufficient assets.
- Tort creditor are involuntary; meaning they have limited opportunities to protect themselves from a corp
that causes them a loss.
I. Walkovszky v. Carlton (P.294)
a. Plaintiff was struck by a cab due to driver negligence. The cab was owned by Seon Cab Corp.
b. The owner of Seon was claimed to be stockholder of 10 corporations with two cabs
registered each and the minimum level of insurance each.
c. These corporations were alleged to operate as a single entity and enterprise with regards to
financing, supplies, repairs, employees and garaging. The plaintiff sought to hold each
stockholder personally liable because the structure was an attempt to “defraud the general
public”.
i. Stockholders not held liable.
ii. There was no evidence that the defendants were doing business in their individual
capacity, shuttling personal funds in and out “without regard to formality”.
iii. The court may not disregard the corporate form solely because the recovery is not
equal to what is sought.
II. Radaszewski v. Telecom Corp. (P.298)
a. Plaintiff was injured in an automobile accident when his motorcycle was hit by a truck
driven by an employee of Contrux, Inc.
b. Telecom Corp is the corporate parent of Contrux and plaintiff sought to hold Telecom liable
for the injuries.
i. Telecom couldn’t be held liable for actions taken by Contrux.
ii. Under Missouri law, to PCV the plaintiff must show:
1. The corporate entity had complete control;
2. Such control must have been used by the corporation to commit fraud or
wrong, to perpetuate the violation of statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff’s legal rights;
3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained.
iii. The plaintiff did not prove the second element even though they argued
undercapitalization by using an insolvent insurance company which they owned.
iv. The corporation was considered financially responsible under applicable federal
regulation. There was no proof they knew the insurance company was going to be
insolvent
D. Piercing in Contract Cases
- P seeks to PCV of the corporate counterparty and recover from a shareholder who is not a party to the
agreement.
- They are voluntary.
- Corp can make Misrepresentation to harm Ps.
I. Freeman v. Complex Computing Co. (P.303)
a. Glazier developed a software program and after it was licensed gave plaintiff the right to sell
the product.
b. Glazier was the sole signatory on C3’s bank account and had complete control over all its
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actions. Eventually he sold the right to sell the product to a different person, and the plaintiff
was thus denied commissions, other payments, etc.
i. PCV should be allowed because Glazier was an equitable owner of the corporation.
Requirements to PCV was similar to Contrux case.
ii. C3 did not observe the corporate formalities.
II. Theberge v. Darbro, Inc. (P.310)
a. PCV was not allowed because defendant did not act fraudulently or illegally.
b. The court believed they acted shrewdly and employed sharp business practice.
E. Piercing in Corporate Groups
- P seeks to PCV of a wrongdoing subsidiary to recover from its parent, or to recover from some other entity
or entities related to the worngdower.
- PCV may be attempted in this case where: (1) a plaintiff seeks to recover from a parent for injuries caused
by a subsidiary; and (2) a plaintiff seeks to recover from affiliates if neither the corporation that caused the
injury nor the parent corporation has sufficient assets.
I. Gardemal v. Westin Hotel Co. (P.312)
a. Wife of decedent brought wrongful death action against Westin when her husband died while
snorkeling on vacation at a subsidiary.
b. She argued liability could be imputed because Westin Mexico was the alter ego of Westin or on the
theory of single enterprise.
i. Neither could be held liable. The record showed a typical corporate relationship between
a parent and a subsidiary.
ii. The two corporations did not abuse the corporate form.
II. OTR Associates v. IBC Services, Inc. (P.315)
a. OTR owned a shopping mall in NJ, and leased a space to IBC, who purported to be a Blimpie
franchise.
b. The relationship eventually deteriorated and resulted in lack of rent payments leading to eviction.
Blimpie was required to pay $208,000 and appealed.
i. PCV allowed. IBC continually led OTR to believe that they were a Blimpie franchise and
OTR expected to be dealing with a nationally respected and financially responsible
corporation.
ii. IBC was also created only to hold leases for Blimpie; evidence showed they held many
leases similar to the one in this case.
Chapter 15 – Shareholder Information Rights (P.396-421)
- To exercise fully their rights, Sh often must obtain information from the corp.
- State law allows SH to inspect corporate books and records if they have proper purpose.
- Federal law requires that SH in public corp receive a formal disclosure document called a “proxy statement”
- Federal law requires that any communication soliciting SH votes be honest and complete.
- Often, it is a pre-litigation tool for SH to obtain information from their corp.
A. SH Inspection Rights
- DGCL § 220 Inspection of Books and Records, P398.
o Must make written demand stating a proper purpose to inspect a stock ledger…
o Proper purpose: a purpose reasonably related to such person’s intrest as a stockholder.
I. Proper Purpose
a. Cases:
i. State ex rel. Phillsbury v. Honeywell, Inc. (P.400)
1. Charles Pillsbury wanted to stop production of anti-personnel bombs by Honeywell
to be used in Vietnam.
2. He purchased 100 shares for the sole purpose of gaining a voice in the company and
requested a shareholders’ list to solicit proxies to elect new directors.
i. Pillsbury is not entitled to the documents because he does not satisfy
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the proper purpose requirement.

ii. Proper purpose refers to concern with a shareholder’s economic
interest in the corporation. Pillsbury’s sole interest is to extend his
societal and political beliefs against the war in Vietnam.
iii. His purpose was irrespective of any economic benefit to himself or
Honeywell.
3. The BJR will be a huge obstacle for any shareholder to accomplish what Pillsbury
was attempting to do (convert social motivations to corporate action).
i. The Board ultimately retains the decision where to invest money and
those decisions are strongly insulated by the BJR.
ii. Saito v. McKesson HBOC, Inc. (P.403)
1. Saito bought stock in McKesson while they were negotiating a merger with HBOC.
The merger was finalized a few months after Saito purchased stock.
2. Following announcements of poor finances during the first year (due to HBOC
accounting errors), Saito requested documents to improve his derivative complaint.
The Chancery Court denied three of the requested documents: 1) records that
predated his purchase of McKesson stock, 2) documents created by third party
financial advisors, 3) any HBOC documents.
i. Saito was entitled to all three types of records denied by the
Chancery Court.
ii. The date on which a stockholder first acquires corporate stock does
not control the scope of records available to them.
1. A potential derivative claim may involve a continuing wrong
that both predates and postdates the purchase of stock.
2. The alleged post-purchase date wrongs may have foundation
in prior events.
iii. Since McKesson and McKesson HBOC relied on financial and
accounting advisors to evaluate HBOC’s condition, those reports
were critical to Saito’s complaint and could receive those documents.
iv. Stockholders of a parent company are not entitled to inspect a
subsidiary’s books and records absent a showing of fraud or if they
are a mere alter ego; however, it does not apply to relevant
documents that HBOC gave to McKesson before the merger, or to
McKesson HBOC after the merger
II. Stockholer List
- In US, corps are required to maintain records that list the names of stockholders of record – persons
holding legal title to outstanding shares of stock.
- Now, with advance of electronic data storage, most investros in public corp are nor record holders, but
instead hold their stock in nominee accounts in “street name.”
- Most stock brokerage firms holds their customers’ stocks.
- Corp can ask Depositary Trust to prepare a “CEDE breakdown” – a list of all brokerage firms and
institutions holding stock in the name of…
III. SH standing and “Encumbered Shares”
a. a normal share (long position)
i. if share price goes up, you have made money.
b. a “shorted” share (short position) -> you borrow a share from a broker and then sell the share.
i. You get the money up front, but you have the obligation to return the share.
ii. If share price goes up, you lose money b/c you have to buy more expensive share to
return.
c. Some investors might have more short positions, so that she would make money if the share price
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declines… Such an investor would not have the economic incentives of a shareholder.
i. Dela court held that the investor owning both long and short shares have inspection rights
based on its long positions.
B. Information Required for SH voting
I. State Law
a. requires notice of when and where the meeting will happen. No matters
b. BUT, if special meeting, sh must be provided with notice of the matter to be voted on.
II. SEC Rules
a. Federal law says SH in public corp receive extensive information on all matters on which they are
asked to vote on.
b. SEC requires that any solicitation, whether by management of by another SH, seeking SH proxies be
accompanied by a disclosure document callsed a proxy statement.
c. Management of proxy
i. Prepare a proxy statement: a detailed disclosure document describing board candidates
and the matters on which sh will vote.
ii. A form of proxy: the instructions that specify how SH want their shares to be voted.
C. Regulation of Proxy Fraud
- SEC Rule 14(a) on P418
I. Implied Federal Cause of Action
a. P must show 1) a false or misleading statements; 2) of material fact; 3) upon which sh voters relied;
and 4) causing them to suffer losses.
b. In federal proxy fraud action:
i. Wheher federal COA meant that SH are unhappy about the results.
ii. Whether Sh approval corporate merger case
iii. Whether fraud by proxy
II. Duty of Disclosure under State Law
a. Dela used the duty of disclosure(candor) to successfully challenge mergers, reorganizations, and
charter amendments accomplished through false or misleading proxy statements.
Chapter 17 – Shareholder Litigstion (P.479-519)(A-D)
A. Direct v. Derivative (whether the nature of the injury to SH is direct or derivative)
I. Derivative (whether the SH injury was equal)
a. SH bring a suit on behlf of the corp b/c the board of directors has failed to do so.
b. Any amounts recovered belong to the corp.
c. SH-plaintiff can get attorney fees if successful.
II. Direct (Whether the SH injury was special)
a. SH can directly sue on their behalf to vindicate individual rights, rather than corp rights.
i. Protection of financial rights – compel dividends or protect accrued dividend arrearages,
compel dissolution, appoint a receiver, or obtain similar equitable relief.
ii. Protction of voting rights - enforce right to vote
iii. Protection of governance righs – enjoin an ultra vires or unauthorized act, challenge the
use of corp assets for a wrongful purpose.
iv. Protections of minority rights – challenge things like merger…
v. Protection of informational rights – inspect corp books and records.
III. Tooley v. Donaldson, Lufkin, & Jenrette, Inc. (P.483)
a. Rule: The analysis to determine whether something is a direct or derivative action is two-fold: 1)
Who suffered the alleged harm—the corporation or the suing stockholder individually; 2) who
would receive the benefit of the recovery or other remedy?
i. The stockholder’s claimed direct injury must be independent of any alleged injury to the
corporation.
ii. The stockholder in a direct action must demonstrate that the duty breached was owed to
23
the stockholder and that he or she can prevail w/out showing an injury to the corporation.
B. Demand Requirement
I. FRCP 23.1 or Dela Chancery Court Rule 23.1
a. The complaint in a derivative suit shall allege with particularity the wfforts, if any, made by the P to
obtain the action P desires from the directors and the reason for the P’s failure to obtain the action
or for no making the effort.
b. When would demand be excused as futile?
i. Aronson v. Lewis (P.489)
ii. Rule: Demand will only be excused when there are facts alleged with particularity which
create a reasonable doubt that the directors’ actions were entitled to the BJR. Two-Part
Test:
iii. The directors are disinterested and independent; and
iv. The challenged transaction was otherwise the product of a valid exercise of business
judgment.
v. If these are both satisfied, demand is not futile.
vi. NOTE
c. MBCA Demand Requirement (MBCA §7.42)
i. Demand is required on the board in all derivative suits, and then the claimant-shareholder
must wait 90 days for the board to take corrective action.
ii. Once the 90 days expire, the shareholders may then bring the derivative claim in court.
iii. If the board rejects the demand, the shareholder must plead with particularity that the
board’s rejection was flawed because it was either not informed, not disinterested, or not
in good faith.
d. Special Litigation Committee
i. Einhorn v. Culea (P.501)
C. Who Qualifies for Plaintiff?
- Generally, there is an ‘adequacy’ and ‘standing’ requirement.
- Adequacy- In the vast majority of decisions, so long as a plaintiff is represented by a qualified attorney and
does not have interests antagonistic to the class or the corporation adequacy is satisfied.
o A representative plaintiff will not be barred from the courthouse for lack of proficiency in matters of
law and finance and in poor health so long as they have competent support from advisors and
attorneys and is free from disabling conflicts. In re Fuqua Industries, Inc. Shareholder Litigation (Del.
Ch. 1999).
- Standing- See above explanation requiring shareholder must be owner throughout the litigation
Chapter 19 – Board Oversight (P.565-606)
- Directors are not expected to directly oversee every aspect of a corporation’s business. However, the
‘oversight’ function is increasingly important with respect to managing the financial and regulatory risks
that corporations face.
o Have to keep the BJR in the back of your mind; courts will generally presume directors have acted in
the best interests of the corporation in exercising the oversight function.
A. “Classic” Case of Oversight Failure
I. Francis v. United Jersey Bank (P.566)
a. Family company was in the business of reinsurance. The board had four directors: father, mother, and two
sons.
b. After the father passed away, the sons operated the business for 5 years, and were borrowing money from
the company during the float period. The mother was not paying attention and the company ended up
going bankrupt.
24
c. A perusal of the company’s financial statements would demonstrate that there was inappropriate
practices going on.
d. A bankruptcy trustee brought suit on behalf of the creditors which was rare. There was a fiduciary
relationship because the company was holding other people’s money.
i. Most obvious case of director misconduct since the mother never looked at the financial
information or attended meetings, etc.
ii. RULE: Directors, at a minimum, should: (1) have a basic understanding of the business;
(2) A general understanding of the financial status of the corporation; (3) keep informed
of the activities of the corporation, and cannot shut their eyes to corporate misconduct
and then claim it did not see the misconduct; (4) general monitoring of corporate affairs
(i.e. attend meetings)
e. It is okay to rely on other board members and employees for information, but Francis did nothing—she
abdicated her responsibility.
f. Directors are measured on an objective standard—they are required to educate themselves to a minimum
level of expertise for areas necessary to run the business.
i. This allows boards as a whole to consist of directors that are competent, and benefit the
corporation.
g. The minimum standard of care is tailored to the particular director’s expertise (e.g. a financial expert has
a higher standard of care in economic affairs of the corporation)
II. MBCA Provisions
a. §8.30-Standard of Conduct for Directors
i. The standard of care primarily entails a duty of attention.
b. §8.31- Standard of Liability
i. A director may be liable to the corporation or its shareholders for any failure to take any
action as a director if:
i. The challenged conduct consisted or was the result of:
1. A sustained failure of the director to devote attention to
ongoing oversight of the business and affairs of the
corporation.
c. The MBCA underscores the importance of directors to pay attention. They must make informed decisions;
if they aren’t paying attention to the corporation they are essentially useless.
d. The duty of attention is implicit within the duty of care.
B. Oversight of the Modern Corp
I. The Sarbanes-Oxley Act §404 requires managers of public corporations to establish and maintain an
adequate internal control structure and procedures for financial reporting, and include an assessment
of these controls in the corporations’ annual report.
II. Graham v. Allis-Chalmers
a. Plaintiffs alleged because of consent decrees given 26 years ago, the company should have been
aware what was happening currently could harm the corporation.
b. RULE: Directors are entitled to rely on the honesty and integrity of their subordinates until
25
something occurs to put them on suspicion that something is wrong. Absent cause for suspicion,
there is no duty upon the directors to install and operate a corporate system of espionage to ferret
out wrongdoing which they have no reason to suspect exists.
i. Remember, this was before the Sarbanes-Oxley Act.
III. In re Carrmark International Inc. Derivative Litigation (P.577)
a. There are two classes of cases that can result in liability: (1) liability for decisions because the act
was negligent; (2) liability for failure to monitor
i. Liability for decisions are judged under the BJR analysis. This also applies for situations
where the Board makes a conscious decision not to take action.
i. This is different than not noticing an issue, which does not get the BJR
analysis. This passive inaction is analyzed under whether there is a
failure of the duty of care.
ii. Liability for failure to monitor is analyzed by whether the director’s conscious decision
not to act is because monitoring systems are so inadequate the board has no information
to base their action or inaction. Not protected by the BJR.
i. Corporations cannot purposely blindfold themselves.
b. In a Caremark type case the plaintiff must show: either (1) the directors knew; (2) should have
known that violations of law were occurring and, in either event; (3) the directors took no steps in a
good faith effort to prevent or remedy that situation; (4) that such failure proximately resulted in
the losses complained of.
c. RULE: Only a sustained or systematic failure of the board to exercise oversight—such an utter
failure to attempt to assure a reasonable information and reporting system exists—will establish
the lack of good faith that is necessary condition to liability
C. Oversight and “Good Faith”
- When directors rely on experts, courts ask whether the reliance was made in good faith.
- When analyzing independy of directors, courts ask whether the decision was made in good faith.
- Dela § 102(b)(7) states that companies are permitted to limit the personal liability of directors for
monetary damages for breaches of fiduciary duties, with an important exception for actions not in good
faith.
- In the Disney case, the Dela SC stated that a failure to act in good faith amounted to something more than a
violation of the duty of care.
I. Stone v. Ritter (P.586)
a. The failure to act in good faith may result in liability because the requirement to act in good faith is
a subsidiary element of the fundamental duty of loyalty.
b. The fiduciary duty violated by director oversight liability is the duty of loyalty.
c. Director Oversight Liability:
i. The directors utterly failed to implement any reporting or information system or controls;
or
ii. Having implemented such a system or controls, consciously failed to monitor or oversee its
operations thus disabling themselves from being informed or risks or problems requiring
their attention.
1. In either case, imposition of liability requires a showing that the directors knew that
they were not discharging their fiduciary obligations. Where directors fail to act in
the face of a known duty to act, thereby demonstrating a conscious disregard for
their responsibilities, they breach their duty of loyalty by failing to discharge that
fiduciary obligation in good faith.
D. Oversight of Risk Management
I. What approach to risk management?
a. Historically, courts held directors to heightened duties in their role overseeing financial risks.
b. In re Citigroup Inc. Shareholder Derivative Litigation
26
Chapter 20 – Director Conflicts (A-C) (P.607-656)

- The duty of loyalty requires a director to place the corp’s best interests above his or her own.
- Big Q: how should a court evaluate business transactions that affect the corp when a corp fiduciary has a
personal interest that conflicts with corp interest?
A. Statutory Approaches to Director Conflicts
I. The general rule was that a corp or its SH could void a conflicted transaction between a director and
the corp.
II. A director simply was not supposed to engage in self dealing.
III. Gradully changed…more flexible…
a. A conflict of deal was valid if it was 1) approved by a disinterested majority of the other directors,
and 2) was not unfair or fraudulent.
IV. Then, more contemporary statutes (safe harbor approach to highlight who is an interested party, what
is conflict of interest, and who are qualified directors)
a. DGCL § 144
i. An interested-director transaction will not automatically be void or voidable if either
there has been informed, disinterested board approval, or informaed SH approval, or the
transaction is fair to the corp.
b. MCBA § 8.31
i. Standards for director liability
ii. Self-dealing is appropriate when a director’s conflicting interest transaction is immune
from attack if it is authorized by qualified directors, disinterested SH, or a court under a
fairness standard.
iii. Director Conflicting Interest Transaction (DCIT)- A transaction in which the director is (1)
a party; (2) has a material financial interest, or (3) knows that a related person is a party
or had a material financial interest.
iv. Material Financial Interest- One that would reasonably be expected to impair the
director’s judgment when authorizing the transaction.
v. Related Person- Someone on a precisely enumerated family tree, someone who lives in the
director’s house, and entity controlled by the director or someone on the family tree, an
entity in which the director serves as director, partner, or trustee, or an entity controlled
by the director’s employer.
vi. Qualified Director- Someone who does not have a conflicting interest in the transaction or
one who has no “material relationship” with a conflicted director.
V. Remillard Brick Co. Remillard-Dandini Co. (P.610) Traditional Approach
a. Stanley and Sturgis used their control of the boards of both companies to have a manufacturing
company enter into contracts with the sales corporation, so that the manufacturing corporation
were stripped of their sales function.
b. Minority shareholders who owned approximately 40% in the manufacturing company at first, now
owns like 12% of a corporation that is worth next to nothing.
i. This was a breach of the duty of loyalty and the act of disclosing to the shareholders what
they were doing (and complying with the statute), is not sufficient since it is used to
circumvent the duty.
ii. Stanley and Sturgis used their majority power to gain their own advantage to the
detriment of the minority shareholder.
iii. RULE: When a transaction greatly benefits one corporation at the expense of another, and
especially if it personally benefits the majority directors, it should be set aside.
i. Defendants have the initial burden of proving fairness, but if they had
complied with the statute (informing the shareholders) it is up to the
plaintiffs to prove that it is unfair.
ii. Even though a transaction is not voidable simply because an
27
interested director participated, it will be voided if it is unfair to the

minority stockholder
VI. Benihana of Tokoy, Inc. Benihana, Inc. (P.617)
B. Board Approval, Shareholder Approval, and Fairness (court’s focus when determining conflict)
I. Court-determined Fairness
a. Two forms of fariness inquiry: substantive and procedural
i. Procedural focuses on the internal corp process followed in obtaining approval by
directors or SH.
ii. The courts focus on how the transaction was approved, the disclosure given the decision
makers, the ability of directors to be objective, and the effect of SH ratification.
iii. Substantive fairness focuses on a comparison of the fair market value of the transaction
to the price the corp actually paid.
iv. Also, whether the transaction was one that was reasonably likely to yield favorable results.
b. In Sum, fairness is determined by 1) the terms of the transaction, 2) the benefit to the corp, 3)
process of the decision making.
II. Approval by Disinterested and Independent Directors
- Whether the directors who approved the deal were disinterested and independent?
a. Disabling interest exists in two instances:
i. When (1) a director personally receives a benefit, 2) as a result of the challenged
transaction, 3) which is not generally shared with the other SH of the corp, and 4) that
benefit is of such subjective material significance to that particular director that it is
reasonable to question whether that director objectively considered the advisability of the
challenged transaction to the corporation an its SH.
ii. When a director stands on both sides of the challenged transacton. First 3 requirements +
whenever a director stands on both sides of the challenged transaction he is deemed
interested and allegations of materiality have not been required.
b. Independence
i. Whether the director’s decision resulted from that director being controlled by another.
c. Example in P628.
III. Disinterested SH Approval
a. Lewis v. Vogelstein (P.634)
b. Harbor Finance Partners v. Huizenga (P.638)
C. Corporate Opportunity Doctrine
I. A director, officer, or managerial employee is forbidden from diverting to himself any business
opportunity that “belongs” to the corporation.
II. Dela SC held that a corp fiduciary cannot take a business opportunity for himself if it is one that the
corp can financially undertake; is within the line of the corportion’s business and is advantageous to
the corp; and is one in which the corp has an interest or a reasonably expectancy.
III. Corp opportunity doctrine focuses on potential harm to the corp, not actual harm.
a. Taking business opportunity without informing the corp.
IV. Farber c. Servan Land Co. (P.646)
a. DGCL § 122 – Specific Powers <- which permits corp to waive the protections of the corp
opportunity doctrine.
V. Factors:
a. Corporation has expressed interest in that activity in the past
b. Possible profit/advantage to the corporation
c. Could the corporation have acted
d. Connected to the corporate purpose, i.e. is it in the same line of business?
e. How the opportunity arose/was communicated?
Chapter 26 – Sale of Control (P.817-838)
28
A. Sale of Controlling Shares

I. Sharing of Control Premium?
a. Control sales are unfair to minority SH so that any control sale to an outsider should be made only
as part of an offer to purchase shares on the same therms from all shareholders.
b. Such egalitarianism would discourage control transfers, potentially keeping corp assets out of the
hands of those who value them most and are best able to use them efficiently.
i. Control can be sold at a premium subject to exceptions only in special
circusmtances.
c. Harris v. Carter (P.819)
i. Buyer misrepresented themselves during a stock exchange agreement, essentially
swapping stocks of a worthless shell corporation, ISA. The buyer required the
ownership group to resign so they could replace them with their own group.
ii. After the sale, the minority shareholders of Atlas had their ownership reduced from
48% to 12%.
a. RULE: 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.
b. When a shareholder presumes to exercise control over a corporation, to
direct its actions, that shareholder assumes a fiduciary duty of that same
kind that is owed by a director.
c. A shareholder’s right to sell controlling stock is not an absolute right, but has
limitations comparable to the tort duty of a reasonably prudent person.
II. Selling a Corporate opportunity
a. Can owners of control be able essentially to sell these business advantages such as patents,
customer relationships, without sharing the premium with other non-control SH?
b. Perlman v. Feldmann (P.826)
i. Feldman sold a controlling interest in the corporation, a producer of steel, to Wilport
Corp. who were looking for more steel than they could typically find during the
Korean War.
ii. Plaintiffs argued that the consideration paid for the stock included compensation for
the sale of a corporate asset, a power held in trust for the corporation by the
defendant.
iii. The asset was the ability to control the allocation of the product in a time of short
supply, through control of the board of directors. This was effectively transferred in
the sale by having Feldman procure the resignation of his own board and the
election of Wilport’s nominees upon consummation of the transaction.
a. RULE: The responsibility of a fiduciary may not be limited to tangible
balance sheet assets, but includes his uncorrupted business judgment for the
benefit of the corporation.
i. When there is a market shortage, where a call on a corporation’s
product commands an unusually large premium, in one form or
another, a fiduciary may not appropriate to himself the value of
this premium.
ii. Note: most courts have refused to follow this case
B. Sale of Office
I. Usual practice when a buyer acquires a control block is to require existing directors to resign and have
vacancies filled by new directors chosen by the buyer.
a. Directors, elected by all shareholders, are not legally allowed to sell their corporate office.
29
II. Serial resignations-elections are prominent and accepted in takeovers.

III. Essex Universal Corp. v. Yates (P.832)
Chapter 29 Planning in the Close Corporation (P.924-961)(A-D)
- There are some special problems in close corp, where no ready market is available for SH to exercise their
“exit” rights.
- How to protect SH in close corp when the usual SH rights to vote and sell are not available?
A. Preliminary Considerations
I. Close Corp as Incorporated Partnership
a. Def: no public market for the corp’s shares. Integration of ownership and management. Only
a few stockholders.
b. As a lawyer, you must use flexibility to anticipate potential problems and to create solutions
from the outset, thus reducing the likelihood of problems or providing dispute resolution
mechanisms should they arise.
i. Identify each of interests
B. Realigments of Shareholder Control
I. Cumulative Voting
a. Allows SH group to elect directors in rough proportion to the shares held by each group and thus to
be guaranteed minority representation on the board.
b. Each share carries a number of votes equal to the number of directors to be elected, but a SH may
cumulate her votes.
i. Multiplying the number of votes a shareholder is entitled to cast bu the number of
directors for whom she is entitled to vote.
ii. X = ( s x d) / (D+1) +1
iii. X = number of shares required to elect directors
iv. s = number of shares represented at the meeting
v. d = number of directors it is desired to elect
vi. D = total number of directors to be elected.
II. Class voting
a. Permitted by statute and entails dividing the voting stock into two or more classes, each of which is
entitled to elect one or more directors.
i. Example) corp with 3 SH each wishing to elect one director. Three classes of shares would
be created and each class would have the right to elect one director.
III. Shareholder Voting Arrangements
a. Voting trusts
i. Conveying legal title to their stock to a voting trustee or a group of trustees pursuant to
the terms of a trust agreement.
ii. The transferring Sh receive voting trust certificates(transferrable) in exchange for their
shares which can be their evidence of equitable ownership of their stock.
iii. The owner of the certificate is entitled to receive whatever dificends are paid on the
underlying stock.
iv. They lack the right to inspect corporate books or to institute a derivative suit.
v. Usually has duration limit (such as 10 years), and their terms be made a matter of public
record.
b. Irrevocable proxies
i. When proxy becomes irrevocable, the SH loses control of her vote for the period of the
proxy, and the vote is separated from ownership.
ii. Irrevocable proxy coupled with an interest is upheld.
c. Vote pooling agreeements
i. To bind some or all SH to vote together – either in a particular way or pursuant to some
specified procedure – on designated Qs or all Qs that come before SH.
30
ii. MBCA § 7.31: voting agreements may be specifically enforceable.

C. Restrictions on BoardDiscretion
a. Triggs v. Triggs (P.939)
b. Smith v. Atlantic Properties, Inc. (P.948)
D. Contractual Transfer Provisions
a. Concord Auto Auction, Inc. v. Rustin (P.955)
Chapter 27 – Antitakeover Devices (P.839-879) (ABC)
A. Some Leading Defenses
B. Should Board be Permitted to Adopt Antitakeover Devices?
C. Three Judicial Approaches to Antitakeover Devices
31

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STAKEHOLDERS = OFFICERS, SHAREHOLDERS, CONSUMERS, CREDITORS, LABOR, COMMUNITY

Chapter 2 – Corporate Basics (P.25-54)

“Corporation is a complex structure.”

III. Limited liability company

protect corporate interests.

c. This is an outdated fiction based on “Par Value”

2. It allows outside creditors to receive payment before insiders

the proper purpose requirement.

Chapter 20 – Director Conflicts (A-C) (P.607-656)

interested director participated, it will be voided if it is unfair to the

A. Sale of Controlling Shares

II. Serial resignations-elections are prominent and accepted in takeovers.

ii. MBCA § 7.31: voting agreements may be specifically enforceable.

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