BA OUTLINE

I. AGENCY
Issue – When does an agency relationship exist? And, whether the Agent has
authority to act?
Definition – An agency is a fiduciary relationship, which results from the
manifestation of consent by one (1) person to another that the other shall act on his
behalf and subject to his control, and consent by the other to so act.
the principal has the power to instruct the agent and the agent must follow
instruction
a. CREATION
i. Manifestation of desire by one person (principal) for another person
(agent) to act on his behalf;
ii. Subject to the control by the principal; and
iii. Consent by the agent to do so
-However, formalities aside, an agency may be established by mistake – OR
without the intent to create an agency
b. DUTY
-Upon creation of an agency, the agent owes certain duties to the principal.
These duties include:
i. Duty of Loyalty
a. An agent MUST act solely for the benefit of the principal in all
matters connected with the agency
b. Agent CANNOT:
i. Compete with the principal in field/area of agency
ii. Take conflicting duties
iii. Must keep principal’s information confidential – DOC
c. Consequences
i. Principal can be held liable for the tortious acts of their
agents and can be required to fulfill contract into which
their agents have entered
d. Policy
i. Since the principal gains from the actions of another,
principal should sometimes be held to answer for the
costs inflicted by the agents
c. AUTHORITY
i. Actual Authority – Actual authority is established when the principal
manifests consent for the agent to act. There are two (2) types of
actual authority – Expressed and Implied
i. Express – Express actual authority is conveyed by the
principal, to the agent, either orally or written
ii. Implied – Implied actual authority is depending on the role or
job prescribed to the agent by the principal. Typically, an agent
has implied actual authority to engage in any actions which are
reasonably necessary to accomplish the given task
 ii. Apparent Authority – A principal may be liable for an agent who
undertakes actions as a result of apparent authority. Apparent
authority is established when a third (3rd) party REASONABLY
believes that the agent had the principal consent to act. This
reasonable belief is valid despite the giving of actual consent by the
principal to the agent
*Whether a third (3rd) party’s belief is “reasonable” is dependent on
the surround circumstances
iii. Ratification/Inherent Authority – Even absent authority by the agent
to act, a principal may continue to be liable for the acts of their agent if
the principal ratifies the non-authorized actions of the agent through
inherent authority
iv. Estoppel – A principal may also be held liable for the acts of an agent
under the doctrine of estoppel
a. Estoppel occurs when a third (3rd) party:
i. REASONABLY believes that an agent is acting under the
manifestation of the principal’s consent; and
ii. The third (3rd) party DETRIMENTALLY relies on such
belief
d. VICARIOUS LIABILITY
● An employer will be held liable for the actions of their employers if the
act was in the scope of the employment
II. PARTNERSHIPS
Issue – Was there a valid partnership formation? Was it for profit?
Definition – A partnership is an association of two (2) or more people to carry on, as
co-owners, a business for profit
➢ Types:
o At-will – Free/open with no specified end or purpose
o Term – For a specific term
o Undertaking – For a specific purpose
a. FORMATION
● The intent to create a partnership is NOT needed. That is, a partnership
may be created accidently. In determining whether a partnership was
established, the court considers actions and words of the parties
b. PARTNERSHIP AGREEMENT
Issue – Was there a valid partnership agreement? Was/were there an
unwaivables waived?
Rule – Relation among and between the partners and the partnership are
governed by the partnership agreement. This agreement, although able to
include any provision defined by the partnership, the agreement must
contain certain unwaivable provisions. That is, the partnership agreement
CANNOT:
● Vary the rights and duties of the partnership, unless emanating
the duty to provide copy of statements to all partners
● Unreasonable restrict the right of access to books and records
 ● Eliminate DOL
● Unreasonably reduce the DOC
● Eliminate DGF and Fair Dealings
● Vary the power to disassociate a partner, unless varying the
requirement that notice of disassociation must be in writing
● Vary the right of the court to expel a partner
● Vary the requirements to wind up the partnership business
● Vary the law relating to limited liability
● OR restricting the rights of 3rd parties
c. PARTNERSHIP LIABILITY
Rule – Who, within the partnership is liable?
Rule – All parties are jointly and severally liable for all obligations of the
partnership. Furthermore, since each partner is an agent of the partnership
for the purpose of its business, any acts of one partner, which is carried out
as part of the ordinary course of the partnership’s business, binds the entire
partnership
Special Rules
● If, however, the partner, although acting in the ordinary course of
business
o Did not have authority by the partnership to engage in the
specific act; and
o The person with whom the unauthorized partner was
dealing with knew or had received some notice of the
partners lack of authority,
● Then, the partnership is NOT liable
● If the act of the partner is outside the scope of the ordinary course
of the partnership business, but the act was authorized by the
other partners, then the partnership is liable. Authorization by the
other partners may be in the form of a vote or a provision in the
partnership agreement
d. PARTNERSHIP DUTIES
Issue – Did the partner(s) violate any of their duties to the partnership of
other parties?
Rule – Partnership duties include 1) Duty of Loyalty and 2) Duty of Care. In
addition, partners are always required to act in Good Faith
Exceptions – A partner does NOT violate any of his duties for engaging in
conduct with advancing his own self-interest. A partner may lend money and
engage in business with the partnership, so long as the right and obligations
of the partner are the same as those who are not partners. (Cannot give
yourself the deal you want)
i. Duty of Loyalty
Rule – Under the duty of loyalty, a partner must:
● Account for all partnership property as trustee;
● Refrain from adverse dealings;
● Refrain from competing with the partnership;
 ● Refrain from stealing partnership property, including money
ii. Duty of Care
Rule – Under the duty of care, a partner shall avoid acting with:
● Gross negligence
● Recklessness
● Intentional misconduct
● Knowledge of violations
e. OPPORTUNITIES FOR PARTNERSHIP
Common Law (Case Law – Meinhard v. Salmon) – Joint ventures, like co-
partners, owe to one another, while the enterprise continues, the duty of
finest loyalty. Essentially, don’t be immoral/dishonorable. If the judge thinks
a person was not being honorable, they have violated their Fiduciary Duties.
I.e., Misappropriation occurs when a partner is presented with the
opportunity and doesn’t present it to the partnership
f. PARTNERSHIP TERMINATION
i. Dissolution
Rule – Dissolution is when a partnership ends
Issues – When can a partner leave a partnership? What happens to
assets as a result? What is the order of payment to person interested?
● Ways in which dissolution can occur – RUPA § 801
o A partner at will disassociated and request dissolution
o Partners for term/undertaking unanimously agree or
o Half or more agree after a disassociation or
o The term of undertaking expires
o Event agreed to in the partnership
o Unlawfulness
o Court order, which may relate to practically, frustration of
economic purpose, detrimental conduct of partner, or
certain events arising
ii. Disassociation
Rule Disassociation is when a partner leaves the partnership.
Disassociation does not always lead to dissolution. Disassociation may
arise from:
● Express will to withdraw
● Agreed upon event
● Expulsion per the partnership agreement
● Expulsion by unanimity
● Court ordered expulsion
● Partner bankruptcy
● Death or incapacity
● Legal termination of partners existence (when a partner is
a corporation)
Wrongful Disassociation
● Partnership AT WILL can be wrongfully disassociated
ONLY if violates the partnership agreement
 ●Disassociation is wrongful ONLY if:
o It breaches a provision of the partnership agreement;
o Before the end of the partnership’s TERM or
UNDERTAKING, the partner withdrawals by will (unless
following death or wrongful disassociation of another
partner), or expelled by a court, or becomes bankrupt,
or legally terminated
● Partner who wrongfully disassociate are liable to the
partnership for damages caused by disassociation
III. CORPORATIONS
Public v. Close (closely-held)
● Close Corporations
o Generally
▪ Small number of Shareholders (usually about 21)
▪ No ready for market stock – Shares are more of contract
▪ Substantial majority shareholder participation in the
management of the business entity
o Shareholder Agreements
▪ Shareholder agreements are agreed upon by shareholders,
stating their obligations and rights. They are generally valid, so
long as not against public policy
a. FORMATION
i. Types
a. Open
b. Close
ii. Articles of Incorporation/Charter
Rule – The articles of incorporation or charter must include certain
basic information about the corporation, such as:
● Name – Includes “corporation,” “company,” “incorporate,”
“limited”
● Purpose – “To engage in any lawful activity”
● Number of shares
● Name and address of its registered agents
● Name and address of each incorporator
b. GOVERNANCE
i. Articles of Incorporation/Charter
Rule – Although the charter is filed to incorporate, they need not spell
out the manner in which the corporation is to be governed.
a. Corporate Powers – In addition to specifying purposes, the
articles of incorporation may also enumerate powers that the
corporation possesses. Most states automatically grant all
corporations broad powers, such as the powers to buy and sell
property and to sue and be sued. Some states place restrictions
on various corporate actions, including corporate loans to
officers and directors. For a corporation with stock listed on a
 national securities exchange, federal law prohibits the
corporation from making personal loans to a director or
executive officer of the corporation
b. Amendments of Articles
Rule – The Corporation can amend its articles with any lawful
provision. The procedure for securing approval to amend the
articles depends on whether the corporation has issued stock
1. No Stock Issued – If the corporation has not issued
stock, the board of directors – or, if the board doesn’t
exist, the incorporators – may amend the articles
2. Stock Issued – If stock issued, then corporations
generally must follow a two (2) step approval process:
1) The board of directors must adopt the
amendment to the articles; and
2) The board must submit the amendment to the
shareholders for their approval by majority
vote
ii. Bylaws
Rule – Contains provisions for managing the corporation, but cannot
be inconsistent with the articles of incorporation – private internal
rules. Including, how shares are issued, how elections are carried out,
where meeting are held, and corporate officers and their duties
● The bylaws may contain any lawful provision for the
management of the corporations business or the regulation of
its affairs that is not inconsistent with the articles of
incorporation. When there is a conflict between the articles
and bylaws, articles control
● Generally, the board of directors adopts the initial bylaws.
However, a majority vote by either the directors or the
shareholders can adopt, amend, or repeal a bylaw
c. ORGANIZATIONAL MEETING
Rule – Once the articles of incorporation are filed, an organizational meeting
is held at which the appointment of the officers, adoption of bylaws, and
approval of contract may take place. When the incorporators held the
meeting, election of the board also takes place
d. CHARACTERISTICS OF CORPORATION
i. Balance of Power – All corporations have the same general structure.
All must have (1) Shareholder, (2) Officers, and (3) a board of
directors
ii. Limited Liability – One of the primary benefits of a corporation is
limited liability. Parties to a corporation are only liable to the extent of
their investment. As discussed below, this limited liability is
occasionally overcome and certain officers and directors can be held
liable personally liable for actions of the corporation – Piercing the
corporate veil
e. VALID ACTION?
Issue – Whether the (proposed) action(s) taken by the (committee,
shareholders, Board) was valid
Rule – In order for a corporate player to act, they must 1) have the power to
do so; and 2) follow the appropriate process
i. Board of Directors
Definition – The Board of Directors manages and directs the
management of the corporations business and affairs. The board also
authorizes the officers and other corporate employees to exercise the
powers possessed by the corporation
a. Composition Requirements
i. Number of Directors
Rule – Traditionally, a board needed three (3) or more
directors, but today a board can have as few as one
director, regardless of the manner of shareholders. In
its articles or bylaws, a corporation may permit the
board to vary the number of directors
ii. Qualifications for Directors
Rule – A corporation CANNOT serve as the director of
another corporation; a director must be a natural
person. Unless required by the articles or bylaws, a
director need not be a shareholder or resident of a
particular state
iii. Selection of Directors
Rule – Shareholders select directors at annual
shareholders meetings and may be elected by straight
or cumulative voting and by one or more classes of
stock
b. Term of Directors
i. Annual Terms
Rule – Typically, a director serves for a one-year term
that expires at the first annual meeting after the
director’s election
ii. Staggered Terms
Rule – A director may serve for longer than one year IF
the terms are staggered. With staggered terms, each
year some directors are elected for multi-year terms.
The main purpose is to limit the impact of cumulative
voting
iii. Holdover Director
Rule – A director whose term has expired may continue
to serve until a replacement is selected
iv. Resignation
Rule – A director may resign at any time by delivering a
written notice to the board, its chair, or the corporation
v. Removal
 Common Law – At common law, shareholders had the
inherent power to remove a director. However, because
directors were deemed to have an entitlement to their
offices, they could only be removed for cause based on
substantial grounds (such as breach of fiduciary duty,
fraud, criminal conduct, etc.)
Modern Law – The current trend in most states and the
RMBCA is to allow shareholders to remove a director
with or without cause, unless the article provide
otherwise
1. Meeting Requirements
Rule – A director may be removed only at a
meeting called for the purpose of removing the
director, and the meeting notice must state the
removal is at least one of the purposes
2. Voting Requirements
Rule – A director who was elected by a particular
voting class of stock can only be removed by that
same class (or by court order)
● If cumulative voting is NOT authorized, then
a shareholder vote removes a director if the
number of votes for removal exceeds the
number of votes against removal
● If cumulative is authorized, then a director
may not be removed if votes sufficient to
elect the director are cast against the
directors removal
c. Meeting Requirements
i. Types of Meetings
Rules – The board of directors may hold regular or
special meetings. A director is only entitled to notice of
a special meeting. A director may waive notice of a
meeting at any time by a signed written waiver. In
addition, a director’s attendance waives notice of that
meeting unless the director promptly objects to lack of
notice
ii. Presence at Meeting
Rule – A director is not required to be physically
present at a meeting. A meeting may be conducted
through a conference call or any other means that allow
each director to hear the other directors during the
meeting
iii. Action Without a Meeting
Rule – A board may act without holding a meeting by
unanimous written consent to the action
d. Voting Requirements
 i. Quorum Rules
Rules – For the boards act at a meeting to be valid, a
quorum of directors must be present at the meeting
1. Number of Directors – A majority of all
directors in office constitutes a quorum, unless
a higher or lower number is required by the
action or bylaws
2. Presence of Directors – Unlike shareholders, a
director must be present at the time that the
vote is taken to be counted for quorum
purposes. Presence includes appearances made
using communications equipment that allows
all persons participating in the meeting to hear
and speak to one another
ii. Voting Agreements
Rule – Generally, an agreement between directors as to
how to vote (i.e., a pooling agreement) is unenforceable.
Each director is expected to exercise independent
judgment. A director also may NOT vote by proxy
e. Committees
Rule – A board may take action through one or more
committees
i. Composition of Committee
Rule – A committee may consist of two (2) or more
directors
ii. Selection of Committee Members
Rule – Generally, a majority of the directors must vote
for the creation of a committee and the appointment of
a director to a committee
iii. Committee’s Powers
Rule – A committee may generally exercise whatever
powers are granted to it by the board, the articles, or
the bylaws.
A committee may NOT:
1. Declare distribution, except within limits set by
the board;
2. Recommend actions that require shareholder
approval;
3. Fill vacancies on the board or its committees;
or
4. Adopt, amend, or repeal laws
f. Duties
Issue – Based on the action(s) taken by the director(s), be
brought against the director(s)?
Rule – A director owes two (2) basic duties to the corporation –
(i) duty of care, and (ii) a duty of loyalty. In discharging these
duties, a director is required to act in Goof Faith and in a
manner the director reasonably believe to be in the best
interest of the corporation
i. Duty of Care
Rule – Under Van Gorkum, a director has a duty to make
decisions that are not 1) Grossly Negligent; 2) Reckless;
or 3) Done with the intent to harm
1. Prudent Person
Rule – Directors have a duty to act with
reasonable care that a person in a like position
would reasonably believe appropriate under
similar circumstances.
As an objective standard, the director is
presumed to have the knowledge and skills of
an ordinarily prudent person. In deciding how
to act, the director is also required to use any
additional knowledge or special skills that he
possesses
2. Reliance Protection
Rule – A director is entitled to rely on the
performance of, as well as information, reports,
and opinions supplied by the following person
if the director reasonably believes them to be
reliable and competent:
i. Officers and other employees of the
corporation
ii. Outside attorneys, accountants, or other
skilled or expert individuals retained by
the corporation; and
iii. A committee of the board of which the
director is not a member
3. Breach of Duty of Care – BJR
Rule – The business judgment rule is a
rebuttable presumption that a director
reasonably believed that his actions were in
the best interest of the corporation. Generally,
a court will not interfere with the business
judgment of a director or officer without a
showing of fraud, illegality, or conflict of
interest
i. Overcoming the BJR
Rule – To overcome the BJR, it must be
shown that:
a. The director did not act in Good
Faith;
 b. The director was not informed to
the extent that the director
reasonably believed was necessary
before making a decision;
c. The director did not show
objectively or independence from
the directors relation to or control
by another having material
interest in the challenged conduct;
d. There was a sustained failure by
the director to devote attention to
an ongoing oversight of the
business and affairs of the
corporation;
e. The director failed to timely
investigate a matter of significant
material concern after being
alerted in a manner would have
caused a reasonably attentive
director to do so; or
f. The director received a financial
benefit to which he was entitled, or
any other breach of his duties to
the corporation
4. Exculpatory Provisions in Articles – To protect
from breach of DOC
Rule – A corporation’s articles may include an
exculpatory provision shielding directors from
liability for money damages for failure to
exercise adequate care in the performance of
their duties as directors
Typically, exculpatory provisions do not protect
directors from liability for any breach of the duty of
loyalty, for acts of omissions that are not in Good Faith,
or for any transactions from which the director received
an improper personal benefit
ii. Duty of Loyalty
Rule – The duty of loyalty requires a director to act in a
manner that the director reasonably believes its in the
best interest of the corporation. Typically, a director
breaches this duty by placing her own interest before
those of the corporation
1. Conflict of Interest – Self-Dealings
Rule – A director who engages in a conflict-of-
interest transaction with his own corporation,
also known as self-dealing, has violated his
 duty of loyalty unless the transaction is
protected under the safe harbor rule
The NJR does NOT apply when a director
engages in a conflict-of-interest transaction
with his corporation. Additionally, a director
must not profit at the corporations expense
2. Safe Harbor Rules – “Freshening”
i. Standard for Upholding Transaction
Rule – There are three (3) safe harbors by
which a conflict-of-interest transaction
may enjoin protection:
1) Disclosure of all material facts to, and
approval by a majority of, the board of
directors without a conflicting interest;
2) Disclosure of all material facts to, and
approval by a majority of, the votes
entitled to be cast by the shareholders
with a conflicting interest; and
3) Fairness of the transaction to the
corporation at the time of the
commencement
ii. Fairness of the Transaction
Rule – The fairness test looks at the
substance of the transaction to see if the
corporation received something of
comparable value in exchange for what it
gave to the director. Interested directors
who were on both sides of a transaction
in question have the burden of
establishing the fairness of the
transaction
iii. Effect of Safe Harbor Provisions
Rule – Satisfaction of the safe-harbor
defenses is NOT necessarily a complete
defense, and some states instead hold that
the burden of proof shifts to the party
challenging the transaction to establish
that the transaction was unfair to the
corporation
iv. Remedies
Rule – A conflict-of-interest transaction
that is found to be in violation of the safe-
harbor provisions may be enjoined or
rescinded. In addition, the corporation
may seek damages from the director
 v. Business Judgment Rule – (Triggered by
“Freshening”/Safe-Harbor)
vi. Rule – Approval of a conflict-of-interest
transaction by fully informed
disinterested directors triggers the BJR
AND limits judicial review to issues of
waste or gift, with the burden of proof on
the party attacking the transaction
3. Usurpation
Rule – In addition to a conflict-of-interest, a
director may violate his duty of loyalty by
usurping a corporate opportunity rather than
first offering the opportunity to the
corporation
i. Corporate Opportunity
Rule – In determining whether the
opportunity is one that must first be
offered to the corporation, courts have
applied the “interest or expectancy” test
or the “line of business” test
● Under the “Interest or Expectancy”
Test, the key is whether the
corporation has an existing
interest (e.g., an option to buy) or
an expectancy arising from an
existing right (e.g., purchase of
property currently leased) in the
opportunity. An expectancy can
also exist when the corporation is
actively seeking a similar
opportunity - Broz
● Under the broader “line of
business” test, the key is whether
the opportunity is within the
corporations current or
prospective line of business
4. Competition with Corporation
Rule – A director that engages in a business
venture that competes with the corporation
has breached their duty of loyalty
iii. Good Faith Obligations
Rule – In addition to owing Shareholders the duty of
care and loyalty, directors have the obligation to act in
Good Faith when making decisions on behalf of a
corporation. As long as the duties are fulfilled and the
 directors acted in Good Faith, neither the corporation
nor the directors will be liable to the Shareholders
Directors are not liable to the shareholders for poor
hiring choices so long as they act consistent with the
duty of care, loyalty, and in Good Faith – Disney
g. Indemnification & Insurance
Rule – When a director is involved in a legal action as a
consequence of her rile as director, she may seek
indemnification for expenses incurred as well as for any
judgment or award declared against them. Indemnification
may be (i) mandatory, (ii) prohibited, or (iii) permissive
Insurance – A corporation may acquire insurance to indemnify
directors for actions arising from services as a director. The
insurance can cover all awards against a director as well as
expenses incurred by her, even though the corporation could
not otherwise indemnify the directors for such amounts
ii. Shareholders
a. Meeting Requirements
Rule – There are two (2) basic types of shareholders meetings
– annual and special. In addition, shareholders may express
their collective will through written consent
i. Annual Meeting
Rule – A corporation is required to hold a shareholder
meeting each year. Generally, the time and place of the
meeting are specified in the corporate bylaws. The
primary purpose of the annual meeting is to elect
directors, but any business that is subject to
shareholder control may be addressed
ii. Special Meeting
Rule – A corporation may also hold a special meeting,
the purpose of which must be specified in the notice of
the meeting. Generally, a special meeting may be called
by the board of directors or shareholders who own at
least 10% of the shares entitled to vote at the meeting
iii. Notice of Meeting
Rule – Shareholders must be given notice of either type
of meeting. To properly call a meeting, the corporation
must notify all shareholders entitled to a vote at the
special meeting in a timely manner
A shareholder may waive notice either in writing or by
attending the meeting. Usually, notice must be given no
less than 10 days and no more than 60 days before the
meeting date
The notice must include the time, date, and place of
meeting
b. Voting Requirements
 i. Voting Eligibility
Rule – Typically, ownership of stock entitles the
shareholder to vote. There are two (2) basic issues
regarding shareholder voting – who the owner of the
stock is and when such ownership is measured
1. Ownership – Generally, a corporation
maintains a list of Shareholders who are
entitled to vote
ii. Shareholder Voting
Rule – The primary issue upon which shareholders are
entitled to vote is the selection of the board of directors
Shareholder approval is also required for fundamental
corporate charges, such as charges to the articles or
structural changes to the corporation
iii. Voting Power
Rule – Typically, each share of stock is entitled to one
vote. However, a corporation, through its articles, can
create classes of stock that have voting power
iv. Quorum Requirements
Rule – For a decision made at the shareholder meeting
to be valid, there must be a quorum of the shares
eligible to vote present at the meeting
v. Voting for Directors
Rule – Corporations may choose directors by
cumulative voting is so provided in the articles
1. Cumulative Voting
Rule – When more than one director is to be
elected, corporations can allow shareholders to
cumulate their votes and cast all those votes
for only one (or more than one) of the
candidates
The effect of the cumulative voting is to allow
minority shareholders to elect representatives
to the board
Example:
-A owns 30 shares of X, Inc.
-B owns the remaining 70 shares of X, Inc.
-X, Inc. has three (3) directors
-Without cumulative voting, A is unable to
elect any of the three (3) directors because B
owns a majority of the shares. However, with
cumulative voting, A can elect at least one
director by casting all of her 90 votes (30 votes
X 3 directors) for one director
2. Staggered Terms
 Rule – Typically, all directors of the
corporation are elected manually. However,
some corporations provide for the election of
fewer than all of the directors, thereby
staggering the terms of the directors, which
provides for some continuity on the board
from election to election.
The main purpose for the staggered terms is to
limit the impact of cumulative voting
vi. Proxy Voting
Rule – A shareholder may vote in person or by proxy. A
proxy vote must be executed in writing and delivered to
the corporation or its agent
A proxy is revocable unless it expressly provides that it
is irrevocable and the appointment of the proxy is
coupled with an interest
Any act by the shareholder that is inconsistent with the
proxy, such as attending a shareholder meeting and
voting the shares, revokes the proxy
vii. Shareholder Proposals – Voting Together with other
Shareholders
1. Voting Pool/Agreements
Rule – Shareholders enter into a binding voting
agreement, also known a voting pool, which
provides for the manner in which they will vote
their shares
Under such an agreement, shareholders retain
ownership of their stock. Such an agreement is
a contract that may be specifically enforced. It
does not need to be filed with the corporation,
and there is not time limit
2. Management Agreements
Rule – Generally, shareholders may agree to
alter the way in which a corporation is
managed even though the agreement is
inconsistent with the statutory provisions
* The court, for policy reasons, will decline
things that are social policies – I.e.,
micromanaging
Matters on which shareholders may agree are:
- Elimination of the board of directors or
restrictions on the discretions of powers
of the board of directors;
- Authorization or making of distributions;
- Determination of who is a member of the
board, the manner of selection or removal
 of directors, and the terms of office of
directors
- The exercise or division of voting power
by or between the shareholders and
directors or by or among any of them,
including director proxies
- A transfer to one or more shareholders or
other persons all or part of the authority
to exercise corporate powers or to
manage the business and affairs of the
corporation; and
- The manner or means by which the
exercise of corporate powers or the
management of the business and affairs of
the corporation is affected
c. Inspection of Corporate Records Right
Rule – A shareholder has a right to inspect and copy corporate
records, books, papers, etc. upon five (5) days written notice
stating a proper purpose. As a litigant against the corporation,
the shareholder also has a right to discovery
i. Disclosure of Financial Statements
Rule – To enable shareholders to make an informed
decision when voting, publically held corporations that
have issued securities are required to supply
shareholders with an annual audited financial
statement
d. Suits by Shareholders – Direct v. Derivative
Rule – A shareholder may bring a direct or derivative action
against the corporation in which the shareholder owns stock
How the action is characterized will affect the requirements for
bringing suit and to whom any recovery is paid
i. Direct Actions
Rule – A shareholder may pursue two (2) basic types of
direct actions: (i) an action to enforce shareholder
rights or (ii) a non-shareholder action, the recovery
from which is to the benefit of the indirect shareholder
1. Action to Enforce Shareholder Rights
Rule – A shareholder may sure the corporation
for breach of a fiduciary duty owed to the
shareholder by a director or an officer
Typical actions are based on the denial or
interference with a shareholders voting rights,
the board’s failure to declare a dividend, or the
board’s approval or failure to approve a
merger
2. Non-Shareholder Active
 Rule – A shareholder may sue the corporation
on grounds that do not arise from the
shareholders status as a shareholder
Example:
- A shareholder who is struck by a vehicle
owned by the corporation and driven by a
corporate employee may pursue a negligence
claim against the corporation as the injured
party of the corporation’s tortious conduct
ii. Derivative Actions
Rule – In a derivative action, a shareholder is suing on
behalf of the corporation for harm suffered by the
corporation. Although the shareholder also may have
suffered harm, recovery generally goes to the
corporation
Example: A shareholder may bring a derivative action to
force a director to disgorge a secret profit earned by the
director on a transaction with the corporation
1. Who May Bring Suit
Rule – Generally, only person who is a
shareholder at the time of the act or omission
(or one who receives the shares through a
transfer from such a shareholder) may bring a
derivative action
2. Standing
Rule – A set must have standing to bring a
derivative action. To have standing, a
shareholder must have been a shareholder (i)
at the time of the wrong OR (ii) at the time that
the action is filed and, regardless of when one
became a shareholder, he must continue to be a
shareholder during the litigation
*Lastly, the shareholder must adequately
represent the interests of the corporation
3. Demand Upon the Board
Rule – The π in a derivative action must make a
written demand upon the board, demanding
that the board take action
A derivative action may not commence until 90
days have passed from the date of demand
Exceptions:
i. Futility Exception
Rule – A demand upon the board is not
required if the demand would be futile
Factors for determining futility include
whether the directors are disinterested
 and independent and whether the
transaction was the product of a valid
exercise of BJR
ii. Irreparable Injury Exception
Rule – The π may be excused from
waiting a reasonable time for the board to
respond to the demand if the delay would
result in irreparable injury to the
corporation
*Effect of Board Rejection of Demand →
BJR
Rule – If the board specifically rejects the
demand, then the rejection is tested
against the BJR
If there is a business justification for the
rejection, then the π must establish that
the board’s rejection was due to a lack of
care, loyalty, or good faith to persuade the
court to override the boards refusal
e. Shareholder Liability
Rule – One reason the corporate form is favorable is that the
investors in a corporation are subject to limited liability for
corporate acts, and they are only at risk to the extent of their
investment
This principle of limited liability is subject to challenge,
primarily with respect to shareholders of closely held
corporations
i. Piercing the Corporate Veil
Rule – If a π can “pierce the corporate veil,” then a
corporation’s existence is ignored, and the shareholders
of the corporation are held personally liable
Although courts are reluctant to hold a director or
active shareholder liable for actions that are legally the
responsibility of the corporation (even if the
corporation has a single shareholder), they will
sometimes do so if the corporation was markedly non-
compliant, or if holding only the corporation liable
would be singularly unfair to the π
An individual may be held liable for the acts of a
corporation through the doctrine of respondeat
superior if it can be proven that the individual used his
control of the corporation for person gain
ii. Types of Veil Piercings
- Vertical Veil Piercing
Rule – A way of holding shareholder personally liable
for corporation obligations. To hold director liable, go
 through fiduciary duty or insider trading (or other
avenues for liability)
- Horizontal Veil Piercing
Rule – May be used to reach another corporation, which
is owned by the same shareholders
- Reverse Piercing
Rule – Holding a corporation liable for the
debts/liabilities of a shareholder
iii. Officers
a. Types
Rule – Typically, a corporation’s officers are composed of a
president, secretary, and treasurer
The RMBC does not specify which officers of a corporation
must have, but it simply indicated that the corporate bylaws
are responsible for delineating the officers of the corporation
b. Selection
Rule – The primary officers of a corporation are elected by the
board of directors. These officers may in turn be empowered
by the board of directors or the bylaws to select other
corporate officers and employees
c. Authority
Rule – An officers authority can be actual, implied, or apparent
- Actual authority is wielded by an officer is defined by the
corporate bylaws or set by the board of directors
- Implied authority is given to officers to carry out the
necessary tasks of the officers duties by virtue of their status or
position, so long as the matter is within the scope of ordinary
business
- Apparent authority is given when the corporation holds the
officer out as having authority to bind the corporation to third
(3rd) parties
d. Duties
Rule – Specific duties of an officer are defined by the
corporations bylaws or set by the board
The duties of care and loyalty that are imposed on the directors
are also owed by the officers
e. Liability
Rule – As an agent of the corporation, an officer does not incur
liability to third (3rd) parties merely for the performance of
duties for the corporation
Of course, an officer can be liable to a third (3rd) party of the
officer has acted in his personal capacity (e.g., guaranteed a
corporate loan) or has engaged in purposeful tortious behavior
f. Indemnification/Insurance
 Rule – An officer is entitled to indemnification to the same
extent and subject to the same restrictions as a corporate
behavior. Similar insurance rues apply
g. Removal
Rule – An officer may be removed at any time without cause
IV. MERGERS & ACQUISITIONS
a. MERGERS
i. Definitions
Rule – A merger is the combination of two (2) or more corporations
such that only one (1) corporation survives. The surviving
corporation may be created as a result of the merger, rather than
existing before the merger, in which case the process is referred to as
a consolidation
ii. Procedure
Rule – Although the business aspects of effecting a merger can be
complex, the statutory procedure is simple
To merge:
(i) The board of each corporation must approve of the merger;
(ii) The shareholders of each corporation must usually approve of the
merger;
(iii) The required documents must be filed with the state
a. Shareholder Approval
Rule – Shareholder approval requires a majority vote, meaning
a majority of the votes cast, but the shareholders meeting at
which the vote is taken is subject to a quorum requirement,
which is usually a majority of shares entitled to vote
b. Voting by Class
Rule – If a corporation has more than one class of stock, and
the amendment would affect the rights of a particular class of
stock, then the holders of that stock class must also approve
b. ASSET ACQUISITION
Rule – The sale or other transfer of a corporation’s assets does not require
approval by the shareholders or a board of a transferor corporation
c. STOCK ACQUISITION
Rule – A corporation may acquire stock in another corporation and thereby
secure control of that corporation without going through the process of
effecting a statutory merger
The two (2) primary means by which a corporation can acquire stock in
another corporation is by exchanging its own stock for that stock or by
paying cash or other property for that stock
d. Dissenting Shareholders Right to Appraisal
Rule – A shareholder who objects to a merger or acquisition may be able to
force the corporation to buy his stock at a Fair value as determined by an
appraisal
V. TAKEOVERS
Rule – Occurs where an inherited corporation seeks to buy another corporation, but,
the target corporations director, and some percent of their shareholders are
refusing to do so
a. WAYS IT CAN OCCUR
i. Tender Offer
Rule – A tender offer is an offer to shareholders of a publically traded
corporation to purchase their stock for a fixed price, which is usually
higher than the market price
Frequently used to affect a hostile takeover of a corporation – a
takeover that is opposed by the current management of the
corporation
ii. Direct Stock Purchase
Rule – A corporation may purchase stock in another corporation on
the open market. Or make an offer to buy the stock from the current
shareholders – tender offer
iii. Proxy Fight/Contest
Rule – When shareholders become unhappy with the operations of a
corporation, they can use signed proxies in an attempt to pool voting
power and force out member of the board of directors with whom
they are unhappy
b. TAKEOVER DEFENSES
Issue – What defenses, if any, could the corporation implement in an attempt
to remove the threat of a hostile takeover
Rule – Typically, responses to a hostile takeover include: (i) a poison pill; (ii)
white knight; or (iii) a staggered board of directors
1. Poison Pill – To block a tender offer/direct stock purchase
Rule – A poison pill is a tactic used by companies to prevent or
discourage a hostile takeover. A company targeted for a takeover
uses a poison pill strategy to make shares of the companys stock
look unattractive or less desirable to the acquiring firm
-“Flip-in” Poison Pill – Permits shareholders, except those for
the acquirer, to purchase additional shares at a discount

-“Flip-over” Poison Pill – Enables stockholders to purchase the

acquires shares after the merger at a discounted rate
2. White Knight – Defend Against Tender offer/direct stock
purchase/Proxy fights
Rule – A white knight is a targeted corporation attempt to avoid
the hostile takeover by finding another corporation to merge with
and who, in theory, is a better acquirer than the corporation
attempting the hostile takeover
3. Staggered Board – Defense to a proxy fight
Rule – In situations of a proxy fight to implement a takeover, a
staggered board is an effective defense. This is because a staggered
board implies a “For Cause” limit on removal of the board of
directors
 c. UNOCAL STANDARD – BoD’s Defense Actions Permissible?
Issue – Whenever there is a takeover defense and the BoD are trying to
prevent the takeover, were the actions of the BoD permissible?
The main inquiry under the UNOCAL standard is whether the response to the
takeover was truly in the best interest of the corporation and its
shareholders
Rule – Under the UNOCAL standard, to justify their response, the BoD must
show: 1) The BoD reasonably perceived a threat; and 2) The response to such
perceived threat was proportionate
1. Reasonably Perceived Threat
Rule – To satisfy this prong, the BoD must show that they acted in
good faith and conducted a reasonable investigation, which led to
the refusal
The board need not establish that a threat actually existed. Rather,
the board must simply establish that they reasonably feared the
takeover would not be in the best interest of the corporation
2. Proportional Response
Rule – To satisfy this prong, the BoD msut show that the response
was 1) reasonable, and 2) not be either coercive or preclusive
-A response is coercive if it forces the shareholders to accept your
deal or view
-A response is preclusive when it prevents the shareholders from
accepting any other offer
d. INEVITABLE TAKEOVER
Rule – Under Revlon, it was held that, when it is inevitable that a takeover is
taking place, the BoD have the duty to obtain the best price possible for its
shareholders. Any duty the corporation has to note holders is outweighed by
the duty to shareholders. Actions by the directors that show anything other
than maximizing price for shareholders of a violation of the BJR
VI. SECURITIES FRAUD & INSIDER TRADING
a. SECURITIES FRAUD
Rule – A securities fraud action requires fraudulent or deceptive conduct by
the ∆ in connection with the sale or purchasing of a security
Elements:
i. Misstatements/Omissions
Rule – The ∆ can engage in such conduct by (i) making an untrue
statement of material fact, or (ii) failing to state a material fact that is
necessary to prevent statements already made from being misleading
ii. Materiality
Rule – A ∆’s conduct must involve the misuse of material information.
A fact is material if a reasonable investor would find the fact
important in deciding whether the purchase or sell a security
iii. Π’s Reliance
Rule – A π must establish that they relied on the ∆’s fraudulent
conduct. However, the ∆’s fraudulent conduct is not aimed directly at
π, such as if the ∆ issues a press release, then courts have permitted
 the π to establish reliance by finding that the ∆’s conduct constituted a
fraud on the market
iv. Causation – Two Types – Must have BOTH for valid claim
a. Transaction Causation – If ∆ had not lied, π would not have
purchased the stock
b. Loss Causation – Once the public found out about ∆’s lie, the
share price dropped
v. Scienter
Rule – A ∆ is not strictly liable for making a false or misleading
statement or for negligently making a statement. Instead, the ∆ must
make the statement with scienter – Intentionally or Recklessly
b. INSIDER TRADING
Rule – The mere possession of material information that is not public
knowledge does NOT give rise to an insider trading liability; a person who
has such insider knowledge does not incur liability UNLESS he also trades
stick or other securities on the basis of such knowledge
i. Possession as Use of Information
Rule – In establishing that a person has traded on the basis of non-
public information, a person is presumed to have traded on the basis
of the information that he possessed at the time of the trade
ii. Affected Traders
Rule – There are four (4) types of traders who may be liable for failure
to disclose information:
a. Insiders – An insider is a director, officer, or other employee of
the corporation who used non-public information for personal
gain
b. Constructive Insider – A constructive insider is a person who
has a relationship with the corporation that gives that person
access to corporate information not available to the general
public. Such individuals include lawyers, accountants,
consultants, and other independent contractors
c. Tippees – A tippee is a person who is given information by an
insider or constructive insider (the “tipper”) with the
expectation that the information will be used to trade to the
stock or other securities. The tipper MUST receive a personal
benefit form the disclosure or intend to make a gift to the
tippee
To be liable, the tippee must have shown (or should have
known) that the information was provided to him in violation
of the insider’s duty to the corporation
d. Misappropriators – A misappropriator is a person who uses
confidential information in order to trade stock or other
securities in violation of the duty of confidentiality owed to the
corporation
Example – Wenger as a law clerk
iii. Requires Remaining Elements – Materiality, Scienter, π’s Reliance, and
Causation