AGENCY

AGENCY INTRO
 Agency law = type of relationship
 Define
o Principal (P) and Agent (A) are in a relationship so that the A’s interactions with 3rd parties can
result in either Tort liability or K liability towards P
 Gorton v Doty (p 1)
o Facts
 Teacher lends car to football coach (Garst) to drive players to away game
 Football coach gets in car accident with player as passenger
o Issue
 was the coach the agent of appellant while and in driving her car
o Rule
 agency is the relationship which results from the manifestation of consent by one
person to another that the other shall act on his behalf and subject to his control, and
consent by the other so to act
o Analysis
 Appellant consented that Garst should act for her and in her behalf is clear from her act
in volunteering the use of her car upon the express condition that he should drive it
 Garst consented to so act for appellant by his act in driving the car
o Conclusion
 Yes, the evidence supports the finding that the relationship of principal and agent
existed between appellant and Garst
 Agency TEST
o manifestation of consent that A acts
 can be informal/made through actions
o on P’s behalf
 who benefits?
o and subject to P’s control
 A. Gay Jenson Farms Co. v Cargill, Inc. (p 7)
o Facts
 Grain company and farmers
o Issue
 Did Cargill, but its course of dealing with Warren, become liable as a principal on
contracts made by Warren with plaintiffs
o Rule
 Consent, acting on behalf, subject to control
 A security holder who merely exercises a veto power over the business acts of his
debtor by preventing purchases or sales does not become a principal. However, if he
takes over the management of the debtor’s business either in person or through an
agent and directs what contracts may or may not be made, he becomes a principal.
o Analysis
 Manifestation of consent: substance of the written agreement
 On P’s behalf: Warren procured grain for Cargill; Cargill’s name used
 Subject to P’s control: approval rights, termination rights, right of first refusal
o Conclusion
 Yes; by its control and influence over Warren, Cargill became a principal with liability for
the transaction entered into by its agent Warren
AGENTS & CONTRACTS
 In order for a principal to be liable on a K entered into from an agent:
o Principal and agent relationship
o Agent had authority to enter into K
 Actual authority
 Apparent authority
o Two kinds of authority can be present in the same fact pattern (see quiz Q 4)
 Actual express authority (restatement § 2.01)
o A’s reasonable belief
o Based on P’s express manifestations
o Ex: manager says “agent go hire a gardener”
 Actual implied authority
o A’s reasonable belief
o Acts necessary or incidental to express manifestations
 Apparent authority (restatement § 2.03)
o Focus on understanding of third party
o Based on T’s reasonable belief
o Traceable to P’s manifestations
o Ex: course of dealing or customary authority
 Undisclosed principal
o An undisclosed principal is liable for all the acts…which are within the authority usually confided
to an agent of that character
 If a principal hires an agent and remains undisclosed, an unusual restriction on the
agent’s authority will not have effect
 Principal will be stuck with customary authority of an agent of that type.
 Ratification
o Affirming prior act professed to be done on your account
o Accepting results with:
 Intent to ratify
 Knowledge of material circumstances
 Estoppel
o T detrimentally relies on imposter agent; AND
 T must have suffered damage (ex: actually lost money)
o P intentionally or carelessly caused belief; OR had notice and took no reasonable precautions
 Mill Street Church of Christ v Hogan (p 13)
o Facts
 Mill Street Church of Christ regularly hired Bill Hogan to paint and maintain the church
building over a period of time. The Church had routinely allowed Bill to hire his brother
Sam Hogan (plaintiff) as an assistant on painting projects. In 1986, Church hired Bill
again to paint. During his painting, Bill reached a point where he could not finish the job
without an assistant. Bill offered Sam the helper job. Sam accepted the offer and
commenced work. A half hour after he started work, Sam fell and sustained an injury
that required hospitalization. Bill reported the accident to the Church treasurer, who
paid Bill for hours spent on the project, including the half hour Sam worked. Sam filed a
claim for workers’ comp. The Old Workers’ Compensation Board ruled that Sam Hogan
was not an employee of the Church and denied his compensation claim.
o Issue
 Is implied authority established
 o Rule
 Implied authority is actual authority circumstantially proven which the principal actually
intended the agent to possess and includes such powers as are practically necessary to
carry out the duties actually delegated
 The agent must reasonably believe because of present or past conduct of the principal
that the principal wishes him to act in a certain way or have a certain authority
o Analysis
 The existence of prior similar practices is one of the most important factors
 In the past the church has allowed Bill to hire his brother or other persons whenever he
needed assistance on a project
 Maintaining a safe and attractive place of worship is part of the church’s function, and
one for which it would designate an agent to ensure the building is properly painted and
maintained
 Sam believed that Bill had the authority to hire him as had been the practice in the past
o Conclusion
 Bill Hogan had implied authority to hire Same Hogan as his helper
 Three-Seventy Leasing Corporation v Ampex Corporation (p 16)
o Facts
 370 sued Ampex for breach of contract to purchase computer core memories. After a
meeting between 370’s sole employee, Joyce, Ampex salesman Kays, and Kays’ boss,
Mueller, the parties commenced negotiations which resulted in Kays giving Joyce a
written document containing the terms of sale of memory units from Ampex to 370. The
document had signature blocks for a representative of each party to sign. Joyce signed
on behalf of 370, but no one from Ampex signed the document. Shortly after Joyce
signed the document, Mueller circulated an intra-office memorandum stating that
Ampex had an agreement with 370 for the purchase of computer core memories, and
that at Joyce’s request all communications with 370 concerning the sale would be
handled through Kays. A few days later, Kays sent a letter to Joyce confirming the
delivery dates and installation instructions for the core memories. At trial, Ampex
contended that the only employees who had authority to enter into a contract were
Ampex’s contract manager or supervisor, not salespeople.
o Issue
 Did Kays have authority to bind Ampex to the sales agreement
o Rule
 An agent has apparent authority sufficient to bind the principal when the principal acts
in such a manner as would lead a reasonably prudent person to suppose that the agent
had the authority he purports to exercise
 Absent knowledge on the part of third parties to the contrary, an agent has the
apparent authority to do those things which are usual and proper to the conduct of the
business which he is employed to conduct
o Analysis
 It is reasonable for third parties to presume that one employed as a salesman has the
authority to bind his employer to sell
 There is no evidence that the limitation (only the contract manager has authority to sign
contracts on behalf of Ampex) was communicated to Joyce
o Conclusion
 Kays had apparent authority to bind Ampex and a contract was formed
  Absent knowledge of such a limitation by third parties, that limitation will not bar a
claim of apparent authority
AGENTS & TORTS
 Employer is liable for employee torts within scope of employment (respondeat superior)
o Employee = agent + principal controls manner and means of work
o A ER-EE relationship exists where the EE has agreed to:
 work on behalf of the ER and to be subject to ER’s control
 to be subject to ER’s control or right to control the “physical conduct” of the EE (manner
in which the job is performed)
o an agent-type independent contractor is one who
 has agreed to act on behalf of another, the principal
 but NOT subject to the principal’s control over how the result Is accomplished (the
physical conduct)
 actual agency (respondeat superior)
o control
o right to control the precise part of the business
 apparent agency
o justifiable reliance by plaintiff on the appearance of the agency relationship
o on care or skill of apparent agent
 scope of employment
o an act is within the scope of employment if it serves any purpose of the employer
o Restatement § 707(2)
 see restatement § 220 to determine type of relationship
o (a) control
o (B) distinct business
o (c) custom
o (d) skill
o (e) tools and place
o (f) length
o (g) compensation
 Ex: $/job (independent contractor); salary (employee)
o (h) core?
o (i) intent
o (j) P in business?
 Agent liability
o Own torts
o Agent for undisclosed principal (act like a principal, treated like a principal)
o Rogue agent
AGENCY SUMMARY
 Objectives
o Define agency relationship (Rstmnt § 1)
o Understand that the rules and analysis change based on underlying nature of the liability
 Liabilities that arise out of K claims
 Underlying agency relationship + some form of authority, estoppel, ratification,
non-disclosed principal
 Liabilities that arise out of tort
 Look for EE/ER relationship
 OR doctrine of apparent agency
o Justifiable reliance by third party
o On the appearance of the agency relationship
 See agency summary pdf

PARTNERSHIP
FORMATION
 Define: the association of two or more persons to carry on as co-owners of a business for profit forms
a partnership, whether or not the persons intended to form a partnership
o Co-owner = sharing $$ or sharing control
 Partners compared with EEs
o Fenwick v Unemployment Commission
o A person who receives a share of the profits of a business is presumed to be a partner in the
business…unless the profits were received in payment of services of an independent contractor
or of wages or other compensation to an employee
o Economic factors of a partnership
 Sharing profits and losses (strongest indicator)
 Sharing profits (revenues – expenses) (moderate indicator)
 Sharing revenues (weak indicator)
o Holding
 Even though they shared profits, there was no partnership
 EE did not have any shared control
 EE did not represent to third parties she was a partner
 Partners compared with lenders
o Martin v Payton
o All partners are liable jointly and severally for all obligations of the partnership
 Any one partner could be liable for the full amount of any liabilities
 Partnership by estoppel
o Young v Jones
o Test
 Representation of partnership
 By defendant
 Reasonable and good faith reliance by P
 Resulting in detrimental change of position
o P did not see brochure (evidence of partnership representation) until after decision was made
therefore, they did not make investment BECAUSE of the partnership representation
MANAGEMENT
 Partnership agreements can supersede the default management provisions in RUPA
 Statutory actual authority
o Each and every partner has unilateral authority
o UNLESS
 Really weird
 Known disagreement & RUPA 401(j) can’t solve
 Statutory apparent authority
o Even in cases where partner lacks actual authority (ex: disagreement or provision in agreement)
o If 3rd parties have reasonable belief that a partner has certain types of authority
o Partner has unilateral ability to bind partnership
 o UNLESS
 Outside ordinary course of partnership
 3rd party on notice of limitation of authority
o If one partner exceeds actual authority but binds partnership to obligation under apparent
authority, all other Ps can sue that party even though partnership is still liable to 3rd party
 Nabisco v Stroud
o Known disagreement between partners about ordering bread from Nabisco
o 401(j) cannot resolve because vote is 1-1 (no majority)
o R: maintain the status quo
 One partner did not have the ability to cut off the customary authority of the other
 When partners disagree on actual authority and 401(j) cannot resolve the dispute the
result is to maintain the status quo and the partnership keeps doing what it is doing
 Summers v Dooley
o 2 partners can’t agree on whether to hire a 3rd worker
o 401(j) cannot resolve because no majority  maintain status quo
 Fiduciary duties
o Meinhard v Salmon
 R: in controversy; see RUPA 404(b)
 (a) The only fiduciary duties a partner owes to the partnership and the other
partners is the duty of loyalty and the duty of care set forth in subsections (b)
and (c).
 (b) A partner’s duty of loyalty to the partnership and to the other partners is
limited to the following:
 (1) To account to the partnership and hold as trustee for it any property, profit,
or benefit derived by the partner in the conduct and winding up of the
partnership business or derived from use by the partner of partnership property,
including the appropriation of a partnership opportunity.
 R simplified: “hold as trustee” = more than just disclose; must share with partners
ECONOMICS
 RUPA default
o § 401(b): partners share equally in profits and losses
o § 401(a): “partnership” or “capital” account
 Starts equal to property or cash contributed
 Is increased by profits allocated to partner
 Is decreased by losses allocated to partner
 Is decreased by distributions to the partner
 Why have an alternative arrangement
o Profit allocations based on individual performance

CORPORATE BASICS
VOCABULARY
 The cast
o Shareholders
 Vote (directors elections, mergers)
 Cash checks
o Board of directors
 Appoint and oversee officers
 Make key decisions (mergers)
 o Officers
 Oversee employees
 Manage day-to-day
 Ex: president/CEO; secretary; treasurer/CFO
 Formation
o Deliberate formation: requires a filing with the state and adherence to certain formalities
o File articles with secretary of state  name initial directors  adopt bylaws/appoint officers 
issue (sell) stock  annually re-elect directors and officers
 Stock terminology
o Authorized shares = max amount of stock than can be issued
o Issuance = sold
o Outstanding = amount of stock has been issued
 Varieties
o Public (publicly traded)
 Thousands of passive shareholders
 Initial public offering
 SEC reporting
 Exchange (NYSE; Nasdaq)
o Close (privately held)
 Small # of shareholders
 Shareholders are also directors and officers of company
 Illiquid shares (not possible for the public to go out and buy/sell shares)
LIMITED LIABILITY
 MBCA 6.22(b)
o A shareholder is not personally liable for the acts or debts of the corporation except that he
may become personally liable by reason of his own acts or conduct
 Walkovsky v Carlton; p 198
o Carlton owns taxicabs and portions them out to several different corporations
o 2 exceptions to MBCA 6.22(b)
o Enterprise liability (stitching together sister corporations)
 Extending liability to the different corporations under common ownership
 TEST
 Co-mingling of corporate resources
 Ex: funds, employees, operations
 Resources among the different corporations are mixed up and can’t untangle
 Avoidable through recordkeeping
 Ex: documentation and compensating transfer of funds so you can tell where
one corporation ends and another begins
o Piercing the corporate veil (PCV)
 Extending liability to the individual shareholder
 TEST
 Unity of interest (control)
o not following formalities
 ex: corporation isn’t holding meetings/no board of directors
o commingling corporate and personal business
 ex: shareholder using corporate assets for personal reasons
o undercapitalization
 ex: company did not have sufficient funds to cover likely liabilities
  Injustice (in most jx acts must be deliberate not just a mistake)
o Fraud-ish conduct
 shareholder misrepresentation to creditors about being paid
o Unjust enrichment
 Shareholder gets personal benefits same time creditors got stiffed
 Sea-Land Services, Inc. v Pepper Source; p 204
o PCV can work in two ways (forward & reverse)
 1: extend liability from corporation to shareholder
 2: extend liability from shareholder back down to other corporations
o TEST (textbook case for PCV)
 Unity of interest
 Not following formalities: botched formation; no meetings
 Commingling: child support; pet support
 Undercapitalization: drained capital w/o proper dividend
 Injustice
 Fraud-ish conduct: false payment assurances
 Unjust enrichment: shareholder lined his pockets with corporate funds at the
same time creditors went unsatisfied
 PCV tips
o PCV will rarely (if ever) be available against shareholders of a public company
o Issue spot for fact patterns with parent/subsidiary relationship (high possibility of PCV)
PURPOSE
 A.P. Smith Manufacturing; p 214
o I: was charitable donation in the best interest of the corporation
o Business judgment rule
 Free of conflict of interest or other scandal, courts are generally going to defer to the
business judgment of the board
 Restated: courts will not step in and interfere with honest business judgment of the
directors unless there is a showing of fraud, illegality, or conflict of interest (Shlensky)
 Boards are expected to provide some business justification for philanthropy, BUT these
justifications will generally be accepted by the court
o Limits to courts staying out of corporate charitable donations
 No pet charities
 Ex: donating to charities set up/favorited by members of the board can be seen
as a conflict of interest
 Modest in amount
 Ex: donation is so large it can danger viability of corporation
 Board reasonably believed beneficial
 Ex: why did donation serve purpose of corporation
o Approaches
 Delaware: courts respect board’s business judgment
 The purpose of a corporation, unless specified differently, is to make money for
shareholders
 Dodge v Ford Motor; p 220
o Exception: court did step in
o Because Ford did not give a business justification for his decision the court would intervene and
force dividends to resume
o Corporate purpose doctrine
  Corporations should be operated for the financial benefit of shareholders BUT
 With courts giving wide discretion to the board to decide what is in their interests
 Hybrid entities can explicitly identify a purpose that is not financial/benefiting someone other than the
shareholders
o ex: social purpose corporation; benefit corporation*will come back in later modules*
CORPORATE BOARDS (INTRO)
DUTY OF CARE (DOC)
 duty to avoid mistakes
o guidance to directors of what is expected of them
 review standards
o fairness (most rigorous scrutiny)
o intermediate scrutiny
o business judgment review
 Kamin v AMEX; p 277
o AMEX board had 2 options to sell company
 Dividend “in kind” (option A)
 Sell shares (option B)
o Board decides option A  shareholders sue because they wanted option B
o Court
 The court will defer to the board (BJR) unless there is some reason to rebut it
 Ex: fraud, dishonesty, or nonfeasance
 Needs more than a mistake
 Smith v Van Gorkom; p 281
o CEO describes merger to board at meeting
 Short meeting
 No documents
 No analysis/questions re price
 Inadequate market check
o Rule
 BJR is presumption
 It is a presumption that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith, and in the honest belief
that the action taken was in the best interests of the company
 Gross negligence standard for rebutting “informed basis”
 If a board is grossly negligent in becoming informed about a decision, the BJR is
lost and the fairness review standard is applied instead
DUTY OF LOYALTY (DOL)
 Self dealing
o Bayer v Beran; p 303
 CEO serves on the board of directors and orchestrates the hiring of his wife (singer) for a
radio advertisement
 Self dealing transaction between corporation and CEO director
 Fairness review governs this transaction
 The business judgment rule yields to the rule of undivided loyalty…the dealings
of a director with the corporation for which he is the fiduciary are therefore
viewed with jealousy by the courts
 Fairness TEST
 Highest level of scrutiny
 Procedural fairness
o Was the process fair
o Ex factors: use of standard form contract
o Negotiated through agent
o Reports of advertising consultants
 Substantive fairness
o Was the outcome fair
o Ex factors: apparent success of the program
o Cost v industry standard
o Cost v historical practice
o Cost v company revenues
o Singer’s comp v other performers
 Corporate opportunities
o Broz v CIS, inc.; p 313
 4-part TEST
 Financial capability to undertake the opportunity?
 Was the opportunity in the same line of business?
 Interest or expectancy in opportunity?
o Concrete interest; taking steps or having plans to acquire license
 Resulting conflicts?
o By pursuing opportunity individually, would individual be in some
continuing conflict of interest with corporation?
o Ex: would individual be directly competing with corporation?
o Ex: would individual be using inside information from corp against them?
 First two prongs of test tend to carry a lot of weight
 If individual can satisfy test court will find it is not a corporate opportunity that has to be
offered up to the corporation
 Ex: answering “no” to above questions = individual wins
CLEANSING (RAFIFICATION)
 MBCA 8.61
o 3 options for a board of directors to avoid liability for a conflict of interest transaction:
 Approval by qualified directors OR
 MBCA 8.62
 Approval by qualified shareholders OR
 MBCA 8.63
 Prove fairness in court
 HYPO
o Board: A (100 shares), B (50 shares), C (50 shares)
o C wants to buy assets from corp (self-dealing)
 Directors (MBCA 8.62)
 Who’s qualified: directors free from taint
o A&B
 Quorum: majority of the qualified directors
o How many need to show up for it to be considered a valid meeting?
o A&B
 Required vote: majority of the votes cast at meeting
o How many votes have to be cast in favor of ratifying transaction?
 o A&B
 Shareholders (MBCA 8.63)
 Who’s qualified: shareholders without conflict
o A&B
 Quorum: majority of qualified shares in attendance
o A is enough
 Required vote if both show up
o A is enough because 100/150 shares is the majority
 Read 8.60-8.63; 8.70
o Note: 8.62: a single director cannot ratify a transaction
o Note 8.63: nothing prevents a single shareholder from ratifying a transaction
OVERSIGHT
 MBCA: § 8.31(a)(2)(iv)
 Francis v United Jersey Bank; p 296
o Mother and 2 sons on board of directors; sons are stealing; mother is sleeping
o Can mother be liable for actions of sons?
 Directors are under a continuing obligation to become informed about the activities of
the corporation
o Standard of review for oversight
 Oversight duty is part of the duty of care
 Did board breach fiduciary duty based on negative acts of others
 Ex: can board be held liable if CFO is found to have been falsifying invoices
 MBCA 9.31(a)(2)(iv)
 2 circumstances that hold a director liable for inaction and failure of oversight
 Constitutes a pattern of conduct
o “sustained failure to devote attention to the corporation”
o This is not a one-time incident
 Particular fact that would alert a reasonable director to start paying attention
o If there is an initial incident you ae expected to be more vigilant about
that part of the business in the future
CORPORATE BOARDS (ADVANCED)
BACKGROUND
 Poison pill
o Provision adopted by the board of directors
o Nondetachable shareholder right to obtain shares at a nominal cost after a triggering event
o Ex:
 1000 shares outstanding
 $30 share price
 Poison pill provision:
 if anyone reaches 20% ownership
 the other shareholders can buy shares at 50% market value
 with one such right/share
 application
 person buys 200 shares (20% of 100)  poison pill is activated
 1,000 – 200 = 800 other shares  exercise all 800 shares at $15/share
 1,000 (previous shares) + 800 (new shares) = 1,800 (total shares)
 Investor now has 200 shares/1800 (total shares) = 11.1% ownership stake
o Before pill: investor had 200/1000 shares = 20% ownership
 o Effects
 Diluting voting rights and economic interests of that shareholder wanting to takeover
 Increase cost of takeover
o Poison pill has not been activated since it was introduced in 1982
o What if you want a takeover?
 Board can vote to rescind poison pill
 Mergers & Acquisitions (M&A) basics
o Triangular merger
 Most large mergers
 Steps
 1. Acquirer forms acquisition sub (form a corporation solely for the purpose of
completing merger)
 2. Target ultimately merges into acquisition sub
 Target shareholders receive $ or shares of acquirer stock in exchange for target
stock
 End result
 acquirer owns new combined entity
 (acquisition sub + target assets and liabilities)
 Requirements
 Approval by board of directors of target
 Majority of target shareholders
o Tender offer
 I: acquirer cannot reach agreement with target board of directors
 Steps
 Acquirer makes public offer to target shareholders
 Result
 Unlikely acquirer can reach agreement with each and every shareholder
 Acquirer owns most target shares
 Remaining target shareholders keep their shares
 Second step merger
 Acquirer arranges merger with target entity
 Remaining target shareholders will receive $/shares for remaining shares
o They have no say because they will be outvoted
 Result
o Acquirer owns target assets & liabilities AND acquirer assets & liabilities
UNOCAL
 Intermediate/enhanced scrutiny
o Falls in between fairness and BJR
o 2 parts
 Unocal (this lecture)
 Revlon (see below)
 Unocal
o I: Attempted hostile takeover
o Unocal board approves $72 self-tender offer excluding mesa to discourage takeover
o TEST (hostile takeover)
 Court wants to see 2 things before they can get benefit of BJR
 Motive
 Legitimate motive in adopting takeover defense
  Ex: timing (secret good news), completion risk, price inadequacy
 Proportionality
 Takeover defense adopted is proportionate to stated motive
 Least burdensome method not required
 If motive is timing, may not block indefinitely

REVLON
 Intermediate/enhanced scrutiny
 Facts
o Target: Revlon
o Hostile bidder: Pantry Pride
o White knight: Forstmann Little
 Act 1: the takeover defenses
o Revlon develops takeover defenses to hold off PP
o 2 CEOs discuss potential takeover – Revlon has no interest
o Revlon board adopts “rights plan”
 (Similar to poison pill)
 Distributes exchange right
 Triggered by 20% acquirer
 Acquirer excluded
o PP goes hostile: public tender offer $47.50 to shareholders conditioned on financing
o Revlon develops second takeover defense “poison debt”
 Exchanged shares for
 high interest notes and
 preferred stock
 restrictive covenants
 no new debt
 can’t sell assets
 no dividends
 waivable by independent directors only
o PP increases bid to $56.25
o Okay under Unocal?
 Yes; so far
 Motive: price inadequacy
 Proportionality: effectively bid up price
 Act 2: deal protections
o Revlon strikes “white knight” deal with FL and agrees to waive poison debt after deal
o Revlon gives FL asset lock-up, no shop, and termination fee in exchange for FL “supports” notes
 Deal protection devices are not unusual under circumstances
 Devices are rather generous (Issue)
 RULE
o When breakup of the company was inevitable, the duty of the board has thus changed from the
preservation of Revlon as a corporate entity to maximization of the company’s value at a sale
for the stockholders’ benefit
o If the board is going to sell the company, at this point they need to do everything they can to
get the best price rather than choosing the bidder they liked best
 When does Revlon apply
o Trigger: board committing to
  Cash deal or
 Stock deal resulting in controlling shareholder
o Requires: reasonable steps to maximize short term value
 Ex: public auction;
 canvas market/discuss with people likely to buy company
 market check
BAD FAITH
 why it matters
o directors acting in good faith indemnified
o can’t eliminate liability for bad faith
 examples
o intent to harm corp
o intent to violate regulations
o conscious disregard of duties
 Disney
o 1995 Disney was in search for successor
o Compensation package for Ovitz
 Terms: $25M, severance
 Process: past experience, compensation consultation, term sheet
o Ovitz is fired and he sues for $130M
o P’s claims
 Rebut BJR through van gorkom
 Court: not best practices but does not rise to level of gross negligence because of
compensation committees experience; consultation process
 Rebut BJR b/c bad faith
 Court: no bad faith (if you don’t find gross negligence it is unlikely we will find
bad faith)
 Bad faith = more than gross negligence
 Subjective bad faith = actual intent to do harm
 Conscious disregard for one’s responsibilities
 Even if BJR, waste
 Requires claims that are on its face so irrational it cannot be defended
 Court: the claim does not come close to satisfying the high hurdle required to
establish waste
 Overview recap

CORPORATE SHAREHOLDERS
SHAREHOLDER FIDUCIARY DUTIES
 Sinclair Oil; p 325
 o Self-dealing = disproportionate benefits to shareholders (look at did the minority shareholders
get what was proportionately theirs??)
o A controlling shareholder cannot engage in self-dealing that produces disproportionate benefit
to the controlling shareholder unless that self-dealing is fair to the corporation
 If so  court will scrutinize under fairness standard not business judgment
o Courts will scrutinize self-dealing transactions between corporations and controlling
shareholders that provide disproportionate benefit
 What is a controlling shareholder?
o 50%+ voting control; OR
o 25%+ voting control & other factors
SHAREHOLDER AGREEMENTS
 McQuade v Stoneham; p 620
o Shareholder agreement provisions
 Art I: We will vote for each other in board elections (ok)
 Art II: Once elected to the board, we will vote for each other in officer elections (issue)
o Court:
 While it is permissible for shareholders to band together and commit in advance how
they will vote their shares,
 It is impermissible for them to decide in advance how they will act as directors
 Stepping into the boardroom = obligation to all shareholders
o Takeaway
 Shareholders can band together to decide how to vote shares to get people on board
 Not ok for shareholders to band together and decide how the board will vote on things
 Clark v Dodge; p 626
o Shareholder agreement provisions
 Clark will be a board member and officer
o Court
 Agreement is valid
o Distinguish from McQuade
 All shareholders are banding together and signing agreement excuses rule in McQuade
 Shareholder agreements
o Commonly cover
 Shareholder voting
 Share transfers
o Generally do not cover the election of the parties as officers
 Cannot dictate board votes, unless signed unanimously by all shareholders
 Employment agreement
o Agreement between officer and corporation
o Entrepreneur will hold office for a period of time with a certain amount of compensation
SHAREHOLDER INSPECTION RIGHTS
 What?
o Shareholder list
o Other books and records
 Financial statements
 Board minutes
 Crane Co. v Anaconda; p 588
o Statute
 Shareholder list available if it is for a proper purpose related to the corporation
 o Proper purpose?
 Communication regarding corporate transaction = YES
 Solely social/political issues = NO
 What is a shareholder list?
o Cede list
 Typically lists “intermediaries”
 Brokers that hold shares but do not control votes
o NOBO list
 Actual list of shareholders who control votes
 Difficult to get
 Sadler v NRC
o When must company give NOBO list?
 Only when a corporation has it
LLCs
FORMATION
 Overview
o Owners = members
o Partnership economics
o Partnership tax
o Limited liability
 Owners of LLC are not generally liable for obligations of the entity
 Formation
o Filing articles of organization with the secretary of state
o Operating agreement
o Maybe:
 De facto LLC doctrine
 LLC by estoppel Applicable to
 Assumption of pre-incorporation expenses corporations too
o Duray Development , LLC v Perrin; p 234
 Perrin signed agreement for excavating work individually and behalf of company Perrin
Development
 Revised agreement was signed with Perrin’s new entity Outlaw LLC
 Revised agreement was signed before Outlaw’s articles of organization were
accepted by the state
 I: Outlaw LLC entered into an agreement before it existed
 Perrin defense: De Facto Corporation Doctrine
 Common law doctrine that says when someone tries in good faith to form an LLC
or Corporation, the law will recognize a corporation even if there has not been
one officially formed
 Elements
o Incorporation statute available
o Good faith attempt to comply
o Conducted business in corporate name
 Exception
o No limited liability if you know articles have been rejected
 Exam tip: did someone actually complete and mail in articles
 Corporation by estoppel
  When someone treats the body like a corporation, it cannot later go back and
argue that the corporation did not exist
 Hypo
o XYZ corp enters into supply K
o Never filed articles
o Parties continue to act like XYZ is a corporation (performing services,
paying bills)
o XYZ can’t get out of the K
o Neither can supplier
 Generally non-applicable to tort claims
 Duray signed K with Outlaw LLC, paid bills to Outlaw LLC
Liability
o Limited liability ULLCA 303(a)
 Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a
limited liability company, whether arising in contract, tort, or otherwise, are solely the
debts, obligations, and liabilities of the company. A member or manager is not
personally liable for a debt, obligation, or liability of the company solely by reason of
being or acting as a member or manager
 Members will not be liable for the obligations of the entity
o Piercing the LLC veil
 NetJets Aviation; p 253
 Unity of interest (control)
o Not following formalities (see ULLCA 303(b)
o Commingling
o undercapitalization
 Injustice
o Fraud-ish conduct
o Unjust enrichment
MANAGEMENT STRUCTURE
 ULLCA 301
 Member-managed
o Each member has unilateral actual authority
 Limits
 Really weird or
 Known disagreement and ULLCA 404(a)(&(c) can’t solve
o Each member has unilateral apparent authority
 Limits
 Outside ordinary course of business or
 3rd party on notice on restriction on member’s authority to bind LLC
 Manager-managed
o Managers (not members) have unilateral actual authority
 Limits
 Really weird or
 Known disagreement and ULLCA 404(a)(&(c) can’t solve
o Managers (not members) have unilateral apparent authority
 Limits
 Outside ordinary course of business or
 3rd party on notice on restriction on manager’s authority to bind LLC
  Operating agreement limitations
o Operating agreement cannot effectively cut off apparent authority with provisions limiting the
member/managers decisions
o If an operating agreement prohibits a member/manager from committing an act on behalf of
the LLC, but apparent authority binds the LLC to the act anyways, the member/manager is liable
to the other for breach of the operating agreement
FIDUCIARY DUTIES
 ULLCA 404
o If member-managed, all members have
 DOL
 DOC
 To entity and each other
o If manager-managed, only managers have
 DOL
 DOC
 To entity and each other
 ULLCA 409
o imposes a duty of care on members of a member-managed LLC and managers of a manager-
managed LLC.
o The least culpable conduct that can result in liability of the duty of care = gross negligence
o Look from lectures above on DOC/DOL

 McConnell v Hunt Sport Enterprises; p 261

o I: can the contract provision override the statute for the fiduciary duty of loyalty?
 Yes
 An operating agreement can define the scope of its members’ fiduciary duty
o You can reduce/define the duty of loyalty but cannot completely do away with it
CHOICE OF ENTITY
ALPHABET SOUP
 Rarely used entities:
 Limited partnerships (LP)
o Formation
 filing of a Certificate of Limited Partnership
o Management
 Limited partners
 Financial investors
 Rights to profits/losses
 Passive – cannot be involved in management of company
 Limited liability – can only lose amount of investment
 General partner
 Must be at least one
 Liable jointly and severally to partnership liabilities
 Rights to profits/losses
 Active – makes decisions
 Can be an entity
 Limited liability partnerships (LLP)
o Formation
 File with state
 o Management
 All partners active
o Liability
 Some states limit liability for torts only
 Other states extend limited liability
o Eligibility
 Only available to specialized types of professional services
 Ex: accountant, lawyer, architect
TAXATION
 LLC tax
o Taxation only occurs once on individual level at member distribution
o Corporations are doubly taxed
 Entity pays its own taxes at corporation level
 Shareholders are taxed on dividends
CLIENT ADVICE
 Advising choice of entity
 The choices:
o C-corp
o S-corp
 Distinction applies to IRS not state corporate law
 Same tax advantages of an LLC (pass through taxation)
 Strings attached reserving status for small corporations
 Can’t have more than 100 SH
 SH must be individuals not entities
 SH must be US taxpayers
 Can only have one class of stock
o LLC
 Generally considered tax advantaged
o Partnership
 Never really the answer because of liability concerns

SECURITIES LAWS
OVERVIEW
 Sources
o Federal (focus on this class)
  Securities Act of 1933 (’33 Act)
 Exchange Act of 1934 (’34 Act)
o State (won’t study in great detail here)
 “blue sky laws”
 Often preempted by, or similar to, federal law
 Primary features
o Registration
o Periodic disclosure
 Regular disclosure to the market after initial public offering
o Fraud liability
 ‘33 Act
o Rule statement: offer or sale of a security must be registered or exempt
 1. Is it a security? If Y  do any exemptions apply?
o Must register “offer or sale” of “security”
 “offer or sale” – any issuance of security (formation, capital raising, etc.)
 “security” – stocks, bonds, some LLC interests (investment K), etc.
o Unless it can confirm exempt private offering
 ’34 Act
o Regulates companies AFTER the IPO
o Periodic reporting
 Annual report: 10-K
 Quarterly: 10-Q
 Real time disclosure: 8-K
o Governance requirements
 Majority independent directors
 Audit committee
 Compensation committee
 Nominating committee
o Proxy statement when soliciting proxies
 asking shareholders for their vote
 Rule 14(a)
 Securities Fraud
o Most famously, Rule 10b-5 of ’34 act
o Elements similar to common law fraud
 Material misstatement or omission
 Material = important to the average investor
 Scienter
 Intentional or reckless
 Reliance
 Loss causation
o SEC/DOJ enforcement
DEFINITION OF SECURITY
 Case notes:
o It is the “economic reality” of a particular instrument, rather than the label attached to it that
ultimately determines whether it falls within the reach of the securities laws
 Whether an investor, as a result of the investment agreement itself or the factual
circumstances that surround it, is left unable to exercise meaningful control over his
investment
  Robinson v Glynn; p 413
o Agreement: NOTE this is an LLC
 Robinson will invest up to $25 mil after a successful product test
 Robinson will receive 33,333 shares of GeoPhone
 Robinson will have the right to appoint 2 managers
 Robinson will be Treasurer and board chairman
o Fraud claim
 Company falsifies product test
 I: is this a type of securities fraud
 “shares” of LLCs are not considered “stock” under “securities” definition
o Security factors
 Stock specifically listed
 NOT LLC interests
 “investment contract”
 A contract, transaction or scheme whereby a person invests money in a common
enterprise and is led to expect profits primarily from the efforts of the promoter
or a third party
o Aka a passive investment
 Examine legal rights of the investor
o Holding
 No investment K = no security = no securities fraud
 Robinson was actively involved in company
 Officer/management position
REGISTRATION EXEMPTIONS
 See “Rule 506 Summary” doc
 Case notes
o Exempt securities
 Exempt securities need never be registered, either when initially sold by the issuer or in
any subsequent transaction
o Exempt transactions
 One-time exemptions
 Private placement exemptions
o Doran v Petroleum Management Corp; p 420
 Agreement
 Doran will invest $125,000
 Doran will receive LP interests
 Section 4(a)(2) exemption
 You don’t have to register a sale of a security if it is not a public offering
 # of offerees
o Not just sales
o Size 8 is not a large amount (entirely consistent with 4(2))
 $ size of offering
o $125 k is considered small
 Manner of offering
o No public advertising
 Relationship of offerees to each other and the issuer
o Did company and offerees have pre-existing relationships
 Disclosure of (or access to) information
 o what type of information was expressly provide to offerees
o Ex: disclosure statements
 Sophistication of offerees
o Was everyone who was offered the security experienced
 Looking for transaction where there is some means of investor protection where
they don’t need the protection of this statute
o Rule 506
 Cements bright line rules to satisfy case law 4(2) vagaries
 Preempts state blue sky requirements
 “accredited investor”
 $1M net assets or
 $200K annual income
 Applicable if all accredited investors
 Unlimited $ and # of investors
 No specific disclosure requirements
 Must certify “accredited” status
o Self- certifying
 “check this box if you meet the requirements”
 No general solicitation allowed
o + extra verification
 Personally research investors meet “accredited” status
 General solicitation allowed
 EXAM APPLICATION
o Securing exemption is important because generally it is too expensive to register a public
offering of a security

PUBLIC COMPANY GOVERNANCE

LOOK & FEEL
 Background info
  NOT on exam
SHAREHOLDER PROPOSALS
 Rule 14a-8
o Grounds for exclusion
o Company proxy statement
o $2,000 stock (owned for at least one year)
o Short supporting statement (500 words)
o No misleading statements
 Lovenheim v Iroquois
o Shareholders recommend that the board form a committee to study whether the production of
foie gras is cruel
o Rule 14a-8(i)(5) – relevance exclusion
 Less than 5% assets, net profits, gross sales; AND
 Not otherwise significantly related
 Ex: social or ethical importance for the company
 AFSCME v AIG
o The bylaws of AIG shall be amended to permit shareholder nominees access to the company’s
proxy statement
o Rule 14a-8(i)(8) – election exclusion
 Only prohibits a shareholder proposal that is trying to influence a particular election
 Bylaw amendments changing the process for future elections in general are allowed
 CA, Inc. v AFSCME
o Rule 14a-8(i)(1) – improper under state law
 What can SHs do directly
 As long as a proposal is phrased as a recommendation “we request/recommend that…”
then it cannot be excluded as improper under state law
 Shareholders can express themselves so long as it isn’t binding on the board
o Rule 14a-8(i)(2) – violation of law
 Can’t be fixed by making something a recommendation
 Typically a proposal directing a company to violate a rule that governs its operations
 Ex: we recommend Apple refute, obstruct, and undermine all efforts by the US
government to access date on phones, including defying court orders
 Trinity Wall Street v Wal-Mart
o We recommend Wal-Mart’s board review company policy regarding the sale of guns
o Rule 14a-8(i)7) – management function exclusion
 Shareholder proposal “deals with a matter relating to the company’s ordinary business
operation”
 Social implications not “ordinary”
 Unless micro-managing
INSIDER TRADING
 Insider trading is a type of Rule 10 b – 5 violation
 SEC v Texas Gulf Sulfur Co.
o Insider with material nonpublic info must disclose information or abstain from trading
 Material?
 Probability of event x magnitude of effect
 Importance to reasonable investor (biggest factor)
 SEC v Dirks
o Tippee Liability
  The insider has breached his fiduciary duty to the shareholders by disclosing the
information to the tippee and
 Requires insider receiving personal benefit
o Pecuniary gain
o Reputational benefit (translating to future earnings)
o Providing tips to relative or friend
 The tippee knows or has reason to know that there has been a breach
 Tippee is responsible for insider trading and insider is responsible for aiding and abetting
o Temporary fiduciary
 See note 14
 Extends “classical” insider trading
 When you work for a company you become a fiduciary to that company
 Ex: lawyers and other consultants
 US v O’Hagan
o Misappropriation Theory
 “deception”
 Secretly stealing information from any source (not just traded company)
 Tippee liability still applies (do this analysis too if applicable)

CORPORATE LITIGATION
DERIVATIVE SUITS (DEMAND)
 Recap
o Federal securities law
  Rule 10b-5
 Fraudulent private placements
 Large class-action fraud claims
 Insider trading
 Other
 ’33 Act § 11 false registration statement
 ’34 Act § 14 false proxy statement
o State law
 Fiduciary duty claims (derivative)
 Appraisal actions, statutory violations
 Direct = brought by shareholder in own name
 Derivative = initiated by shareholder on corporation’s behalf
 Tooley Test
o Did corporation (derivative) or individual shareholders (direct)
 Suffer the alleged harm?
 Receive the benefit of the remedy?
o Fiduciary duties are owed to corporation - breach of DOL/DOC (derivative)
o Voting, inspection, and preferential distribution rights held at shareholder level (direct)
 Demand = a request of the board that they take action
 roadmap:

 Grimes
v Donald

o Aronson test – do we trust the board to handle litigation

 Board is NOT trusted if:
 (1) Majority of board
o (a) Has material financial or familial interest in challenged transaction; or
 Need more than just voting for challenged transaction
o (b) Lacks independence from wrongdoer (financial or social ties); or
 (2) Transaction not valid exercise of business judgment
o Ex: evidence of gross negligence in becoming informed; waste
DERIVATIVE SUITS (SLC)
 Special litigation committees
o If the board cannot be trusted to handle litigation, SH can run litigation
o Independently reviews transaction/litigation and if it should be pursued
 Zapata
o Step 1
 Independence and good faith of committee
 Bases supporting recommendation
o Step 2
 Court’s own business judgment
 Does corporation have a “compelling interest” in suit being dismissed?
 SLC has persuaded court claim has no merit
 Claim will result in bad publicity
 Expensive lawsuit to try to prosecute and won’t result in worthwhile benefits
 Court can consider matters of law and public policy
 Even if it isn’t a great idea for corporation to pursue claim, it is an important
principle that the lawsuit continue bc it will reveal a scandal that should be
revealed to restore confidence in corporate America
 or it will lead to discovery of criminal conduct that should be punished in
criminal justice system
o Burden
 On the corporation
INDEMNIFICATION
**see indemnification summary pdf**
 The ability or requirement of a corporation to pay judgments or litigation expenses incurred by
corporate officers or directors while serving the corporation
 DGCL 145
o A. MAY indemnify for 3rd party claims
o B. MAY indemnify for derivative claims
o C. MUST indemnify when director or officer vindicated
o E. MAY liberally advance expenses
o F. MAY somewhat enhance these rights
 Checklist
o Does statute permit corporation to indemnify?
 DCGL 145(a)/(b)
o Did corporation agree in advance somehow?
 See articles, indemnification agreements, board action
o Is it required by statute?
 DGCL 145(c)
 DGCL 145(a) – 3rd party claims
o A corporation shall have power to indemnify any person who was or is a party to any action by
reason of the fact that he is or was an officer against expenses, judgment, fines, and amounts
paid in settlement if he acted in good faith
 DGCL 145(f) – enhancement
o The indemnification and advancement of expenses provided by [this statute] shall not be
deemed exclusive of any other rights…under any bylaw, agreement…or otherwise
o Court interpretation
  Corporations can use bylaws/articles to make permissive language in 145(a)/(b)
mandatory
 Agreement cannot expand (a)/(b) – providing indemnification in circumstances where
(a)/(b) would not allow it
 DGCL 145(c) – D&O vindication
o To the extent an officer has been successful on the merits or otherwise in defense of any
action…he shall be indemnified against expenses…reasonably incurred by him
 DGCL 145(b) – derivative claims
o No indemnification if “adjudged liable”
 A court finds director or officer to be liable
o Only covers:
 Litigation expenses from a win
 Litigation expenses in reaching settlement
 DGCL 145(e) – advance expenses
o Permissible, never mandatory through statute
o Must be reasonable
o Must agree to pay back if ultimately not entitled

CA CPROPRATE LAW
QUASI-CA CORPORATIONS
 CA Corporations Code Section 2115
o Tries to apply CA law to corporation incorporated in other states but headquartered in CA
o Triggers
 Majority of business in CA
 Sales
 EEs
 property
 Majority voting shares held in CA
 Does not apply to publicly traded companies
o Applicable laws
 Election of directors (section 708)
 Cumulative voting
o Each SH gets votes = # of shares they hold X # of directors being elected
o Votes can be stacked on one candidate
 Voting on mergers
 DE
o Preferred and common vote together
 CA section 1201 & MBCA
o Separate voting by class (class voting)
o Both a majority of preferred and majority of common must approve a
transaction
 Internal affairs doctrine
o The internal operation of a corporation is governed by the state of incorporation
o Unless CA gets involved  look if 2115 applies
BOARD DIVERSITY
 Short essay assignment
HYBRID ENTITIES
 Contain both economic goals (making $$ for SHs) and non-economic goals
 Social purpose corporation (SPC)
o Must specify a social purpose
 Goal to have a positive effect on:
 EEs, suppliers, customers, creditors; OR
 Community and society; OR
 Environment
o Annual social purpose reporting
 Informal reporting requirement
 Board/management are supp0osed to send out some discussion on what they did to
advance that social purpose
 Benefit corporation (BC)
o Required purpose
 “a material positive impact on society AND the environment, taken as a whole”
o Progress towards stated goals is measured by independent third-party standard
 More than just corporation’s board/management opinion