BASICS FORMATION, PLANNING, REPRESENTING, DOCUMENTS CONSTITUENTS 1. CHARACTERISTICS OF CORPORATIONS a. Separate entity b. Perpetual existence c. Limited liability d.

. Centralized management/separated s/h and ownership interests e. transferability of ownership interests, market for corporate control 2. TYPES OF ORGANIZATIONS a. Public stocks traded, governance separates ownership from control, usually no active management by shareholders b. Close different rules. No market for securities. Overlap of management and ownership. Shareholders also officers, operates like partnership. c. Non Corporate i. General Partnership contract based. Each members joint & severally liable. ii. LLP GPs are joint & severally liable. Limited partners are not. iii. LLC LL of corporation with tax advantages of partnership. 1. Corporations pay tax on net income, or has loss. Partnership pays no tax on net income after salary payments, but corporation does. So, If you expect a business to run loss for the first few years, might want a partnership, because individual income taxes will be lower. 3. FORMATION a. MBCA 2.01 2.07 illustrates procedures generally required i. Organization is carried out by incorporator who plays no role in resulting corp. ii. Incorporator files documents & signs them iii. Filing is accompanied by payment of fee (usually calculated by # of authorized shares or aggregate legal capital) b. When does corporate life begin? i. In MBCA jurisdictions, corporate existence commences w/filing of articles ii. In some other states, existence commences when Sec of State or other official issues a certificate c. First Acts After corporation comes into existence, first meeting must be held i. Either by incorporators, who select BOD, or where BOD is named by articles, by Bd members themselves ii. Tasks: elect additional directors, adopt by-laws, appoint officers, adopt a corporate seal, designate bank for corporate funds, sell of stock to s/h 4. PLANNING CONCERNS a. Three sets of issues: i. How do different forms handle majority and minority interests? ii. How does the choice of form affect the ability to raise capital? iii. What are the tax implications of each form?

b. Majority/Minority Interests (extent to which form deals with opportunistic behavior) i. Corporation favors interests of majority s/h. Board decisions that advance the majority interest are insulated unless they do not pass the BJR. 1. Some states allow minority s/h to seek a judicial order ii. General Partnership default rule allowing at-will dissolution is critical. Majority can bring about needed changes that otherwise would require unanimous consent. (If partnership isnt working, partners can dissolve, fix the problem, and then reorganize) 1. Minority partner can prevent unjustified squeeze-out by proving that the majority did not act in good faith, or can use at-will dissolution opportunistically to deal w/majority. 2. To deal with this problem, partnerships can draft provisions that reduce the risk of opportunism by calling for specified undertakings or terms or permit expulsion without dissolution in certain sets of circumstances w/payment dictated by the agreement. c. Ability to Raise Capital i. B/c they have limited liability, corps. find it easier to raise capital than partnerships ii. LLCs = best of both worlds they have limited liability, but they also allow the entity to be structured as a partnership and to be taxed like a partnership. 5. LEGAL CONCERNS who is the client? (AMA Model Rule 1.13) a. Entity Theory retroactive. Pre-incorporation representation is deemed to be corporate representation. (Danforth) i. If you help set up a corp., you are & always have been the corps lawyer, even if you were working on project before the corp. legally came into existence b. Aggregate Theory Represent both corporation and individuals as joint clients. i. Giles v. Davison (lawyer represents multiple co-clients during formation. Once entity is formed, clients decide whether lawyer will continue to represent (a) constituents AND entity, or (b) JUST the entity.) ii. Opdyke v. Kent Liquor Mart ((lawyer had breached duty to plaintiff (an original s/h) when he purchased stock in the company he helped incorporate although he knew that plaintiff wanted to purchase it himself) c. Reasonable Expectations Test what were the reasonable expectations of the client/clients? i. Westinghouse Elec. Corp (7th Cir. 1978) ((1) if an attorney leads an individual or entity to believe that they are a client, (2) and the belief is reasonable under the circumstances attorney-client relationship is created, regardless of whether client enters into a formal retainer agreement.) ii. Rosman v. Shapiro (S.D.N.Y. 1987) (reasonable expectations test to disqualify corporate counsel in a litigation. The only 2 s/h reasonabl*y+ . . . believe[d] that the corporate counsel [was] in effect his own individual attorney.) 1. Relied on evidence showing that both s/h consulted with attorney for legal advice concerning the creation of the corporation d. Hazard, Ethics in the Practice of Law lawyering for the situation i. Lawyer is a nonpartisan observer when clients clash: can assess the situation objectively, is an interpreter of facts and precedent, can discourage escalation of conflict and recruitment of outside allies, articulate general principles and common custom and help the parties assess their claims

6. BASIC DOCUMENTS a. Articles of Incorporation i. MBCA 2.02; DGCL 102(a) - AoI must set forth specific things (name of corp) ii. MBCA 10.03; DGCL 242(b)(1) Amendment by having directors adopt submitting so s/h for approval. At special or regular meeting. 1. Difference in power Amendments have to go through BoD. S/h can't initiate change; can only approve b. Bylaws i. MBCA 10.20 - can be amended by either s/h or BoD ii. DGCL 109(a) - only s/h granted authority to amend bylaws 1. BUT does say that can give that power to BoD if want to 1. CONSTITUENTS: a. Shareholders right to vote on major transactions. Residual financial interest. b. Board of directors ultimate legal authority to run a corporation. elected by stock holders. Responsible for managing/supervising corporation. Inside/Outside. i. MBCA 801(b); DGCL 141- all corporate powers shall be exercised or under Board authority c. Committees (nominating, compensation, audit, etc.) i. Board can delegate full authority to a committee on a particular subject (e.g. whether to bring suit) ii. Importance of independent committees in evaluating takeovers and offers. d. Officers CEO, President, Vice Presidents, Secretary, Treasurer e. Other Corporate Actors (Stakeholders) i. Creditors protect themselves in contracts, not by fiduciary duties ii. Employees protected by employment Ks, common law, OSHA, discrim. statutes, labor laws. iii. Customers, Suppliers, Community THEORY VIEWS OF THE CORPORATION, CORPORATE SOCIAL RESPONSIBILITY 1. THEORIES OF THE FIRM a. Private Property i. Berle-Means enhance s/h voice to improve relationship, but keep directors and s/h separate ii. Contractarian group of people who contract to engage in economic activity. mkt for corporate control to take care of agency problems. discredited iii. Director Primary (Bainbridge) directors should be given wide discretion b/c they have expertise & managerial skill. Letting them run things is an efficient division of labor. b. Social Institution i. Team production board discretion, w/input from s/h. Board can have ultimate say. ii. Shareholder Primacy b/c is a means to the end of advancing the larger social interest of the shareholders, not b/c of property rights. iii. Political Product public co. is the product of a combination of political/economic forces c. Way to reconcile: short-term and long-term welfare

i. Enlightened view of self-interest allows s/h and stakeholders to both have their interests served ii. Example: e.g. CTO to purchase company at a 50% premium and then cut the workforce by 50%. Great for current s/h, not for stakeholders. obligations diverge. 1. Property: S/h obligation is to accept. Stakeholders obligation is to accept & not make it hard for s/h to accept. (voice option) 2. Institutional: s/h and stakeholders have an obligation to the entity at a whole. Balance welfare. (exit option) 2. SOCIAL RESPONSIBILITY a. Dodge v. Ford: Acorporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are supposed to be exercised for that end. They have the authority to choose the means, but not another objective. i. What does it prove? some scholars cite this case to prove that sole (legal or normative) duty of directors is to maximize s/h profits . . . this is not strictly true. 1. Court noted that an incremental humanitarian expenditure for the benefit of employees is permissible 2. Close reading suggests that case is more concerned with majority s/h oppressing minority than with broader question of duty to maximize s/h wealth. ii. Conclusion: Ford stands for the proposition that as long as the goal of the corporation is profitmaximization, Ds have discretion to choose strategy (BJR) b. Must a director maximize s/h welfare in all cases? (DE) i. No. Unocal and Time v. Paramount establish that directors have discretion to take into account various stakeholder interests, and are not limited strictly to pursuing short-term shareholder profit. c. Different Theories of Firm have different Conceptions i. Berle only for ratable benefit of s/h (Milton Freidman) ii. Dodd business corporation has economic, social, profit functions iii. Davis large corps. provide social benefits BY seeking profit. (R&D, etc.) iv. ALI reconciling both to promote optimal outcomes. May devote effort to public welfare, depart from short-term profit to realize long-term. d. Theodora Holding Corp (reasonableness standard for corporate contributions/donations.) i. Rule: within reasonable limits both as to amount and purpose ii. Comes from IRC, which says that business donations are limited to 5% of revenue of corporation. If < 5%, per se reasonable) MONEY SECURITIES, ACCOUNTING 1. Corporate Securities a. Debt options, bonds, debentures, notes. SAFE & secure, but exercise no control i. Debt claims subordinate equity claims ii. Options: right to buy future stock. Can be issued by one person. (DGCL 157(c)) 1. Backdating (awarding @ lowest cost) misleading b/c company is not deducting every expense its supposed to)

2. Call option: right to buy shares. 3. Put option: right to sell shares (uncommon) 4. Strike price/exercise price: price specified in option k 5. Maturity date/expiation date: date specified in option K 6. Warrant: stock option issued to public iii. Bonds: fully contractual indentures, issued w/o shareholder approval. No vote. 1. Requiring corp. to pay fixed amount at maturity, interest throughout. 2. If default acceleration, entire amount due immediately 3. Convertible debenture bonds convert to common stock. Way to hedge guarantee if company suddenly booms. 4. Callable at fixed price @ option of borrower. Valuable if interest rates decline. Price often set at higher than K price. b. Equity common, preferred, riskiest, but exercise control. i. Until sold: authorized, but unissued ii. Authorizing more shares requires an articles amendment iii. When sold: authorized, issued or authorize, outstanding iv. If bought back by corporation: authorized and issued, but not outstanding. (Treasury shares) v. How many shares to issue? 1. issuing only limited number preserves voting rights. 2. MBCA 6.21(f): s/h retain power over issuance of additional shares of authorized stock approval is needed if corporation issues shares with voting power equal to more than 20% of voting power outstanding immediately before transaction (unless cash) vi. Preemptive rights: To prevent share dilution. If new shares issued, current s/h get first dibs. Today, most corps. have an opt-in approach. 1. Must include provision in articles of incorporation. 2. Only small corporations adhere to the doctrine of preemptive rights. 3. MBCA 6.30(b) addresses problems that arise when s/h have preemptive rights a. Unless articles provide otherwise, no preemptive rights exist b. are limited in corps with multiple classes of stock. c. Tax Considerations favor debt in capital structure i. Allows corps to deduct from taxable income interest paid on issued bonds. 1. Repayment on principle (bond) typically treated as tax-free return on capital. ii. Does not allow corps. to deduct from taxable income dividends paid on stock. iii. So why not always bonds instead of preferred stock? 1. Preferred stock is more flexible directors dont have to pay preferred dividends but do have to make regular payments on all debts. 2. company w/low debt:equity ratio is unattractive to investors d. When is debt really debt? (Slappey Factors)

Names given to certificates Presence of absence of fixed maturity date Source of payments Right to enforce payment of principal and interest Participation in management flowing as a result Status of contribution w/r/t regular corporate creditors

Intent of the parties thin or adequate capitalization identity of interest between creditor and stockholder source of interest payments ability of corporation to obtain loans from outside lenders extent to which advance was used to acquire capital assets failure of debtor to repay or seek postpone due date

e. Leveraging/Undercapitalization DEEP ROCK DOCTRINE (Taylor) i. courts have exercised equity jurisdiction to subordinate claims of s/h creditors to those of other creditors when they conclude that s/h creditors have not invested adequate equity capital into the corporation to keep it running. ii. Issue in applying: determining whether the company has deceived lenders into thinking the company is more creditworthy than it is. 1. If no deception: high leverage alone not a problem, and courts suggests that if lenders know the facts about high leverage, they can make informed decisions and can bargain for higher interest rates or more collateral to cover their risks. 2. If deception: more likely to invoke Deep Rock Doctrine and subordinate the claims of the purported debtholders to those of the real debtholders f. Equity Link Investors (duty to prefer interests of common stock over preferred (in good faith) when there is conflict.) i. Rationale: common s/h are the residual owners. They are the ones who get what's left after all the debt is paid off. They are taking the most risk, and are the most sensitive to fluctuations in the company. 2. Financial Accounting a. Assets = Equities + Liabilities i. Asset = property, tangible or intangible. (cash, marketable securities, accounts rec., notes/loans rec., inventory, prepaid expenses, deferred charges, fixed assets [depreciate , charged against revenue], intangible assets. 1. Different ways to report (check chart) ii. Liabilities = debts firm owes to others 1. Current: < 1 year until due 2. Long term: due > 1 year from balance sheet date (mortgage, bonds, off balance sheet, loan guarantees, warranty obligations, claims by civil plaintiffs) iii. Equity = paid in capital iv. Example: You buy something for $1000. You borrowed $300, plus paid $700 from your savings. Assets = $1000, liabilities = $300, equity = $700. b. Balance Sheet Analysis i. Liquidity = does firm have cash to meet obligations? 1. Liquidity ratio (cash + mktbl. securities + AR)/ current liabilities 2. Working capital (current assets current liabilities)

3. Current ratio (current asset / current liabilities) a. Analysts prefer 2:1, although some firms work well w/less, and any growth of this ratio is good. ii. Debt-equity (LT Notes Payable/ total equity) 1. Indicates long-term capitalization. 2. > 1:1 = living on borrowed capital iii. Interest coverage (annual earnings/annual interest on LTD) 1. Whether firm would be able to service debt. c. Income Statement (accrual accounting) i. Realization recognize revenue in period that services were rendered or goods shipped, even if payment not received in that period. ii. Matching allocate to the period in which revenues are recognized the expenses company incurred generating those revenues. iii. Gross Profit = Net Sales COGS iv. Net Income = everything (positive net income = retained earnings) v. Operating Income = Gross Profit Operating Costs vi. EBIT = before interest & tax vii. EBITDA = before interest, tax, depreciation & amortization. viii. Pretax Income = Operating Income Interest Expenses ix. Return on Equity = Net Income / Equity at end of previous year 1. Compare to % return on alternative investments. If better return on risk-free investment, firms not worth book value. d. Statement of Cash Flows i. Operating activities (important) ii. Investing Activities iii. Financing Activities iv. Structure: starts with net income, then corrects for non-cash changes. If firm had X income in inventory (non-cash), would have to correct cash flows by X. v. Relationship between income & cash flow: 1. Cash flow lagging: rapid growth? Need additional funding? 2. Increases in inventory = Long term growth or short term pumping? 3. if inventory decreases, is firm petering out? 3. Process of Accounting a. Recording & controls takes down info. concerning every transaction b. Audits company verifies the accuracy of the recorded information c. Accounting classifies & analyzes audited info. Presents it statements. (GAAP) d. GAAP Assumptions i. Business is an accounting unit separate from its owners, whether or not it has a separate legal existence ii. Business = going concern (will operate for foreseeable future)

iii. Firm is required to apply same accounting concepts and procedures from one period to the next iv. Firms must disclose all material information v. Firms must follow a conservatism principle that profits not be anticipated and that probable losses be recognized ASAP e. Outside audit examining, on a test basis, evidence supporting amounts & disclosures in financial statements. i. If everything compiles with GAAP, issue unqualified or clean opinion, but compliance with GAAP does not guarantee that statements present information fairly. f. Audit Committee must be independent Ds under Sarbanes-Oxley i. Sends to CEO/CFO who must personally certify that statements present fairly in all material respects the condition of the company. CORPORATE GOVERNANCE IAD, BOARD AUTHORITY, SHAREHOLDER AUTHORITY, ALTERING S/H VOTING 1. CHOICE OF LAW INTERNAL AFFAIRS DOCTRINE a. DELAWARE: Law of state of incorporation governs internal affairs (McDermott panama case) i. Internal affairs = relationships between constituents (voting, rights to distribution of dividends, information rights) 1. Vantage Point v. Examen DE defining internal affair. Holding Wilson v. Louisiana Pacific unconstitutional. ii. External affairs governed by law of the state in which activities occur and by federal/state regulatory statutes. (E.g. minimum wage, tax, tort) b. NY & CALI: Jurisdiction over pseudo-foreign companies. Majority of business = states doctrine applies. Applies to in-state & out of state equally, so no DCC. Must be > 50%, so no DPC conflict. (Wilson v. Louisiana-Pacific) c. Both internal/external rules Right to merge and procedure to be followed d. Benefits of IADII: Predictability in business relationships, Constitutional foundation e. Constitutional Principle (A.14) i. Excluding out-of-state corps unconstitutional unless discrimination . . . bears a rational relation to a legitimate state purpose. (Western & Southern Life) ii. Dormant Commerce State statute violates constitution if it either (1) treated domestic and foreign corporations differently or (2) ran the risk of generating multiple and conflicting standards that would burden interstate commerce. iii. Also see CTS, Ananda. Anti-takeover statutes are constitutional, if unwise. 2. BOARD AUTHORITY a. Board has plenary authority, subject to limitations in the Articles. i. Issue: the extent to which articles can be amended to constrain the board. 1. MBCA 8.01, DE 141) core of director responsibilities that cannot be abridged. b. Board Meetings i. (DE 141: must be by vote of majority members at a meeting at which theres a quorum (majority of the board))

ii. types of meetings 1. regular (scheduled, can be held w/out notice of time, place) 2. special (have to be preceded by @ least 2 days notice) c. Notice i. MCBA 8.22(b) requires two days notice of date, time, and place for special meetings 1. But see MCBA 822(a) for regular meetings, does not require notice (assumption that board knows schedule) ii. MCBA 8.23(a) any director who does not receive notice may waive notice by signing a waiver before or after the meeting, or by attending and participating and not protesting the absence of notice. MCBA 8.23(b). 1. But If you attend solely to protest, have not waived notice. ( 8.23(b)) d. Quorum precludes action by a minority of directors i. Statutory norm for quorum: majority of the total number of directors. Although by statute this can be reduced to no less than of directors. e. Action At A Meeting Each director has 1 vote may not vote by proxy i. Vote of majority (when there is a quorum) is necessary to pass a resolution 1. Meeting rule (Baldwin v. Canfield): all Ds had signed a deed, but board never met, deed was held invalid, because they must act as a board, not as individuals who are all on the board. Ensures common understanding of goals, terms, conditions, concerns. ii. Binding boards to things not agreed up on per the meeting rule 1. Unanimous action they all would have agreed anyway, for their own separate reasons, and wouldnt have discussed it. 2. Emergency if impossible to convene, corp. must proceed on the opinions of whatever Ds can be gotten to deliberate 3. Unanimous s/h approval if all s/h meet, result they reach will bind the BOD. Meeting rule is a hardship as applied to large # of parties. 4. Majority shareholder-director approval if directors who participate in informal actions are a majority, and also own a majority of the corporations outstanding issued and outstanding shares corporation is BOUND by that action. f. Informal Director Actions i. MCBA 8.21 allows board action to be taken w/out a meeting with unanimous written consent of directors. ii. MBCA 8.20(b) permits board to conduct a meeting by any means of communication by which all directors participating may simultaneously hear each other during the meeting (e.g. Skype call). Official comment: the advantage of traditional meeting is interchange this is also permitted by conference call. g. Unauthorized Meetings i. OPEN: Presence of enumerated exceptions leads some courts to take a harder stance on corporations who hold unauthorized meetings

1. Village of Brown Deer (Wisc.) corporate pres & majority s/h who had customarily made decisions without the BOD, signed a petition on the corps behalf for annexation of land. (since board can act w/unanimous written consent w/out a meeting, petition lacked authority because president made the action WITHOUT that required consent.) ii. CLOSE: Upholding even though not in compliance with statute 1. White v. Thatcher Financial (Colo.) 2 Ds approved payments to outgoing president. Although statute required board have a minimum of 3 Ds, vacancies had gone unfilled for several years, and there were only 2 members. Court pointed out that these 2 directors constituted a quorum of the minimum and upheld the validity of the payments, remarking that permitting reliance on the custom and practice of a board (like a board w/only 2 members) protected innocent third parties in dealing with a close corporation. h. Grants of Authority to Directors i. Officers receive their authority via delegation from directors. Their power comes directly from Director plenary authority within the corporation. ii. Agency - consensual relationship between a principal & agent, by which agents actions can obligate the principal. Agent is a fiduciary of the principal iii. Actual authority (Express/implied) assume general 1. Summit Properties: Persons dealing with a known agent have the right to assume, in the absence of information to the contrary, that the agency is general, not subject to specific restrictions. iv. Apparent authority (can run contrary to actual intentions of Principal) 1. vests in an agent when a third party reasonably believes the actions of the principal instilled such authority in the agent v. Inherent agency power (Menard purchase of property by president) 1. A question of reasonable belief in the circumstances. 2. How to show: provisions of laws, art. of incorporation, bylaws, resolution of BOD, evidence that corp. has allowed the officer to act in similar matters and has recognized, approved, or ratified actions a. In Menard, signing the purchase agreement was within the normal scope of Sterling's duties as president, and sufficient to establish Menard's reasonable belief that Sterling possessed necessary authority. vi. Ratification of the act of another 1. Summit Properties (ratification through acquiescence. COO publishes news about purchase, then tries to argue seller didnt have agency) 3. BOARD ALTERING S/H VOTING RIGHTS (requires compelling justification e.g. structural coercion) a. Blasius. (Del.): When the board acts for the primary purpose of interfering with the exercise of the s/h vote, the board must have a compelling justification. Reappears in takeover defense measure cases. i. Triggers Blasius 1. Preclusion (not preventing, cf. Stahl), makes s/h approval not realistically attainable (Chesepeake), dilution representation on the board (Liquid Audio)

2. Coercion (interferes with shareholder ability to decide whether to agree to the transaction on the merits, as opposed to a fear of some threat that will materialize) ii. Compelling justification 1. Gridlock: no (Liquid Audio) 2. Inadequate price: no 3. Structural coercion: yes 4. Substantive coercion: yes, if well established evidence 5. Policy, culture, community: probably not b. Stahl (reconciling Schnell, Blasius, and other DE decisions involving this issue) i. where corporate directors exercise their legal powers for an inequitable purpose their action may be rescinded or nullified . . . at the instance of an aggrieved shareholder. . . . under this test the court asks the question whether the directors purpose is inequitable. ii. In Stahl, the election process is not being foreclosed, its just being delayed. Whenever the board calls a meeting the vote will take place. This is not preventing anybody from exercising his vote. Stahl has no right in law or equity to compel a meeting. c. Liquid Audio (Del.): defensive action by Ds (increasing board size on the eve of a contested election w/ motive of diluting the influence of the new directors) compromised the role of corporate democracy in maintaining proper allocation of power between the s/h and the board i. Since the Ds didnt demonstrate a compelling justification under Blasius, bylaw amendment that expanded the board size was invalid. 4. BOARD CONSTRAINING ITSELF (only if in articles of incorporation) a. Quickturn (poison pill Rights Plan is invalid under DGCL 141(a), because any limitation on the boards authority must be set out in the certificate of incorporation.) 5. SHAREHOLDER AUTHORITY a. Approve fundamental transactions i. sale of all or substantially all of a corp.s assets ii. dissolution iii. statutory merger (targets s/h will have to approve) 1. MBCA 6.21(f) says that purchasers s/h will get to vote if the merger will result in a dilution of their shares by 20% or more 2. DGCL 251 says that purchasers s/h only get to vote if its a formal merger) iv. triangular merger 1. DGCL says that purchasers s/h wont get to vote at all 2. MBCA and NYSE says they will if their shares are diluted). b. Make recommendations (Auer v. Dessel) c. Amend bylaws (Teamsters v. Fleming) i. MBCA articles may give them exclusive authority to do so. ii. DGCL s/h have default ability to amend bylaws, directors can be given it. d. Elect directors, increase # of directors e. Remove directors with or without cause. (Campbell removal is implicit in power to elect)

i. Articles can specify only for-cause removal. If articles so provide, usually define cause as a high bar . . . illegal behavior, abuse of power, etc. not bad business judgment ii. S/h must provide cause & notice of hearing at start of proxy solicitation process. f. Are not permitted to: i. Amend the articles. Can only vote on amendments. ii. Make decisions about business operations of company 1. Auer cant require reinstatement of president, because thats a business decision iii. Compel directors to take action (Auer hire back prez) FIDUCIARY DUTIES BJR, CARE, GOOD FAITH, LOYALTY (conflicts, cleansing), EXCULPATION 1. THE BUSINESS JUDGMENT RULE a. Elements i. Informed (to rebut, show uninformed/gross negligence/inability to be coherently explained (E.g. Selheimer. (pouring money into construction of a plant, knowing it could never be operational or profitable) ii. Rational business purpose (to rebut, show waste. If what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid. Grobow) iii. Disinterested (to rebut, show personal interest) (Disney) iv. Independent (to rebut, show domination) b. If the rule does not apply, courts scrutinize decision as to intrinsic fairness to the corporation and the minority shareholders. (fair process + fair price) i. If informed prong is rebutted fair process prong of entire fairness is invalidated. ii. If rational business purpose prong is rebutted fair price prong is invalidated iii. Burden then shifts to corp. to prove NO HARM c. Aaronson v. Lewis (Del. 1984) : the business judgment rule is . . . a presumption that in making a business decision the directors . . . 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. Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. d. Business Judgment Rule and Negligence i. NEW MBCA: gross negligence Discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances. (8.30(b)) e. Policy for the BJR (Joy v North) i. Shareholders voluntarily undertake the risk of bad business judgment. Because potential profit often corresponds to potential risk, it is in the interest of s/h that the law not make investors too risk-averse. 2. DUTY OF CARE act in the corporations best interests and to exercise reasonable care in overseeing corporations affairs/making business decisions a. Functions & Related Duties

i. oversight function (ongoing supervision and monitoring of the corp.; directors have a duty of attention/cant be asleep at the switch) ii. decision-making (discrete acts by board that are under scrutiny; MBCA says that D must get all reasonably available and relevant info). iii. Duty to become informed (Van Gorkam/Trans Union Case - failing to apprise itself of all information reasonably available and relevant, failing to disclose all material information such as a reasonable stockholder would consider important in the situation at hand) b. OVERSIGHT: substance based decision. breach of this duty = breach of the duty of loyalty, because directors put their own interests over necessity of doing whats best for the corporation. i. MBCA 8.01(c) lists sorts of matters to which oversight applies: corporate/legal compliance, preparation of financial statements ii. MBCA 8.31: sustained failure to devote attn. to ongoing oversight, becoming aware of info that a reasonable director should recognize is problematic triggers the duty to inquire further. hindsight in real time. iii. DE: Caremark (Del.) (Breach when (1) Ds utterly failed to implement any reporting or information system or controls OR (2) having implemented such a system or controls, consciously failed to monitor/oversee its operations, disabling themselves from being informed of risks/problems, and (3) a showing that directors knew they were not discharging fiduciary obligations) 1. compare w/Stone v. Ritter & LOYALTY breach for total failure to implement. iv. Courts other than DE let oversight claims progress 1. McCall v. Scott (6th Cir) (Ds held liable for failing to monitor and prevent management from engaging in fraud. Either recklessly or intentionally disregarded red flags and failed to act. 2. Abbot Labs (7th Cir.) (directors breached a duty by failing to provide appropriate oversight to prevent findings of violations of FDA rules. Board members were aware of FDA violations, and took no corrective measures) c. DECISION MAKING BJR comes into play. Process-based decision. i. Overcoming the BJR: Irrationality, unreasonable process, bad faith, conflict of interest, waste 1. Waste (lacking RBP): If what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth that which the corporation has paid. Grobow v. Peroti (Del) ii. Shelinsky v. Wrigley (1968) (Cubs night ball? Not best choice, but court will not interfere with an honest business judgment absent a showing of fraud, illegality or conflict of interest. Decisions should not be disturbed just b/c there is a good case that the policy chosen may not be wisest) d. DUTY TO BECOME INFORMED i. THE TRANS UNION CASE: Smith v. Van Gorkom (Del) (duty to become informed - "Under the BJR there is no protection for directors who have made an unintelligent or unadvised judgment. Liability for failing to inform itself of all information reasonably available and relevant to their decision to recommend the merger, and by failing to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the merger.

1. Holding. Ds were grossly negligent because they approved a controversial merger (turned out to be low price) without substantial inquiry or any expert advice into the terms of the transaction. 2. Importance: stands for the importance of a thorough and thoroughly documented deliberation process. Directors have to be given info, take the time to consider it, and ask questions. 3. EXCULPATION a. Exculpation clauses (affirmative defense) - allowed for DUTY OF CARE only. i. DGCL 102(b)(7) (not self-executing requires s/h to adopt affirmatively) 1. Available: breach of the duty of care (oversight unless total failure, decision-making & BJR, duty to become informed, Revlon duties unless total failure) 2. Unavailable: breaches of the duty of loyalty, acts or omissions in bad faith, intentional misconduct, knowing violations of law, and/or transactions in which the director received an improper personal benefit (i.e. insider trading) ii. MBCA 202(b)(4) 1. Available: breaches of the duty of care, bad-faith omissions (b/c ABA Committee thought that otherwise it would be too vague a standard) 2. Unavailable: improperly received financial benefits, infliction of harm on corporation or s/h, intentional violations of criminal law, bad faith acts, unlawful distributions of assets. b. Indemnify (reimburse) directors in certain circumstances i. MBCA 8.51: MAY indemnify against liability incurred in certain proceedings. Liability incurred means judgment, settlement, penalty, or fine, or reasonable expenses incurred (costs vs. expensescosts are things like judgments, expenses are things like atty.s fees). 1. Non-derivative suits: costs + expenses as long as D acted in good faith and reasonably believed that conduct was in corps best interests, or at least not opposed to the corp.s interests (subjective standard). 2. Criminal if D had no reason to think conduct was unlawful. 3. Derivatives suits: can only indemnify Ds for expenses (requires (1) good faith (2) reasonable belief of best interests of corporation) 4. Officers: MBCA 8.56: a corp. can indemnify officers to the same extent as directors. ii. Delaware (DGCL 145) 1. Non-derivatives: indemnify costs and expenses if the D acted in good faith/with reasonable belief. 2. Derivatives: indemnify expenses only if the director hasnt been judged liable (so indemnification can only happen if the case is settled) 3. Criminal if D had no reason to think conduct was unlawful. iii. Who determines whether the standard for indemnification has been met? 1. 1994 MBCA amendments permit decision to be made though a majority of disinterested directors. 8.50 defines disinterested director: (i) not a party to the proceeding, (ii) does not have a familiar, financial, professional, or employment relationship with the director

c. D&O insurance MBCA 8.57 and DGCL 145(g) authorize cos. to purchase it for their directors & officers, regardless of whether theyd qualify for indemnification. 4. DUTY OF LOYALTYplace best interests of corporation above personal interests. Underlying duty of good faith. a. Bayer v. Beran (radio station & singer wife) interested D shifts burden to board to prove entire fairness b. Good Faith i. Definition: fiduciary intentionally acts with a purpose other than that of advancing the best interests of corp., with the intent to violate applicable positive law, or intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for duties (oversight). ii. failure to act in good faith more egregious than breach of duty of care. (Disney) iii. Good faith upheld, duty of oversight: Stone v. Ritter (Del.) (no breach of good faith when board had put in place a number of procedures & systems/there was no conscious disregard of their obligations) 1. No reporting system at all breach of the duty of loyalty, because youre not acting in good faith to carry out your responsibilities. 2. System in place you can breach your duty of care by not responding to a specific report of wrongdoing or by not revising the reporting system when theres evidence of its failure. iv. Araneta (Del.) (Breached f duty of loyalty when Araneta stripped the co. of its major asset and transferred it to his family (subordinated co.s interests to his own). Also found that 2 directors breached their duty of loyalty by acting as Aranetas stooges) c. CONFLICTS OF INTEREST (are transaction-specific) i. Questions to ask 1. Is there a director with a personal interest in the transaction? 2. If yes, are any of the other directors beholden to that director in a way that could compromise their judgment? ii. What does it mean to have an interest in a decision? 1. Personal interest 2. Self-dealing: director is on both sides of the transaction. (Benihana) 3. Compromised judgment: decision clouded by interest in reaping personal benefits 4. Beneficiary independence compromised by being beholden to another director who does have a personal interest in the decision. iii. What does it mean not to be independent? 1. Challenging- degrees of relationships between interested and non-interested directors. 2. NYSE NYSE affirmatively deemed to have no material connection to company whose board hes on. Not independent if: employment in past 3 years, > $120k in compensation to D or immediate family member. iv. When do you consider independence? 1. Shifting the burden to the challenging s/h in transactions involving management contracts, approval of settlement of derivative suit, demand futility, dismissal of suit by SLC, to uphold anti-takeover and deal protection measures (IC to bolster Unocal) d. CLEANSE (once cleansed & BJR satisfied, all you can do is challenge on DUTY OF CARE grounds) i. DGCL 144 can challenge for any conflicting interest, not just financial. (e.g. familial, Stanford)

1. Whose conflicts are imputed: unspecified. 2. Cleanse by: (1) disclosure & approval by a majority of the disinterested, independent, informed Ds, or (2) a majority of disinterested, independent, informed s/h OR inherent fairness 3. Interested Ds can be counted in a quorum, deliberate, vote on transaction. 4. Once cleansed, Board gets the benefit of the BJR. (Benihana) ii. MBCA 8.62 only a financial DCIT subject to challenge. Other interests (personal) dont count. 1. Whose conflicts are imputed (8.60): spouse, family member, person living in same home, entity owned by director, entity that director serves or is trustee, guardian, representative, or fiduciary. Directors employers. 2. Cleanse by: (1) authorizing by a vote of a majority of qualified Ds who voted on the transaction, (2) authorizing by a committee, as long as members are qualified or members were appointed by majority of qualified Ds, (3) authorizing by a vote of qualified (disinterested, independent) shares 3. Interested Ds cannot deliberate, participate, or vote iii. DISINTERESTED DIRECTOR APPROVAL 1. Walt Disney (determining independence. Matter of relationship, degree.) 2. Ebay (whether, in a s/h derivative suit, the s/h have to make a demand on the Board to ask it to bring suit against directors, or whether s/h can file directly. If directors cannot make a disinterested decision about whether to bring suit, claim is futile) 3. Oracle (court has already ruled that demand is futile, but court gives a last shot at litigation by establishing a SCL board is THAT board independent?) iv. RATIFY/SHAREHOLDER APPROVAL 1. Lewis v. Vogelstein (legal effects & nature of shareholder ratification) 2. Lewis v. Vogelstein II (waste must be ratified by unanimous vote) 3. Harbor Finance (Del.) (if theres effective s/h ratification, complaint should be dismissed outright Ps shouldnt be allowed to try to prove waste.) 4. Gantler v. Stephens (Del.) (s/h can only ratify director action when specifically asked to approve, not transactions that they inherently must approve anyway) v. INHERENT FAIRNESS to the corporation (both MBCA and DGCL) 1. Substantive = Terms of the transaction are such as to be comparable to those of an armslength transaction in the market. 2. Depends mainly on whether its a fair price there is a range of fair prices. 3. Also require harm vi. Summary: 1. duty of loyalty raises the question of whether directors are both disinterested (no prospect of personal gain from the transaction) and independent (arent beholden to any interested party). 2. Cleanse (Ratify, S/H Approval, Inherent Fairness)

3. If a transaction is upheld/cleansed duty of loyalty challenge is not possible, and only possible to bring a case based in duty of care a. Duty of care = BJR, and exculpation provisions. Much more difficult. CLOSE CORPORATIONS PLANNING, LEGAL TREATMENT, OPPRESSION 1. LEGAL TREATMENT a. At time of formation, must elect to be treated as a Close Corporation. b. Problem: s/h of a CC may find that the rules of centralized mgmt. and majority control are at odds with their expectations of decentralized equality. i. In a close corp., s/h want some voice in mgmt. to protect their interests, and the parties v. much rely on particular individuals who are involved in the co. ii. S/h who are in a close corp. who dont have voice are subject to exploitation, cant exit. iii. The standard rules that apply to corps. (straight voting, free transferability of shares, separation of ownership from mgmt.) generally are problematic in close corps. iv. Courts have become more realistic about the special demands of a close corp. and have become far more tolerant of departures from the norm. . c. Legislative response: i. Common statutory approach presume that all corps. are alike but expressly authorize close corps. to adopt governance structures that vary from traditional model (MBCA 732, 801(b)). ii. A second approach is the comprehensive close corp. statute, which allows the corp. to elect treatment under a special statutory regime (DGCL- have to formally elect treatment before shareholders can deviate from the standard corporate model). d. Tailoring Governance System - VOTING: i. Cumulative Voting aggregate all of your shares/take the # of shares youve got times the # of positions to be filled- can cast all your votes for 1 candidate. (available if articles provide) 1. Ensures that every s/h can have their choice of @ least one Director. X = (s * d/D+1) + 1 a. s = number of share represented at meeting b. d = Number of directors desired to elect c. D = Total number of directors to elect d. X = number of votes needed to elect D number of directors ii. Class voting- divide common shares into 2 or more classes, and specify that ea. class gets to elect a certain # of directors. Not tinkering with capital structure as much as cumulative. iii. Voting Trusts (convey legal title to a trustee to vote your shares; courts have traditionally resisted them because youre potentially granting authority to a party who has no economic stake in the enterprise- potential for misalignment of interests) 1. Contradiction because Board cant be a board trust who promises to appoint each other. iv. Vote pooling agreements (a K that binds the s/h to vote together on certain or all questions. (MBCA 7.31(a) and (b)) e. Modifying Governance Rules

i. Triggs v. Triggs: father and son entered into a share purchase agreement and an agreement to elect the father as chairman and the son as president at guaranteed salaries. 1. Rule (from Fuchsberg dissent): s/h in a close corp. are allowed to agree among themselves on how to allocate authority as long as theres no intent to defraud other s/h or creditors; majority s/h do owe fiduciary duties to minority. ii. MBCA 7.32(a) permits s/h agreements that restrict the discretion of the board or eliminate the board altogether (so that s/h run the co.). 1. Must be in bylaws/written agreement + approved by all shareholders. iii. DGCL 350: written agreement of a majority of the s/h can restrict board auth. iv. DGCL 351: majority vote can provide that corp. will be managed by s/h rather than board. v. High voting/supermajority requirements MBCA 7.27(a), DGCL 141(b) and 216). 1. risk might result in deadlock, because theyre designed to give veto power on all board decisions or certain significant decisions 2. to reduce risk restrict classes of decisions to which supermajority requirement will apply vi. Fiduciary duties in exercising veto rights: some statutes impose duties on s/h who assume mgfopmt. functions or acquire veto rights under a shareholders agreement (MBCA 7.32(e)). 1. Donohue, cited in Smith v. Atlantic Properties (Mass.) (imposing duties of good faith & utmost loyalty on s/h in close corp who created a supermajority system & then deadlocked each other D had his own interests in mind, not corporations. Should act like partners.) vii. Contractual transfer provisions: 1. S/h agreements that limit ability of a s/h to transfer shares to others. It matters that there are particular people involved/shareholding isnt regarded as a fungible economic interest. 2. Mechanism must address how purchase will be funded and how a price for the stock will be established. MBCA 6.27 and DGCL 202 expressly authorize transfer restrictions. 3. Examples of restrictions: a. right of first refusal, required consent of the other shareholders. 4. How shares might be valued: book value, appraisal, mutual agreement. In Concord Auto Auction v. Rustin (1 s/h died, shares were worth twice as much in repurchase agreement, but court enforced price in transfer provision anyway b/c of CONTRACT) 2. OPPRESSION IN CLOSE CORPORATIONS a. Rule: whoever makes up the majority on an issue has a duty not to oppress those in the minority i. If somebody holds a majority of shares, then that person is easy to identify all the time. If not, shifting coalitions depending upon the issue at hand. b. Test for Oppressive Conduct (Wilkes firing & termination of stipend meant to freeze-out Wilkes) i. Significant frustration of a reasonable expectation ii. No legitimate business purpose iii. If majority can establish LBP, minority can rebut by demonstrating that there was a less harmful alternative that could have accomplished the same purpose. iv. In re Kemp & Beatley (oppressive conduct = "conduct that substantially defeats the reasonable expectations held by minority s/h in committing their capital to the particular enterprise.")

c. Types of Oppression i. Majority cut off minority stockholders from return, thus leaving them holding illiquid stock that generates no current income ii. Majority exercise control to frustrate preferences of the minority d. How Courts Respond i. Donohue reasonable expectation frustrated. ii. Wilkes v. Springside Nursing Home (partnership view of CCs - test for close corporations should be whether decision that severely frustrates a minority owner has a legitimate business purpose.) iii. BUT Nixon v. Blackwell (DE) company that does not specifically elect to be treated as a CC in its articles is not treated as one. e. Statutory Remedies i. MCBA 14.30(2) grants court power the dissolve the corporation if 1. Directors are deadlocked and deadlock cannot be broken by s/h and is injuring the corporation or impairing its business conduct 2. S/h are deadlocked and have not been able to elect a D for 5 years 3. Corporate assets are being wasted 4. Those in control of the corporation are acting in a manner that is illegal, oppressive, or fraudulent 5. Comment: courts should be careful in using this so as to limit cases to genuine abuse rather than a weapon. Shield, not sword. ii. MCBA 14.34 authorizes any CC or any s/h of a CC to purchase all shares owned by the petitioning s/h at fair value within 90 days after a petition is filed under MCBA 14.30. 1. Three important questions a. What is oppressive conduct? b. When a court finds oppression, which remedy? (Buy out or dissolution?) c. Where a corporation of s/h elects to exercise buy-out rights under 14.34, how is Fair value determined? f. Dissolution sell off assets, pays creditors, and distributes the balance to s/h i. threat of dissolution from minority s/h can leverage a better price for her ii. If a business derives its value primarily from tangible assets, s/h who wish to continue to operate the business will probably have to pay fair market value for those assets, since other purchasers could use them to equally valuable effect. iii. Risks: Can be time-consuming, expensive, risky. Involuntary dissolution threats with this kind of capital structure credible iv. However, if the business derives most of its value from the goodwill supplied by the majority, dissolution will not serve minority interests, b/c majority might be able to purchase tangible assets for fair market price and capture the associated goodwill at no extra cost. g. Oppression of Shareholder-Employee investment model of oppression i. S/h oppression doctrine is at odds with the at-will doctrine of employment law.

ii. Moll: Investment model of oppression when a minority s/hs investment includes expectation of employment (and benefits) these expectations can be protected by the oppression doctrine without running afoul of the at-will law. iii. Bonavita v. Corbo (investment model Even if oppression is not wrongful or illegal, remedy OK if behavior had the practical effect of destroying any reasonable expectation that the employee/shareholder had in his investment.) h. Non-Dissolution Remedies i. Buyout at fair value Majority has call right to minoritys shares 1. Purpose: to prevent strategic abuse of dissolution procedures. 2. s/h who elect to purchase must a. b. give notice to court w/in 90 days then negotiate w/ petitioning s/h

c. If negotiations fail, court must order a buyout, determine fair value d. If petitioner had probable grounds for relief under misconduct provisions of the involuntary dissolution statute, this can include attorneys fees. ii. Mullenberg v. Bikon (oppression at a meeting that minority failed to attend. At the meeting, majority voted to declare dividend, to retain an outside accountant, etc. Actions were in response to disputes between majority and minority s/h. Focused on reasonable expectations- minority would expect that having given up his other business to start this company, he would be given sizeable management role) REMEDY: ORDERED TO MAJORITY TO SELL OUT TO MINORITY iii. Kelley v. Axelsson (refusing to find oppression when majority s/h stopped paying dividends to the minority s/h who inherited from corps co-founders.) 1. Since minority was never active in management, their only reasonable expectation was that dividends would continue to be paid on stock if funds were reasonably available. PROXY VOTES REGULATION, DISCLOSURE REQUIREMENT 1. FEDERAL REGULATION OF PROXY SOLICITATIONS State law authorizes s/h to vote by proxy, but federal law regulates the process by which proxy solicitation occurs. a. Management Solicitations i. Before soliciting proxies, mgmt. must prepare a proxy statement (detailed disclosure documentSchedule 14A specifies what has to go in it) and a form of proxy (contains instructions that specify how s/h want their shares to be voted). Both must be reviewed by the SEC. ii. 14a-9: no proxy statement can contain any statement thats false or misleading with respect to any material fact, or which fails to state a material fact 1. Rule: management must disclose both the negative and positive aspects of any proposal; only including arguments for would be a material omission. iii. 14a-1 (Lilco): solicitation = any request for proxy, or furnishing of a form of proxy or other communication intended or reasonably calculated to result in someone giving a proxy. iv. Long Island Lighting Co.: citizens published a newspaper ad accusing the co. of mismgmt. and urging support for political candidates campaign that govt. acquire the co. Co. claimed the ad was unlawful

because it constituted a proxy solicitation for which no proxy statement had been filed with the SEC, and that it was false/misleading. What matters isnt whether its directly addressed to the s/, but whether the challenged communication, seen in the totality of the circumstances, is reasonably calculated to influence the s/h votes. You dont have to be confined to the corporate arena to be engaged in a proxy solicitation/be subject to SEC rules. 1. Winters dissent: test is too broad. Would interfere with the exercise of 1st Amendment rights. SEC subsequently adopted his approach, exempting any solicitation that doesnt seek proxy voting authority and that doesnt provide the shareholder with a form of proxy to confer that authority. Rule 14a-2. However, this exemption doesnt apply to mgmt./the co. whose shares are involved in the controversy. b. Shareholder Proposals i. 14a-8: any s/h who meets ownership requirements of the rule (1% or $2k worth of the co.s shares for at least 1 yr.) and submits a proposal in a timely fashion and in proper form can have the proposal included in the co.s proxy materials for a vote at the annual meeting. Compels co. and other s/h to subsidize s/h proposals ii. Exceptions. Corporation may proxy statement if exclude if 1. (i)(1) improper under state law 2. (i)(2) violation law 3. (i)(3) false or misleading 4. (i)(4) personal grievance, special interest 5. (i)(5) relates to ops. that account for < 5% of co.s total assets and < 5% of its earnings or sales, & is not otherwise significantly related to the co.s biz, it can be excluded. a. Standard of relatedness: see Lovenheim, Medical Committee (public policy) b. Evolution of significantly related Cracker Barrel case 6. (i)(6) Absence of power/authority 7. (i)(7) management functions (deals w/ordinary business operation) a. Cracker Barrel Case (SEC said co need not incl s/h proposal to end co policy to fire gays, under "ordinary business" exception upheld SEC changed mind) 8. (i)(8) relates to an election of the board 9. (i)(9) conflicts with the companys own proposal c. Shareholder Nomination of Directors (related to general/procedural, or specific) i. AFSCME: proposal to amend bylaws to require that the corp. include in its proxy materials the name of the nominee of any s/h who had held at least 3% of the co.s stock for at least 1 yr questioning whether 14(a)(i)(8) applies to procedural relationship to election of board. 1. S/h argued that an election is intended to relate to proposals that address particular elections, instead of elections generally. 2. Court said that they interpreted the election exclusion as applying to s/h proposals that relate to a particular election, and not to proposals that would establish the procedural rules governing elections generally. Also told the SEC to come up with a coherent pronouncement. ii. SEC has issued 2 proposals for comments:

1.

(8) includes proposals for process by which Ds are nominated/elected. S/h should be able to put proposals on the ballot that relate to the process of nominating directors a. nce they do that, are subject to a specific disclosure regime

2. ADD (17) (8) would cease to exist a. (17) significant expansion of s/h power. 2. DISCLOSURE DUTIES = MATERIALITY + CAUSATION a. Implied private right of action under 14(a)(9) (Borak). i. If youre a s/h who believes that the solicitation of your proxy occurred through distribution of materially misleading information right to sue the directors for proxy fraud. ii. You dont attack the terms of the transaction under federal law, thats a state law issue. Only thing you can attack under federal law is process by which corp. conducted solicitation. b. (1) MATERIALITY substantial likelihood that the disclosure of the omitted fact wouldve been viewed by the reasonable investor as having significantly altered total mix of the info made available. i. MBCA: TSC Industries - proxy solicitation for merger approval failed to disclose that bidder exercised influence over TSC board ii. DE: Gantler v. Stephens once you discuss something, you have to make full and fair disclosures iii. Speculative or contingent benefit: depends on a balancing of the indicated probability that event will occur against magnitude of the event in light of the totality of co. activity. (Basic). iv. Statement of fact about actual reason the Ds urged adoption of the proposal can be a fact 1. Test: (1) maker of the statement couldnt have reasonably believed it was true, (2) Statement was actually false (ie. Said fair price, but it wasnt) (Virginia Bankshares) v. Omitted information can be material even if not financially so. (Huntington Bankshares --accounting misstatements were immaterial financially but material to s/h because they demonstrated boards lack of integrity) vi. Fairness of price alone is not materiality (Santa Fe) c. (2) CAUSATION an essential link in the solicitation. (Virginia Bankshares) i. When required solicitation: causation. 1. Mills v. Electric Auto-Lite misleading because s/h werent told that 11 of the one co.s directors had been nominated by the other co. (boards recommendation of the merger wasnt disinterested). If the proxy solicitation was necessary in order to gain approval of the transaction (an essential link), then you have causation. ii. When solicitation not legally required: 1. Virginia Bankshares left open possibility that even if your shares arent necessary to gain approval/the proxy solicitation isnt an essential link, you may still have a cause of action if you lost your ability to challenge the transaction under state law. The injury isnt that the transaction was approved, its that you lost your ability to challenge/get appraisal. 2d Cir. has adopted this position. 3. STATE LAW DUTIES OF DISCLOSURE a. Duty of fair disclosure = application in a specific context of the duties of care, loyalty, and good faith. Its not a freestanding fiduciary duty.

b. Duties of care and loyalty i. require that when directors are speaking to s/h, they have to be honest and candid. c. DEs duty of disclosure applies to officers, directors, and controlling s/h in their communications with s/h. i. Malone v. Brincat: directors who knowingly disseminate false info or make material omissions that results in corporate injury or damage to an individual s/h violate their fiduciary duty and may be held accountable. 1. However, 3rd party tender offerors dont have such a duty. 2. Line between the duty of care and the duty of loyalty is often blurry. 3. How a duty is described matters- can determine whether the BJR applies and whether a corp. is permitted to limit a directors liability (only with duty of care). DUTIES OF CONTROLLING S/h Cash Out, Short-Form, Tender Offers, Duty of Care, Sale of Office 1. FIRST ESTABLISH CONTROL a. Question is whether non-dominant s/h controls through significant power over decisions. b. Presumption is that non-majority s/h are not dominant. Plaintiff must prove domination. c. De jure absent special rules, owner of 50+% of shares controls d. De facto owner of significant stock. (in a public corp. w/dispersed shares, 20% or more controls) (Lynch, Essex) e. Incumbency in public corps. w/fragmented ownership, incumbent usually possess de facto control b/c of power to nominate management candidates and use company resources to support them. 2. CORPORATE GROUPS a. Sinclair Oil - But, if the parent and the minority s/h get the same benefit, the BJR applies. RULE: Parent can use subsidiary as it sees fit, as long as it doesnt exploit it and theres a rational business purpose) i. if transaction is at the expense of subsidiary establish entire fairness. 3. CASH-OUT TRANSACTIONS a. DELAWARE: Weinberger entire fairness = Fair dealing + fair price i. First establish CONTROL ii. Fair dealing = recreate an arms length transaction. Structure & timing. (Lynch II) iii. Fair price = determined based on totality of circumstances iv. Burden on Ds, unless approval by an IC or a majority of minority s/h who are. 1. independent and disinterested 2. fully informed 3. If so, then burden of proof shifts to the plaintiff. Remedy is judicial appraisal v. Unless fraud, misrepresentation, self-dealing, deliberate waste, or gross and palpable overreaching vi. Lynch I relationship between fair dealing & fair price. IC usually evidence of fair dealing, but when not independent enough, can still violate entire fairness standard. 1. Before burden shifts to plaintiff, must determine a. whether majority dictated terms of the merger b. whether the IC had real bargaining power.

vii. Lynch II (predation) controlling s/h permitted to act in own interest and using its superior bargaining power, as long as it doesnt gain a benefit at the expense of the minority. b. ELSEWHERE: Business Purpose Test (illegal to merge for sole purpose of eliminating minority shareholders) i. Alpert (NY. 1984) (legitimate business purpose existed when company needed to get additional outside capital only available if the minority s/h interest were eliminated) ii. Coggins (Mass. 1986) (no legitimate business purpose when merger was consummated only for purpose of gaining access to corporate assets to pay personal debts) iii. SEC Rule 13e-3 requires disclosure of reasons for cash-out transactions for mergers involving public corporations. 4. DIRECTOR LIABILITY IN CASH-OUT a. Emerging Communications (2004) (liability of outside directors can vary depending on level of expertise director on negotiating committee who had financial expertise had special responsibility to respond to price unfairness, compared to outside directors) i. Exculpation only in the case of gross negligence, not bad faith, conflicts.) b. Fertitta (Del. Ch. 2009) (board breached its duty of care by committing corporate waste when it cancelled a transaction, incurring a RT fee, without legitimate business purpose) 5. SHORT-FORM MERGER (DGCL 253) a. if bidder owns 90%+ of co. stock, can merge in a procedure that requires only approval of Board, not s/h) i. statute authorizes unilateral act, so no entire fairness standard. That wouldnt make sense. ii. Basis for obligation of candor, disclosure is state law. b. Glassman (Del. 2001) (appraisal is sole remedy in the case of an unfair short-form merger) i. By definition involves self-dealing. Entire fairness standard does not apply - EXCLUSIVE remedy is appraisal, absent fraud of illegality. c. Berger v. Pubco Corp (Del. 2009) (remedy for minority s/h in a short-form merger in which parent company breached its duty of disclosure is quasi appraisal: minority s/h automatically become members of a class and are not required to escrow a portion of the proceeds they received) 6. TENDER OFFER SHORT FORM MERGER (DGCL 253) a. bidder corporation (sometimes already w/controlling interest) makes a tender offer conditioned on acquiring 90%+ of stock. If successful, bidder mergers in a way that requires only approval of the Board.) b. Test for Coercive Tender Offer (Pure Resources does not require fair price, only the following) i. subject to a non-waivable majority of the minority tender condition ii. controlling s/h promises to do a short-form merger @ same price if it gets 90% or more iii. controlling stockholder has made no retributive threats against minority iv. same price to all shareholders (otherwise structural coercion) c. Solomon v. Pathe Communications (Del. 1996) (in the case of totally voluntary tender offers, courts do not impose any right of the s/h to receive a particular price . . . the determinative factor as to voluntariness if whether coercion is present, or whether full disclosure has been made.) 7. SALE OF A CONTROLLING INTEREST a. Control premium controlling s/h command a premium when they sell their shares b/c it carries the power to exercise dominion over corporations assets.

b. Exploitation of control? control can be used to do less efficient things with companies. market for corporate control theories presumes that this is not a problem. c. Trade-offs involved any rule designed to facilitate transfers of control has some exploitive possibilities. d. Zetlin (NY1979) Control can be sold at a premium, subject to exceptions only in the following special circumstances: (1) looting of corporate assets, (2) conversion of a corporate opportunity, (3) fraud or other acts of bad faith 8. CONTROLLING S/H DUTY OF CARE a. Harris v. Carter (Del.) (If circumstances put the seller on notice, if no adequate investigation is made, and if harm follows, then liability also follows. Gross negligence.) i. Holding. Breach of duty by failing to conduct investigation into whats going on. They were on notice. Things didnt add up. An investigation would have showed how the structure of ISA was fragile, insufficiently capitalized, and lacking in productive assets tipped them off w/r/t looting. ii. Rule: Gross negligence standard. Those who control may not act in a way that is wholly oblivious to the interests of everyone even in the act of parting with control of their shares. iii. Analogy: you can drive (be the controlling s/h, sell your stock) but you owe a duty of care to your passengers (other s/h). 9. SALE OF OFFICE a. When s/h sell their controlling stock, usual practice is for some or all of the directors to resign and for new directors to be appointed by the purchasers. However, it is illegal to transfer corporate office for value b. Essex v. Yates (2d Cir.) (agreement to turn over board seats along w/sale of a lot of shares is not against public policy b/c its not sale of directorship, its sale of shares that would entitle purchaser to a directorship anyway.) i. Facts. Essex offered to purchase > 500K shares (28% of outstanding) at above market price from Yates. Essex was going to pay 37.5% of the total price up front and the rest over 2 years, during which time Yates would hold on to the certificates as security. Yates also that he would have 8 of 14 board members resign so Essex could replace them. ii. Held. Agreement was valid does not violate public policy. Essex got a lot of shares, which would have eventually entitled him to elect directors. Agreement only accelerated that process. 1. It was also acceptable for the majority s/h (Yates) to obtain a premium for selling control of the company in this case b/c there was no breach of a duty to minority s/h. 2. On remand, burden would be on Yates to prove that a voting block greater than Essexs size would have not approved of the deal. SHAREHOLDER DERIVATIVES SUITS (DIRECT v. DERIVATIVE, DEMAND, SETTLMENTS) 1. DIRECT v. DERIVATIVE a. Tooley (Del.) (determining that suit was a derivative suit based on (1) who suffered the harm, (2) who would get benefit of a remedy) b. DERIVATIVE SUIT brought on behalf of the corp. alleging injury or breach of duty to the corp. for which the board has failed to seek a remedy. i. Procedural requirements:

1. S/h P must adequately represent the interests of the corp. a. MBCA 7.41 and FRCP 23.1 2. S/h must be a s/h at the time that the alleged misconduct occurred. 3. P also remain a s/h throughout the litigation. (Except DE) 4. S/h demand on the board to file an action a. DE: demand excused if the s/h can show that itd be futile b. MBCA 7.42 written demand be made in every case without exception. MBCA jurisdictions do not recognize the doctrine of futility. 5. Court must approve any settlement (because of the possibility of agency costs, court wants pass on the fairness of the settlement). ii. Examples: excessive executive compensation (waste), failure of the board to exercise adequate oversight to prevent misconduct that results in corporate liability (Caremark), any sort of DCIT (corp. has been harmed because someone with a personal interest put that interest above the corp.s interest), seizure of corporate opportunity. c. DIRECT SUIT s/h sues in his individual capacity to enforce his rights as a s/h. Injury is separate & independent from any injury the corp. may have suffered. i. Typically have to be brought in fed court. Usu. takes the form of a class action. ii. Procedural requirements 1. P s/h fairly and adequately represent the class of s/h. 2. Lead P is a fiduciary for the entire class (cant receive a special benefit). iii. Federal legislation: 1. 1995 Private Securities Litigation Reform Act (PSLRA) requires that any allegation of fraud in a securities class action be pleaded with particularity (intended to dismiss at the pleading stage claims without any merit/prevent strike suits). a. Also, lead P selected according to which party has largest financial interest. 2. 1998 Securities Litigation Uniform Standards Act (SLUSA) says that most class actions involving publicly traded securities have to be brought in federal court (exception for suits based on violations of state disclosure duties, ie. DEs under Malone). iv. Examples: failure to allow s/h to inspect corporate records, failure to call a special meting when all of the requirements are met, sale of a substantial portion of corp.s assets without s/h approval, failure of board to get a fair price in a merger, material omission or misrepresentation in financial statements, suits to compel payment of dividends, protection of voting rights/preventing improper dilution. d. THE DEMAND REQUIREMENT i. When does the demand issue arise? 1. S/h must exhaust intra-corporate remedies before bringing a derivative suit unless exhaustion would be futile (Ds would not act) 2. In some circumstances, board can act to cause the corporation to dismiss a suit after is has been brought on the theory that the suit is not in the corporations best interests ii. DE Approach: emphasis on whether demand is futile. 1. SUBSTANTIALLY SAME BOARD

a. If majority of Ds who made the decision are still on the board, so much that it might not get the benefit of the BJR & personal liability is at stake futile. b. If majority of directors currently on the board are beholden to those who originally made the demand demand is futile c. Aronson v. Lewis demand is futile only when plaintiff produces particularized facts to produce reasonable doubt that .. (1) directors are disinterested and independent, OR (2) challenged transaction was otherwise the product of valid business judgment.. trouble is that without discovery, may not have particularized facts. Must use informal info gathering rights under 220) 2. DIFFERENT BOARD a. Test: Whether board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. (Rales) 3. DEMAND Refusal BJR if board is disinterested, independent, and refusal was in good faith. (Aaronson) 4. NO DEMAND a. Required Dismissal b. Excused Suit Proceeds on merits OR board forms SLC, moves to dismiss. i. Oracle: searching inquiry because of the magnitude of the decision ii. Martha Stewart: this type of inquiry be confined to the SLC context. iii. Zapata: motion doesnt get benefit of the BJR. 1. corp. has the burden of proving that the SLC is independent, acted in good faith, and conducted a reasonable investigation 2. if the corp. proves that, court applies its own biz judgment to determine if the suit should be dismissed- court is concerned about structural bias). c. Concerns about STRUCTURAL BIAS: Degree to which SLCs are influenced by other directors who look out for their own. Miller v. Register (Iowa 1983); Alford v. Shaw (N.C. 1987) 5. ON THE MERITS analyze duty of care claim on the merits; a. whether it was cleansed: majority of disinterested Ds, majority of disinterested S/H, entire fairness. iii. MBCA Approach 1. Rationale: draw a balance between interests of s/h and interests of directors. Gives the board an opportunity to review the conduct and take corrective action. Eliminates time & expense involved in mini trials on issue of whether demand is excused. 2. At outset: all directors are presumed independent. 744(c) 3. Procedure: Demand should be made in every case before a derivative suit is filed. P must wait 90 days to file, unless demand is refused.

a. 744(b)(1); 744(e) When demand is refused, P (without discovery) must plead with particularity facts establishing either i. IF QUORUM OF QUALIFIED DS: (p has burden) 1. (1) majority of the board that rejected demand did not consist of independent directors. 2. AND (2) that the decision rejecting demand was not made in good faith following a reasonable inquiry. ii. IF NO QUORUM OF QUALIFIED Ds form SLC of 2 or more qualified Ds 1. SLC is voted for by majority of qualified Ds at meeting 2. corporation has the burden of proving the above factors. 4. Einhorn (Wis. 2000) (MBCA) jurisdiction rejecting structural bias substituting test for SLC member independence. Court defer to the judgment of a SLC that is (a) properly composed and (b) properly operating. Review each member of SLC separately. Applied to each as o the time the decision was made a. Test for independence (p. 975-6) Totality of circumstances i. status as a defendant and potential liability ii. participation in approval of alleged wrongdoing or benefit from transaction iii. past/present business dealings w/individual defendant iv. past/present personal, familial, social relationship with individual defendant. v. Past/present business relations with the corporation vi. # of members on a litigation committee (the more, the less one dependent is likely to affect the whole) vii. Roles of corporate counsel & independent counsel (if independent counsel, more likely independent committee) 2. SETTLEMENTS AND ATTORNEYS FEES a. Settlements the pros and cons i. Favor smaller, speedier settlements in trials likely to drag on with no resolution. P Attys find it financially attractive to initiate strike suits: little chance of success, but impose litigation costs on the defendant corporation: nuisance settlement values, but S/h benefit only from victories, not strike suits or settlements that produce only symbolic changes in governance w/no appreciable change in stock price value. b. Judicial review of settlements i. Proponents of a settlement bear the burden of convincing the court that it is fair. E.g. Needham v. Cruver (Del. 1995) ii. Monetary awards adequacy of amount recovered \ compared with potential recovery for success at trial, discounted by risk inherent in litigation and by declining value of $ over period during which recovery is delayed. 1. Factors include (Polk v. Good Del. 1986) 2. Probable validity of claims 3. Apparent difficultly of enforcing claims through courts

4. Collectability of judgment recovered 5. Delay, expense, trouble of litigation 6. settled amount as compared with amount/collectability of judgment 7. Views of parties involved, pro and con iii. Non monetary awards: Difficult to evaluate therapeutic value of organizational changes or disclosures, which does nothing for s/h at all. 1. ALI recommends that court review value of non-pecuniary relief when evaluating settlement and computing counsel fees. ALI Principles 7.14, Comment c. c. Factors that impair courts ability to review effectively i. Hearings rarely adversarial once a settlement is agreed upon, attorneys on both sides say OK ii. Absent an objector, courts must take a serious initiative to review settlements with a discerning eye. They are not really looking out for s/h iii. Shareholders rarely object collective action problems & free riding iv. Objecting requires time-consuming challenge of both own attorneys and the corporations attorneys. v. Objection also much be done in a relatively short time frame. vi. Courts are skeptical to reject even a settlement about which they are unsure. d. Validity of settlements i. In re Chicago & North Western (Del. 1995) (even though settlement only benefitted attorneys, upheld in a lesser amount, because there was at least some benefit to s/h) ii. Fruchter v. Florida Progress (Fla. Cir. 2002) (refused to approve b/c only benefit was assurance that challenged merger was negotiated properly defendants would be released from claims. This is NO compensation at all s/h are in the same legal and monetary position that they began in, and have also given up their rights. legal equivalent of a dirty mop) iii. In re M & F Worldwide (Del. 2002) (denied a motion to disqualify five law firms who were all supporting a settlement they had negotiated, on grounds that movants had made to clear to their lawyers that they wanted rescission and were not satisfied w/lesser relief. Different type of legal relationship with s/h and counsel than with clients and counsel. Counsel acts in the best interest of the corporation, and you get what you get). PROTECTING & SELLING CONTROL (TAKEOVER DEFENSES, REVLON DUTIES) 1. COMMON DEFENSES a. POISON PILL i. Board issues rights to s/h to purchase additional shares of either target or bidder upon some triggering event, e.g. announcement of tender offer for certain % of shares, acquisition of certain % of shares by bidder. ii. Board has right to redeem the pill for nominal consideration. iii. Makes takeover unattractive dilutes bidders shares in target or itself. iv. Permissible under Moran

v. Special issues: Has the threat disappeared or has the company been put up for sale? If so, board may breach fiduciary duty by refusing to redeem the pill. b. SELF-TENDER OF SHARES/REPURCHASE BY COMPANY i. Company offers to purchase certain percentage of shares from existing s/h, excluding a bidder. ii. This may: (1) make the company less attractive because of the debt that must be incurred to fund the repurchase and/or (2) increase the percentage of shares held by management. iii. Permissible under Unocal. iv. Special issues: Will management percentage of shares be so large after the repurchase that disinterested s/h will be precluded? Chesapeake. c. SUPERMAJORITY REQUIREMENT, amendment of articles or bylaws i. Permissible in itself. ii. Special issues: May have preclusive effect in combo w/share repurchase. 1. Preclusion = depending on assumptions, challenger would have to gain support of 78% 91% of disinterested s/h to satisfy supermajority requirement for amending bylaws. 2. Chesapeake (examine takeover defenses that interfere with s/h voting rights first under Unocal, then Blasius. Infer purpose from effect of defensive measure employed.) a. Unocal legitimate threat + proportionate response considering threat. i. In Chesapeake, unreasonable price was a legitimate threat, but substantive coercion was not. It is a fact-based inquiry. b. Blasius compelling justification test: i. If preclusive is there a compelling justification? ii. If not preclusive satisfies Blasius. 3. Mercier v. Intertel (under Blasius, even if the s/h voting modification is in subjective good faith still must show that it had a "compelling justification. In this case, is MET.) d. STAGGERED BOARD i. Delays ability to use acquisition of controlling % of shares to exercise control. ii. Special issues: If company is up for sale, directors may have a duty to agree to resign and/or to amend articles or bylaws to eliminate staggered board. e. WHITE KNIGHT (NO SALE) i. Seek combination with friendly company. ii. Pursuing white knight is permissible as long as it is consistent with directors business strategy. Cf. Unocal, Time Warner. iii. Special issues: if combination with white knight involves sale of control, this triggers Revlon duty to obtain the best price for the company f. WHITE KNIGHT (UP FOR SALE) i. Even when company is up for sale under Revlon, directors can adopt some measures designed to induce another company to bid and to protect the deal with it, such as termination fee, no-shop provision qualified by director compliance with fiduciary duty, and opportunity to match another offer. ii. Special issues: 1. Deal protection measures cant have the effect of deterring other bidders (Revlon)

2. But, truly higher bids will not be deterred by deal protection measures. Only BS marginal Ill raise you $1 million deals will be deterred. And these people are free-riding on first bidders efforts. 3. BUT, reasonable accommodation to bidder demands is permissible as long as it doesnt seriously deter other bidders. (Toys R Us) 4. In situation TRU board was in, reasonable to assume that they would lose the benefits of the deal if they didnt agree this satisfies Revlon. 2. OTHER OPTIONS INDEPENDENCE, WAITING, INCENTIVES, SELLING a. REMAINING INDEPENDENT: i. Rule: no obligation to discuss any proposal as long as they have an informed basis for believing that the proposal is not in the companys best interest. 1. get the benefit of the BJR 2. Informed? Van Gorkam. ii. Airgas (DE Defers to board for keeping measures in place for > 1 year. Deference due to board on issue of whats in long term best interest. Idea that s/h can just have short term goals in mind... but no structural bias??) 1. Facts: tender offer for Air Gas by Air Products poison pill + staggered board. Kept them in place for > 1 year. Numerous offers were turned down as inadequate. proxy contest Air Products managed to get Ds on the bd, but not majority result: standoff between AP and AG. AG board said they were concerned about substantive coercion. 2. Issue: at what point does refusal to eliminate defenses outlive usefulness? 3. Holding: AG position is defensible. Court knows the risks of relying on substantive coercion, but theoretically the proxy contest worked once, so it might work next time. b. WAIT AND SEE: Board may simply decide to wait to see what happens even when it knows that the company is in play because other companies are interested in acquiring or merging with it. i. Rule: Board may adopt this approach, reviewed under the business judgment rule, because being in play does not in itself trigger Revlon duties. c. DEAL PROTECTION AS INCENTIVE, BIDDER i. Types: No-shop / no-talk provisions, Asset purchase, Majority of minority, Break-up fee, Force the vote (s/h must vote on bid even if directors recommend against it), Stockholder voting agreement (K between bidder & s/h of target under which s/h agree in advance to approve) ii. Rule: A company may adopt deal protection measures that are meant to create incentives for parties to go through with a merger that they have agreed upon. (BJR) d. DEAL PROTECTION AS INCENTIVE, NO BIDDER (Negotiated merger) i. Rule: BJR. Time v. Paramount. Ultimately have to justify under Unocal when bidder appears. ii. Rationale: a board may decide that furthering its long-term business strategy requires merger with another company, and that the deal protection measures enhance the likelihood of the merger being completed. e. DEFENSIVE MEASURES, NO INCENTIVES, NO BIDDER: i. Rule: preventive step w/o bidder justify under Unocal.

ii. If bidder appears: Even if the companys adoption of the defenses is upheld under Unocal, board must AGAIN satisfy the Unocal standard when it decides to keep those defenses in place when a bidder appears. (Omni-Care) f. DEFENSIVE MEASURES, BIDDER Unocal 2-part test. If satisfied BJR. If not loyalty breach. i. First, did the board have reasonable grounds to believe that there was a threat to corporate policy and effectiveness? (Unitrin hostile takeovers are generally considered a mild threat) 1. structural coercion from an offer that is designed to induce s/h to tender without sufficient deliberation. E.g. two-tier tender offer, in which a certain percentage of tendering s/h receive cash, while those remaining get less desirable securities in exchange for their shares. 2. bidder offers an inadequate price for shares, even if its an all-cash all-shares bid. 3. substantive coercion risk that s/h will not appreciate the long-term superiority of the business strategy and favor short-term gains from tender offer. (Chesapeake) 4. Threats to preservation of culture, employees, creditors, suppliers, communities, as long as there is reasonable connection to s/h benefits in doing so. (Time Warner) 5. Bd may retain provisions designed to deter bidders in response to the threat that failing to do so will cause the company to lose another partys agreement to a deal. (Toys R Us) ii. Second, Measures proportionate? Reasonable relation to threat? Less restrictive alternative? 1. Coercive or preclusive. If a measure is coercive or preclusive, it can be justified only by a compelling reason under Blasius. a. A coercive measure interferes with the s/h ability to decide whether to agree to a transaction on the merits, as opposed to a vote based on the fear of some threat that will materialize if s/h vote against. b. Preclusive measure makes s/h approval not realistically attainable. Unitrin. See, e.g., Chesapeake (preclusion where, depending on assumptions, challenger would have to gain support of 78% - 91% of disinterested s/h to satisfy supermajority requirement for amending bylaws). c. Compelling justification Mercier: (1) s/h are about to reject a 3rd party proposal that Ds believe is in their best interest, (2) info used for decision-making process has not been adequate considered or publicly disclosed, (3) if stockholders vote no, bidder will walk away and the offer will be irrevocably lost. 2. If not coercive or preclusive, does it effectively address the threat without overly limiting possibility that bidders may have an opportunity to present other offers? iii. Third no absolute lock up of board that makes consummation of an agreement a forgone conclusion. (Omnicare) 1. Requiring s/h approval and entering into s/h agreements that commit a majority of s/h to approving the deal is impermissible. g. REVLON DUTIES: In certain circumstances, directors have an obligation to maximize s/h interests by getting the best price for the company. i. Triggered When 1. The company has taken steps to make the break-up inevitable, e.g.

a. Actively initiating an auction or b. abandoning long-term strategy to seek an alternative involving break-up 2. Company plans to sell controlling interest in itself. QVC a. In such cases, directors sole duty is to look after the s/h interest. They may do this by making reasonable efforts to do so. Lyondell ii. Not Triggered When: company desires to remain independent. (e.g. repurchase) iii. Liability for breach of Revlon. 1. duty of care by not taking comprehensive steps to check whether the price that is offered is the best available, but if the company has an exculpation provision in its articles that claim is not worth much. 2. duty of good faith, but only if directors consciously disregard their obligation to take any steps to obtain the best price for the company. Lyondell. h. INDEPENDENT COMMITTEE FOR TAKEOVER BIDS: i. Can help establish reasonable perception of threat, proportionate response, and reasonable deal protection measures ii. Courts view use of committee as lessening the influence of management interest in resisting takeover based on self-interest. EQUITABLE REMEDIES (EQUITABLE LIMITATIONS ON CORPORATE ACTION, VEIL PIERCING) 1. EQUITABLE LIMITATIONS ON CORPORATE ACTION a. Bove - as long as is permitted by law, will be permitted by courts. b. Schnell v. Chris-Craft (moved date of meeting disenfranchise dissident s/h) Inequitable action does not become permissible just because its legally possible c. How to reconcile BOVE & SCHNELL?: Courts are unwilling to jeopardize rights of common s/h, but dont mind so much impinging on rights of other stakeholders. 2. PIERCING THE VEIL & HOLDING S/H LIABLE a. Test For Piercing i. Domination (alter ego, etc.) ii. Fraud (undercapitalization is evidence of fraud) iii. Harm (phantom third prong) b. Basic Concern: does the company have enough assets to cover its reasonably foreseeable obligations? c. Justifications i. Piercing shifts costs of loss back to s/h from creditors ii. Limited liability was a means of encouraging entrepreneurship and keeping markets competitive it continues to promote social goals and should be protected, but sometimes more equitable to hold s/h liable for their actions. d. CONTRACT (most common) i. Misrepresentation (Browning-Ferris): corporation has led potential creditors to believe it was more solvent than it really was

1. Omni Realty (1994) (absent evidence that the original capital of a corporate general partners of a LLP was a sham, fact that the corp. was undercapitalized would not support decision to pierce) 2. Theberge (1996) (refused to hold sole s/liable , even though s/h had assured creditors orally that he would stand behind the corporations obligations said he did not act fraudulently, but rather shrewdly and with sharp business practices) ii. Equitable Ownership (Freeman) - to go after assets of someone who doesnt own the company but exercises considerable control. 1. Sufficient control/domination + use of control to commit fraud. iii. Shell corporation (Kinney Shoe v. Polan) 1. Unity interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist? 2. Rule from Kinney about tort/contract creditors: Court may not pierce the veil to aid creditors if the creditors could have known that the entity was undercapitalized e. TORT i. Dummy test (Walkovsky) 1. Domination + fraud + harm 2. If fragment of larger corporation which conducts business NO 3. If dummy for individual business YES 4. Carrying government mandated amount of insurance sufficient to stop piercing. ii. Tripartite complete domination test (Collett, Radaszewski) 1. D has complete domination not only of finances, but company has no separate mind, no existence of its own 2. Control was used by D to bring about the fraud or wrong a. note: purposeful undercapitalization became proxy for this 3. Fraud or wrong was proximate cause of accident 4. Carrying government mandated amount of insurance sufficient to stop piercing. f. PARENT-SUBSIDIARY i. Alter ego (Westin, Gardemal) 1. Mere tool or business conduit. Major factor for establishing liability under this doctrine is undercapitalization ii. Single Business Enterprise (Westin, Gardemal) 1. not operated as separate entities; fully integrated resources to achieve common business purpose. iii. Conduit (OTR) 1. Parent so dominates subsidiary that it is merely a conduit. No separate existence. 2. Domination used to commit a fraud/wrong, or to avoid positive legal duty. 3. Satisfied when: corporation had no office, no staff, and no assets beyond the leases, it did not have a separate existence. g. Public v. Close

i. Easterbrook: tradl arguments for limiting liability to increase economic productivity have limited applicability to close corps. less separation of management & capital, absence of a market for stocks. ii. Presser disagrees with above point- close corporations particularly require limited liability b/c it only protects s/h qua s/h, does not protect s/h who are also bad managers. iii. Leebron takes a middle position that limited liability should exist for close corporations in 2 circumstances that would protect against major abuses of limited liability. 1. s/h should not be allowed to reduce capital availability for involuntary creditors by using debt they have personally guaranteed, rather than equity, to finance corporation. 2. shareholdermanagers must carry adequate insurance for foreseeable tort liabilities. h. Individual S/H v. Corporate Groups i. Question: whether disregarding separate incorporation should be easier in a holding company structure . . . when parent company owns controlling shares of subsidiary. ii. Argument: As originally conceived, corp. was an enterprise formed to carry on all operations, and early corporate laws prohibited one corporation from holding stock of another. But corps. began to operate through subsidiaries. Courts originally responded by employing enterprise theories to hold parent companies responsible for liabilities of subsidiaries 1. When parent company controls a subsidiary, seems pointless to permit limited liability, because purpose of LL Is to promote investment by dispersed individual investors. iii. Bainbridge argues that from policy perspective, danger that large corporations will externalize risks by using thinly-capitalized subsidiaries is high. iv. Posner: vertical integration achieves efficiencies, eliminates double marginalization. Would be perverse to penalize for superior efficiency by withdrawing privilege of LL that its nonintegrated competitors enjoy.