corporations

• 1) P manifests consent that agent act on P’s behalf AND
• 2) subject to P’s control AND
• 3) agent manifests consent

show had actual authority to act or authority was ratified giving agent authority

show agent acted beyond scope of her authority

Show agent had apparent or actual authority

• Not a pship
• - Creditor relationship: not sharing profits/losses but protecting against risky debtor and getting what he put in + interest (Martin v. Peyton)
• Yes a pship
• - economic terms (what % to party)
• - engagement in day-to-day activities
• - opportunity to earn ample profits if investment succeeds and losses if fails
• - ability to make managerial decisions
• **Note since pship doesn’t require state filings, easy to get into even if parties don’t intend to form Pship but to form economic relationship!**

• Show other P’s failure to disclose/“exclude[d] from chance to compete” : Meinhard v. Salmon
• -requires “not honesty alone, but the punctilio of an honor the most sensitive…” (Cardozo in Meinhard)

• - If state law allows LP liability, courts look at if: 1) substantial activity like a GP and 2) fairness

Creditor/third party has burden to prove:

• 1) corp functions as a single entity (alter ego) as shareholder(s) (including parent corps) or fraud, (but most creditor protxns under creditors’ law)
• Atex: 1) adequacy of capitalization; 2) the corporation’s solvency; 3) payment of dividends; 4) observation of corporate formalities (conduct meetings, elect officers, etc); 4) intermingling of funds (i.e. no maintenance of maintain separate accounts
• Note: jurisdictions differ! See outline
• AND

• 2) an element of injustice or unfairness if not pierced in MOST jurisdictions
• i.e. shell corporation, undermises legal rights or “unfair” biz practices, unjust enrichment)

keep corp’s biz separate (separate bank accournts, property, records), hold meetings, keep minutes, elect board members, issue stock, make sure corp adequately capitalized, maintain at least minimum required insurance

• If improper purpose, burden on SH to prove proper: improper purposes:
• - persuading corp to adopt social or political concerncs irrespective of economic benefit to corp SHs (Pillsbury v. Honeywell)
• - seeking trade secrets, other info
• - finidng potential customers for a personal biz venture

• If proper purpose, burden on corp to prove improper: proper purposes:
• - gain control of unless (unless hostile)
• - investigate alleged corp mismanagement
• - gather info to assess value of shares
• - communicate with other SHs

1. Is it a public co? - NO appraisal rights since can sell in 2ndary market before deal is finalized

• 2. Is it a merger that requires SH approval?
• - An acquisition? (selling “substantially all” assets) NO SH approval not required so NO appraisal rights
• - corp buying less that 20% of survivor’s shares under 251(f)- NO
• - parent that owns at least 90% of a subsid- NO

• Either
• 1) make demand on Board before deriv action OR

• 2) or argue that demand would be futile at the time suit is brought (not when action happened) ,
• Futile test:
• i. Majority of board either not disinterested or not independent
• ii. Underlying transaction not a product of valid biz judgment

3) or, if Board used special committee, prove either process defective, committee not independent/conflict, or (in DL) court can apply own biz judgment to decide if committee action valid under BJR.

• 1) Direct vs. Deriv, assess (Tooley):
• a. Who suffered the alleged harm—the corporation or the suing stockholder individually and
• b. Who would receive the benefit of the recovery or other remedy

• 2) If deriv, shareholder at the time and remains a SH during pendency of the deriv action?
• a. If not, did deal 1) intentionally transpire to deny derivative claim or 2) was deal in reality a reorganization that does not affect P’s ownership interest of shares

• Does it satisfy duty of candor? (akin to partnership principles in Meinhard)

• 1. Did Board vote with duties of care and loyalty?
• 2. Does it require SH vote? only if either
• -merger or
• -sale of substantially all assets ( DGCL§ 271) (Hollinger)
• 3. Are dissenting SHs entitled to appraisal rights? (see #5 above)
• 4. How are liabilities of the Target treated?

• what is the specific action and what’s motivating that action?
• Just fighting off takeover? Unocal (and Unitrin) rule
• Is breakup “inevitable” (Revlon) or change in corp control (QVC): 1) chooses to be up for sale (shift in role from “defenders to auctioneers)”, 2) target offering white knight control vs. diffuse SHs like Time, 3) break-up inevitable

Duties

• Just fighting off takeover (Unocal rule)
• If inside director:
• -Duty of Loyalty: cleansed by majority of disinterested directors or by SHs after full disclosure. If not cleansed, must be fair to the corp

• Outside director: Unocal test :
• 1) Board must show acted in good faith and after reasonable investigation, concluded that a danger existed to corporate policy and effectiveness

• AND
• Unitrin:
• 2) action taken by the Board must not be draconian, neither
• -preclusive: i.e. limited to some SHs, must be “more than just a theoretical possibility” (Airgas) that offering SHs can have successful offer
• NOR
• - coercive: clear terms, not punished for not participating in repurchase

• OR
• 3) proportionate: courts will defer to any “range “of reasonable judgment of the Board

• From defenders to auctioneer (Revlon rule)
• Revlon and progeny
• - duty to maximize value of transaction in short term once role become that of “auctioneer” (Revlon) OR abandoning long term strategy for short term (Paramount)
• - base analysis of value on “adequate information” (Paramount v. Time)

ordinary care: 1) “good faith” and 2) act as “ordinarily prudent persons under similar circumstances in like positions” (Francis)

• Ps must show either:
• 1) directors knew or
• 2) should have known violations of law occurring and
• 3) directors took no steps in a good faith effort to prevent/remedy and
• 4) such failure proximately resulted in the losses complained of

Must be systemic failure to monitor (Caremark)

• intentional dereliction of duty (conscious disregard for one’s responsibilities) that may not be precluded by charter or indemnification provisions

• did CS breach duty of loyalty in sale?
• - corporate looting, conversion of corporate opportunity, fraud, or other acts of bad faith? (Zeitlin)- YES
• - receipt of consideration for sale of office? YES
• - Buyer gets Board position as result of sale of stock? NO

• Gimbel test, which fine tunes meaning of 271 “substantially all”:
• 1) quantitative: “Assets quantitatively vital to the operation of the corporation” AND
• 2) qualitative: “out of the ordinary and substantially affects the existence and purpose of the corporation”
• ----
• -consider the “economic quality” (Hollinger) of corp assets being sold: “are stockholdders left with an investment that in economic terms is qualitatively different that the one they now possess” and, overall, sale “strikes at the heart of the corporate existence”
• - “if the portion of the biz not sold constitutes a substantial, viable, ongoing component of the corproation, the sale is not subject to 271”

• OVERALL guidelines
• 1) is there a conflict of interest; if so, step #2 if not, no DOL issue
• 2) cleanse the conflict: look at common law & statutes to cleanse conflict (generally, cleansed if approved by majority of informed directors OR ratified by informed shareholders OR intrinsically fair transaction
• 3) identify protections/effects of cleansing steps- i.e. if Board approval subject to BJR

• entire fairness
• 1) arm’s length transaction
• 2) fair terms? (**the more idiosyncratic harder it is to prove fairness, i.e. real property in Lewis case with the car garage

BJR and assess duty of care 1) reasonable steps to be informed and 2) no illegality, fraud, egregious decision or waste, conflict of interest, or bad faith.

• waste : transfer of corporate assets that serves no corporate purpose or for which no consideration is at all received (which in turn subject to BJR)
• no waste: if substantial consideration AND good faith judgement that transac worthwhile

• 1) is it a corporate opportunity?
• 2) If so, was it fully disclosed properly to appropriate authority? (If disclosure but no proper vote , was it nevertheless fair?)
• 2) If no disclosure, was it misappropriated (improperly used/taken by fiduciary)
• 3)If misappropriated, any defenses? (i.e, fairness if disclosed, See ALI for other exceptions), if not → violates duty of loyalty

• Is it a tender offer? Some courts use 8 factor test
• (CB 863); in general any pressure on SHs, how sophisticated are SHs? Others, a substantial risk SHs will lack info they need to make careful appraisal of offer

- Comply with Williams Act (added provisions 13d, e, 14d,e,f to SEA 1934)

• § 13(d), (not exhaustive!!) bidder must disclose:
• - when acquire more than 5% of shares (file Schedule 13D)
• - whether intended purpose is to acquire control and/or other fundamental change
• - any contracts, arrangements with anyone else with respect to any securities of the Target

§ 14(d) additional provisions for when more than 5%

14(e) provisions for any class of equity security registered under § 12

• intrinsic fairnes (Sinclair) (not entire fairness??)
• if parent gains nothing, BJR

• Oppression/Fraud: two prong analysis-
• 1) reasonable expectations of SHs and other stakeholders: reasonable expectations created at the inception of the relationship; those reasonable expectations must be examined as altered over time;the reasonable expectations that develop throughout the course of dealings must also be looked at
• 2) do the actions substantially defeat those reasonable expectations?

entire fairness test

Entire fairness with either Board or SHs’ approval

• P must show:
• 1) Is it “connect[ed]”… to the “purchase or sale of a security”?
• a. Only have standing if purchased or sold stock; not would have sold stock had not been induced by misrepresentations or omissions that violated 10b-5 (Blue Chip)
• b. Sale defined loosely (i.e. shares as consideration in a merger=sale)
• c. SEC can still have proceedings even if no private right of action
• d. Some states, exceptions if seeking injunctive relief or future monetary loss w/out
• injunction (4th circuit)
• b. In connection with read broadly
• i. “reasonably calculated to affect the investment decision of a reasonable investor ”
• ii. P must be a buyer or seller under 10b-5, but D does not have to be
• 2) Which device under 10b-5?
• a. “device, scheme, or artifice to defraud?” OR
• b. “untrue statement of a material fact” OR
• c. Omission of a material fact necessary in order to make statement no misleading OR
• d. Any act, practice, or course of business that operates as a fraud or deceit AND
• 3) Scienter (intent or knowledge of wrongdoing OR recklessness, see #24 below) AND
• 4) Materiality AND
• 5) Reliance (fraud caused transaction) AND
• 6) Causation (fraud cause the economic loss; proximate cause or “loss causation”)

• P must show scienter- D’s intent to deceive, manipulate, or defraud or D acted recklessly (in 9th circuit, heightened to deliberate recklessness
• - Recklessness is highly unreasonable conduct, estreme departure from standard of ordinary care
• - See outline for more!!

Depends on the significance a reasonable investor would place on the misrepresented information (in Basic, depended on the probability of whether the transaction would have happened)

• For omission:
• A reasonable investor who knew the omitted fact would or would not have bought or sold at the given price (see TSC Industries and how omission alters “total mix” of information, Ute: not saying anything still “misleading statement[]”)
• Note: similar to what must be proven in a case of non-disclosure, sometimes meld together

• 1) Existence of relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone
• 2) Inherent unfairness where a party takes advantage of such information knowing ut’s unavailable to those with whom he is dealing.
• 3) If using info of corp to whom owes fiduciary obligation

• 1) Look at function of insider—in a position of influence? (fact-intensive inquiry)
• 2) Use “lowest purchase price, highest sale price” method
• Smolowe/Gratz formula to determine extent of loss. Possibility that insider lost less because of inside information=profit
• Penalty to SEC or discorgement to corp = 3xs amount of gain.
• NOTE: courts differ in how they like 16(b) and some may not use

• Claiming involuntary transaction (i.e. Kern)
• 1) Must prove had no influence on the timing of the transaction
• 2) Prove to court did not have inside information to act on speculation that transaction imminent (“involuntariness…does not guarantee exoneration”)

• Ben owners claiming purchase not connected to sale, sale not connected to purchase
• 1) Show not beneficial owner before purchase of corp’s equities (so a purchase that makes one a beneficial owner not liable to discorge gprofits from sale of that purchase w/in 6 months)
• 2) Sale: a sale making one 10% or less ben owner not liable to discorge profits from later sales

D/Os claiming no connecting b/w p-s, s-p