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Use Restatement of the Law (Third) Agency and Case Law on the Exam
Agency: Restatement (Third) 1.01Agency is the fiduciary relationship that arises when one person (a
principal) manifests assent to another person (an agent) that the agent shall act on the principals behalf and
subject to the principals control and the agent manifests assent of otherwise consents so to the act.

Types of Agency:
Express Agency: an agency that occurs when a principal and an agent expressly agree to enter into an agency
agreement with each other.
Apparent Agency: agency that arises when a principal creates the appearance of an agency that in actuality
does not exist.
Agency by Ratification: an agency that occurs when:
o a person misrepresents himself as anothers agent when in fact they are not, and
o the purported principal ratifies (accepts) the unauthorized act.
Agency by Estoppel: when a third party alters its position because of offer from the agent
o Protects against improper actions of the principal

Gorton v. Doty

-Def. Agency

A Gay Jenson
Farms Co. v.
Cargill, Inc.

-Questions of

Where one undertakes to transact some business or mange some affair for
another by authority and on account of the latter, the relationship of
principal and agent arises.
A creditor who assumes control of his debtors business may be held liable
as principal for the acts of the debtor in connection with the business.


Agents Liability to Third Party: Restatement (Third) 7.01
Principals Liability in Contract: Restatement 144a principal is subject to liability upon contracts made by
an agent acting within his authority if made in proper form and with the understanding that the principal is a
Principals Liability in Tort: Restatement (Third) 2.03 Respondeat Superior:

Types Authority:
Actual Authority: Restatement (Third) 2.01 An agent acts with actual authority when, at the time of
taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with
the principals manifestations to the agent that the principal wishes the agent so to act.
Apparent Authority: Restatement (Third) 2.03 Apparent authority is the power held by an agent or the
other actor to affect a principals legal relationships with third parties when a third party reasonably believes
the actor has authority to act on behalf of the principal and that belief if traceable to the principals
-Implied Authority by custom:
Implied authority: Restatement (Third) 2.02
o Implied actual authority: act of putting agent in such a position leads agent to reasonably believe
he has authority
o Implied apparent authority: act of putting agent in such a position leads third party to reasonably
believe agent has authority
Inherent Authority (Now just apparent authority):

Restatement 8AInherent agency power is a term used in the restatement of this subject to
indicate the power of an agent which is derived not from authority, apparent authority or estoppel,
but solely from the agency relation and exists for the protection of persons harmed by or dealing
with a servant or other agent.
Third Restatement abandons inherent authority and groups it with apparent authority.

Mill Street Church

of Christ v. Hogan


Leasing Co. v.
Ampex Co.
Watteau v. Fenwick


A person possesses implied authority as an agent to hire another worker

where such implied authority is necessary to implement the agents
express authority.
A salesperson binds his employer to a sale if he agrees to that sale in a
manner that would lead the buyer to believe that a sale had been
When one holds out another as an agent, that agent can bind the principal
on matters normally incident to such agency, even if he was not authorized
for a particular type of transaction.


Restatement (Third) 4.01 Ratification Defined

Botticello v.


(1) An agency relationship cannot be established where the fair

preponderance of the evidence does not indicate that the purported
principal has authorized or agreed to the purported agent acting on her
(2) A person cannot ratify a prior act where the person neither intends to
do so nor has full knowledge of all the material circumstances.


Restatement (Third) 2.05 Estoppel to Deny Existence of Agency Relationship

Hoddeson v. Koos


To establish apparent agency, the appearance of authority must be shown

to have been created by the manifestation of the alleged principal and not
solely by the supposed agent.


Agent Liability on the Contract:

Disclosed Principal Restatement (Third) 6.01Ps existence and identity are known
No liability to agent unless; clear intent of all parties to be bound, or agent made a contract without
Partially Disclosed (Unidentified) Principal Restatement (Third) 6.02 Ps existence is know but identity is
not known
Agent treated as a party to the contract, third party picks who to sue
Undisclosed Principal Restatement (Third) 6.03Ps existence and identity are not known
Agent is liable

Atlantic Salmon A/S

v. Curran


It is the duty of an agent, in order to avoid personal liability on a contract

entered into on behalf of the principal, to disclose not only that he or she is
acting in a representative capacity, but also the identity of the principal.



Independent Contractors: an independent contractor is a person who agrees to carry out some task but is not subject
to the principals control in doing so.
Independent contractor (agent type)subject to limited control by P with respect to the chosen results
A has the power to act on Ps behalf
Independent Contractor (non-agent type)less control on Ps part
A has no power to act on Ps behalf.

Humble Oil &

Refining Co. v.
Hoover v. Sun Oil
Murphy v. Holiday
Inns, Inc.

Contractor vs.

A party may be liable for a contractors tort if he exercises substantial

control over the contractors operations.

A franchisee is considered an independent contractor of the franchisor if

the franchisee retains control of inventory and operations.
If a franchise contract so regulates the activities of a franchisee as to vest
the franchisor with control within the definition of agency, a principalagent relationship arises even if the parties expressly deny it.


Miller v.
McDonalds Corp.

-Tort liability;
-Control ;
-Apparent vs.
actual authority

Ira S. Bushey &

Sons, Inc. v. United

-Scope of

For purposes of determining tort liability, a jury may find that an agency
relationship exists between a franchisor and a franchisee where the
franchisor retains significant control over the daily operation of the
franchisees business and insists on uniformity of appearance and the
standards designed to cause the public to think that the franchise is part of
the franchisors business.
Conduct of an employee may be within the scope of employment even if
the specific act does not serve the employers interest.

Manning v.

-Scope of
-Tort liability

To recover damages from an employer for injuries from an employees

assault, the plaintiff must establish that the assault was in response to the
plaintiffs conduct which was presently interfering with the employees
ability to perform his duties successfully.

Arguello v. Conoco,


To impose liability under civil rights legislation for the discriminatory

actions of a third party, the plaintiff must demonstrate an agency
relationship between the defendant and the third party.


P usually not liable for an independent contractors torts, but exceptions apply:
P retains control over the aspect of the work in which the tort occurs

P engages an incompetent contractor

Nondelegable duty
Activity contracted for is a nuisance per se

Majestic Realty
Associates, Inc. v.
Toti Contracting Co.

liability for

Although a person who engages a contractor, who conducts an

independent business using its own employees, is not ordinarily liable for
negligence of the contractor in the performance of the contract, such a
person is liable when the contractor performs inherently dangerous work.


Fiduciary Duties of Agents: Restatement (Third) of Agency 1: Agency is the fiduciary relationship that arises when
one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principals
behalf and subject to the principals control, and the agent manifests assent or otherwise consents so to act.

Agents Fiduciary Duties:

Duty of Care:
Restatement (Third) 8.08 Duty of Care, Competence, and Diligence: Subject to any agreement with the
principal, an agent has a duty to the principal to act with the care, competence, and diligence normally
exercised by agents in similar circumstances. . . .
Duty of Loyalty:
Secret Profits
o From transaction with principal
o Use of position
Restatement (Third) 8.02 -- Material Benefit Arising Out of Position:
Restatement (Third) 8.05 -- Use of Principals Property; Use of Confidential
Usurping Business Opportunities from the P
o Restatement (Third) 8.04: Competition
Grabbing and Leaving
o Restatement (Third) 8.05: Use of Principals Property; Use of Confidential Information

Reading v. Regem

Rash v. J.V.
Intermediate, Ltd

-Agents duty of
-Secret profits
-Agents duty of
-Usurping bus
from principal

An agent who takes advantage of the agency to make a profit dishonestly

is accountable to the principal for the wrongfully obtained proceeds.
An employee has a fiduciary duty, as the employers agent, to disclose to
the employer what the employer, as a principal, has a right to know.

Town & Country
House and Home
Services, Inc. v.

-Duty of
-Grabbing and

Former employees may not use confidential customer lists belonging to

their former employer to solicit new customers.

Use RUPA (1997) on the Exam
Partnership Creation:
o Uniform Partnership Act (1997) Section 202. Formation of partnership
o (c) In determining whether a partnership is formed, the following rules apply:
(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property,
or part ownership does not by itself establish a partnership, even if the co-owners share profits
made by the use of the property.
(2) The sharing of gross returns does not by itself establish a partnership, even if the persons
sharing them have a joint or common right or interest in property from which the returns are
(3) A person who receives a share of the profits of a business is presumed to be a partner in the
business, unless the profits were received in payment:
(A) of a debt by installments or otherwise;
(B) for services as an independent contractor or of wages or other compensation to an
(C) of rent;
(D) of an annuity or other retirement or health benefit to a deceased or retired partner or a
beneficiary, representative, or designee of a deceased or retired partner;
(E) of interest or other charge on a loan, even if the amount of payment varies with the
profits of the business, including a direct or indirect present or future ownership of the
collateral, or rights to income, proceeds, or increase in value derived from the collateral;
(F) for the sale of the goodwill of a business or other property by installments or
o UPA (1997) 105: (a) Except as otherwise provided in subsections (c) and (d), the partnership agreement
governs: (1) relations among the partners as partners and between the partners and the partnership (b)
To the extent the partnership agreement does not provide for a matter described in subsection (a), this
[act] governs the matter.
EXAM NOTE: Have two or more persons associated together to carry on as co-owners a business for profit?
o When in doubt, refer to rule UPA (1997) 202
Fenwick v.

-Def of

A partnership is an association of two or more persons to carry on as coowners a business for profit.


Martin v. Peyton

-Intent of parties
on partnership

Although the absence of an explicit partnership agreement does not itself

preclude he creation of a partnership, it must be proven that investors in an
enterprise have intent to carry on as co-owners of the enterprise a business
for profit before they can be considered partners of the enterprise.

Southex Exhibitions,
Inc. v. Rhode Island

-Standard of
review for

The existence of a partnership normally must be determine under the

totality-of-the-circumstances test.

Association, Inc.



Partnership by Estoppel: to establish, four elements must be proven:

o 1. Plaintiff must establish a representation, either express or implied, that one person is the partner of
anotheri.e., that there was a holding out of a partnership
o 2. The making of the representation by the person sought to be charged as a partner or with his consent
o 3. A reasonable reliance in good faith by the third party upon the representation
o 4. A change of position, with consequent injury, by the third person in reliance on the representation.

Young v. Jones

-Partnership by

A person who represents himself, or permits another to represent him, to

anyone as a partner in an existing partnership or with others not actually
partners, is liable to persons to whom such a representation is made who
has given credit to the actual or apparent partnership.


Partnership Fiduciary Duties:
o UPA (1997) 409. General Standards of Partners Conduct:
(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty
of loyalty and the duty of care set forth in subsections (b) and (c).
o Duty of Care: UPA (1997) 409(c). General Standards of Partners Conduct:
(c) A partners duty of care to the partnership and the other partners in the conduct and winding
up of the partnership business is limited to refraining from engaging in grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of law.
UPA (1997) 105 Effect of Partnership Agreement
(a) Except as otherwise provided in subsections (c) and (d), the partnership agreement
governs: (1) relations among the partners as partners and between the partners and the
(b) To the extent the partnership agreement does not provide for a matter described in
subsection (a), this [act] governs the matter.
(d)(3) If not manifestly unreasonable, the partnership agreement may:
o (A) alter or eliminate the aspects of the duty of loyalty stated in Section 409(b);
o (B) identify specific types or categories of activities that do not violate the duty
of loyalty;
o (C) alter the duty of care, but may not authorize conduct involving bad faith,
willful or intentional misconduct, or knowing violation of law
Manifestly Unreasonably: UPA (1997) 409(c). A partners duty of
care to the partnership and the other partners in the conduct and winding
up of the partnership business is limited to refraining from engaging in
grossly negligent or reckless conduct, intentional misconduct, or a
knowing violation of law.
o Duty of Loyalty: 409. General Standards of Partners Conduct:
o (b) A partners duty of loyalty to the partnership and the other partners is limited to the following:
(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived
by the partner:
(A) in the conduct or winding up of the partnerships business;
(B) from a use by the partner of the partnerships property; or
(C) from the appropriation of a partnership opportunity;
(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership
business as or on behalf of a person having an interest adverse to the partnership; and

(3) to refrain from competing with the partnership in the conduct of the partnerships business
before the dissolution of the partnership.
Actions that might violate this duty: competing with the partnership; taking away
business from the partnership; using partnership property for personal profit; conflicts of

Meinhard v. Salmon
Sandvick v.

-Joint venture
fiduciary duty
-Partnership vs.
Joint venture;
-Def of joint
-Joint venture
fiduciary duty of
-Usurping bus

Joint adventurers own one another the highest fiduciary duty of loyalty
while the enterprise is ongoing.
(1) A partnership does not exist where a business undertaking is more
limited than a series of acts directed to an end.
(2) A joint venture exists between parties who purchase assets from their
credits in a single checking account in equal shares, where the assets are
titles in a single entitys name, and where profits, if any, are to be shared.
(3) Joint venturers breach their fiduciary duty of loyalty to co-joint
venturers where they take for themselves an opportunity that belongs to the
joint venture without giving their co-joint venturers the chance to
participate in that opportunity.


What is Manifestly Unreasonable?:

o UPA (1997) 105(d)(3): If not manifestly unreasonable, the partnership agreement may:
(A) alter or eliminate the aspects of the duty of loyalty stated in Section 409(b);
(B) identify specific types or categories of activities that do not violate the duty of loyalty;
o UPA (1997) 105(e):
(e) The court shall decide as a matter of law whether a term of a partnership agreement is
manifestly unreasonable under subsection (c)(6) or (d)(3). The court:
(1) shall make its determination as of the time the challenged term became part of the
partnership agreement and by considering only circumstances existing at that time; and
(2) may invalidate the term only if, in light of the purposes and business of the
partnership, it is readily apparent that:
o (A) the objective of the term is unreasonable; or
o (B) the term is an unreasonable means to achieve the terms objective.
Meehan v.
-Partner fid duty A partner breaches his fiduciary duty by using his position of trust and
of loyalty
confidence to the disadvantage of the partnership.
-grabbing and
-law firm
Lawlis v.
Kightlinger & Gray

-Good faith

When a partner is involuntarily expelled from a business, his expulsion

must have been in good faith for dissolution to occur without violating the
partnership agreement.

Rights of a Partner:
o Control Rights: UPA (1997) 401(h): Each partner has equal rights in the management and conduct of
the partnership business.

Putnam v. Shoaf

Economic Rights: UPA (1997) 401(b): Each partner is entitled to an equal share of the partnership
distributions and is chargeable with a share of the partnership losses in proportion to the partners
share of the distributions.
Partnership Property:
UPA (1997) 501: A partner is not a co-owner of partnership property and has no interest in
partnership property which can be transferred, either voluntarily or involuntarily
UPA (1914) 25(1): A partner is co-owner with his partners of specific partnership property
holding as a tenant in partnership
Partnership Capital: UPA (1997) 401(a)
Capital Account: a running balance showing each Ps ownership equity
interest in

A co-partner owns no personal specific interest in any specific property or

asset of the partnership, and may only convey an undivided interest in the
value or deficit of the partnership.

The Partnership Interest: the partners interest is the partners share of profits and losses
o UPA (1997) 503(a)(2) codifies prior law that transfer of an interest does not effect a dissolution of the
A partner who has transferred his interest remains a partner
UPA (1997) 601(4) expulsion for transferring substantial amount of partners interest.

Creditors Access to Firm and Personal Assets:

o UPA (1997) 306. Partners Liability
(a) Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and
severally for all obligations of the partnership unless otherwise agreed by the claimant or
provided by law.
(b) A person admitted as a partner into an existing partnership is not personally liable for any
partnership obligation incurred before the persons admission as a partner.
o UPA (1997) 501. Partner Not Co-owner of Partnership Property: A partner is not a co-owner of
partnership property and has no interest in partnership property which can be transferred, either
voluntarily or involuntarily.
o UPA (1997) 504. Partners Transferable Interest Subject to Charging Order
(a) On application by a judgment creditor of a partner or of a partners transferee, a court having
jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment.
The court may appoint a receiver of the share of the distributions due or to become due to the
judgment debtor in respect of the partnership and make all other orders, directions, accounts, and
inquiries the judgment debtor might have made or which the circumstances of the case may
Actual Authority:
o UPA (1997) 410. Actions by partnership and partners.
(a) A partnership may maintain an action against a partner for a breach of the partnership
agreement, or for the violation of a duty to the partnership, causing harm to the partnership.
National Biscuit
A partner may not escape liability for debts incurred by a co-partner merely
Company v. Stroud
liability for
by advising the creditor, in advance, that he will not be responsible for
those debts.
Summer v. Dooley
Business difference in a partnership must be decided by a majority of the
partners provided no other agreement between the partners speaks to the
-Liability for

Day v. Sidley &

-Partner fid duty

to disclose

Partners have a fiduciary duty to make a full and fair disclosure to other
partners of all information that may be of value to the partnership.

o Effect on partnership: If no agreement between partners to carry on the business, the partnership must be
wound up.
If the business will not continue then winding up process contemplates that the firms assets are
distributed to the partners.
Authority of partners to act on behalf of partnership terminated except in connection with
winding up of partnership business. UPA (1997) 804
Dissociation: UPA 601. Events Causing Partners Dissociation
o (5) on application by the partnership or another partner, the person is expelled as a partner by judicial
order because the person:
(A) has engaged or is engaging in wrongful conduct that has affected adversely and materially, or
will affect adversely and materially, the partnerships business;
(B) has committed willfully or persistently, or is committing willfully or persistently, a material
breach of the partnership agreement or a duty or obligation under Section 409; or
(C) has engaged or is engaging in conduct relating to the partnerships business which makes it
not reasonably practicable to carry on the business with the person as a partner;
Owen v. Cohen


Collins v. Lewis

dissolution basis

Giles v. Giles

A court may order the dissolution of a partnership where there are

disagreements of such a nature and extent that all confidence and
cooperation between the parties has been destroyed or where one of the
parties by his misbehavior materially hinders a proper conduct of the
partnership business.
A partner who has not fully performed the obligations required by the
partnership agreement may not obtain an order dissolving the partnership.
(1) In a family partnership, a partner may be dissociated from the
partnership where the partnership has threatened the other partners; the
family relationship between the partners and other partners is broken; and
there is only distrust between the partner and other partners.
(2)In a family partnership, a partner may be dissociated from the
partnership where the partners conduct toward the other partners has led to
a standstill so that the partnership can no longer carry on its business to the
mutual advantage of the other partners.

UPA (1997) 602. Partners Power to Dissociate; Wrongful Dissociation

(a) A partner has the power to dissociate at any time, rightfully or wrongfully, by express will
pursuant to Section 601(1).
(b) A partners dissociation is wrongful only if:
(1) it is in breach of an express provision of the partnership agreement; or
(2) in the case of a partnership for a definite term or particular undertaking, before the
expiration of the term or the completion of the undertaking:

(i) the partner withdraws by express will, unless the withdrawal follows within
90 days after another partners dissociation by death or otherwise under Section
601(6) through(10) or wrongful dissociation under this subsection;
o (ii) the partner is expelled by judicial determination under Section 601(5);
o (iii) the partner is dissociated by becoming a debtor in bankruptcy; or
o (iv) in the case of a partner who is not an individual, trust other than a business
trust, or estate, the partner is expelled or otherwise dissociated because it
willfully dissolved or terminated.
(c) A partner who wrongfully dissociates is liable to the partnership and to the other partners for
damages caused by the dissociation. The liability is in addition to any other obligation of the
partner to the partnership or to the other partners.


UPA (1997) 603. Effect of dissociation

o Effect on Departing Partner: entitled to accounting (fair value of partnership + interest from the date of
Departing partner remains liable on all firm obligations unless released by creditors. UPA (1997)
o Effect on New Partners: If a new partner joins the firm when it continues after a dissolution, the new
partner is also liable for the firms old debts, but such liability can only be satisfied out of partnership
property. UPA (1997) 306(B).
The new partner cannot be held personally liable for the old debts, unless he or she expressly
agrees to be so held.

Prentis v. Sheffel

-Judicial sale
-Bad faith

Pav-Saver Corp. v.
Vasso Corp.

-Right to
continue the bus

Majority partners in a partnership-at-will may purchase the partnership

assets at a judicially supervised sale where a minority shareholder has been
frozen out of the partnership and the parties relationship has deteriorated to
the partnerships detriment.
When a wrongful partnership dissolution occurs, partners who have not
wrongfully caused the dissolution shall have the right to continue the
business in the same name and to receive damages for breach of the


Unlimited Liability in General Partnership

o UPA (1997) 306(a): ... all partners are liable jointly and severally for all obligations of the partnership
unless otherwise agreed by the claimant or provided by law

Kovacik v. Reed

-Liability of
partnership Loss

In a joint venture in which one party contributes funds and the other labor,
neither party is liable to the other for contributions for any loss sustained.

G&S Investments v.

-Freedom of

(1) The mere filing of a complaint seeking dissolution of a partnership

does not require liquidation of the partnership assets and distribution of the
net proceeds.
(2) A partnership buyout agreement is valid and binding even if the
purchase price is less than the value of the partner interest, since partners
may agree among themselves by contract as to their rights and liabilities.

Use Case Law on Exam
Limited Liability Limited Partnership: a limited partnership that elects limited liability limited partnership status by
filing an application for LLLP registration.
o All partners in the limited partnership, including the general partners, have personal liability protection
o Other than the limited liability component, an LLLP maintains all other characteristics of a LP
o In an LP the general partners have full personal liability, but a corporation may serve as general partner
In an LLLP the general partners, whether individual, unincorporated association, or corporation, gets
limited liability.
Limited Partner Liability in Limited Partnerships:
o ULPA (1976): A limited partner shall not become liable as a general partner, unless, in addition to the
exercise of his rights and powers as a limited partner, he takes part in the control of the business.
o ULPA (1985) 303(a): Only limited partners who participate in control can be held liable
o ULPA (1985) 303(b): Safe harbors for conduct not deemed to participate in control
Being an agent, employee, or contractor for the limited partnership;
Consulting with the advising a general partner with respect to the business of the limited partnership;
Approving or disapproving of an amendment to the partnership agreement; or
Voting on specified matters.
Holzman v. De
In re: El Paso
Pipeline Partners,
L.P. Derivative

-Limited vs.
General Partners
-Right to
contract away
fid duties
-Duty of good

If a limited partner participates in or exercises control over the partnership

business, he becomes a general partner.
(1) Where a limited partnership agreement eliminates directors common
law fiduciary duties and replaces them with contractual obligations, those
express obligations are not breached where directors have acted in accord
with the contractual obligations.
(2) Where a limited partnership agreement does not expressly eliminate the
obligation of the general partner to act in good faith, the general partner
does not breach the implied covenant of good faith and fair dealing where
the agreement suggests if the parties had addressed the issue, no obligation
to act in good faith would have been imposed.


Use Case Law on Exam

Limited Liability Companies: Cross between a partnership and a corporation
o Tax advantages of partnerships
o Limited liability of corporations
o None of the restrictions (e.g., number and type of shareholders) applicable to S corporations
o Funding
Members typically contribute capital
Contribution may be cash, property, services rendered, a promissory note, or other obligation to
contribute cash, property, or to perform services. ULLCA 401.
o Liability
Members stand to lose capital contributions, but their personal assets are not subject to
o Tax Consequence
Income passes through to members like patnership
LLC does not pay taxes

Formation of LLC:
o Legal Steps:
File articles of organization in the designated State office. ULLCA 202(a)
Required and optional contents in ULLCA 203
Filing fees and $800 min franchise tax (California)
o Other steps:
See Outline
Development, LLC
v. Perrin

-De Facto Corp.

-Corp. by

(1) The de facto corporation doctrine may be extended to a limited

liability company where its incorporators have (1) proceeded in good faith,
(2) under a valid statute, (3) for an acknowledged purpose, and (4) have
executed and acknowledged articles of association pursuant to that
(2) A limited liability company by estoppel finding is appropriate where
the parties enter into a contract believing that a limited liability company
has been validly formed, and the parties proceeded under that belief,
notwithstanding the in face limited liability company was not validly
formed at the time the contract was entered into.

De Facto Corporation: Grant shareholders limited liability as though in a de jure corporation if the organizers
meet the 4 requirements

Corporation by Estoppel: Estop creditors from holding shareholders personally liable as against only contract
creditors If the person dealing with the firm:


Members Interest:
o Financial interest
Right to distributions and liquidation participation
Profit and Loss Sharing
o Management rights
Absent contrary agreement, each member has equal rights in the management of the LLC
Most matters decided by majority vote
Significant matters require unanimous consent
Manager-managed LLC option available

Assignment of LLC Interest: Analogous to partnership rules

o Unless otherwise provided in the LLC's operating agreement, a member may assign his financial interest
in the LLC
An assignee of a financial interest in an LLC may acquire other rights only by being admitted as a
member of the company if all the remaining members consent or the operating agreement so

Elf Atochem North

America, Inc. v.

-LLC freedom
to contract

Fisk Ventures, LLC

v. Segal

-Limits of the
-LLC duty of
good faith

Because the policy of Delawares Limited Liability Company Act is to

give maximum effect to the principal of freedom of contract and to the
enforceability of LLC agreements, the parties to LLC agreements may
contract to avoid the applicability of certain provisions of the Act,
including dispute resolution and forum selection provisions.
(1) Where an LLC agreement vests power in more than one equity class,
and requires the classes to cooperate to effect the LLC action, one class
does not breach the LLC agreement by failing to acquiesce to the wishes
of the other classes simply because the other classes believe their approach
is superior or in the best interest of the LLC.
(2) Where an LLC agreement vests power in more than one equity class,
and requires the classes to cooperate to effect LLC action, one class does
not breach the LLC agreements implied covenant of good faith and fair
dealing by failing to simply because the other classes believe their
approach is superior or in the best interest of the LLC.


NetJets Aviation,
Inc. v. LHC

-Piercing the
corp. veil
-Alter ego

Claims against the owner of a company for the debts of the company
should be allowed to proceed on the theory that the owner is the
companys alter ego where sufficient evidence has been presented that the
owner and company operated as one, and that the owner conducted the
companys affairs in a fraudulent, illegal, or unjust manner.


Fiduciary Obligations Absent Agreement to the Contrary: ULLCA 409(b)

o (b)(1): to account to the company ... for ... any property, profit, or benefit ... derived from a use by the
member of the companys property, including the appropriation of a companys opportunity
o (b)(3): to refrain from competing with the company in the conduct of the companys business before the
dissolution of the company

Altering or eliminating Fiduciary Duties in the Operating Agreement:

o ULLCA 105(d)(3): If not manifestly unreasonable, the operating agreement may:
(A) alter or eliminate the aspects of the duty of loyalty ;
(B) identify specific types or categories of activities that do not violate the duty of loyalty;

McConnell v. Hunt
Sports Enterprises

-Fid duty

(1) Extrinsic evidence will not be permitted for interpretation of an LLC

operating agreement the terms of which are un ambiguous and clear.
(2) A member of an LLC does not breach a fiduciary duty to the company
by directly competing against it where the operating agreement expressly
permits such competition.
(3) A directed verdict against an LLC member, which is based on operating
agreement violations, is appropriate where the evidence shows that the
member has violated the operating agreement.

Racing Investment
Fund 2000, LLC v.
Clay Ward Agency,

-LLCs right to
capital call,

An LLCs capital call provision may not be invoked by a court in order to

obtain funds from the LLCs members to satisfy a judgement against the

Dissociation v. Dissolution
o Dissociation:
Withdrawal or expulsion of a member (ULLCA 601)
Dissociation w/o Dissolution:
o Dissociated members interest must be purchased by the LLC
Judicial appraisal proceeding available
o Members right to participate in firm business terminates
Exception for participation in a post-dissolution winding up process
o Dissolution:
Winding up of LLC triggered (ULLCA 801)
Events of Dissolution:
o By operation of law:
Upon the happening of any event specified in LLC operating agreement
Vote of members (as specified in operating agreement)
It becomes unlawful to carry on the business
o Upon court order:
Economic purpose frustrated
Misconduct by members
New Horizons
Supply Cooperative
v. Haack

r liability

A member or manager of an LLC is not personally liable for any debt,

obligation, or liability of the company only if the member or manager
follows statutorily prescribed formalities of LLC incorporation,
dissolution, and creditor notice.


Corporation-General Info
o Either Public (Publicly held) or Close (Closely held)
o Critical Attributes:
1. Legal Personality, separate legal existence from its owners
2. Limited Liability
3. Separation of Ownership and Control
4. Liquidity
5. Flexible Capital Structure

Rights of Shareholders
o Vote on limited range of issues
o Receive dividends when declared by the board
o Inspect corps. books and records
o Receive distribution upon termination
o Purchase proportionate shares of a new issuance of corporate stock to maintain current current ownership
% (Preemptive right )
o File derivative suit

Issuance of Stocks: controlled by the board of directors

o Shareholder involved only if:
Board wants to sell more shares than are presently authorized in its charter
Board wants to issue a new class of shares not authorized in the charter


Boilermakers Local
154 Retirement
Fund v. Chevron

-BoD power
under article of

(1) Where a corporations certificate of incorporation empowers its

board to adopt, amend, or repeal bylaws adopted by the board that
requires litigation relating to the corporations internal affairs to be
brought in the corporations state of incorporation is not statutorily
(2) Where a corporations certificate of incorporation empowers its
board to adopt, amend, or repeal bylaws, a bylaw unilaterally adopted by
the board that requires litigation relating to the corporations internal
affairs to be brought in the corporations state of incorporation is not
contractually valid.


Walkovszky v.

-Piercing the
corp. veil

Sea-Land Services,
Inc. v. Pepper

-Grounds for
piercing the
corp. veil
-Owner Liability
-Grounds for
piercing the
corp. veil
-Parent /
-Parent Tort

In re Silicone Gel
Breast Implants
Products Liability

Frigidaire Sales
Corporation v.
Union Properties,

liability of
limited partners
-Ground for

Whenever anyone uses control of the corporation to further his own

rather than the corporations business, he will be liable for the
corporations acts, but where a corporation is a fragment of a larger
corporate combine which actually conducts the business, a court will not
pierce the corporate veil to hold individual shareholders liable.
The corporate veil will be pierced where there is a unity of interest and
ownership between the corporation and an individual and where
adherence to the fiction of a separate corporate existence would sanction
a fraud or promote injustice.
(1) Summary judgement will not be granted in multidistrict products
liability litigation on a piercing the corporate veil claim where there is
evidence that tends to show that a subsidiary that has manufactured and
sold injurious product is the alter ego or instrumentality of its soleshareholder parents and that the parent has used the subsidiary to effect
fraud, inequity or injustice.
(2) A parent corporation may be held directly liable for injuries caused
by the products of its wholly owned subsidiary where the evidence tends
to show that the parents has committed the tort of negligent undertaking
with regard to those products.
Limited partners do not incur general liability for the limited partnerships
obligations simply because they are officers, directors, or shareholders of
the corporate general partner.


Direct and Derivative Suits:
o Direct: brought by shareholder in an individual capacity that arises from an injury directly to the
o Derivative: brought by a shareholder on behalf of the corporation fir an injury suffered by the entire
Traditional Tests:
Who suffered the most direct injury?
o If corporation, suit is derivative
To whom did defendants duty run?
o If corporation, suit is derivative
Delaware Approach:
In Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 2004 WL 728354 (Del.2004), the
Delaware supreme court adopted a two-pronged standard to be used in determining
whether a stockholders claim is derivative or direct:
o Who suffered the alleged harm, the corporation or the suing stockholders,
o Who would receive the benefit of any recovery or other remedy, the corporation
or the stockholders, individually?
Derivative Litigation Decision Tree

Cohen v. Beneficial
Industrial Loan
Eisenberg v. Flying
Tiger Line, Inc.

-State incorp.
law in Fed Court
-Derivative suits
-Personal vs.
derivative suits

A statute holding an unsuccessful plaintiff liable for the reasonable

expenses of a corporation in defending a derivative action is entitling the
corporation to require security for such payment is constitutional.
A cause of action that is determined to be personal, rather than derivative,
cannot be dismissed because the plaintiff fails to post security for the
corporations costs.


Delaware Legal Standard for Demand Futility

o Plaintiff must allege particularized facts (pre-discovery using the tools at hand) creating a reasonable
doubt that the board is capable of making a good faith decision on suit:
1. Majority of board has material financial or familial interest
2. Majority of the board lacks independence (domination and control by wrongdoers)
3. Challenged transaction not product of valid exercise of business judgment
o Disjunctive
Demand Futility in NY under Barr and Marx
o Three factor (disjunctive) standard:
1. Majority of directors interested in challenged transaction
2. Directors failed to inform themselves to degree reasonably appropriate
3. Challenged transaction so egregious that it could not have been the product of sound business
judgment of the directors

Grimes v. Donald

Marx v. Akers

-Direct vs.
-Waiver on
-NY law on
Demand Futility

(1) A claim that a board of directors has abdicated its statutory duty may
be brought directly.
(2) When a stockholder demands that the board of directors takes action
on a claim allegedly belonging to the corporation and demand is refused,
the stockholder may not thereafter assert that demand is excused with
respect to other legal theories in support of the same claim, although the
stockholder may have a remedy for wrongful refusal or may submit
further demands which are not repetitious.
Demand on a board of directors is futile if a complaint alleges with
particularity that: (1) a majority of the directors are interested in the
transaction; (2) the directors failed to inform themselves to a degree
reasonably necessary about the transaction; or (3) the directors failed to
exercise their business judgement in approving the transaction.


Delaware Standard for reviewing Special Litigation Committee Recommendations:

o Zapata two step:
Step 1:
Inquiry into the independence and good faith of the committee
Inquire into the bases supporting the committees recommendations
Step 2:
Court may go on to apply its own business judgment as to whether the case is to be

Independence Contexts:
Independent and disinterested decision makers key precondition to BJR:
Demand futility
SLC recommendation
Approval of conflicted interest transactions
Mergers and acquisitions
Especially defenses against hostile takeover bids

Board Functions: DGCL 141(a): The business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors.
Board Special Committees: DGCL 141(c)(2): The board of directors may designate 1 or more committees,
each committee to consist of 1 or more of the directors of the corporation. Any such committee, to the extent
provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to the following matter: (i) approving or adopting,
or recommending to the stockholders, any action or matter (other than the election or removal of directors)
expressly required by this chapter to be submitted to stockholders for approval or (ii) adopting, amending or
repealing any bylaw of the corporation.
Corporate Officers:
o Officers serve at the pleasure of the Board of Directors.
o Act as agents for the corporation.
Have fiduciary duties of agents, plus.
o In most states, one can be both officer and director.
Fiduciary Duties: Directors and officers are fiduciaries of the corporation.
o Duty of Care: Directors/officers are expected to act in good faith and the best interests of the corporation.
Failure to exercise due care may subject individual directors or officers personally liable.
o Duty of Loyalty: subordination of personal interests to the welfare of the corporation.

Auerbach v.

-Courts scope of

Zapata Corp. v.

-Zapata 2 step

While the substantive aspects of a decision to terminate a shareholders

derivative action against defendant corporate directors made by a
committee of disinterested directors appointed by the corporations board
of directors is beyond judicial inquiry under the business judgement
doctrine, the court may inquire as to the disinterested independence of the
members of that committee and as to the appropriateness and sufficiency
of the investigative procedures chosen and pursued by the committee.
When assessing a special litigation committees motion to dismiss a
derivative action, a court must: (1) determine whether the committee
acted independently, in good faith, and made a reasonable investigation;
and (2) apply the courts own independent business judgement.


In re Oracle Corp.

-Burden of

A special litigation committee does not meet its burden of demonstrating

the absence of a material dispute of fact about its independence where its
members are professors at a university that has ties to the corporation and
to the defendants that are the subject of a derivative action that the
committee is investigating.


Dividends: Courts will generally leave dividends to the discretion of the directors
o But will intervene if refusal to pay amounts to such an abuse of discretion as would constitute a fraud, or
breach of good faith

Business Judgement Rule: In the absence of a showing of fraud, illegality or self-dealing by the directors, their
decision is final and not subject to review by the courts

A.P. Smith Mfg. Co.

v. Barlow

Dodge v. Ford
Motor Co.

Shlensky v. Wrigley

-BoD Scope of
-Derivative suit

State legislation adopted in the public interest can be constitutionally

applied to preexisting corporations under the reserve power.

A corporations primary purpose is to provide profits for its stockholders.

A shareholders derivative suit can only be based on conduct by the

directors that borders on fraud, illegality, or conflict of interest.


Exercise of Business Judgement? Waste? Fraud? Conflict of interest? Illegal Action? Egregious
Decision? Uninformed Decision? Bad Faith? Business Judgement Rule applies court abstains


Kamin v. American
Express Company

-BoD Fid. Duty

of Care

The decision to declare a dividend or make a distribution is exclusively a

matter of business judgement for the board of directors, so that courts will
not interfere with the boards decision as long as it is made in good faith.

Legal Effect of a Merger: DGCL 259(a): When any merger shall have become effective , for all purposes of
the laws of this State the separate existence of all the constituent corporations except the one into which the other
constituent corporations have been merged shall cease and the [surviving] corporation [shall possess] all the
rights, privileges, powers and franchises ..., and [be] subject to all the restrictions, disabilities and duties of each of
such corporations so merged or consolidated and all property, real, personal and mixed, and all debts due to any of
said constituent corporations shall be vested in the corporation surviving from such merger but all rights of
creditors of any of said constituent corporations shall be preserved unimpaired, and all debts, liabilities and duties
of the respective constituent corporations shall thenceforth attach to said surviving corporation
Mergers effect on Shareholders: DGCL 251(b)(5): The plan of merger shall specify the manner of converting the
shares of each of the constituent corporations into cash securities of any other corporation or entity which the
holders of such shares are to receive in exchange for [their] shares
Business Judgement Rule post-Van Gorkom:
o A standard of liability
Directors may be held liable for gross negligence in failing to make an informed decision
o A rule of abstention
Will court review substance of BoD decision?
Court will examine decision making process
o The extent to which BoD made an informed decision
Directors Defense to Business Judgement Rule:
o DGCL 141(e) provides a defense for directors who rely on reports from officers.
BUT, BoD has a duty of inquiry, they cannot rely blindly

Smith v. Van

Francis v. United
Jersey Bank

-BJR scope
-BoD Duty of
Care, informed
-Liability of
BoD to corp.
-Duty of care

The business judgement rule shields directors or officers of a corporation

from liability only if, in reaching a business decision, the directors or
officers acted on an informed basis, availing themselves of all material
information reasonably available.
Liability of a corporations directors to its clients require a demonstration
that: (1) a duty existed; (2) the directors breached that duty; and (3) the
breach was a proximate cause of the clients losses.


Delaware Law on Contracts between the Corporation and a Directors Interest: DGCL 144
o (a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between
a corporation and any other corporation, partnership, association, or other organization in which 1 or more
of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at or participates in the meeting
of the board or committee which authorizes the contract or transaction, or solely because any such
directors or officers votes are counted for such purpose, if:
(1) The material facts as to the directors or officers relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the committee, and the board
or committee in good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors be less than a
quorum; or
(2) The material facts as to the directors or officers relationship or interest and as to the contract
or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the shareholders; or
(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved
or ratified, by the board of directors, a committee or the shareholders.
o (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting
of the board of directors or of a committee which authorizes the contract or transaction.

Bayer v. Beran

Benihana of Tokyo,
Inc. v. Benihana,

-BJR Scope
scrutiny for
breach of
loyalty claims
-Interested vs.
-BoD duty of
loyalty scope
-BJR Scope


Policies of business management are left solely to the discretion of the

board of directors and may not be questioned absent a showing of fraud,
improper motive, or self-interest, even though the decision may later be
judged unwise or unprofitable.
(1) A statutory safe harbor for transactions involving interested directors
is satisfied where the disinterested directors do not know that the interested
director negotiated a financing transaction on behalf of a potential buyer,
but know that the interested director is a principal of the buyer, and
approached the company on behalf of the buyer, about entering into the
(2) An interested director does not breach his duty of loyalty where the
director neither sets the terms of the transaction nor deceives, nor controls
or dominates the disinterested directors approval of the transaction.
(3) A board validly exercises business judgement where it subjectively
believes a transaction it is approving is in the companys best interests and
for a proper corporate purpose.

Corporate Opportunity Doctrine:

o Objective:
To deter appropriations of new business prospects belonging to the corporation
o Targets:
Officers & Directors of corporation
Dominant Shareholders who take active role in managing firm

Delaware Test:
o A corporate opportunity exists where:
1. Corporation is financially able to take the opportunity
2. Opportunity is in the corporation's line of business
3. Corporation has an interest or expectancy in the opportunity
Interest: Something to which the firm has a better right
Expectancy: takes something which, in the ordinary course of things, would come to the
4. Embracing the opportunity would create a conflict between directors self-interest and that of the

Waiver of Duty under Delaware Law:

o DGCL 122. Specific powers
Every corporation created under this chapter shall have power to:
(17) Renounce, in its certificate of incorporation or by action of its board of directors, any interest
or expectancy of the corporation in, or in being offered an opportunity to participate in, specified
business opportunities or specified classes or categories of business opportunities that are
presented to the corporation or one or more of its officers, directors or stockholders.

Broz v. Cellular
Systems, Inc.

In re eBay, Inc.

Doctrine Scope;
Doctrine Scope;

The corporate opportunity doctrine is implicated only in cases where the

fiduciarys seizure of an opportunity results in a conflict between the
fiduciarys duties to the corporation and the self-interest of the director as
actualized by the exploitation of the opportunity.
Where a corporation regularly and consistently invests in marketable
securities, a claim for usurpation of corporate opportunity is stated where
it is alleged that the corporations officers and directors accepted IPO share
allocations at the initial offering price instead of having those allocations
offered to the corporation.


Parent and Subsidiary Corporations:

o Wholly-owned subsidiaryparent owns 100% of the subs. stock

o Majority-controlled subsidiaryparent owns 50.1% of the subs. stock
o Minority-controlled subsidiary <50% of subs. stock owned by the parent
Standards of review in Parent/Subsidiary Transactions:
o Business Judgement Rule
Burden of proof on plaintiff to rebut
o Intrinsic fairness
Burden of proof on defendants to show transaction was fair to subsidiary
Intrinsic fairness used when parent has received a benefit to the exclusion of the minority
shareholders of the subsidiary and at the expense of the minority shareholders of the subsidiary

Sinclair Oil Corp. v.


Zhan v.

-Parent /
Subsidiary fid
-BJR vs.
Intrinsic fairness
-Majority SH fid
-Majority SH
conflicts of

The intrinsic fairness test should not be applied to business transactions

where a fiduciary duty exists but is not accompanied by self-dealing.

-Ratification of
Doctrine Burden
of Proof
-Duty of
-Duty of Care,
informed SH
-Duty of
informed SH

Ratification of an interested transaction by a majority of independent,

fully informed shareholders shifts the burden of proof to the objecting
shareholder to demonstrate that the terms of the transaction are so unequal
as to amount to a gift or a waste of corporate assets.

Majority shareholder owe minority shareholder duty similar to the duty

owed by a director, and when a controlling shareholder is voting as a
director, he violates his duty if he votes for his own personal benefit at the
expense of the minority stockholders.

Fliegler v. Lawrence

In re Wheelabrator
Technologies, Inc.

(1) A duty of disclosure claim must be dismissed where it lacks

evidentiary support.
(2) An informed shareholder vote on a merger has the effect of
extinguishing duty of care claims brought in connection with the merger.
(3) As to a duty of loyalty claim not involving a controlling shareholder,
fully informed shareholder ratification serves not to extinguish the claim
but to make the business judgement rule the applicable review standard
with the burden of proof resting on the plaintiff stockholders.


Delaware law protecting BOD breaching duty of care: 8 Del. C. 102(b)(7): fiduciary out clauses are
acceptable if they meet 4 standards (See outline)
Delaware law allowing BOD to rely on professional or expert competence: 8 Del. C. 141(e):
Delaware law requirement of BODs good faith:
o Courts often refer to the business judgment rule as a presumption that the directors or officers of a
corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in
the best interests of the company


DGCL 141(e) provides: A member of the board of directors, or a member of any committee
designated by the board of directors, shall be fully protected in relying in good faith upon [specified
documents and persons]
DGCL 102(b)(7) provides that a corporations articles of incorporation may (but need not) contain: A
provision eliminating or limiting the personal liability of a director to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director: for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law.
DGCL 145(a) and (b) only authorize indemnification of a director or officer who acted in good faith.
Bad Faith = Failure to Act in the Face of a Known Duty to Act
Intentional dereliction of duty, a conscious disregard for one's responsibilities
Fiduciary conduct of this kind, which does not involve disloyalty (as traditionally
defined) but is qualitatively more culpable than gross negligence, should be proscribed.
Section 102(b)(7) distinguishes between intentional misconduct and a knowing
violation of law (both examples of subjective bad faith) on the one hand, and acts ... not
in good faith, on the other. Because the statute exculpates directors only for conduct
amounting to gross negligence, the statutory denial of exculpation for acts ... not in good
faith must encompass the intermediate category of misconduct captured by the
Chancellor's definition of bad faith.


Corporate Waste: A transaction that is so one sided that no business person of ordinary, sound judgment could
conclude that the corporation has received adequate consideration

In re The Walt
Disney Co.

-De Facto corp.

-Due care / Bad
faith grounds to
deny BJR
-BoD approval
of emp.
Duty of Care
-BoD Duty of
-Def, of bad
power under
-Directors Duty
of good faith
reliance on
-Corp. waste

(1) An individual cannot be deemed to be a de facto corporate officer

where that individual has not assumed or purported the assume the duties
of a corporate office.
(2) Due care and bad faith may be treated as separate grounds for denying
business judgement rule review.
(3) An entire board of directors does not have to consider and approve an
officers employment agreement.
(4) Members of a compensation committee do not breach their duty of du
care where, although they do not follow the best practices, they are
sufficiently informed about all material facts regarding a decision they
(5) Directors do not breach their duty of due care in electing an officer
where they are informed of all material information reasonably available
regarding their decision.
(6) Intentional dereliction of duty, a conscious disregard for ones
responsibilities is an appropriate legal definition of bad faith.
(7) Where a corporations governing instruments vest authority in the
CEO/Chairman as well as in the entire board of directors to terminate an
officer, the entire board of directors does not breach the fiduciary duties of
due care and good faith by failing to terminate an officer and by permitting
the CEO/Chairman to do so.
(8) A CEO/Chairman does not breach the duty of care or the duty to act in
good faith by making a decision that is based in fact and that is made
within his business judgement.
(9) Where the directors rely on advice that is accurate, and their reliance
is made in good faith, they do not breach any fiduciary duties.

(10) Where payment provisions of a corporate contract have a rational

business purpose, directors do not commit waste of corporate assets by
making payment under contract.

Standard of Demand Excusal in Oversight Cases

o Grimes/Aronson standard of demand futility:
The basis for claiming excusal would normally be that: (1) a majority of the board has a material
financial or familial interest; (2) a majority of the board is incapable of acting independently for
some other reason such as domination or control; or (3) the underlying transaction is not the
product of a valid exercise of business judgment.
o What happens when the business judgment rule is inapplicable where the board did not exercise business
judgment. Is demand automatically excused in oversight cases?
No. Use Rales v. Blasband standard
o Stone adopts Rales v. Blasband standard:
a court must determine whether or not the particularized factual allegations of a derivative
stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the
board of directors could have properly exercised its independent and disinterested business
judgment in responding to a demand

Stone v. Ritter

-Derivative suit
-Exculpation of
duty of care for
-Good faith

A derivative action will be dismissed for failure to make demand where

alleged particularized facts do not create a reasonable doubt that the
corporations directors acted in good faith in exercising their oversight


Analytical Sequence:
o 1. Direct or Derivative?
o 2. If derivative, demand excused or required? Standard:
Complaint create reasonable doubt BoD could have exercised independent judgment in
responding to a demand?
Substantial risk of monetary liability?
o 3. Risk of liability analysis depends on whether 102(b)(7) clause is present
o 4. If so, is there reason to believe plaintiff can show loyalty or bad faith?
BoP? Probably defendant, b/c 102(b) is an affirmative defense
o 5. If only care claim, 102(b)(7) precludes liability and demand required
In real world, plaintiff probably goes away
o 6. If bad faith or loyalty, liability cannot be exculpated
o 7. Liability risk high enough to excuse demand?
If so, defendants probably settle
If not, SLC?
If not, pre-trial substantive motions: remember determinations to this point all reasonable doubt
based on pleadings and limited discovery

In re China
Agritech, Inc.

-Derivative suit
-Demand futility
- Exculpation of
duty of care for
-Duty of loyalty
-Good Faith
- 102(b)(7)

(1) A derivative action will not be dismissed where the plaintiff has
pleaded particularized facts that support a reasonable inference that a
majority of the members of the board on whom demand would have been
made were not independent or disinterested and would face a substantial
risk of liability for oversight violations.
(2) Where a corporation has a provision in its certificate of incorporation
that exculpates directors for breach of the duty of care, such a provision
does not shield the directors from claims that implicate the duty of loyalty
and its embedded requirements of good faith.


Securities Laws:
o Securities Act of 1933
Regulates the offering and sale of new securities
o Securities Exchange Act of 1934
Regulates secondary market activity
o Purpose of Securities laws is full disclosure for investors and fraud prevention.

Important Civil Liabilities:

o 1933 Act 11the principal express cause of action directed at fraud committed in connection with the sale
of securities through the use of a registration statement.
Fraud in the registration statement
Due diligence defense
o 1933 Act 12(a)(1)imposes strict liability on sellers of securities for offers or sales made in violation of 5.
Strict liability for illegal offers and sales
Rescission remedy
o 1933 Act 12(a)(2)imposes private civil liability on any person who offers or sells a security in interstate
commerce, who makes a material misrepresentation or omission in connection with the offer or sale, and
cannot prove he did not know of the misrepresentation or omission and could not have known even with the
exercise of reasonable care.
Fraud in a prospectus or oral sales communication
o Implied private rights of action
1934 Act 10(b) and SEC Rule 10b-5
1934 Act 14(a) and proxy rules

SEC Rule 10b-5

o It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were made,
not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person,
o in connection with the purchase or sale of any security.

1934 Act Section 10(b)

o It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of any national securities exchange.
(b) To use or employ, in connection with the purchase or sale of any security registered on a
national securities exchange or any security not so registered, any manipulative or

deceptive device or contrivance in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in the public interest or for the protection
of investors.

Section 16(a): Every person who is directly or indirectly the beneficial owner of more than 10 per centum of any
class of any equity security . . . or who is a director or an officer of the issuer of such security . . . within ten days after
the close of each calendar month . . . shall file with the Commission . . . a statement indicating his ownership at the
close of the calendar month and such changes in his ownership as have occurred during such calendar month
Section 16(b): any profit realized by [such beneficial owner, director, or officer] from any purchase and sale, or any
sale and purchase, of any equity security of such issuer . . . within any period of less than six months . . . shall inure to
and be recoverable by the issuer

Halliburton Co. v.
Erica P. John Fund,
West v. Prudential
Securities, Inc.

Securities and
Commission v.
Texas v. Gulf
Sulphur Co.

Dirks v. Securities
& Exchange

-Reliance on
fraud info;
-Effect on stock
-Fraud-on-themarket doctrine
-Disclosure of
Material inside
-Insiders with
info duty;
-Insider trading
on non-public
-Tippee (noninsider) with

Defendants in a securities fraud class action, prior to the class being

certified, may rebut the presumption that plaintiffs relied on defendants
misrepresentation by showing that the alleged misrepresentation did not
actually affect stock price.
A class action may not be brought on behalf of everyone who purchased
stock during a period when a broker was violating securities laws by
providing material non-public information.
(1) Anyone in possession of material inside information must wither
disclose it to the investing public, or, if ordered not to disclose it to protect
a corporate confidence, abstain from trading in the securities concerned
while such inside information remains undisclosed.
(2) A company press release is considered to have been issued in
connection with the purchase or sale of a security for purpose of imposing
liability under the federal securities laws, and liability will flow if a
reasonable investor, in the exercise of due care, would have been misled
by it.
A tippee will not be liable for disclosing nonpublic information received
from an insider where the insider will not personally benefit from the
disclosure so as not to be in breach of the insiders fiduciary duty.

Exchange Act 14(e):

It shall be unlawful for any person. . . to engage in any fraudulent, deceptive, or manipulative acts or practices, in
connection with any tender offer. . . . The [SEC] shall, for the purposes of this subsection, by rules and regulations
define, and prescribe means reasonably designed to prevent, such acts and pratices as are fraudulent, deceptive, or
SEC Rule 14e-3(a):
(a) If any person has taken a substantial step or steps to commence, or has commenced, a tender offer (the
offering person), it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of
section 14(e) of the [Exchange] Act for any other person who is in possession of material information relating to
such tender offer which information he knows or has reason to know is nonpublic and which he knows or has
reason to know has been acquired directly or indirectly from:
(1) The offering person,
(2) The issuer of the securities sought or to be sought by such tender offer, or
(3) Any officer, director, partner or employee or any other person acting on behalf of the offering person
or such issuer,
to purchase or sell or cause to be purchased or sold any of such securities or any securities convertible into or
exchangeable for any such securities or option or right to obtain or to dispose of any of the foregoing securities,
unless within a reasonable time prior to any purchase or sale of such information and its source are publicly
disclosed by press release or otherwise.

United States v.

Reliance Electric
Co. v. Emerson
Electric Co.

ForemostMcKesson, Inc. v.
Provident Securities

-10(b) and
Rule 10b-5;
-Insider fid
-Traders duty;
- Rule 14e-3(a)
-Tender Offers
-16(b) scope/
-16(b) scope/

(1) A person who trades in securities for a personal profit, using

confidential information misappropriated in breach of a fiduciary duty to
the source of the information, is guilty of violating Securities Exchange
Act 10(b) and Rule 10b-5.
(2) The Securities and Exchange Commission (SEC) did not exceed it
rulemaking authority by promulgating Rule 14e-3(a), which prohibits
trading on undisclosed information in a tender offer situation, even where
the person has no duty to disclose the information.
When a holder of more than 10 percent of the stock in a corporation sells
enough shares to reduce its holdings to less than 10 percent, and then sells
the balance of its shares to another buyer within six months of its original
purchase, it is not liable to the corporation for the profits it made on the
second sale.
In a purchase-sale sequence, a beneficial owner must account for profits
only if he was a beneficial owner before the purchase.

Delaware Law on Indemnification:

As to suits by shareholders or third parties, 145(a) authorizes the corporation a
corporation shall have power to indemnify the director or officer for expenses plus
"judgments, fines, and amounts paid in settlement" of both civil and criminal proceedings
o if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
persons conduct was unlawful
As to suits brought by or on behalf of the corporation, 145(b) authorizes a
corporation shall have power indemnification only for expenses, albeit including
attorney's expenses.
o if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation
o If the director or officer was held liable to the corporation, he may only be
indemnified with court approval
Mandatory vs. Permissive Indemnification:
Under 145(c), the corporation must indemnify a director or officer who "has been
successful on the merits or otherwise."
o As for directors and officers who are unsuccessful, check whether
indemnification is allowed by 145(a) or (b)
o If so, the corporation may but need not indemnify the director or officer
Advancement of Expenses:
Under 145(e), the corporation may advance expenses to the officer or director provided
the latter undertakes to repay any such amount if it turns out he is not entitled to
Indemnification by Agreement:
145(f) authorizes the corporation to enter into written indemnification agreements with
officers and directors that go beyond the statute:

Waltuch v.
Services, Inc.

of good faith

(1) A provision of a corporations articles of incorporation that provides

for indemnification without including a good-faith limitation runs afoul of
a statute that permits indemnification only if the prospective indemnitee
acted in good faith, even if the statute also permits the corporation to gran

(c); (f)

Citadel Holding
Corporation v.

-Corp advance
of reasonable
cost in
defending suit

rights in addition to indemnification rights.

(2) A corporate director of officer who has been successful on the merits
or otherwise vindicated form the claims asserted against him is entitled to
indemnification from the corporation for expense reasonably incurred.
A corporation may advance reasonable costs defending a suit to a director
even when the suit is brought by the corporation.


Voting at annual (or special) meetings
o DGCL 216: Decisions must be approved by the vote of a majority of the shares present
A few matters require approval by a majority of the outstanding shares; e.g.:
Amendments to the charter
Proxy Contests
o A shareholder (a.k.a. the insurgent) solicits votes in opposition to the incumbent board of directors
Electoral contests: Insurgent runs a slate of directors in opposition to slate nominated by
incumbent board
Issue (policy) contests: Shareholder solicits votes against some proposal
o Shareholder appoints a proxy (a.k.a. proxy agent) to vote his/her shares at the meeting
o Appointment effected by means of a proxy (a.k.a. proxy card)
Can specify how shares to be voted or give agent discretion
SEC Proxy Rules:
o Proxy Card Requirements: mostly Rule 14a-4
o Securities Exchange Act 14(a): It shall be unlawful for any person, by use of the mails or by any
means or instrumentality of interstate commerce or of any facility of a national securities exchange or
otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary
or appropriate in the public interest or for the protection of investors, to solicit any proxy in respect
of any security registered pursuant to Section 12 of this title

14a-3: Incumbent directors must provide annual report before soliciting proxies for annual meeting
Anyone who solicits a proxy must provide a written proxy statement BEFORE soliciting the
o Rule 14a-1(l)(2)(iv) exempts public statements of how the shareholder intends to vote and its reasons for
doing so
o Rule 14a-2(b)(1), subject to numerous exceptions, exempts persons who do not seek "the power to act as
proxy for a security holder" and do not furnish or solicit "a form of revocation, abstention, consent or
o Rule 14a-2(b)(2) exempts solicitations of 10 or fewer persons
o Rule 14a-2(b)(3) exempts the furnishing of proxy voting advice by someone with whom the shareholder
has a business relationship
o Solicit includes not only direct requests to furnish, revoke or withhold proxies, but also ...
communications which may indirectly accomplish such a result or constitute a step in a chain of
communications designed ultimately to accomplish such a result.Long Island Lighting Co. v. Barbash,
779 F.2d 793, 796 (2d Cir.1985).


Levin v. MetroGoldwyn-Mayer,

-Proxy contests
-Corp funds for

Incumbent directors may use corporate funds and resources in a proxy

solicitation contest if the sums are not excessive and the shareholders are
fully informed.


Management can use corporate funds to pay for expenses they incur in conducting their proxy solicitation as
long as the amounts are reasonable and the contest involves policy questions rather than just a purely
personal power struggleRosenfeld
Insurgent can use corporate funds to pay for expenses it incurs in conducting their proxy solicitation if it is
approved by the shareholders and the board must act first.
Reimbursement Bylaws:
o In 2009, DGCL 113 adopted:
(a) The bylaws may provide for the reimbursement by the corporation of expenses incurred by a
stockholder in soliciting proxies in connection with an election of directors, subject to such
procedures or conditions as the bylaws may prescribe, including:
(1) Conditioning eligibility for reimbursement upon the number or proportion of persons
nominated by the stockholder seeking reimbursement or whether such stockholder
previously sought reimbursement for similar expenses;
(2) Limitations on the amount of reimbursement based upon the proportion of votes cast
in favor of one or more of the persons nominated by the stockholder seeking
reimbursement, or upon the amount spent by the corporation in soliciting proxies in
connection with the election;
(3) Limitations concerning elections of directors by cumulative voting pursuant to 214
of this title; or
(4) Any other lawful condition.

Rosenfeld v.
Fairchild Engine &
Airplane Corp.

-Contest over
-Corp funds for

In a contest over policy, corporate directors have the right to make

reasonable and proper expenditures from the corporate treasury for the
purpose of persuading the stockholders of the correctness of their position
and soliciting their support for policies that the directors believe, in good
faith, are in the best interest of the corporation.


Proxy Litigation:
o Fraud:
Rule 14a-9 under 1934 Act 14(a) prohibits misrepresentations or omissions of a material fact in
proxy materials
o Other Violations:
Soliciting without providing proxy statement
Failing to file proxy materials w/ SEC
Company soliciting proxies without first providing annual report

Stock Options
o Stock options are rights to purchase shares at a specified price during a specified period of time.
Stock options are the most popular long-term incentive compensation approach used in U.S.
o Exercising Stock Options
Cash exercise option holder pays company cash; company often uses it to buy stock back to
reduce dilution
Cashless exercise - no investment or risk on part of recipient.
Broker buys shares from company and immediately sells them; then delivers difference in
cash to recipient

Seinfeld v. Bartz

-Stock options;
omissions under

Valuations of option grants to outside directors are not material information

that must be included in a corporations shareholder statement to solicit
proxy votes.


Shareholder Proposals
o Many companies have advance notice bylaws.
Require advance notice of shareholder proposals and director nominations to ensure orderly
annual meeting process and to give company adequate time to strategize and prepare proxy
Delaware Chancery Court narrowly construes these provisions and resolves ambiguities in favor
of dissident shareholders.
o Rule 14a-8: Allows qualifying shareholders to put a proposal before their fellow shareholders
And have proxies solicited in favor of them in the companys proxy statement
Expense thus borne by the company
o Responses to Proposals
Attempt to exclude on procedural or substantive grounds
Must have specific reason to exclude that is valid under Rule 14a-8

Include with opposing statement

Negotiate with proponent
Wide range of possible compromises
Adopt proposal as submitted
Exclusion Under Rule 14a-8

Timing: The proposal must be submitted to the corporation at least 120 days before the date on
which proxy materials were mailed for the previous year's annual shareholder's meeting.
Holdings: 14a-8(b)(1): Proponent must have owned at least 1% or $2,000 (whichever is less) of
the issuer's securities for at least one year prior to the date on which the proposal is submitted.
Length: 14a-8(d): Proposal plus supporting statement cannot exceed 500 words
Submitting Proposals:
14a-8(c): Only one proposal per year
14a-8(h): If the proponent fails to show up at the meeting to present the proposal in
person, the proponent will be ineligible to use the rule for the following two years
Repeat Proposals: 14a-8(i)(12): a proposal can be excluded if it (or a substantially similar one )
was submitted
Once during the preceding 5 years and got less than 3% of the vote
Twice during the preceding 5 years and got less than 6% of the vote the last time it was
3 times in the preceding 5 years and got less than 10% of the vote the last time it was

Lovenheim v.
Iroquois Brands,

CA, Inc. v. AFSCME

Employees Pension

-Exclusion of
SH proposal;
-Scope of SH
-Rule 14a-8(c)
-SH proposal
subject matter;
109(a); 141(a)
-BoD scope of

A shareholder proposal can be significantly related to the business of a

securities issuer for non-economic reasons, including social and ethical
issues, and therefore may not be omitted from the issuers proxy statement
even if it relates to operations that account for less than 5 percent of the
issuers total assets.
(1) A proposal seeking to require a company to reimburse shareholders for
expenses incurred in the election of directors is a proper subject for inclusion
in proxy statements as a matter of Delaware law.
(2) A proposal seeking to require a company to reimburse shareholders for
the expenses incurred in the election of directors, if adopted, would cause the
company to violate Delaware law to which it is subject.


Statutory Close Corporations
o DGCL 342 allows election of close corporation status, if:
Articles provide that company is a close corporation
No more than 30 sharehholders
The corporation did not issue stock in a public offering
Stock is subject to one/more transfer restrictions specified in 202
Offer of first refusal
Mandatory redemption / Forced transfer
Corporation or SH approval of the transfer
Restriction on transfer to certain persons (unless manifestly unreasonable)
Any other lawful restriction on transfer or registration
Special Rules
o DGCL 351: Articles may permit the corporations business to be managed by shareholders rather than
o DGCL 350: Shareholder agreement between shareholders who hold a majority of the outstanding voting
stock is valid even if it interferes with the BoDs discretion/power
In such cases, the directors are relieved from their fiduciary duties and those duties are imposed
on the shareholders who are party to the agreement
o DGCL 354: Shareholder agreements are valid even if they operate the corporation as if it were a
Ringling Bros.-Stock pooling
Shareholders may lawfully contract with each other to vote their stock in a
Barnum & Bailey
stock pooling arrangement that is not illegal and does not violate public
Combined Shows v.
-SH voting
McQuade v.
-SH agreements A shareholder agreement entered into by directors as shareholders is illegal
by directors
and void where the agreement purports to abrogate the directors
independent judgement.
Clark v. Dodge
-Director as sole Where the directors are also the sole stockholders of a corporation, a
SHs ability to
contract between them to vote for specific persons to serve as directors is
contract as SH
legal, and not in contravention of public policy.
Galler v. Galler
-SHs of a
Shareholders in a closely held corporation are free to contract regarding the
closed corp.
management of the corporation absent the presence of an objecting minority,
ability to
and threat of public injury.
Ramos v. Estrada
-Vote pooling
Voting agreements binding individual shareholders to vote in concurrence
agreement as
with the majority constitutes valid contract.
contract (not
Brodie v. Jordan

Jordan v. Duff and

Phelps, Inc

-Minority SH
-Forced buyout
-Close corp
stock buy back
-Duty to

A forced buyout is an inappropriate remedy for the freeze-out of a minority

shareholder in close corporations where such a remedy effectively grants the
minority windfall or excessively penalizes the majority.
Close corporations buying their own stock have a fiduciary duty to disclose
material facts.


o All states have provisions under which a shareholder may seek an involuntary dissolution of the
o Dissolution leads to a winding up and liquidation of the firm, followed by a distribution of the firms
remaining assets to creditors and then to shareholders.
o Common grounds for involuntary dissolution:
Fraud, oppression, or illegality by the majority shareholders towards the minority
Oppression: Oppression is defined as conduct that substantially defeats a minority
shareholders reasonable expectations.
Waste of corporate assets
Deadlock among the directors
3 conditions:
o 1. The directors must be evenly divided and therefore unable to make corporate
o 2. The shareholders must be unable to resolve the deadlock.
o 3. The deadlock must threaten irreparable injury to the corporation or prevent the
business of the corporation from being conducted to the advantage of the
Shareholder deadlock
2 conditions:
o 1. The shareholders must be evenly divided.
o 2. Because of their division the shareholders must be unable to elect a board of
directors for two years running.
o Alternatives to Dissolution: order the shareholders to buy the plaintiffs shares at a fair price.
Best way to stop a freeze-out is to avoid it from the start with buyout agreements

Alaska Plastics, Inc.

v. Coppock
Stuparich v. Harbor
Furniture Mfg., Inc.

-Maj SH duty of
good faith to
Min SH
dissolution in
close corp
-Animosity b/w

Majority shareholders in a closely held corporation owe a fiduciary duty of

utmost good faith and loyalty to minority shareholders.
Statutory dissolution of a close corporation is not reasonably necessary for
shareholder protection on the grounds of animosity among the corporate

Frandsen v. JensenSundquist Agency,
Zetlin v. Hanson
Holdings, Inc.

Essex Universal
Corporation v. Yates

-Asset sale as
transfer of
-Controlling SH
right to sell
-Sale of
transfer of

In a transfer of control of a company, the rights of first refusal to buy shares

at the offer price are to be interpreted narrowly.
Absent looting of corporate assets, conversion of a corporate opportunity,
fraud or other acts of bad faith, a controlling stockholder is free to sell, and a
purchaser is free to buy, that controlling interest at a premium price without
the minority shareholder being entitled to share in that premium.
A sale of a controlling interest in a corporation may include immediate
transfer of control.



Legal Effects of a Merger DGCL 259(a):
o Merger One company absorbs another
o ConsolidationNew company formed

Mergers: Step by Step

o 1. DGCL 251(b)
T and A boards adopt Merger Agreement
DGCL 251(b)(3): surviving entitys charter can be amended at this point
DGCL 251(b)(5): Allows cash, property, and securities in addition to Acquirer common as
o 2. DGCL 251(c)
SH vote at A and T: majority of shares entitled to vote thereon
o 3. DGCL 251(c)
File articles of merger
Merger effective at this point
o 4. DGCL 262: Appraisal rights

Mergers v. Asset Sales

Triangular TransactionsProvides the transaction cost-minimizing advantages of an asset sale, while also
providing the advantages a merger.
o Froward Triangular Merger

Reverse Triangular Merger


Freeze Out Techniques

Freeze Out Merger

Short Form Merger

Reverse Stock Split

Tender Offer + Merger

o Unilateral two step freeze out vs. Negotiated two step freeze out

Standards of review
o Legal Background: Alternative standards of judicial review for claims of breach of fiduciary duties in
sales transactions
o Standard of review has implications for the cost and uncertainty of fiduciary duty lawsuits regardless of
the merits, the standard of review impacts the stage at which non-meritorious suits can be dismissed and,
therefore, the settlement value
Business judgment rule significantly increases likelihood of potential dismissal of claims without
merit; likelihood of winning at trial when motion to dismiss is denied

Business Judgment Rule

Courts typically do not probe substantive basis of Boards decision
Motions to dismiss or for summary judgment are routinely granted
Plaintiff has burden of proving that directors breached their fiduciary duties
Entire Fairness
Much higher bar than deferential business judgment rule
Motions to dismiss or for summary judgment are rarely granted
Defendant has burden of proving two prongs
(1) Fair Dealing
o Weinberger, embraces questions of when the transaction was timed, how it was
initiated, structured, negotiated, disclosed to the directors, and how the approvals
of the directors and the stockholders were obtained.
E.g. Conflicted target board; Use of confidential information; Lack of
disclosure to target board; Misrepresentations to target board or
shareholders; Undue time pressure
(2) Fair Price
o Weinberger, relates to the economic and financial considerations of the proposed
merger, including ... assets, market value, earnings, future prospects

Weinberger v. UOP,
Kahn v. M & F
Worldwide Corp.

-Fair Price
-Conditions for
BJR applied to a
going private,
buyout merger

E.g. Quasi-Appraisal

A freeze-out merger approved without full disclosure of share value to

minority shareholders is invalid.
A going private, controller buyout merger will be reviewed under the
business judgement standard of review if, and only if: (i) the controller
conditions the procession of the transaction on the approval of both a special
committee and a majority of the minority stockholders; (ii) the special
committee is independent; (iii) the special committee is empowered to freely
select its own advisors and to say no definitively; (iv) the special committee
meets its duty of care in negotiating a fair price; (v) the cote of the minority
is informed; and (vi) there is no coercion of the minority.

Tender Offers
o In its basic form, a tender offer is simply a public offer usually made to all shareholders of the target
corporation in which the buyer offers to purchase target company shares
o Most potent weapon in the hostile corporate raiders arsenal
Advantages over major alternatives, such as asset sales or mergers:
Approval by the targets board of directors is a necessary prerequisite to statutory
o Tender offer permits the bidder to bypass the targets board and to purchase a
controlling share block directly from the stockholders

Coggins v. New
England Patriots
Football Club, Inc.

-Controlling SH
fid duty to Min

Controlling stockholders violate their fiduciary duties when they cause a

merger to be made for the sole purpose of eliminating the minority
shareholders on the cash-out basis.

Planning for Defense
o Start early when implementing defenses

Shark Repellents
o Provisions in the articles of incorporation or bylaws; articles better, see DGCL 109(a)
Limit shareholder right to call a special meeting (so that they cant remove directors)
Prohibit removal of directors other than for cause
o Fair Price Provision: No backend or freeze-out merger unless bidder pays a fair price (as determined per
provision) or transaction approved by a majority of the disinterested shareholders (as defined)

Redemption Provision: Gives post-tender offer minority shareholders a put option to sell at a fair price
(as defined)
o Business Combination Provision: Precludes a freeze-out merger for a specified period of time; and even
then typically requires approval by disinterested shareholders
o Classified boards
Divide board into classes (usually 3)
Each class serves a multiyear term (equally to the number of classes)
Only one class elected per year
Poison Pills
o The term poison pill refers to the adoption by the target board of directors of a stockholder rights plan
that has the effect of deterring any corporate raider or would-be hostile party from purchasing stock of the
target corporation beyond a specified trigger level without approval of the target board.
The second generation discriminatory flip-in/flip-over pill
o The board declares a dividend of one stock purchase right for each outstanding common share (the
company also enters into a rights agreement with a bank or trust company acting as rights agent, and this
agreement embodies the terms of the rights plan).
o The right has no economic value unless and until a bidder acquires a specified percentage of the targets
voting stock without board approval. Doing so causes the bidder to be treated as a non-board-approved
owner, and regardless of bidders intentions, allows all other stockholders to purchase additional voting
stock at a discount from the current market price (the flip-in).
o In addition, if, after a flip-in event, the company is involved in a business combination or substantial asset
sale with any person, all stockholders (except the raider) become entitled to purchase, at a discount to
market price, the most senior voting securities of the ultimate corporate parent resulting from the
transaction (the flip-over).
NOL Pills
o Losses accumulated in prior periods can be used to offset future profits
o Under IRS regulations, NOLs are are forfeited if an ownership change occurs at the company.
An ownership change occurs (simplified) if any shareholder owning 5 percent or more of the
company increases its ownership by more than 50 percent
o Companies have been adopting NOL poison pills to protect tax status of their NOLs.
Very low triggers of 4.99% stockownership
NOL pill also has the ancillary effect of being a substantial antitakeover device that can
be justified for economic reasons
Poison Debt: Target issues bonds or notes with terms that make target less attractive

Cheff v. Mathes

-Corp funds for


Corporate fiduciaries may use corporate funds to fend off what they, in good
faith and pursuant to reasonable investigation, believe is a threat to corporate
policy and effectiveness.

-Tender Offer
measures for

A selective tender offer, effected to thwart a takeover, is not itself invalid.

Unocal Corporation
v. Mesa Petroleum

o Standard of Review:
Not business judgement rule because the omnipresent specter that a board may be acting in its
own interest

Conditional BJR an enhanced duty which calls for judicial examinations at the threshold before
the protections of the business judgement rule may be conferred
Burden of Proof:
Initially on board of directors.
If the directors carry their burden?
o BOP shifts back to the plaintiff, who must rebut the BJR.
If not?
o The defense must pass muster under the intrinsic fairness standard of the duty of
Defining the Unocal Test:
Was the action within the power or authority if the board?
Requires two questions: (1) does the statute authorize this defense; and (2) if it is okay
under the statute does the firms charter impose any restrictions on the use of this
Does the board have reasonable grounds for believing that a danger to corporate policy and
effectiveness exists?
Defendant satisfy this by showing good faith and reasonable investigation
o Good faith = primary purpose not entrenchment
o Reasonable investigation = Van Gorkom
Was the defense reasonable in relation to the threat posed?
Post-Unocal Standards of Review:
Traditional BJR, i.g. Van Gorkom
Traditional duty of loyalty, i.g. Weinberger
The new conditional BJR, set out by Unocal

Revlon, Inc. v.
MacAndrews &
Forbes Holdings,

-Directors as

Lockups and related defensive measures are permitted where their adoption
in untainted by directors interests or other breaches of fiduciary duty and
where the value to shareholders is maximized.

Rule of Law from Revlon:

o When the board puts the company up for sale, they have a duty to maximize the company's value by
selling it to the highest bidder:
"The directors' role changed from defenders of the corporate bastion to auctioneers charged with
getting the best price for the stockholders at a sale of the company."
o Triggering Revlon:
If the transaction would result in a change of control Revlon
If the control would not change hands as a result of the transaction Unocal

Relationship between Van Gorkom and Revlon:

o Van Gorkom requires that decision to merge be an informed one

Case implicitly approved shopping the company as a means of gathering information, but did not
require the directors to do so
Delaware addressed in Barkan
Holding: Revlon does not require that every control transaction be preceded by a bidding contest
When the board is considering a single offer and has no reliable grounds for judging its
adequacy, a concern for fairness demands that the market be canvassed
o But when directors possess a body of reliable evidence with which to evaluate
the fairness of a transaction, they may approve it without an active survey of the

Inc. v. Time

Directors of a corporation involved in an ongoing business enterprise may

take into account all long-term corporate objectives in responding to an offer
to take over the corporation.

Chancellor Allen, correctly identified the heart of the matter.

o Where does the locus of decision-making power. . . reside ? With the board of the shareholders?
o Chancellor Allen determined that the merger agreement would not result in a transfer of control because
control of the combined entity remained in a large, fluid, changeable and changing market.
Hence, no Revlon duties
o Delaware supreme court indicated Allens change of control analysis was correct as a matter of law, but
it rejected plaintiffs Revlon claims on broader grounds:
Under Delaware law there are, generally speaking and without excluding other possibilities, two
circumstances which may implicate Revlon duties. The first, and clearer one, is when a
corporation initiates an active bidding process seeking to sell itself or to effect a business
reorganization involving a clear break-up of the company. However, Revlon duties may also
be triggered where, in response to a bidders offer, a target abandons its long-term strategy
and seeks an alternative transaction also involving the breakup of the company.

Inc. v. QVC
Network Inc.

-Tender offer
-Directors duties

-Multiple suitors
-favoritism to

The directors of a corporation targeted by two or more suitors may not

institute tactics that favor one suitor in such a manner as to allow the favored
suitor to offer less than it otherwise would have.

Court rejected Paramounts application of Time in favor of enhanced scrutiny

o In explaining need for enhanced scrutiny, the opinion stated: Such scrutiny is mandated by: (a) the
threatened diminution of the current stockholders voting power; (b) the fact that an asset belonging to
public shareholders (a control premium) is being sold and may never be available again; and (c) the
traditional concern of Delaware courts for actions which impair or impede stockholder voting rights.
o Rejected Paramounts reading of Time
While the relevant passage listed initiation of an active bidding process and approval of a breakup of the company as events triggering Revlon, it did so without excluding other possibilities
In this case, one of the other possibilities was present; namely, a change of control
Accordingly, Revlon was triggered
o The QVC court did not overrule Time, but limited Time to its unique facts
Boundaries of the Change of Control test from QVC

So long as the acquiring entity is publicly-held, neither triangular nor non-stock for stock mergers should
be deemed a sale of control
QVC really concerned with creation of a large block of stock held by an identifiable control
Enhanced Scrutiny:
o Under QVC, the enhanced scrutiny test is basically a reasonableness inquiry to be applied on a case-bycase basis:
The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the
adequacy of the decision making process employed by the directors, including the information on
which the directors based their decision; and (b) a judicial examination of the reasonableness of
the directors action in light of the circumstances then existing.
o Delawares Motive-Based Balance:
Under the Unocal/Revlon regime, the board retains full decision making authority including
the authority to foreclose shareholder choice unless it acted from improper motives

Lyondell Chemical
Company v. Ryan

-When Revlon
duties apply
-Bad faith
-Def of bad faith

There are no legally prescribed steps that directors must follow to satisfy
their Revlon duties to maximize price in a sale of control transaction, such
that failure to take those steps during the sale of their company demonstrates
a conscious disregard of their duties.


Omnicare, Inc. v.
NCS Healthcare,

-Fiduciary out
-Coercive and

Lock-up deal protection devices, which when operating in concert are

coercive and preclusive, are invalid and unenforceable in the absence of a
fiduciary out clause.

o Deal Protection Devices Require Enhanced Scrutiny
Defensive devices adopted by the board to protect the original merger transaction must withstand
enhanced judicial scrutiny under the Unocal standard of review, even when that merger
transaction does NOT result in a change of control.
When Revlon doesnt apply to Defensive Devices, Unocal does.
Just as defensive measures cannot be draconian, however, they cannot limit or
circumscribe the directors fiduciary duties.

A board has no authority to execute a merger agreement that subsequently

prevents it from effectively discharging its ongoing fiduciary responsibilities.

Unocal Test
The second stage of the Unocal test requires board directors to demonstrate that their defensive
response was reasonable in relation to the threat posed.
This inquiry involves a two-step analysis.
o 1) The board directors must first establish that the merger deal protection devices
adopted in response to the threat were not coercive or preclusive, and;
A response is coercive if it is aimed at forcing upon stockholders
a management-sponsored alternative to a hostile offer.
A response is preclusive if it deprives stockholders of the right to
receive all tender offers or precludes a bidder from seeking
control by fundamentally restricting proxy contests or otherwise.
o NOTE: If defensive measures are either preclusive or
coercive they are draconian and impermissible.
o 2) Then demonstrate that their response was within a range of reasonable
responses to the threat perceived.
NOTE: A stockholder vote may be nullified by wrongful coercion where the board or some other
party takes actions which have the effect of causing the stockholders to vote in favor of the
proposed transaction for some reason other than the merits of that transaction.
Revlon issues
o When do directors stop being defenders of the corporate bastion and become auctioneers?
o Are Revlon duties really different from those imposed from Unocal?
o Omnicare says there is something special about Revlon situations.
It is an enhanced scrutiny test.
If Revlon applies you get the price
If it does not, Unocal applies:
o Board must show threat to corporate policy.
o Response must not be coercive or preclusive.
o Response must be reasonable in relation to threat.
o Omnicare seems to be a duty of care case. Even if they breach their duty of care, they have no liability.


Williams Act (1968)Federal regulation of tender offers. Disclosure; Procedural requirements, albeit mainly to
make the disclosure requirements more effective

CTS Corporation v.
Corporation of

-State Leg. Vs.

Williams Act
-SH vote

(1) A law permitting in-state corporations to require shareholder approval

prior to significant shifts in corporate control is consistent with the
provisions and purposes of the Williams Act and is not pre-empt thereby.
(2) A law permitting in-state corporations to require shareholder approval
prior to significant shifts in corporate control is constitutional as not
violating the Commerce Clause.