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2. Facts: Danforth was part of a group of doctors who hired an attorney to assist
them in the creation of a corporation for the purchase of an MRI. Jesse sued
Danforth for medical malpractice unrelated to the activities of the MRI
corporation.
3. Procedural Posture: Jesse hired an attorney from the same office as the one
which incorporated the MRI corporation. Danforth moved to disqualify the
plaintiffs attorney alleging that the firm had a conflict of interest based on
Danforth being a former client of the firm.
5. Holding: No.
Roger W. Martin 1
Corporations Briefs Printed: 4/21/17
3. Procedural Posture: IBM sued Cranson personally for the balance due on the
typewriters. The lower court granted summary judgment against Cranson
holding that the constituents of a business that fails to file articles of
incorporation are personally liable, as a matter of law, for the debts of the
business.
5. Holding: No.
2. Facts: Ford Motor Co. had a surplus of almost $112 million. It declared a
dividend of $1.2 million. The Dodge Bros. were major shareholders, and wished
to get some money to open a competing business. Fords Board of Directors
refused to issue a larger dividend, claiming that the surplus was needed for
expansion and operating cushion.
4. Issue: Whether the refusal of the Ford board of directors to issue such a
dividend in this case amounted to a willful abuse of discretion.
5. Holding: Yes.
6. Reasoning: It is well recognized that the power to declare a dividend, and the
amount of the dividend, is exclusively within the discretion of the board of
directors. However, a board may be compelled to pay a dividend if the failure to
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Corporations Briefs Printed: 4/21/17
3. Procedural Posture: Two shareholders sued to enjoin the board from declaring
the stock dividend.
4. Issue: Whether the declaration of the stock dividend in this case amounts to
abuse of discretion.
5. Holding: No.
6. Reasoning: Unless there is fraud or bad faith, the board of directors has the
exclusive discretion to make such a business judgment. The minority
stockholders are not in a position to question this right of the directors, unless
they act in bad faith. The directors board room, rather than the courtroom, is the
appropriate forum for arguing these purely business (and not legal) questions.
2. Facts: Carlton owns several taxicab corporations. Each corporation owns two
taxicabs. Each taxicab corporation carries the statutory minimum of $10,000 of
insurance per cab. Each corporation is also highly leveraged. Carlton observed
all of the legal formalities of operating these corporations. Walkovsky was
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Corporations Briefs Printed: 4/21/17
injured by one of the taxicabs, and the amount of insurance was not enough to
pay his medical bills.
4. Issue: Whether a claim that does not allege that the owners are conducting
business in their personal capacities through the corporation is sufficient to state
a cause of action for owner liability.
5. Holding: No.
4. Issue: Whether the owners are personally liable under the instrumentality
rule for the liabilities of the corporation when the creditor knew that the
corporation had no assets at the time of contracting, and did not rely on the
owners personal guarantee.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
3. Procedural Posture: The district court held that Kinney had assumed the risk
of Industrials undercapitalization and was not entitled to pierce the corporate
veil. Kinney appeals.
4. Issue: Whether there was sufficient unity of interest and other equitable
factors present to pierce the corporate veil under these facts.
5. Holding: Yes.
Roger W. Martin 5
Corporations Briefs Printed: 4/21/17
1. American Trading and Production Corp. v. Fishbach & Moore, (1970); pg.
356, briefed 2/24/97
2. Facts: An exposition hall was destroyed by fire. The plaintiffs are exhibitors
who lost property. Defendants are the corporate parent of a wholly owned
subsidiary electrical contractor corporation which allegedly installed faulty
wiring in the exposition hall.
3. Procedural Posture: American Trading sued to pierce the corporate veil of the
subsidiary electrical contracting corporation to get at the assets of the parent
corporation. Defendants move for summary judgment on the grounds that they
are not liable under any theory.
5. Holding: No.
6. Reasoning: While stock control and common directors and officers are
generally prerequisites for application of the instrumentality rule, they are not
themselves sufficient to bring the rule into operation. There must also be some
direct intervention by the parent, and the actual exercise of control. Here, that
control is lacking. The undisputed facts clearly show that the subsidiary is a
separate corporational entity, and all formalities as to its operation have been
observed. The separation of the parent and the subsidiary is scrupulously
maintained. Furthermore, there are no equitable considerations that would
justify piercing the corporate veil here, even if the subsidiary were the mere
instrumentality of the parent.
2. Facts: Lee sued Jenkins Bros. to recover pension payments allegedly due under
an oral contract made on behalf of the corporation by the president.
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Corporations Briefs Printed: 4/21/17
3. Procedural Posture: The lower court dismissed on the grounds that there was
insufficient evidence of the oral contract to enforce it. The court of appeals
affirmed, and went on to discuss the following issue:
5. Holding: No.
1. First Interstate Bank of Texas v. First National Bank of Jefferson, (1991); pg.
385, briefed 2/24/97
2. Facts: FIB and FNJ entered into a contract for the purchase of certain bonds.
On behalf of FNJ, their senior vice president, Boyd, signed the contract. When
the deal later fell through, FNJ refused to honor the contract, claiming that Boyd
did not have any authority to bind FNJ in such a manner.
3. Procedural Posture: The lower court held that as a matter of law, there was
insufficient evidence to show that Boyd had sufficient authority to sign the
contract, and directed a verdict for FNJ.
5. Holding: Yes.
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Corporations Briefs Printed: 4/21/17
6. Reasoning: There are two types of authority, actual and apparent. There are
further two types of actual authority: express and implied. A principle can
confer express actual authority by writing or orally. There was evidence that
Boyd had spoken with the board of directors, and that they had given him
authority to sign this contract. Furthermore, Boyds position in the company
lends credence to his assertion that he was authorized to sign. With regard to
implied actual authority, an agent is vested with the implied authority to do all of
those things necessary or incidental to the agency assignment. However, a state
statute requires express agency. With regard to apparent authority, a corporation
may be bound if it 1) manifests the agents authority to the third party, and 2) the
third party reasonably relies on the agents purported authority as a result. By
the nature of Boyds position, the corporation holds him out as having authority.
Furthermore, the corporation sent Boyd specifically to close the deal. Thus, there
is sufficient evidence to create a jury question as to whether there was authority
to bind the corporation.
5. Holding: No.
6. Reasoning: Although the doctrine of de facto merger has some equitable merit,
the fact that a separate statute exists in Delaware to allow an exchange of assets
for stock defeats that argument. It would be up to the legislature to change the
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Corporations Briefs Printed: 4/21/17
statute if desired. The various statutes of the Delaware corporation law are
independent of each other and a given result may be accomplished under one
section which is not possible, or is even forbidden under another.
2. Facts: Penn (parent) created a wholly owned subsidiary called PCC Holdings
(subsidiary). Penn then sought to merge Colt (target) with PCC Holdings, to
effect a triangular merger, thereby bypassing the right of Penn shareholders to
vote on, or dissent from, the proposed merger. Plaintiffs are Penn shareholders.
4. Issue: Whether the merger of Colt into PCC Holdings is a de facto merger of
the parent, Penn.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether the sale of the oil subsidiary was a sale of all or substantially
all out of the ordinary course of business of the assets of Signal, thus requiring a
shareholder approval.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether the stockholders have the power to amend the bylaws to
authorize themselves to fill vacancies created by directors who have been
removed.
5. Holding: Yes.
6. Reasoning: It is settled law that stockholders who have the power to elect
directors have the power to remove them. Thus, it is not inappropriate that they
should use their existing power to amend the bylaws to elect the successors of the
directors that they remove. Any director illegally removed can have his remedy
in the courts.
4. Issue: 1) Whether the stockholders have the power between annual meetings to
elect directors to fill newly created directorships. 2) Whether the shareholders
have the power to remove directors for cause.
6. Reasoning: Del 223 provides that newly created directorships may be filled
by a majority of the directors then in office...unless it is otherwise provided in the
certificate of incorporation or the by-laws. Thus, the statute does not give the
directors the exclusive power to fill such vacancies. In Moon, the court held that
the stockholders do have the inherent right between annual meetings to fill newly
created directorships. The stockholders have the implied power to remove
directors for cause. Otherwise a director who is guilty of the worst sort of
violation of his duty could remain on the board and continue to inflict damage
on the corporation. However, the directors must be given notice and an
opportunity to be heard before removal for cause.
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Corporations Briefs Printed: 4/21/17
1. Blasius Industries, Inc. v. Atlas Corp., (1988) pg. 428, briefed 4/11/97
2. Facts: Blasius acquired 9.1% of Atlas stock, and then delivered a written
consent to Atlas, adopting a resolution recommending that Atlas implement a
certain restructuring proposal, amending the bylaws to increase the size of the
board from 7 to 15, and electing 8 named people to fill the vacancies. In
response, Atlas directors called an emergency meeting to amend the bylaws to
increase the board from 7 to 9 and filling the two new directorships - thus
negating the effect of the Blasius written consents attempt to take control of a
majority of the board.
3. Procedural Posture: Blasius sued to have the boards actions set aside.
4. Issue: Whether Atlas board of directors action to increase the board size for
the principle purpose of defeating the shareholders from electing a new majority
of directors was valid
5. Holding: No.
6. Reasoning: It is clear that Atlas directors were acting in subjective good faith
to protect their control of Atlas because they thought that it was in the
corporations best interest. However, the board has a fiduciary duty to the
shareholders, in the nature of an agent to a principle. As such, the board bears a
heavy burden of demonstrating a compelling justification when it acts to thwart
the power of the shareholders as the principles. Here, the board had time to
present its case to the shareholders, and the shareholders did not need a
paternalistic protection of the board.
2. Facts: A corporation had two classes of voting stock, equally divided among
two families. To break deadlocks, they created one share of a third class of voting
stock, which had no right to dividends and a value of only $10 par, and issued it
to their corporate counsel. The corporate counsel proceeded to consistently vote
against the wishes of one of the families.
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Corporations Briefs Printed: 4/21/17
3. Procedural Posture: The minority family brought this action to declare the
deadlock-breaking class of stock invalid as a voting trust. The lower court found
that the stock was valid.
4. Issue: Whether the third class of voting stock created here was valid.
5. Holding: Yes.
6. Reasoning: There are three tests that must be satisfied to establish that an
arrangement is a voting trust: 1) the voting rights are separated from the
beneficial ownership of the stock, 2) the voting rights are irrevocable, and 3) the
principle purpose is to acquire voting control of the corporation. Here, the
voting rights were not separated from the beneficial ownership. Although the
creation of the third class of stock diluted the voting power of the other two
classes, the other two classes still retained complete control of the voting power
of their own stock. Furthermore, since even non-voting stock is allowed by Del
151(a), it is not against public policy to separate voting rights from beneficial
stock ownership.
2. Facts: A father and three sons were shareholders in a closely held corporation.
The father and one of the sons agreed to vote their shares together to maintain
control and employment at a guaranteed salary in the corporation. They also
entered into an agreement that the first son had an option to purchase the
fathers stock when he died. However, the father and son had a falling out, and
the father executed a codicil to his will that bequeathed his shares to the other
two sons, and declared the agreement with the first son to be null and void. At
the fathers death, the first son sought to have the estate sell him the fathers
shares under the option agreement, and the estate refused.
3. Procedural Posture: The defendant argued that the agreement was illegal as an
attempt to misappropriate the discretion of the board to manage the company.
The lower court granted specific performance of the stock option purchase.
4. Issue: Whether the stock option agreement, in combination with the share
pooling agreement is valid.
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Corporations Briefs Printed: 4/21/17
5. Holding: Yes.
6. Reasoning: If the agreement was in any way illegal, it would only be to the
extent that it restricted the freedom of the board of directors to manage corporate
affairs. However, the evidence shows that the agreement did not fetter the board
of directors power. The other directors, which constituted a majority of the board
were unaware of the share pooling agreement or the option agreement.
Nevertheless, they voted to approve the salaries of the father and the first son
freely. Since the lower court only upheld the stock option agreement, and not the
agreement to guarantee each others salaries, it is affirmed.
1. Wilkes v. Springside Nursing Home, Inc., (1976); pg. 493, briefed 4/11/97
4. Issue: Whether the majority stockholders breached their fiduciary duty to him
as a minority stockholder by freezing him out of the corporation.
5. Holding: Yes.
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Corporations Briefs Printed: 4/21/17
the basic reasons why a minority owner has invested capital in the firm. The
majority stockholders must demonstrate a legitimate business purpose for
frustrating the expectations of the minority, and also show that there was no less
harmful alternative. Here, mere disagreement is not a legitimate business
purpose for freezing out a minority stockholder.
2. Facts: Several investors formed a corporation for the purpose of buying some
land. One of the minority shareholders pushed for, and obtained, a clause in the
bylaws and the articles of incorporation requiring an 80% supermajority vote of
the directors for an action to be valid. This created the need for a unanimous
vote in order to declare a dividend, and the minority shareholder consistently
refused to vote for a dividend so as to avoid personal tax liability, even after
severe tax penalties were repeatedly levied on the corporation.
5. Holding: No.
1. Matter of Kemp & Beatley, Inc., (1984); pg. 519, briefed 4/11/97
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Corporations Briefs Printed: 4/21/17
5. Holding: Yes.
1. Long Island Lighting Co. v. Barbash, (1985); pg. 582, briefed 4/11/97
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Corporations Briefs Printed: 4/21/17
5. Holding: Yes.
3. Procedural Posture: The shareholders brought this action to enjoin Wal Mart
from omitting the proposal. Wal Mart moved to dismiss on the basis that the
proposal deals with ordinary business operations.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether the proposal is excludable under 14a-8(c)(5) for being relevant
to less than 5% of the assets and not otherwise significantly related to the
corporations business.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether the mother is liable for breach of her duties as director for her
failure to inquire into the operations of the corporation.
5. Holding: Yes.
4. Issue: Whether the directors were liable for a breach of the duty of care for
failure to inquire more closely into the activities of the divisions.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
6. Reasoning: The directors had no actual notice of the illegal activities. Prior
illegal activities that were 30 years prior did not put the directors on notice.
Directors are entitled to rely on the honesty and integrity of their subordinates
until something occurs to put them on suspicion that something is wrong. Del
section 141(f) protects a director who reasonably relies on his employees. There
is no requirement for a director, absent some triggering event, to make inquiry
into the activities of the corporations' employees without some justification.
2. Facts: The CEO of the corporation negotiated a leveraged buy-out plan with an
investor. The deal was made outside of the knowledge of the other directors, and
was proposed to them in a summary fashion in a relatively short board meeting
with no supporting data or figures. The buy-out plan was approved by the board
without significant investigation, and the price was approved at $55 per share
which was far above the stock market price.
4. Issue: Whether the board's decision to approve the buy-out was protected by
the business judgment rule under these facts.
5. Holding: No.
6. Reasoning: The business judgment rule is based on the presumption that the
directors acted on an informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the company. The determination of
whether the directors were sufficiently informed turns on whether they have
informed themselves "of all material information reasonably available to them."
Here, the directors were grossly uniformed, and took no action to inform
themselves prior to approval of the sale. There was no crisis or emergency
justification. The board merely relied upon an oral 20 minute presentation
without any facts or figures or studies or reports on the actual value of the
company. Even though the sale was for a substantial premium over the market
price of $38, in the absence of other sound valuation information, this is not an
adequate basis for assessing the fairness of an offering price. There was no study
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Corporations Briefs Printed: 4/21/17
of cash flow valuation. Also, there was no effective "public auction" of the
company to determine the market value to a potential buyer.
1. Shlensky v. South Parkway Building Corp., (1960); pg. 759, briefed 4/13/97
4. Issue: Whether the defendant directors of the property corporation are liable
for damages from a breach of a duty of loyalty to the property corporation.
5. Holding: Yes.
1. Remillard Brick Co. v. Remillard Dandini Co., (1952); pg. 765, briefed
4/13/97
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3. Procedural Posture: The minority shareholders brought this action to have the
sales contracts invalidated on the ground that they unfairly stripped the
manufacturing corporation out of the opportunity to gain profits that otherwise
went to the sales corporation.
4. Issue: Whether the contracts are valid based on their approval by the board of
directors.
5. Holding: No.
3. Procedural Posture: The other family brought an action to have the debt
declared void.
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Corporations Briefs Printed: 4/21/17
5. Holding: Yes.
2. Facts: A golf course was owned by the corporation. Some adjoining land was
available for sale, which, if acquired by the corporation, would increase the value
of the golf course and the adjoining land if they could be sold together. The
corporation was informed of the opportunity to buy the land, and expressed an
interest in it, but did not take any immediate action to buy it. Two of the
directors of the corporation bought the land in their individual capacities. The
land parcels were then sold together at a large profit, with a large share of the
profit going to the two individual directors.
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether the purchase of the adjoining land by the two directors was the
taking of a corporate opportunity.
5. Holding: Yes.
2. Facts: The Burgs and the Horns formed a real estate investment corporation
for the purpose of buying low rent housing in the city. The Horns already had a
corporation of their own that had the same purpose. The Burgs, who were new
to this kind of business, believed that the Horns would offer the joint corporation
any properties it came across, but there was no agreement to that effect. The
Horns separate corporations purchased several buildings that were of interest to
the joint corporation. The Burgs and the Horns later had a falling out.
3. Procedural Posture: The Burgs brought this action for a constructive trust on
the properties purchased by the Horns. The trial judge held that the Horns did
not have any obligation to offer the properties to the joint corporation, and thus
had taken no corporate opportunities.
4. Issue: Whether there was a taking of a corporate opportunity when the Horns
already had a preexsiting and competing corporation.
5. Holding: No.
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Corporations Briefs Printed: 4/21/17
circumstances of the case. Since the Burgs spent most of their time in unrelated
businesses, and the Horns already owned a real estate investment corporation,
there was no duty to offer all buildings to the joint corporation without some
further evidence of an agreement to that effect.
1. Northeast Harbor Golf Club, Inc. v. Harris, (1995); pg. 40 supp., briefed
4/22/97
2. Facts: Harris was the president of the Golf Club corporation. Harris, in her
capacity as president, was approached by a real estate agent with an opportunity
to purchase surrounding land. Without disclosing the offer to the corporation,
Harris purchased the land with her own funds. Later, Harris informed the
board, but they took no action, apparently in reliance on her statement that she
would not develop the land. Later, Harris began to develop the land.
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Corporations Briefs Printed: 4/21/17
the corporation. However, if Harris failed to offer the opportunity, then she loses
outright. Also, if Harris offered the opportunity, but it was not ratified by a
majority of disinterested directors or shareholders, then the burden of proof is on
her to prove that it was fair to the corporation. The case must be remanded for
application of these standards of law.
2. Facts: Newport Steel is a mid-sized steel company trying to expand its market
during the steel shortages of the Korean war. Feldmann is the chairman and
controlling stockholder of Newport. Feldman sold his controlling interest in
Newport for $20 per share to a customer company, Wilport, who needed to
secure a stable source of steel during the shortage. This enabled Wilport to
allocate more steel to itself by placing several people on Newports board. The
book value of the stock was $17 per share and the market value was $12 per
share.
4. Issue: Whether the sale of control under these facts was the sale of a corporate
asset which would entitle the corporation to the profit realized by Feldmann.
5. Holding: Yes.
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Corporations Briefs Printed: 4/21/17
1. Jones v. H.F. Ahmanson & Co., (1969); pg. 1164, briefed 4/22/97
3. Procedural Posture: A class action by the minority shareholders of the S&L for
damages, alleging that defendants had breached a fiduciary duty as controlling
shareholders by rendering the S&L stock unmarketable and locking plaintiffs out
of the share exchange.
5. Holding: Yes.
6. Reasoning: Majority shareholders may not use their power to control corporate
activities to benefit themselves alone or in a manner detrimental to the minority.
Any use to which they put the corporation must benefit the shareholders
proportionally. Good faith and inherent fairness to the minority is required in
any transaction involving control of the corporation by the majority shareholders.
The majority shareholders could have accomplished the same result by effecting
a stock split of the S&L to make its stock more marketable without breaching
their fiduciary duty.
2. Facts: Signal Co. owned a majority of UOP stock, and wished to acquire the
rest of the stock by a tender offer, and then merge with UOP. Using UOP
resources, two of the UOP directors, who were also Signal directors, completed a
valuation study that indicated that a fair price for the tender offer would be up to
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Corporations Briefs Printed: 4/21/17
$24 per share. Signal then made a $21 per share offer, and obtained a fairness
opinion from their banker, Lehman Brothers. However, the $24 per share study
was never disclosed to UOPs shareholders when they voted to approve the
merger at $21 per share.
4. Issue: Whether the burden of proof shifts to the plaintiff to prove the
unfairness of an action when it has been approved by a majority of disinterested
but not adequately informed shareholders.
5. Holding: No.
1. Unitrin, Inc. v. American General Corp., (1995); pg. 67 supp., briefed 4/22/97
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Corporations Briefs Printed: 4/21/17
4. Issue: Whether Unitrins poison pill and stock repurchase programs were
disproportionate responses to the takeover bid by American General.
5. Holding: No.
6. Reasoning: The Unocal standard applies in this case because the boards
actions were defensive reaction to a threat. The first aspect of the Unocal test is
reasonableness, requiring that the board demonstrate that it made a reasonable
investigation of the threat in good faith. The Unitrin board passes the
reasonableness prong because it perceived two dangers: inadequate price, and
antitrust complications. The second aspect of the test is proportionality.
Unitrin may not use draconian means to prevent takeover. Here, the response
was not draconian because the share repurchase program was not a
mathematically significant deterrent to takeover. It was neither preclusive nor
coercive. Thus, the proper test for judging the boards action is the range of
reasonableness of its actions. The case must be remanded for determination of
whether Unitrins board acted within the range of reasonableness.
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Corporations Briefs Printed: 4/21/17
5. Holding: Yes.
2. Facts: A printer, in the course of his job, prints press releases from different
corporations. Several press releases from acquiring companies which announced
mergers passed through his hands, and from their information, he was able to
deduce the parties, and purchased the stock of the target company before the
information became public.
3. Procedural Posture: The printer was convicted of insider trading under SEC
Rule 10(b) for failing to disclose this non-public information, and trading on it.
The court of appeals affirmed stating that no person, whether or not a corporate
insider may trade on any illegally obtained non-public information.
4. Issue: Whether a person who learns from the confidential documents of one
corporation that it is planning to attempt to secure control of a second
corporation violates SEC rule 10(b) if he fails to disclose the impending takeover
before trading the in the target company stock.
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5. Holding: No.
2. Facts: The president of a subsidiary found out due to his position that his
parent company was planning on acquiring a target company. The president
then purchased stock in the target company, and sold it for a profit after the
announcement of the merger.
3. Procedural Posture: The lower court found the president guilty of violation of
rule 10b-5 under a misappropriation theory and ordered him to disgorge his
profits.
5. Holding: Yes.
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Corporations Briefs Printed: 4/21/17
2. Facts: The director of the West Virginia state lottery was notified by the
Governor that he intended to award a video lottery company a single source
contract for the provision of statewide lottery machines. However, due to the
political unpopularity of such a move, the announcement was postponed until
after the Governers re-election. The director then purchased a block of the stock
of the video lottery company.
4. Issue: Whether, in the 4th circuit, criminal liability under Rule 10b-5 may be
predicated upon the mere misappropriation of information in breach of a
fiduciary duty owned to one who is neither a purchaser nor a seller of securities,
or in any other way connected with or financially interested in, an actual or
proposed sale of securities, even when the breach is followed by a purchase of
the securities.
5. Holding: No.
6. Reasoning: The language of the statute, although broad, does not support the
misappropriation theory. The statute prohibits deception in the form of material
misrepresentations or omissions, to induce action or inaction by purchasers or
sellers. The misappropriation theory bases criminal conviction on simple breach
of fiduciary duty, without requiring deception. Therefore, the statute does not
include the misappropriation theory. Even if the misappropriation theory
reqired deception, it still does not require deception which violates a duty of fair
representation or disclosure owed to a market participant. Thus, the language of
Rule 10b-5 is not broad enough to cover this case, and the misappopriation
theory is not recognized in the 4th circuit.
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