Harvard Holger Outline

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SPAMANN CORPORATIONS OUTLINE FALL 2013

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I. INTRODUCTION
1. Agency
What is agency?
RSA 1.01: Agency is a fiduciary relationship that arises when: the principal manifests assent to the agent;
that the agent shall act on the principals behalf and subject to the principals control and the agent
manifests assent or otherwise consents to the act
RSA 1.04(7): A power of attorney is an instrument that states an agents authority
A. Liability in Contract
actual authority
RSA 2.01: An agent acts with actual authority when the agent reasonably believes, in accordance with the
principals manifestation, that the principal wish the agent to act
RSA 3.01: Actual authority is created by principals manifestation, reasonably understood by the agent, of
assent that the agent take action on the principals behalf
RSA 4.01(1): Ratification is the affirmance of a prior act done by another, whereby the act is given effect as
if done by an agent acting with actual authority
RSA 4.02(1): Subject to the exceptions stated in subsection (2), ratification retroactively creates the effects
of actual authority
apparent authority
RSA 2.03: An agent acts with apparent authority when a third party reasonably believes the agent has
authority to act on behalf of the principal and that belief is traceable to the principals manifestations
RSA 3.03: Apparent authority is created by the principals manifestation that the agent has authority to act
with legal consequences on behalf of the principal, so long as the third party believes the actor is authorized
and this belief is traceable to the manifestation
estoppel
RSA 2.05: Estoppel to deny existence of agency relationship: A person who has not made a manifestation
that an actor has authority as an agent and who is not otherwise liable as a party to a transaction
purportedly done by the actor on the persons account is subject to liability to a third party who justifiably is
induced to make a detrimental change in position because the transaction is believed to be on the persons
account if (1) the person intentionally or carelessly caused such belief, or (2) having notice of such belief
and that it might induce others to change their positions, the person did not take reasonable steps to notify
them of the facts
B. Liability in Tort
Respondeat Superior
RSA 6.01: When an agent acting with actual or apparent authority makes a contract on behalf of a
disclosed principal, the principal and the third party are parties to the contract, but the agent is not a party
to the contract unless the principal and the third party agree otherwise
RSA 7.03: (1) A principal is liable to a third party in tort when: (a) the agent acts with actual authority or
the principal ratifies the agents conduct; and the agents conduct is tortious or would subject the principal
to tort liability if committed by the principal; or (b) the principal is negligent in supervising, selecting, or
otherwise controlling the agent; or (c) the principal delegates performance of a duty to use care to protect
other persons on their property to an agent who fails to perform that duty. (2) A principal is subject to
vicarious liability to a third party harmed by an agents conduct when (a) the agent is an employee who
commits a tort while acting within the scope of employment or (b) the agent commits a tort when acting with
apparent authority in dealing with a third party
An agent and a fiduciary have the following duties to each other:
RSA 8.01: An agent has a fiduciary duty to act loyally for the principals benefit in all matters connected
with the agency relationship
RSA 8.02: An agent has a duty not to acquire a material benefit from a third party in connection with
transactions conducted or other actions taken on behalf of the principal or otherwise through the use of the
agents position
RSA 8.03: An agent has a duty not to deal with the principal as or on behalf of an adverse party connected
with the agency relationships
2. Partnership
Partnership vs. Corporation
Partnership: is an association of two or more persons to carry on as co-owners a business for profit (Uniform
Partnership Act)
Formation of a partnership by accident?
Partnership is the default so if you dont affirmatively incorporate you have a partnership
Management
Partnership is dissolved if one person decides to leave
Liability
Partnership: Unlimited Liability (i.e. in Pizza Shop Problem, Kathy and Louis are personally liable)
Corporation: limited liability
limited liability: shareholders cant lose more than the amount they invest; they are not personally
responsible for the debts of the corporation (compare this to partnership where the general partner is legally a
party to all partnership agreements and therefore liable under them)
policy arguments for limited liability (see debate in Massachusetts in 19th century):
foreseeable risk as a creditor or investor you put in a million dollars knowing you wont lose any more than
that (with unlimited liability, who knows how much you could lose)
encourages risk-averse investors to invest in risk but socially useful ventures
it creates incentives for banks and other expert creditors to monitor corporate creditors more closely
unlimited liability favored rich citizens with easy access to capital

private ordering people can take control of their private affairs and converge privately on what is the best
arrangement for them
policy arguments against limited liability (see debate in Massachusetts in 19th century):
no good evidence that limited liability was important for development e.g. California had unlimited liability
until 1931
monitoring: holding people liable gives them a reason to monitor what is being done (same rationale as for
vicarious liability) this works for creditors but small shareholders are not equipped to do this; if you have
to monitor all the time then wont be able to diversify your investment
tort victims are not at the table when contracts are worked out about liability; they are the most negatively
affected by limited liability
How to facilitate pooling many investors resources
incorporate
3. Corporations
Basic Problems Addressed by Corporate Law
corporation is a legal person; it can sign contracts, buy and sell property, and acquire assets and debts in its
own name
indefinite life unlike a partnership, a corporation will survive the death or departure of a principal
transferable shares: equity investors own a share interest which is their legal property and can be transferred
along with the rights that it confers transferability allows the firm to conduct business without interruption
i.e. even as the identity of owners change (compare to a partnership where departure of one partner would
lead to dissolution of the partnership)
centralized management: corporations feature centralized management by a board who are responsible for
initiating corporate transactions and managing the corporation creates tension of how to free shareholders
of the need to micromanage the corporation without making it rational for them to be apathetic about the
corporations management
requires that shareholders elect the board of directors (DGCL 141)
requires that the board appoint the firms managers who are responsible for implementing the directors
mandates and executing day-to-day operations of the corporation
board is largely insulated from shareholders aside from annual meetings; this reduces agency costs and
allows more knowledgeable board to make decisions
default rule = board elected for one year term (though many corporations have staggered boards)
individual corporate directors are not agents of the corporation but corporate officers are agents of the
corporation and are subject to the same fiduciary duties that bind agents
Charter (Articles of Incorporation)
Scope (Mandatory Requirements)

must provide for voting stock
DGCL 151: every corporation must have at least one class of voting stock
DGCL 212(a): default for voting stock is to have one vote per share of capital stock but charter can be
modified to create classes of stock with greater voting rights
must provide for board of directors
must provide for shareholder voting in certain transactions
must name the original incorporations, corporations name, purpose, and fix its initial capital structure (how
man classes of shares and voting power)
DGCL 102(b)(1): everything can go into a charter unless its illegal (general enabling clause)
Amendments
DGCL 242: shareholders can vote upon charter amendments but amendments can only be proposed by the
board (board agenda power)
Limits on Charter Freedom
READING FROM SECTION ON 42
Bylaws
Scope
DGCL 109(a): Shareholders have an inalienable right to adopt, remove, and/or amend the bylaws
(including the bylaws according this power to the board of directors); charter is superior to the bylaws
DGCL 109(b): Bylaws may contain any provision so long as it isnt illegal with the law or charter
Amendments
DGCL 109: shareholders always have power to adopt, amend and repeal and board has power so long as it
is conferred to the board in the charter (but cannot confer this power exclusively upon the directors)
Boilermakers (Ct. of Chancery Del. 2013) F: Chevron and FedEx adopted a bylaw providing that litigation
relating to their internal affairs be conducted in Delaware (forum selection bylaw). Defendants say authority
for board to adopt bylaw in DGCL 109(a) and they adopted it to address inefficient costs of defending
against the same claim in multiple courts at one time. Ps burden is difficult because cant satisfy court by
pointing to some future hypothetical application of the bylaws that might be impermissible. HELD:
challenged bylaws are statutorily valid under DGCL 109 and enforceable as forum selection clauses.
Bylaws may address any subject that isnt inconsistent with the charter/is illegal. Court refuses to accept
hypotheticals; if a plaintiff believes that a forum selection clause cant be equitably enforced in a particular
situation then plaintiff can bring it up in that situation (compare to
AFSCME where it does)
CA v. AFSCME (Del. Sup. Ct. 2008): F: AFSCME submitted a proposal for a stockholder bylaw which
would allow the company to reimburse a stockholder for reasonable expenses incurred in connection with
nominating one or more candidates in a contested election of directors HELD: AFSCME proposal is
inconsistent with the law. In a situation where the proxy contest is motivated by personal/petty concerns or
to promote interests that dont further the interests of the corporation, the boards fiduciary duty could
compel that reimbursement be denied. (compare to Boilermakers where not allowed to consider
hypotheticals) (in present, this provision would be perfectly legal to propose under DGCL 113)
shareholder-adopted bylaws may not prevent the directors from fulfilling their fiduciary duties (i.e. managing
the corporations business and affairs)
bylaws may not mandate how the board should decide specific substantive business decisions but may define
the process and procedures by which those decisions are made
4. Finance Basics
equity: the value of an ownership interest in property, including shareholders equity in business
stock: the generic term for common equity securities
an equity investment increases assets but not liabilities
asset: an economic resource; anything tangible or intangible that is capable of being owned or controlled to
produce value and that is held as positive economic value
liability: an obligation of an entity arising from past transactions or events, the settlement of which may
result in the transfer or use of assets, provision of services or other yielding of economic benefits in the
future
any type of borrowing from people/banks
a duty or responsibility to others that entails settlement by future transfer or use of assets
a duty or responsibility that obligates the entity to another
liquidation preference: term used in venture capital contracts to specify which investors get paid first and
how much they get paid in the event of a liquidation event such as the sale of the company liquidation
preferences helps protect venture capitalists from losing money by making sure they get their initial
investments back before other parties. If the company is sold at a profit, liquidation preference can also help
them be first in line to claim part of the profits. Venture capitalists are usually repaid before holders of
common stock and before the companys original owners/employees.
convertible stock: provisions allowed owners to convert preferred shares into common shares (may want to
do this if initially dont want stocks to have voting power but then want them to be able to be sold at a higher
price i.e. non-voting shares are generally priced lower and non-standard shares may be less liquid, for this
reason may offer someone you are worried about trying to takeover these stocks that can be converted to
common stock that can vote when they want to sell)
securities: is a tradable asset of any kind
debt securities (e.g. banknotes, bonds)
equity securities (e.g. common stock)
5. Ideas from practice exams

If you need to worry about opportunistic behavior of an investor and protect the corporation before
granting the investor access to confidential information:
force investor to do a deal with the corporation rather than buy stock on the open market need a
commitment from investor not to trade in company securities or derivatives for a certain period after getting
access to the confidential information
confidentiality agreement that covers existence of negotiations (dont want public to know that the investor
walked away from a potential deal because will make the company look less valuable)
dont want the investor to be able to use the confidential information from corporation for the benefit of his
competing businesses (could consider using an accounting firm or other third party)
II. THE BASICS

1. Key Authorities: DGCL
DGCL 102(b)(7): A corporate charter may eliminate the personal liability of a director for monetary
damages for breach of fiduciary duty except: (1) for any breach of the directors duty of loyalty (2) for acts
or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law (3)
for any transaction from which the director derived an improper personal benefit
DGCL 141(a): it is the board of directors, not the shareholders, that is empowered to manage the
corporations business and affairs i.e. to make business decisions (Del. Courts draw on this to justify all sorts
of rights of management against shareholders)
DGCL 145: Indemnification: Power to indemnify in third party suits (good faith only; in criminal suits, no
reason to think action was unlawful), power to indemnify in derivative actions (good faith only), obligation
to indemnify in case of successful defense, power to purchase director liability insurance, advances to pay
fees are allowed, charter/bylaw can grant more, and the power to purchase director/officer insurance is
greater than the power to indemnify
DGCL 141(k): Removal of directors. Any director or the entire board may be removed with or without cause
by the holders of a majority of the shares then entitled to vote at an election of directors except in the case
of: staggered or classified board, cumulative voting
DGCL 161: The directors may at any time issue or take subscriptions for additional shares up to the amount
authorized in the corporations charter (directors have power to issue stock) (these are called authorized
unissued shares)
DGCL 170(a): Directors, subject to any restriction in the charter, may declare and pay dividends upon the
shares either (1) out of the corporations surplus or (2) if there is no surplus, out of its net profits for the
fiscal year or preceding fiscal year (directors have power to pay dividends)
DGCL 211(b): An annual meeting of stockholders shall be held for the election of directors and any other
proper business. No annual meeting is required if directors are elected by action by written consent and (1)
this consent is unanimous or (2) all of the directorships to which director could be elected at an annual
meeting held at the effective time of such action are vacant and are filled by the action
DGCL 223(a): Board Vacancies. Unless otherwise provided in charter/bylaws (1) board vacancies may be
filled by a majority of the directors then in office (2) if the charter entitles particular classes of stockholders
to elect certain directorships, vacancies for such directorships may be filled by a majority of the directors
elected by such classes of stock
A. Fiduciary Duties and Shareholder Litigation No Conflict of Interest

(Unconflicted Behavior)
1. Derivative Suit vs. Direct Suit
derivative suit: a lawsuit brought by a shareholder on behalf of a corporation against a third party, usually an
executive officer or director e.g. Aronson
in a derivative suit, plaintiff shareholders do not sue on an individual cause of action but instead sue in a
representative capacity on a cause of action that belongs to the corporation but for some reason corporation is
unwilling to pruuse
note on liability: directors have a strong incentive to settle derivative suits because if theyre found liable by
the courts on the merits they will be personally responsible for costs whereas if they settle can be reimbursed
by the corporation
direct suit: brought by a shareholder to enforce a claim based on the shareholders ownership of shares;
these suits involve contractual or statutory rights of the shareholders, the shares themselves, or rights relating
to the ownership of shares
a shareholder may not bring a direct action against a corporation by alleging that an officer has breached a
fiduciary duty owed to the corporation (this is a derivative action) but may bring a direct action if he has
been prevented from voting his shaares
e.g. EXAMPLE!!!
2. Business Judgment Rule (BJR)

Courts will abstain from reviewing board decisions unless those decision are tainted by fraud, illegality, or
self-dealing
Requirements
an exercise of judgment (decision to refrain from action also protected but not protection where directors
have made no decision)
disinterested and independent directors (no conflict of interest)
not enough to show that just a single director was interested, plaintiff must show that a majority of the board
was interested and/or lacked independence
absence of fraud or illegality
absence of waste (waste: proof that the consideration received is so clearly inadequate that the transaction
effectively amounts to a gift of corporate assets)
rationality: so long as the boards decision could be attributed to any rational business purpose, business
judgment rule applies (Sinclair)
Van Gorkom: (Del. 1985) F: to get tax breaks, Van Gorkom chose a price per share based solely on the
availability of a leveraged buy out; he then pushed the decision through the board with only a 20 minute
discussion and executed merger agreement without any board member having read it HELD: directors do
not get business judgment rule because the board didnt adequately inform themselves of all material
information reasonably available to them
Notes: this is the one case where Del. Cts. imposed monetary liability on disinterested directors for breach
of duty of care. Delaware finds this standard far too demanding so it passes DGCL 102(b)(7) which allows
charters to exclude monetary liability of directors to the fullest extent of the law
Result? many board decisions are over-processed which ultimate costs the shareholders (while directors
would pay if they were found breaching duty of care, the corporation (shareholders) pay for hiring lawyers
and investment banks to advise the board)
Disney: F: Disney was looking for new president and found Ovitz (leading partner/founder of CAA). Ovitz
employment agreement aimed to protect both parties in the event Ovitz didnt work out neither party could
terminate the agreement without penalty. Things did not go well, after only a year, Eisner wanted to get rid
of Ovitz, couldnt find a way around the costly NFT payment so he fired him and paid the fee. HELD: No
breach of fiduciary duties/waste by directors. Ovitz was fired/hired with the belief that it was the best
interest for the company. Eisner (not the board) had exclusive authority to fire Ovitz. Court found that a
plaintiff could rebut business judgment rule by showing that the board acted in bad faith
bad faith: where the fiduciary intentionally acts with a purpose other than advancing the best interests of the
corporation, where fiduciary acts with the intent to violate applicable positive law, or where the fiduciary
intentionally fails to act in the face of a known duty to act (conscious disregard for his duties)
Since Van Gorkom, Disney is the closest Delaware courts have come to imposing a monetary liability on
outside directors (litigation has been heavily colored by 102(b)(7) waiver
3. Limits of the Duty of Care

Business Judgment Rule
Charter Waiver of Liability (DGCL 102(b)(7))
Director/Officer Indemnification (DGCL 145)
4. Oversight Liability
Stone v. Ritter (Del. 2006) F: Stone brought derivative suit alleging that the directors were liable for
corporate losses as a result of managements failure to prevent employee misconduct. Company was liable
for $40 million in fines and $10 million in civil penalties after a government investigation which revealed
employee failure to file suspicious activity reports relating to investment fraud HELD: The court clarifies
Caremark duties. Directors are only liable if: (1) the directors utterly failed to implement any reporting or
information system or (2) having implemented such a system, the directors consciously failed to monitor or
oversea its operation (thus disabling themselves from being informed of risks or problems requiring their
attention) in either case, imposition of liability requires a showing that the directors knew they were not
discharging their fiduciary duties
5. Indemnification and Insurance

DGCL 145: Indemnification: Power to indemnify in third party suits (good faith only; in criminal suits, no
reason to think action was unlawful), power to indemnify in derivative actions (good faith only), obligation
to indemnify in case of successful defense, power to purchase director liability insurance, advances to pay
fees are allowed, charter/bylaw can grant more, and the power to purchase director/officer insurance is
greater than the power to indemnify
6. Strict Liability for Knowing Violations of Law

DGCL 102(b)(7): A corporate charter may eliminate the personal liability of a director for monetary
damages for breach of fiduciary duty except: (1) for any breach of the directors duty of loyalty (2) for acts
or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law (3)
for any transaction from which the director derived an improper personal benefit
7. Policy Arguments
Courts institutional competence
Hindsight Bias
Risk incentives of managers and directors (with court error)
Formalities vs. substance
Why are we so scared of director liability?
Prevent Strike Suits
strike suit: lawsuit brought by single person/group with the purpose of gaining a private settlement before
going to court that would be less costly than defendants legal costs
contractual freedom
guarantees efficiency everyone who is effected by the decision has a say
normative inquiry allows people to do what they want
B. Fiduciary Duties and Shareholder Litigation Conflicted Behavior

1. Key Authorities: DGCL
DGCL 144:
(a) if a director engages in a conflicted (i.e. self-interested) transaction, that transaction is not per se void if:
(1) transaction is disclosed to the directors and approved in good faith by majority of disinterested directors
(2) transaction is disclosed to the shareholders and approved in good faith by a majority of shareholders (3)
transaction is fair to the corporation as of the time it is authorized, approved, or ratified
(b) common or interested directors may be counted in determining the presence of a quorum at a meeting of
the board or a committee which authorizes the contract or transaction
DGCL 170: Dividends, payment, wasting asset corporations
(a) the directors subject to any restrictions in the charter, may declare and pay dividends upon the shares
either
(1) out of the corporations surplus or (2) if there is no surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the proceeding fiscal year
DGCL 251: Merger or Consolidation of Domestic Corporations (see translated version)
allows cash-out merger (transaction where minority shareholders are squeezed out of the corporation
allows the minority to be paid in cash even if they dont vote in favor of the merger)
DGCL 262: Appraisal Rights
stockholder must deliver a separate written demand for appraisal to the corporation before the
stockholder vote
court may order reasonable attorneys fees for the stockholder upon application of the
stockholder
2. Entire Fairness Review (EFR)

Duty of Loyalty: requires directors to act in good faith to advance the interests of the company rather than in
their own self-interest
Who is the duty of loyalty owed?
default view: to shareholders; directors have a duty to maximize shareholder value
conflicting view: directors may owe duties to other parties including consumers, creditors, managers,
employees, and other stakeholders
Delaware has held that directors may consider the interests of constituencies other than shareholders in the
takeover context so long as they are the same relationship to long-term shareholder value (see Unocal)
Weinberger (Del. 1983) F: Freeze-out merger in which Singal (majority 50.5%) buys the remaining UOP
stock but violates the duty of loyalty because Signal failed to share internal reports indicating that they
valued UOP stock higher than the price they offered, forced negotiations to occur on a short timetable, and
did not leave the minority in a position where they could meaningfully negotiate over the terms of the merger
HELD: freeze-out merger must satisfy entire fairness standard. Two Components: 1. fair price and 2. fair
dealing
violation of fair dealing: Arledge-Chitiea report was prepared using confidential UOP information; the
directors could not use their positions as UOP directors to benefit Signal; directors had a duty to disclose all
material facts to independent UOP directors and minority shareholders
if a minority shareholder thought merger was unfair, his remedy is through appraisal proceeding (DGCL
262)
3. Except: No EFR When Approval By Disinterested Board/Shareholders

Weinberger: footnote 7: court specifically addressed that UOP should have appointed an independent
negotiating committee which would have been evidence that the parties negotiated at arms length
now this is the standard for parent-subsidiary mergers: the corporation will charge a committee of
independent directors with the task of negotiating merger terms; the existence of such a committee shifts
the burden of proof back to the plaintiff to prove that the transaction was fair
4. BUT: there can be EFR When Approval by Controlling Shareholder (even with disinterested
board/shareholders)
Sinclair (Del. 1971) F: Sinclair owned 97% of stock of subsidiary Sinven. Minority stockholder sues 1.
payment of large cash dividends by Sinven 2. Sinclair Oils use of other subsidiaries to develop oil fields
outside of Venezuela 3. Sinclairs actions with respect to a contract between Sinven and another Sinclair
subsidiary
HELD: 1 and 2 get business judgment rule (no self dealing) rule in favor of defendant
though Sinclair appoints all directors of Sinven and Sinven pays out dividend, not self-dealing because the
parent has not received a benefit to the exclusion and at the expense of the subsidiary especially in light of
the fact that Sinven minority owners received a proportionate share
HELD: 3. gets entire fairness rule in favor of plaintiff
forcing Sinven to contract with a Sinclair entity is self-dealing because the contract was breached and not
enforced; here, Sinclair got a pro rata benefit from the contract at the expense of the minority
if there is self-dealing, standard of review is always entire fairness but this doesnt mean that all transactions
by a controlling shareholder are subject to entire fairness review (just self-dealing ones)
5. Corporate Opportunities
Guth (Del. Ch. 1939) F: Guth was president of Loft which manufactured candy but not Cola. Lofts soda
fountains purchased large volumes of Coke but then switched to Pepsi. Pepsi went bankrupt and Guth
bought the it and began to sell it at Loft. Loft sued on the grounds that the chance to acquire Pepsi was a
corporate opportunity i.e. Loft alleged that Guth had to give Loft a right of first refusal to acquire Pepsi
HELD: the opportunity to acquire Pepsi belonged to Loft (the company) not Guth (the president)
Corporate Opportunity Doctrine:
1. Is the business venture in question intimately associated with the existing/prospective business of the
corporation? Yes: making cola syrup was within Lofts reasonable future business
2. Does Loft have a prior interest or expectancy in the opportunity? Because Guth discontinued the use
of Coke, it became a business necessity to acquire an alternative and therefore Loft had an equitable
interest in opportunity to buy Pepsi
3. What was the capacity in which Guth discovered the opportunity? Pepsis prior owner had not
approached Guth in his personal capacity but as Lofts president
Delaware applies a line of business test which classifies any opportunity that falls into a
corporations line of business as a corporate opportunity
Broz v. CIS (Del. 1996) F: Broz was the in house lawyer of RFBC and had been asked to join the
board of CIS (a competitor of RFBC that has been in Ch. 11 bankruptcy for 2 years). Broz decides
there is no conflict of interest and joins the board. HELD: no breach of duty of loyalty
Court considers Guth factors; a director/officer may not take a business opportunity for his own if:
1. The corporation is financially able to exploit the opportunity

2. The opportunity is within the corporations line of business
3. The corporation has an interest or expectancy in the opportunity and
4. by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position
inimical (harmful) to his duties to the corporation
Safe harbor provision: if person goes to the board and the board is made up of disinterested people who
approve the decision, then the person is safe under safe harbor provision
But, the court argues these are only guidelines in balancing the equities; court finds there was no
breach of loyalty because: CIS was financially unable to buy (Ch. 11 Bankruptcy), CIS was divesting
and board testified it didnt want to buy the permit Broz bought, a formal presentation to the board is
a safe harbor but not mandatory, and PriCellulars interest in buying was too speculative to consider
6. Junior vs. Senior Conflict

Conflicting risk preferences of junior and senior claimants created by payoff structure where juniors get
paid after seniors
Consequences: biased evaluation of risk projects
juniors favor excessive risk
True Story: FedEx founder flies to Vegas to gamble enough money to pay bills
seniors favor excessive caution
neither has optimal risk choice incentives
Trados
Payoff structure:
commons gets nothing below $57 million, 50% above
preferred get everything below $57 million, 50% above
Consequence 1: Commons are indifferent between any amounts below $57 million; wont work hard in that
range
Consequence 2: Biased evaluation of risky project means that neither consistently maximizes value of
Trados as a whole
Commons: favors excessive risk i.e. would favor a 1% chance of $2,000 million vs. a 100% chance of $40
million
Preferred: favors excessive caution i.e. would favor 100% chance of $40 million over 50% chance of $90
million
Management Incentive Plan (MIP) where management gets % of price paid for Trados and the rest is
distributed (even though they only own common stock)
Self Dealing: Yes

directors must maximize common shareholder interest and all board members are conflicted
Entire Fairness HELD: no breach of duty
Fair Dealing? No
no regard for commons; the MIP pays cash off from the commons even though the commons doesnt benefit
from it
Fair Price? Yes
common stock had no economic value (but Spamann says $0 is not a fair price for the common stock there
is still a chance the company will hit it big)
even though entire fairness includes fair price/fair dealing, in reality, if the price is fair then passes entire
fairness because if there is a fair price what will the remedy be?
7. Self-Dealing Decision tree (see on non-outline mode) and Chart
Self-Dealing?
No.
Yes. 102(b)(7)
Controlling waiver or
SH? Caremark
claim?
No. Yes.
Yes. Approval by No. Good faith
disinterested (almost
Entire fairness directors or
BJR
impossible to
SH? win)
No. Yes.
Entire fairness BJR/Waste
Self Dealing = transaction conferring exclusive benefit (Sinclair) on

Controlling Director/officer
shareholder
Baseline standard (i.e. Entire fairness [burden Entire fairness [burden
interested directors(?)) on D] (Sinclair) on D]
If disinterested directors Entire fairness [?] Business judgment rule
approve with full info because it was just in a [burden on P] (Aronson)
footnote and not a
holding, unclear who
the burden lies with

If disinterested Entire fairness [P] Waste [burden on P]
shareholders authorize (Weinberger)
with full info
C. Shareholder Litigation
1. Demand Requirement (Rule 23.1)
When is the demand requirement excused?
Chancery Rule 23.1 Generally
Demand is excused if the shareholder plaintiff alleges: particularized facts creating a reasonable doubt
(pleading standard) that a majority of the directors can impartially consider the suits merits. A director is
partial if the director or the person the director is beholden to has: (1) a personal interest in the
underlying transaction, or (2) violated her/his directorial duties by participating in the challenged
transaction
Chancery Rule 23.1 Aronson
In the standard case where the board being sued is the same as the board having made the challenged
decision, the standard collapses to: Demand requirement is excused when under the particularized facts
alleged, a reasonable doubt is created that: (1) a majority of the directors are disinterested and independent
in the underlying transaction (self-interest) and/or (2) the challenged transaction was otherwise the product
of a valid exercise of business judgment
Therefore, in the standard case, Rule 23.1 is essentially a higher pleading standard for duty of care claims
prong 2: bar is lower than negligence standard for duty of care claim here, since it is only reasonable
doubt and not actually proof of showing breach of duty of care
Examples:
SH alleges that 9 of 9 directors are sole owners of X-corp (demand excused board not impartial)
SH alleges that 5 of 9 directors are sole owners of X-Corp (demand excused - majority of board not
impartial)
SH brings suit alleging damages from former ACME directors (demand not excused current board fully
impartial)
SH brings damages against 9 current directors pleading breach of fiduciary duty (demand not excused no
particularized facts)
SH brings suit against 9 directors pleading that directors paid themselves in vacations (demand excused yes
self interest under Aronson)
SH bring action against 9 directors for damages where directors approved $30 billion merger without reading
the agreement, involving lawyers, and drunk (demand excused yes, not a product of valid business
judgment Aronson)
SH bring suit against directors where 4 of 9 paid themselves (demand not excused majority of board
impartial)
SH brings suit against directors in name of ACMe where 4 paid themselves vacation and other 5 are their
employees (demand excused other 5 are beholden to directors as employees)
demand must be shown at the time the complaint is filed but it can go to discovery if there is doubt (not
actual proof) that BJR protection should apply but probably lose on BJR anyway
Aronson (Del. 1984): F: derivative suit where plaintiff challenges an employment agreement between Myers
and Director Fink and an interest-free loan by Myers to Fink. Plaintiff claims he didnt make a demand
action before the board before bringing suit because board may be personally liable for the wrongs
complained of and Fink controls/dominated the board so the board would not sue itself. HELD: Plaintiff
failed to first make a demand to defendant directors before bringing a derivative suit. Plaintiff failed to show
that such a demand was excused because he didnt allege particularized facts that would indicate that a
demand would be futile. The business judgment rule protects directors managerial freedom to make
decision in the best interest of the company. BJR Test: 1. independent directors 2. not committing waste 3.
directors are sufficiently informed
in Aronson 47% was not enough to be a controlling shareholder, but Spamann points out that in a case like
Aronson they could have argued that he was a controlling shareholder by pointing out that in past elections,
no more than 90% of the voting stock were represented in any meeting, and so at that point, Aronsons 47%
would control the corp
Blasius (Del. Ch. 1988): F: Blasius is a new stockholder of Atlas who owns 9.1% (Atlas filed with SEC to
disclose his shares under 13d requirement). Blasius suggests that Atlas engage in a recapitalization proposal
to distribute cash to shareholders and then delivers Atlas a signed written consent which Atlas interprets as an
attempt to take control of the company. Atlas calls emergency board meeting where board votes to amend
bylaws to increase the size of the board (to prevent Blasius from appointing its own members to the board
and having an immediate majority). Blasius sued arguing that the directors dont have the authority to act for
the primary purpose of thwarting the exercise of a shareholder vote HELD: even finding that the boards
action was taken in good faith, it constituted an unintended violation of the duty of loyalty that the board
owed to the shareholders
here, board members acted in good faith because the board feared that recapitalization would damage the
company; but even when an action is taken in good faith, it can still be an unintended violation of the duty
of loyalty if a restructuring of Blasius would damage the company, board is entitled to inform the
shareholders and seek to bring them to a similar point of view
2. Special Litigation Committee

at any time after motion to dismiss, corporation can nominate special litigation committee of independent
directors who can file a motion to dismiss much later in the trial timeline
in reviewing the committees determination, the court (1) must inquire into the independence and good faith
of the committee and review the reasonableness and good faith of the committees investigation (2) must
apply its own independent business judgment to decide whether the motion to dismiss should be granted
3. Court Control??
4. Common Fund Doctrine (Attorneys Fees)
common fund doctrine: refers to a principle that a litigant who creates, discovers, increases or preserves a
fund to which others also have a claim is entitled to recover litigation costs and attorneys fees from that fund
Americas Mining (Del. 2012) F: Directors of Southern Peru breached their fiduciary duty of loyalty to
minority stockholders by causing Southern Peru to acquire the controllers 99.15% interest in a Mexican
mining company. Court of Chancery awarded 15% of the judgment ($304 million or $35,000/hour) in
attorneys fees HELD: attorneys fees are reasonable (determined by discretion of court); Court considered all
Sugarland Factors and determined the fee was reasonable:
Reasonable percentage of attorneys fees falls between 10-33%
Want to incentivize plaintiffs lawyers to bring the case
Sugarland: benefit achieved by the plaintiffs; difficult and complexity of the case
Spamann: Southern Peru only paid the fair price which incentivizes Southern Peru to low ball the price to
begin with and then only end up having to pay the fair price if sued even with a massive attorneys fee,
dont actually deter corporations behavior because the worst thing that can happen to them in litigation is
that they will be forced to pay the right price (in sum: why pay the right price to begin with?)
5. Forum Selection Bylaws

Boilermakers (Ct. of Chancery Del. 2013) F: Chevron and FedEx adopted a bylaw providing that litigation
relating to their internal affairs be conducted in Delaware (forum selection bylaw). Defendants say authority
for board to adopt bylaw in DGCL 109(a) and they adopted it to address inefficient costs of defending
against the same claim in multiple courts at one time. Ps burden is difficult because cant satisfy court by
pointing to some future hypothetical application of the bylaws that might be impermissible. HELD:
challenged bylaws are statutorily valid under DGCL 109 and enforceable as forum selection clauses.
Bylaws may address any subject that isnt inconsistent with the charter/is illegal. Court refuses to accept
hypotheticals; if a plaintiff believes that a forum selection clause cant be equitably enforced in a particular
situation then plaintiff can bring it up in that situation (compare to CA v. AFSCME where it does)
see more information under bylaws section (I. 3. Bylaws)
D. Shareholder Voting
1. Shareholder Voting System - DGCL
Summary
In board elections, only shareholders vote (annual DGCL 212(b)
Shareholder and board jointly vote on fundamental changes
mergers (251(c))
charter amendments (242(b)(2))
Shareholder or board alone can amend bylaws (109(a))
board is only one to make business decisions (141(a)) and to issue new stock
Who Votes? (DGCL Defaults)
1 share = 1 vote (212(a))
share ownership on record date decisive (213) (date when shareholders must be informed of a meeting)
Where/When?
annual meeting is mandatory (211(b))
election is only partial if board is staggered (141(d)((k))
special meeting can be called by board (211(d))
written consent (228) any action of a meeting of stockholders may be taken without a meeting by signed
and dated written consent
How?
vote by proxy (212(b)-(e))
proxy statement: statement required of a firm when soliciting shareholder votes
majority vote except in director election (where default rule is plurality) (216)
Agenda Control?
shareholders have little agenda control
only board can intiate merger or charter amendment
only board can call a special meeting
only board decides what to put on the corporations proxy card and materials (except precatory resolutions
including bylaw proposals) (no proxy access because DGCL 112 is optional and 14a-11 was struck down)
Key Provisions - Board
DGCL 141(a): Every corporation must have a board (even if it only has one member) and the business
and affairs of every corporation organized under the chapter shall be managed by or under the direction of a
board of directors, except as may be otherwise provided in this chapter or its certificate of incorporation
DGCL 141(d): Staggered Board. Staggered Board may be created by charter, initial bylaw, or a bylaw
adopted by a stockholder vote (divide directors in up to 3 classes whose terms of office expire in successive
years beginning with class 1 at the first annual meeting after the classification becomes effective)
DGCL 141(k): Removal of Directors. Any director or the entire board may be removed with or without
cause by the holders of a majority of the shares then entitled to vote at an election of directors except in the
case of: staggered or classified board, cumulative voting
Key Provisions Voting and Written Consent
DGCL 109(a): Shareholders can vote upon charter amendments DGCL 242 but these amendments can only
be proposed by the board
DGCL 151: Every corporation must have at least one class of voting stock
DGCL 212(a): Default for voting stock is to have one class of stock but the charter can modify this to create
classes of stock with greater voting rights or with no voting rights; shareholders can also vote by proxy
access
typically, all shares of common stock will have voting rights because they rely on voting to ensure that the
company is governed effective
DGCL 214: Cumulative Voting
Charter may provide that at director elections, each stockholder is entitled to as many votes as: the number
of votes which such holder would be entitled to cast for the election of directors with respect to such holders
shares multiplied by the number of directors to be elected by such holder such holder may choose to cast
all such votes for a single director or distribute them among several directors
DGCL 216: What constitutes a Quorum?
Charter or bylaws may specify the number of shares and/or voting securities that constitutes a quorum (min
# of stockholders present to make proceedings valid) but cant be less than 1/3. In the absence of such
specifications:
(1) a majority of the shares entitled to vote constitutes a quorum
(2) all matters other than the election of directors requires affirmative vote of majority of shares present
(3) directors elected by plurality of votes
(4) where a separate vote by a class is required, a majority of shares of such class constitutes a quorum
DGCL 228: Shareholders can vote by written consent
sufficient written consent must be delivered to the corporation within 60 days of the earliest dated consent
delivered to the corporation
Key Provisions Meetings
DGCL 211(b): Corporation has to have a meeting once a year to elect the board (or some proportion
thereof if the corporation has a staggered board)
DGCL 211(d): Special meeting of stockholders may be called by the board or by persons authorized by
charter or bylaws
Key Provisions Proxy Access
DGCL 112: Proxy Access Requirement
the bylaws may provide that if the corporation solicits proxies with respect to an election of directors, it must
include in its proxy solicitation materials individuals nominated by a stockholder
may be subject to conditions like: minimum stock ownership, submission of specified information,
undertaking to indemnify the corporation in respect to any loss as a result of false or misleading information
may exclude nominations from: any person who has acquired shares constituting a specified % of voting
power within specified period before election of directors
DGCL 113: Proxy Expense Reimbursement
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 (contra CA v. AFSCME)(also compare to 14a-
11 which was struck down in Business Roundtable but required (must) in 14a-11 vs. permissive (may) in
DGCL 113)
2. Written Consent DGCL 228

written consent: a document executed by either the shareholders or directors of a corporation in lieu of a
formal meeting
DGCL 228: Shareholders can vote by written consent so long as its not excluded in the charter
sufficient written consent must be delivered to the corporation within 60 days of the earliest dated consent
delivered to the corporation
3. Staggered Boards DGCL 141(d)

DGCL 141(d): Staggered Board. Staggered Board may be created by charter, initial bylaw, or a bylaw
adopted by a stockholder vote (divide directors in up to 3 classes whose terms of office expire in successive
years beginning with class 1 at the first annual meeting after the classification becomes effective)
4. Cumulative Voting DGCL 214

DGCL 214: Charter may provide that at director elections, each stockholder is entitled to as many votes as:
the number of votes which such holder would be entitled to cast for the election of directors with respect to
such holders shares multiplied by the number of directors to be elected by such holder such holder may
choose to cast all such votes for a single director or distribute them among several directors
5. Federal Proxy Rules (for more detailed see translated Proxy Rules PDF)
Purpose of Proxy Voting is to overcome shareholder collective action problem by reducing the costs
associated with meeting to vote but it introduces a separate collective action problem in which one or
more persons have to bear the expense of soliciting proxies
14a-1: Defines:
Proxy: every proxy, consent or authorization
Solicitation: any request for a proxy BUT NOT a communication stating how the shareholder intends to vote
in that communication
defines proxy as every proxy, consent or authorization and solicitation as any request for a proxy, any
request to execute or not execute, or to revoke, a proxy, or the furnishing of a proxy form BUT NOT a
communication stating how the shareholder intends to vote if that communication is public in nature, is
directed to persons to whom the security holder owes a fiduciary duty, or is made in response to unsolicited
requests for additional information related to either of these items
14a-2:
Rules 14a-3 to 14a-15 apply to every proxy solicitation except:
forwarding of proxy materials by brokers
solicitation by beneficial owner
any solicitation through the medium of a newspaper, advertisement which informs security holders of a
source from which they may obtain copies of a proxy statement, form of proxy and any other soliciting
material
Subject to 14a-6(g)/(p), 14a-7, and 14a-9
Any solicitation by any person who does not seek either on its own or anothers behalf the power to act as
proxy and doesnt furnish or otherwise request a form of revocation
Exceptions: the registrant, an officer or director of the registrant, any nominee for whose election as a
director proxies are solicited, any person soliciting in opposition to a merger, any person who is required to
report beneficial ownership, any person who is likely to receive a benefit from successful solicitation that
wouldnt be shared pro rata
Any solicitation made otherwise than on behalf of the registrant where the total number of persons solicited
is not more than ten
14a-3, 14a-4, and 14a-5: content and form of the proxy statement are heavily regulated
14a-3: requires that those solicited for proxies be furnished with a publicly filed preliminary or definitive
proxy statement; if it concerns a director election, must be preceded by an annual report containing balance
and income sheets, etc.
14a-4: a proxy can confer discretionary authority to vote on items that the person making the solicitation
doesnt know, a reasonable time before the solicitation BUT if its for an annual meeting, proxy can confer
discretionary authority only if the registrant didnt have notice of the matter at least 45 days before the date
on which the registrant first sent in proxy materials OR includes advice on the nature of the matter and how
the registrant intends to exercise discretion
main idea: can authorize someone else to vote for you on matters that come up at the meeting (situations,
admittedly few, a proxy can vote on his/her own conscience rather than simply filling the vote of the
securities holder i.e. shareholder)
14a-5: Presentation of information in proxy statement.
14a-6: Filing Requirements
14a-7: Obligation of registrants to provide a list of, or mail soliciting material to, security holders
14a-8
What is a proposal? shareholder proposal is shareholders recommendation that the company and/or its
board of directors take action which you intent to present at a meeting of the companys shareholders
Who is eligible to submit a proposal? continuously held at least $2000 or 1% of companys securities +
written statement that you intend to hold shares through the shareholder meeting
Each shareholder may submit no more than 1 proposal/meeting
a company is permitted to exclude a shareholder proposal if it is not proper subject for action by
shareholders under the laws of the jurisdiction of the companys organization or if the proposal would cause
the company to violate the law
Proposal must be received at least 120 calendar days before the meeting
Shareholder (or representative) must attend the meeting to present the proposal (can be through electronic
media)
main idea: 14a-8 entitles shareholders to include certain materials in the companys proxy materials and can
do so without filing with the SEC or mailing her own materials out
14a-8(i) does not allow shareholders to include proposals on ordinary business matters these matters are
reserved for the board
14a-9: False or Misleading Statements. No solicitation for proxy may contain a false or misleading with
respect to any material fact or which omits to state any material fact necessary in order to make the
statements therein not false or misleading
14a-10. Prohibition of certain solicitations. Nobody shall solicit any undated or postdated proxy.
14a-11 (struck down by Business Roundtable) requires (compare to DGCL 112 where permissive) public
companies to provide shareholders with information about shareholder-nominated candidates for the board
on the corporations proxy. Limitations: shareholders must have continuously held at least 3% of the voting
power for 3 years, rule doesnt apply if state law or charter prohibits shareholder-nominated candidates, not
allowed if shareholder has the intent of effecting a change of control on the company and a company is not
required to include in its proxy materials more than one shareholder nominee
6. Proxy Access: 14a-11 (struck down)

proxy access: the ability of shareholders to have one or more shareholder nominees included on the
corporations proxy card
14a-11 (struck down by Business Roundtable) requires (compare to DGCL 112 where permissive) public
companies to provide shareholders with information about shareholder-nominated candidates for the board
on the corporations proxy. Limitations: shareholders must have continuously held at least 3% of the voting
power for 3 years, rule doesnt apply if state law or charter prohibits shareholder-nominated candidates, not
allowed if shareholder has the intent of effecting a change of control on the company and a company is not
required to include in its proxy materials more than one shareholder nominee
SEC Reasons for Rule
financial crisis lead to serious concerns about the accountability and responsiveness of corporations and
directors
directors nominated by shareholder-proposed nominations may help make directors more accountable to
shareholders
existing shareholder options
withhold/no vote
wall street walk (sell shares and go somewhere else)
Spamann: you personally wont get anything from this; even if you switch to a corporation that is well-
managed at $55 you will not make any more money than a poorly managed corporation trading at $55 with
potential to go up to $100
Wachtell Comment
no support for link between the financial crisis and shareholder access to company proxy statements
proxy access has the potential to cause real harm
significant distraction: distracts management from their jobs with elections
board balkanization: board works best when it works as a unified whole
discouraging board service by good directors: will be even more difficult to get qualified directors to serve
only a small portion of proxy cost is the mailing cost that would be saved through this proposal
Calpers Comment
investors are best protected when board is responsive and accountable to shareholders
shareholders are too often locked out of the decision-making process for board appointments and are unable
to hold incumbent directors and company management accountable
unlikely that special interest candidates will be nominated under the proposed new rules which restrict this
right of access to long-term shareholders whose investment interest lies in ensuring the companys success
Business Roundtable (DC Cir. 2011) F: Petition for review of 14a-11 which requires public
companies to provide shareholders with information about shareholder-nominated candidates for the
board on the corporations proxy. Limitations: shareholders must have continuously held at least 3%
of the voting power for 3 years, rule doesnt apply if state law or charter prohibits shareholder-
nominated candidates, not allowed if shareholder has the intent of effecting a change of control on the
company and a company is not required to include in its proxy materials more than one shareholder
nominee HELD: Rule 14a-11 struck down; SEC acted arbitrarily and capriciously for not adequately
assessing the economic effects of a new rule
here: SEC inconsistently and opportunistically framed the costs and benefits of the rule, failed to
adequately quantify certain costs, failed to respond to substantial problems raised by commentators
e.g. SEC did not consider cost of a contested election and commission failed to consider how
union/state pension funds might use the new rule
7. Proxy Expense Reimbursement

DGCL 113: Proxy Expense Reimbursement
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 (contra CA v. AFSCME)(also compare to 14a-
11 which was struck down in Business Roundtable but required (must) in 14a-11 vs. permissive (may) in
DGCL 113)
See CA v. AFSCME (I. Introduction)
8. Inequitable Action is not permissible just because its legally possible

Schnell (Del. Sup. Ct. 1971) F: P seeks a preliminary injunction after corporation changes the date of its
annual meeting from what it said in the bylaws. Plaintiffs are dissatisfied with Ds recent business
performance and contend that by advancing the date of Ds annual meeting by over a month and selecting an
isolated town in upstate NY, Ds board has deliberately sought to handicap the efforts of plaintiff and other
stockholders sympathetic to Ps views. HELD: management has attempted to utilize corporate machinery to
keep itself in office and obstruct dissenting shareholders inequitable
inequitable action doesnt become permissible just because it is legally possible i.e. DGCL 109(c)
provides legal authority to the board to amend the bylaws if the charter says they can
9. Policy Shareholder Rights: What are they for?

Shareholder rights
vote: constrains board agency cost but subject to collective action problem
derivative suits with common fund fee award: overcome collective action problem but generates agency cost
through strike suits
sell: may reduce agency cost by pressuring management but collective action problem because the seller
doesnt gain
bad argument: ownership owning shares does not mean you own the corporation i.e. cant go to Exxon
and ask for a small amount of oil because you own some shares
good argument: shareholder rights address asymmetric incentive problems
management: agency cost (i.e. not necessarily doing what they need to be)
shareholders: collective action problem
New Plant New Jet Proxy Contest
Effect on Corporation +$1000 -$1000 +$1000
Effect on Share +$1 -$1 +$1
Other Effect on Manager -$2 (effort, stress) +$2 -$2 (effort, stress)
(shareholder for Proxy)
Social Welfare Effect +$998 -$998 +$998
Do it? No Yes No
Other institutions addressing incentive problems

executive compensation
incentivize performance: stock awards and options
pay off management to overcome resistance (e.g. golden parachute where CEO is given excessive CEO
severance package unrelated to change in ownership)
takeovers
direct effect: eliminate bad management
indirect effect: incentivize better performance
concentrated activism: shareholder assembles large stake in corporation
III. M&A
A. M&A Basics
1. Ways to Acquire a Company
1. Merger
2. Asset Sale
3. Tender Offer: public offer to shareholders of the target corporation in which the prospective acquirer
offers to purchase target company shares at a specified price and then follows it with a freeze=out
merger for the remaining minority shareholders (enables the bidder to eliminate the complications
caused by controlling a company with minority shareholders)
tender offer succeeds in the majority of cases
major collective action problem: rational shareholders accept a premium reflecting less than pro rata sharing
of the gains reasoning that some profit is better than none
4. Proxy Contest
most expensive and uncertain technique
there are restrictions on the insurgents expenses while the incumbent board is allowed to access the
corporate treasury
5. Open Market Purchase (rare)
ownership of 50.1% of outstanding voting stock guarantees the right to elect the entire board of directors; the
acquirer could obtain the necessary shares through open market or privately negotiated block transactions
BUT this is time consuming and must disclose after 5% (13D)
tender offer was devised as a shortcut to this
2. Merger Effects
Key Provisions:
DGCL 259-261: merger is the fusion of two corporations into one
DGCL 259: After merger becomes effective, the surviving corporation has all the rights/obligations of the
constituent corporations
DGCL 260: Surviving corporation may issue obligations to an amount sufficient with its capital stock to
provide for all the payments or obligations necessary to effect merger (surviving may mortgage its assets,
issue stock in exchange for payment)
DGCL 261: Any pending proceeding by/against any corporation party to a merger shall be prosecuted as if
the merger had not taken place (replace the surviving corporation with the original corporation)
3. Merger Approval Requirements

Generally, both corporations boards (251(b)) and shareholders (251(c)) have approval rights
Exceptions:
cash-deal, small deal (251(f)): the approval by shareholders of a surviving corporation is not required if:
the surviving corporations charter is not amended through the merger, and
the surviving corporation issues less than 20% of new shares in the merger
short-form merger (253(a)): if one of the constituent corporations (parent) already owns at least 90% of all
classes of voting stock of the other (subsidiary)
the approval of the subsidiarys board and shareholders is never required
the approval of parents shareholders is not required if parent is the surviving corporation and its charter is
not changed in the merger
applies equally to cash and stock
example: Glassman
back-end squeeze-out/short-form merger (251(h) NEW!): the approval by remaining target shareholders is
not required if:
the target is a public corporation (listed or >2000 shareholders)
if one shareholder acquires 50% of the stock, can squeeze out those who havent tendered for the same
amount of money agreed upon in the tender offer
only applies: when short form merger comes at the end of a two step transaction when the second step is part
of the entire plan enter into merger agreement with target and in merger agreement you already agree that
you will do a squeeze out if in the first step (tender offer) you acquire at least 50% of stock
4. Merger Appraisal Rights

Generally available for shareholders of both corporations in a merger (262(b))
Exceptions:
short-form merger: the parent shareholders dont have appraisal rights (251(h), 253(c)/(d), 262(b)(3))
market-out (262(b)(1)/(2): shareholders
of a public corporation (listed or >2000 shareholders) or
whose approval vote was not required for the merger under 251(f)
do not have appraisal rights if they receive as merger consideration shares of the surviving corporation or
shares of another public corporation
Weinberger: (Del. 1983) F: cash-out merger where Signal (owner of 50.5% of UOP) buys the remaining
UOP stock violating the duty of loyalty HELD: except in cases if fraud, misrepresentation, self-dealing (as
was the case here), or deliberate waste appraisal rights is the exclusive remedy for a minority
shareholder to challenge a merger
Glassman (Del. 2001) F: case considers the fiduciary duties owed by a parent corporation to the subsidiarys
minority shareholder in a short-form merger. A parent corporation cant satisfy the entire fairness standard if
it follows the terms of the short-form merger without more; Unocal owned 96% of the stock of UXC at the
time of the merger; Unocal and UXC appointed a special committee to consider possible merger
HELD: absent fraud or illegality, appraisal is the exclusive remedy available to a minority shareholder
who objects to short-form merger
no entire fairness
Note: Appraisal is not as good of a remedy as entire fairness
same valuation method (Weinberger)
similar procedure (quasi-class action)
but, appraisal includes only dissenters in class and pays less than merger consideration if court finds fair
value to be lower
5. Merger vs. Asset Sale

asset sale: in an asset sale, two companies dont combine rather, the target company remains in existence at
least until the asset sale has been completed asset sales are cumbersome
DGCL 271: Asset Sale. Requires the sale of all or substantially all assets, shareholder majority vote
required, target transfers its assets individually to the target (sales target must carefully describe all assets and
if it fails to do so then the acquirer will not obtain ownership rights in all the assets). Some assets e.g.
contracts cant be transferred without the approval of the contract counterparty
benefits of asset sale
no appraisal rights in asset sale (262)
appraisal rights: judicially evaluated value of their sales to ensure that shareholders get the correct amount of
money for their shares (only gives cash, cant get an injunction)
the acquirer doesnt automatically assume all liabilities of the target (but some liabilities automatically attach
to ownership so in practice this benefit is limited)
shareholder voting: in a straight two party merger (not a short form merger), approval by both companys
boards and shareholders can be expensive (proxy statement) whereas in an asset sale purchasing
corporations shareholders generally not entitled to vote
drawbacks of asset sale
ease of transferring control in a merger: when a merger becomes effective, separate existence of constituent
corporation end (except surviving corporation)
in an asset sale, target company remains in existence with its incumbent directors and shareholders
ease of transferring assets in a merger: in a merger, title to all property owned by each constituent
corporation is automatically vested in the surviving corporation
in an asset sale, documents of transfer must be prepared with respect to every asset
Hariton (Del. 1963) F: Arco agrees to asset sale to Loral in exchange for Loral shares. Arco calls a
stockholder meeting where it approves the plan. HELD: asset sale statutes and merger statutes are
independent of each other and a corporation complying with one or the other is complying with the law
6. Fiduciary Duty Review?

7. Control premia: market rule
control premium: an amount that buyer is usually willing to pay over the current market price of a publicly
traded company
market rule: you can sell your shares to whomever at whatever price you want so a controlling shareholder
can sell his shares at a premium (control premia) before a tender offer when you have to pay everyone the
same price
8. Tender Offer Rules

SEA 14(d)(e) basics
Rule 14(d)-10: tender offer must be open to all shareholders and all must be paid the same consideration
Rule 14(d)(6): pro-rata (proportional) allocation
Rule 14e-5: cant buy outside tender offer
Rule 14e-1: offer open at least 20 business days
this prevents quick acquisitions by way of a tender offer
Rule 14d-7: SH can withdraw while offer open (SH who already tendered may reverse their decision and
withdraw so long as offer remains open)
3G/Burger King: Burger King being bought by 3G Capital. Board signs the merger agreement. Tender offer
(same price for all shareholders 14d-10 and 14e-5). Tender only successful if 79.1% of shares are offered
and financing condition is met (BK then tops up stock to get Sub to 90% - this is no longer necessary
because of DGCL 251(h)). If the stockholders agree to the tender, the business is sold.
What happens in the merger?
surviving corporation only in name (Burger King)

board of the surviving corporation sub
charter of the surviving corporation sub
bylaws of the surviving corporation sub
does anything survive the merger?

officer of the surviving corporation will remind officers (helps to keep Burger King running on a daily basis)
9. Hostile Tender Offer

hostile offer: if a tender offer takes place in a way that management doesnt approve of
technically still need approval of the board under 251
but, if the current board doesnt agree, the acquiring company can buy enough stock, vote out the current
board, and then have the future board agree to the merger
this strategy is limited by takeover defenses like staggered board and poison pill
10. Schedule 13D Disclosure

SEA 13D: within 10 days of shareholder reaching 5% ownership threshold, shareholder must file with SEC a
disclosure of his shares
11. Summary Chart of Merger Types and Asset Sale

Deal Structure Appraisal Entire Fairness
1 Step (shareholder vote required Yes No

+ must prepare a proxy statement)
2 Step Yes Tender: no

Merger: long form? yes short
form? no (Glassman)
Asset sale No (Hariton) No

12. Control Premium Dilemma

Delphi (Ct. of Chancery Del. 2012) F: Delphi is founded by Defendant Rosenkranz who created two classes
of stock (Class B is retained by Rosenkranz). Rosenkranz gave away his right to obtain a control premium
when Delphi is sold (charter provision promises that minority will get equal price any future sale).
Rosenkranz also has RAM contracts between Delphi and his investment services company (Rosenkranz
makes $$$ from this). Rosenkranz then changes his mind and refuses to sell until he is given a premium.
HELD: court denies motion for preliminary injunction because deal was too good to give up but Rosenkranz
may still need to pay damages (court hints that RAM contracts are a sham and that Rosenkranz bargained
away the control premium in the charter)
control premium Equal Opportunity Rule
it benefits shareholders if there is a deal but without a premium there may be no deal (i.e. in the case of
Rosenkranz who is a controlling shareholder with veto power)
as a result, the rule may be bad for public shareholders (i.e. a smaller share of a bigger pie may be a better
deal)
in Delphi public shareholders get the best of both worlds because: there is a deal (since Rosenkranz thought
hed get a premium) AND they get equal price via damages
Why would a controlling shareholder veto a deal that is agreeable to other shareholders?
financial: controller may be able to syphon off money which creates differential reservation prices
public shareholders: status quo firm value money syphoned off
controller: status quo firm value + money syphoned off
this can hurt the public shareholder if the controllers reservation price is too high such that even a buyer
who can improve the firms value will not buy the corporation shareholder only benefits from buyer
creating value if the deal goes through
B. M&A Takeover Defenses

1. 1980s Rise of Hostile Takeovers
30 years after WWII: merger activity was primarily about conglomerate building (large, wealthy
corporations acquired smaller corporations mostly through friendly buyouts)
hostile takeovers became popular in 1980s
raiders were praised by shareholders and free market proponents as activists leading raider = T.
Boone Pickens (Unocal)
CEOs and board members despised the raiders; accused them of being motivated by greed and short-
term gain
Typical Deal Junk Bonds
buyer acquired the target indirectly through an acquisition subsidiary (a shell corporation without any
assets)
this acquisition sub received some cash from its buyer-parent but most of the cash for the takeover
funded by issuing large amounts of debt securities
the sub might also pay for the targets shares directly with debt securities (junk bonds)
2. Types of Takeover Defenses

staggered board: divide the board of directors into 3 classes of which only one is elected annually
crown jewel defense: sell off major assets to make company less attractive for a takeover
poison pill
white knight: may be a corporation or an individual that acquires a corporation at a fair consideration
during a period in which the corporation acquired is facing a hostile acquisition from another
potential acquirer (white knights preferred by the board because they dont generally replace current
board with new board)
golden parachute: termination agreement providing substantial bonuses and other benefits for
managers and certain directors upon change of control
lock-up option: option granted by a seller to a buyer to purchase a target company stock as prelude to
a takeover; the major shareholder is then effectively locked up and isnt free to sell the stock to
another potential buyer
no-shop clause: board cant discuss any business combination with a third party
DGCL 203 (pill is more powerful because in 203 shareholders still have to vote on it and acquirer
can force the vote within 50 days): prevents subsequent merger (business combination) with a
stockholder for 3 years following the time that such stockholder came to own at least 15% of the
outstanding voting stock unless 1. the board approved the acquisition prior to its consummation (i.e.
the old board approved it) 2. the interest stockholder owned at least 85% of the outstanding voting
stock 3. the business combination is approved by the board and by a 2/3 majority vote of the other
stockholders in a meeting
3. Legitimacy of Defense
Unocal (Del. 1985) F: Pickens (raider) controlled Mesa and then acquired 13% of Unocals voting stock.
Mesa launched a hostile two-tiered tender offer. Front end: cash tender of $54 per share for 37% of Unocals
stock. Back end: freeze out merger of junk bonds supposedly valued at $54. Here, Mesa offered
theoretically the same price in both steps but junk bonds are far less attractive. To defend against Mesas bid,
Unocals board authorized a discriminatory self-tender. If Mesas front-end tender succeeded in giving Mesa
a majority of Unocals stock, Unocal would then offer to repurchase the remaining minority shares with debt
securities worth $72/share. Unocal would never need to complete the self tender offer because created
another collective action problem where Unocals shareholders were likely to wait to tender to Unocal
rather than to Mesa (if no shareholders tendered to Mesa, Mesa would not acquire 50% and Unocal would
be able to close its offer without taking down any of the tendered shares). HELD: conditional version of
business judgment rule where 1. directors must first show they had reasonable grounds to believe that a
threat to corporate policy or effectiveness existed; directors must act in response to a perceived threat to
the corporation and not for the purpose of entrenching themselves in office 2. defense must be reasonable
in relation to the threat posed by the hostile bid 3. If yes to 1 and 2, then business judgment rule
applies. Discrimination against Pickens (he was not offered the $72 tender offer) is okay.
4. Weapons of Defense (poison pill)

Moran (Del. 1985) F: Household used a poison pill with 2 triggering events: 1. the making of a tender offer
for 30% or more of Households shares 2. the acquisition of 20% or more of Households outstanding shares
by any person or group. If issued, the rights were immediately exercisable and would entitle the holders to
purchase 1/100th of a share of Household preferred stock at a price of $100 (i.e. every shareholder can
purchase shares at a discount which will dilute the takeover bidders interest and the cost of the bill will rise
substantially idea being that knowing such a plan could be called on, the bidder could be disinclined to
takeover the corporation without the boards approval and will first negotiate with the board so the plan is
revoked ahead of time) HELD: Court authorizes the pill. Board must leave some mechanism by which a
bidder can present an offer to the shareholder. Here, court says there was a mechanism because could have
solicited written consents to remove the board at the same time the offer was made or conduct a proxy
contest to oust the incumbent board.
5. Limits of Defense
Revlon (Del. 1985) F: In response to hostile (unsolicited) tender offer, Revlons board undertook a variety of
defensive measures culminating in boards authorization of negotiations with other prospective bidders.
Board entered into a merger agreement with Frostman (a white knight) which included a lockup arrangement
as well as other measures designed to prevent Pantry Prides bid from prevailing). HELD: In a sale or
break-up, Boards duty changes to getting the highest price. Initial defense measure (poison pill)
reviewed and upheld under Unocal; however, when Revlons board authorized management to negotiate a
merger/buyout with a third party recognition that the company was up for sale and duty changes from
preservation of Revlon as a corporate entity to maximization of companys value. The Board (after granting
lock-up to Frostman) allowed considerations other than the maximization of shareholder profit to affect their
judgment and followed a course that ended in the auction of Revlon to the ultimate detriment of
shareholders.
Practical result of Revlon: After merger agreement is signed, seller wants to be able to go shop to look for
better offers; after Revlon, contracts include a go shop provision where seller can go out and shop for the
best option for shareholders
Example: Burger King 6.02
Time-Warner (Del. 1989) F: After first developing long-term strategic plan that including maintaining the
culture of the company, Times board agreed to merger with Warner. Original plan: Warner shareholders
would receive newly issued Time shares representing 62% of the shares of the combined entity. Agreed to
lockup option, no shop clause, obtained commitments from banks not to finance a takeover. But, shortly
before Times shareholders were to vote on the merger, Paramount made a cash tender offer for Time.
Times board rejected the offer as inadequate without entering into any negotiations with Paramount. New
Plan: Time and Warner agreed on a new structure where Time would make a cash offer for majority of
Warner shares followed by a merger for remaining minority of Warner shares (resulting in 7-10 billion in
debt and would foreclose possibility of sale to Paramount). HELD: Revlon duties are not triggered but
Unocal still applies. 2 duties where Revlon applies (without excluding other possibilities): 1. 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 2. 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. Directors
are not required to favor short-term shareholder profit over long-term corporate plan so long as there
is a reasonable basis to maintain the corporate plan.
Paramount v. QVC (Del. 1983) F: Paramount entered into merger negotiations with Viacom; parties sought
to preclude competing bids with an array of defense measures: 1. no shop clause 2. termination fee
(Paramount obliged to pay Viacom $100 million if merger fell through) 3. Stock Lockup if the Viacom
deal fell through for any reason that triggered the termination fee, Viacom would have option of buying 24
million shares of Paramount at $69 per share. Despite defenses, QVC made a competing offer. HELD:
Revlon triggered. Revlon/Time-Warner said without excluding other possibilities for when Revlon
duties apply, this is another possibility change of control.
Main difference between Time and QVC

In Time: stockholders could still vote afterwards to vote out the board (no controlling shareholder)
In QVC: stockholders would not be able to vote after a controlling shareholder comes in but will still be able
to vote on the deal itself (controlling shareholder)
NCS v. Omnicare (Del. 2003) F: NCS involving in negotiations with Genesis where it had signed an
exclusivity agreement and made it clear that they did not want to be in a biding war with Omnicare.
Omnicare faxed over a higher bid 2 days before deal is signed; Omnicares offer was not firm (depended on
due diligence). NCS takes Omnicare fax to Genesis. Genesis agrees to pay higher price but threatens to
withdraw if deal isnt signed by midnight. The next day, Omnicare makes it offer public and purchases NCS
shares, files a derivative suit to enjoin NCS/Genesis deal as a breach of fiduciary duties. Omnicare launches
a tender offer which ultimately results in the NCS board withdrawing its recommendation of the Genesis
deal. HELD: Enjoins the deal applying Unocal (defense measure but no Revlon duties triggered). The court
holds the lock-up provision is preclusive and hence impermissible.
Spamann: stupid decision because fiduciary duties are supposed to protect shareholders; here, the
shareholders are going to approve the deal and the rationale of the court isnt to protect minority shareholders
won wouldnt approve it but rather to protect amorphous fiduciary duties
Airgas (Del. Ch. 2011) F: Air Products privately approached Airgas about an acquisition which then turned
hostile. Tender offer launched for outstanding Airgas shares. Airgas board unanimously rejected offer as
inadequate. Airgas continued to maintain its defenses which effectively deny shareholders choice of whether
to tender their shares. HELD: A board can maintain a poison pill for the mere reason that it believes
the offer price is inadequate. If the board is staggered by the charter (instead of bylaws) then this means
the board can resist a hostile bid for at least a full year which essentially makes Delaware corporations
takeover proof. Judge seems torn because there appears to be no threat (since stockholders knew information
to make an informed decision for a full year) BUT, judge is constrained because cant substitute his judgment
for that of the Board. Here, Airgas board is independent and has relied on outside financial advisors;
additionally, Air Products own three nominees have insisted on protecting the pill to get the best price.
6. Summary of Takeover Law

Directors must act 1. in response to a perceived threat 2. defense must be reasonable in relation to the threat
posed 3. business judgment rule. Discrimination is okay. (Unocal)
Court authorizes Poison Pill (Moran)

In a sale or break-up, Boards duty changes to getting the highest price (Revlon)
2 duties where Revlon applies (without excluding other possibilities): 1. 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 2. 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. Directors are not required to favor
short-term shareholder profit over long-term corporate plan so long as there is a reasonable basis to maintain
the corporate plan (Time-Warner)
Revlon duties are triggered when there is a change in control i.e. stockholders would not be able to vote after
a controlling shareholder comes in but will still be able to vote on the deal itself (QVC)
A board can maintain a poison pill for the mere reason that it thinks an offer price is inadequate. With a
staggered board + pill, Del. Corporations are essentially takeover proof (Airgas)
7. Policy Harvard Shareholders Rights Project

Harvard Shareholder Rights Project
advocates in favor of de-staggering boards
works with institutional investors who hold shares in large corporations
board has agenda power for charter amendments so much get the board to propose it
shareholder rights project uses a relationship with an institutional investor to ask the board to bring the
proposal to de-stagger the board
Wachtell disagrees: shareholder rights project closes its eyes to the real-world effect of shareholder power
harnessed by institutional investors who own 70% of the shares of the major public corporations
why should short-term focused professional money managers take precedence over the judgment of directors
and executives?
8. Policy Short-term vs. Long-term

Common argument: short term investors are only in it for a quick buck and dont care about the long term
health of the company
Problems with this argument
short term investors make money by selling the stock at a higher price than what they bought it for
so for the argument to work, short term investors would have to find idiot buyers who dont understand that
the long term health outlook is bad
this is obvious if the buyer is a long term investor i.e. long term investors care about long term health
therefore if long term health is bad, long term investor wont pay a higher price
but it also holds if the buyer is another short term investor: the second short term investor wants to re-sell at a
higher price so will be careful not to buy stock expected to deteriorate in value
summary: from shareholder prospective, short term = long term
BUT, managers can easily take short-term actions
managers have superior inside information
they can take action that initially looks good but is bad
e.g. persuade customers to buy products now (in Dec.) at lower price than they would have bought them for
later (in Jan.)
this increases reported sales now but depresses them by more later but outsiders cant distinguish such
artificial sales
if managers care about being elected/defeating a takeover, they may opt for short-term manipulation even
though it is more costly in the long-run
9. Policy Compare US to UK Approach

US UK
SEC, Courts Takeover Panel
Main Regulator there are no rules only
fiduciary duties enforced takeover panel with
by the Delaware Courts authority to make rules
SEC reviews merger

documents and tender
offers
Market Rule Equal Opportunity Rule CC 9
Sales of Control
controlling shareholder can the buyer would have to
sell controlling stake to offer to buy all minority
someone else and minority stock at the same stock
shareholders are stuck with buyer paid for majority
it shares
Partial offer ok 100% only CC 36 (i.e no partial
Tender Offers Financing condition ok offer)
Max. price during offer No subjective fin. conditions CC
13.1, 13.4
Max. price 3/12 months prior CC
6.1(a), 11 (must pay the best price
you would have paid in the past 3-
12 months)
Put-up or shut-up CC 2.6(a) (if
there are rumors then the bidder
must come forward and say if
theyre going to do a takeover or
not
Threshold 5% 3% DTR 5.1.2; 1% during
13D Delay 10 days offer period CC 8.3
must disclose when you hit 2 days DTR 5.8.3

this threshold
Threshold 90% under 253
Short form merger (Glassman) 90% of stock not owned
before CA 979, 981
50% if back-end of 2-step
90% CA 983(2)
Exit Right none
minority can ask that
you buy them out if
there is a 90%
majority stockholder
CC 21.1 + principle 3 (cf.
Defense Unocal, Moran, Revlon next slide)
board cant do anything
that will obstruct
shareholder choice in a
merger offer
Break Fee Approximate 4% okay (break fee: 1% and only with panel
initial bidder offered an incentive permission
to come forward)
Unocal Attack: Two tier tender Fictitious: illegal CC36, principle

3
Defense: self-tender
Moran Defense: poison pill Fictitious: illegal CC21.1(a)
Revlon Defense: asset sale (sells assets Fictitious: illegal CC21.1(b)(iv)

during target period)
III. SECURITIES FRAUD AND INSIDER TRADING

1. Disclosure Requirements
US Corporations must disclose a great deal of information under securities laws
annual disclosure of corporations financial/bisness situation in 10-k
quarterly disclosure on form 10-Q
Immediate disclosure of certain activities on form 8-K
comprehensive disclosure from anyone soliciting shareholder votes in proxy statements
shareholders have to disclose ownership interest above 5% under 13D
corporate insiders must disclose all purchase or sales of shares or options within 2 days
(Exchange Act 16(a))
If a corporation doesnt disclose truthfully, then a plaintiff law firm will file a securities fraud class action
against the corporation (not the board)
if the corporate disclosure was misleadingly positive, then the suit will attempt to recover damages for
shareholders who bought at an inflated price
if the corporate disclosure was misleadingly negative, then the suit will attempt to recover damages for
shareholders who sold at a deflated price
2. Securities Fraud vs. Insider Trading

key legal rule for both is 10b-5
main question in securities fraud: whether the disclosure was misleading and material and the availability of
the class action
typically litigated in class action
main question in insider trading: whether the defendant had access to insider information and/or did indeed
trade on it
typically prosecuted criminally
3. 10b-5 Text
Text: It shall be unlawful for any person, directly or indirectly, but 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 our would operate as a fraud or
deceit upon any person
in connection with the purchase or sale of any security
A. Securities Fraud
1. 10b-5 Securities Fraud Shorthand
Shorthand (same as common law fraud)
1. purchase/sale of security
no claim if you dont transact (i.e. hold or dont buy)
2. false/misleading statement
can include state of knowledge e.g. management is unaware see Basic
right answer: no comment
3. material fact
substantial likelihood thatviewed by reasonable investor as having significantly altered the total mix of
information available see Basic
4. Scienter (intent or knowledge of wrongdoing)
5. reasonable reliance
fraud on the market theory (Basic)
essential for class certification because the claim at issue in litigation is general to all in the class (way of
framing reliance to apply to the entire class)
does it make sense to rely on the price of the market being correct? vast majority of people who trade do it
because they think the price is wrong
6. causation injury
2. 10b-5 Class Actions

Basic (SCOTUS 1998) F: company made 3 statements that they were unaware of any merger negotiations
(despite being aware). Plaintiffs sell their stock and claim they sustained damages as a result arguing that
they relied on the market price being correct. HELD: presumption that everyone relies on the integrity of
the market price when making decision fraud on the market doctrine: courts can presume the existence
of reliance in cases where the misleading statement or omission has been disseminated into a well-developed
securities market because the market prices themselves are what investors rely on when deciding to buy or
sell (allows class actions since reasonable reliance applies to the whole class)
court says that if management wants to protect the negotiations agreement then can say no comment but
cant lie
court wants to encourage 10b-5 litigation requiring a plaintiff to show how he would have acted if omitted
material information had been disclosed would place an unnecessarily unrealistic evidentiary burden on the
Rule 10b-5 plaintiff
Dissent: the shareholders who didnt sell are the ones that are actually punished how is it fair to have
shareholders pay when the managers are the ones who lied and the plaintiff class benefited by being paid by
other shareholders (danger of economic theories replacing legal rules as the basis for recovery)
B. Insider Trading
1. State Action
to corporation: misuse of confidential information (Brophy/Kahnv.KKR)
to traders: fraud (problem: anonymous trading)
if insider trades with insider knowledge then sued and must give money back to corporation; most of the
time this isnt worth it because individuals are not wealthy enough and its really hard to find out without
criminal law enforcement i.e. wire taps
2. Statutory insiders: disclosure and short-swing profit

SEA 16(a): Directors, officers, and principal stockholders (greater than 10%) required to disclose within 10
days
SEA 16(b): Short Swing Profit Disgorgement
If youre an insider or a 10% stockholder then any profit that you derive from trades that are within 6 months
of one another you must disclose to the corporation
underinclusive: if someone were to find out something really important, can go out, buy stocks and then hold
them for 6 months and 1 day no legal violation
SEA Rule 14e-3: Civil and Criminal liability

cant trade while in possession of information relating to a tender offer
prohibits insiders of the bidder and target from divulging confidential information about a tender offer to
persons that are likely to violate the rule by trading on the basis of that information
the rule prohibits tipping of information to persons who are likely to buy target shares of their own account
10b-5 Action
Standard Insider Trading Case (criminal or administrative)
Perpetrator actin(s):
purchase/sale of security making a false/misleading statement (which requires duty to disclose) by not
disclosing a material fact with scienter
important: no general rule that you are not allowed to trade while in possession of nonpublic information
(Chiarella)
however, there is a general rule that you cant trade while in possession of information relating to a tender
offer (SEA Rule 14e-3)
3. Fiduciary Duty Classical and Misappropriation

both classical and misappropriation theories are complimentary and both good law
Classical: duty to disclose or abstain between company insiders and purchaser/seller of the companys
stock; trading on insider information is unlawful if it violate an existing fiduciary relationship of trust and
confidence
includes outsider tippee if insider tippors disclosure breached duty (test: does the insider personally
benefit?) and tippee knows this is the case (Dirks)
examples where requisite personal benefit could be found:
tipper received monetary gain
tipper received non-monetary gain e.g. CEO discloses information to wealthy investor to enhance his own
reputation
where the tip is a gift
Rule 10b-5 is violated when a corporate insider trades in the securities of his corporation on the basis of
material, nonpublic information which violates trust and confidence that exists between the shareholders of a
corporation and those insiders who have obtained confidential information
misappropriation: duty to disclose or abstain to the source of the information (OHagan)
requires deception no liability if full disclosure
violation when a person misappropriates confidential information for securities trading purposes in breach of
a duty owed to the source of the information
duties of trust or confidence under SEA Rule 10b5-2
whenever a person agrees to maintain information in confidence
whenever the person communicating the material nonpublic information and the person to whom it is
communicated have a history of sharing confidences such that the recipient of the information knows that the
person communicating the material nonpublic information expects that it remain confidential
whenever a person receives or obtains material nonpublic information from his/her spouse, parent, child or
sibling (but under this portion can demonstrate that no duty of trust or confidence existed with respect to
information)
in OHagan, even though OHagan had no duty to Pillsbury, whose stock he purchased, he had a duty to the
firm and to the acquirer it was representing
example: next year, working at a corporate firm and see confidential client information on your roommates
desk; you use the information to trade stocks; most likely violates 10b-5 because in using this information
you breach your duty to your roommate with which you have trust that the other wont take your confidential
information and then make trades based on it
types of insider trading information
inside information: typically comes from internal corporate sources and involves events or circumstances
concerning or affecting the issuers assets or earnings
market information: typically originates from sources other than the issuer and involves events or
circumstances concerning or affecting the price or market for the issuers securities and doesnt concern the
issuers assets or earning power
4. Modern Insider Trading Regulation - Cases

Chiarella (SCOTUS 1980) F: Chiarella was an employee of a financial printer that prepared tender offer
disclosure materials. In preparing these documents, company used codes but Chiarella was able to break the
codes. Chiarella purchased target company shares before the bid was announced and then sold the shares for
considerable profit after announcement of the bids. Caught and indicted for illegal insider trading under 10b-
5. HELD: No insider trading. There is no general duty between all participants in market transactions
to forego trades based on material, nonpublic information there is no equal access standard
duty to disclose to the party on the other side of the transaction that arose from a relationship of trust and
confidence between the parties here, Chiarella was not an employee, officer, or director of any of the
companies in whose stock he traded
Dirks (SCOTUS 1980) F: Dirks was a securities analyst who uncovered massive fraud. Dirks passed results
of his investigation onto SEC and Wall Street journal but also discussed his findings with various clients. A
number of those clients sold their holdings as a result before any public disclosure of the fraud (avoiding
substantial losses). SEC investigated Dirkss role in exposing the fraud and censured Dirks for repeating the
allegations of fraud to his clients. HELD: No liability. There can be no duty to disclose where the person
who has traded on inside information was not the corporations agent, was not a fiduciary, or was not a
person in whom the sellers of the securities had placed their trust and confidence. A tippee can only be held
liable where the tipper breached a fiduciary duty by disclosing information to the tippee and the tippee
knows or has reason to know of the breach of duty. Courts must determine whether the insider tipee
personally benefited from disclosure (here, Secrist tipped off Dirks to bring the fraud to light, not for any
personal gain)
OHagan (SCOTUS 1997) F: OHagan was a partner at law firm. Grand Met retained the law firm in
connection with its planned takeover of Pillsbury. Although OHagan wasnt one of the lawyers on the
project, he learned of their intentions and began buying up stock. When Grand Met announced its tender
offer, stock price of Pillsbury doubled allowing OHagan to make a profit of $4.3 million. HELD: OHagan
is liable. OHagan misappropriated confidential information to personally benefit and thus violate 10(b)
because he is in breach of a duty owed to the source of this information. (misappropriation theory).
majority upheld misappropriation theory: a fiduciarys undisclosed use of information belonging to his
principal, without disclosure of such use to the principal, for personal gain constitutes fraud in connection
with the purchase or sale of a security
under misappropriation theory, liability is grounded on deception of the source of the information OHagan
has no disclosure obligation to the person with whom he made the trade (compare to classic theory)
IV. NON-SHAREHOLDER CONSTITUENCIES
A. Creditors
1. No fiduciary duty protection Shareholder Primacy and Stakeholder Model

Background
Corporation is a nexus of contracts: managers, shareholders, creditors, works, customers, suppliers, etc. all
transact with each other through the corporate form
Directors and officers of Del. corporations owe fiduciary duties to common stockholders (see Revlon,
Trados, Gheewalla, and eBay)
Shareholder primacy: corporations are to be run for the benefit of shareholders alone
Stakeholder model: boards should manage corporations for the benefit of all its stakeholders
DGCL 365 and 362 allow for a Public Benefit Corporation
Public Benefit Corporation: Board shall manage/direct business and affairs of the PBR in a manner that
balances the pecuniary interests of the stockholders, those materially affected by the corporations conduct,
and the specific public benefit identified in the charter
this strongly suggests that standard Delaware corporations are not to be managed for the public
benefit
Gheewalla (Del. 2007) F: NACEPF holds certain radio licenses and entered into an agreement with
Clearwire. Under the agreement, Clearwire could obtain rights to those licenses as then existing leases
expired. NACEPF is not a shareholder of Clearwire but filed a direct action as a creditor. In 2003, market
for wireless spectrum collapsed and settlement left NACEPF as the sole remaining member and Clearwire
was unable to obtain any further financing. HELD: Creditors cant bring a direct claim based on breach
of fiduciary duties by corporate directors.
Creditors can bring a derivative suit if the company is insolvent but if theyre successful recoveries go back
into the corporation i.e. not directly to creditors
2. Metlife none of the protections for creditors apply

Metlife (SDNY 1989) F: this case involves the biggest LBO (leveraged buy out) of $17 billion which
resulted in RJRs debt going up from $5 billion to $20 billion. Plaintiffs argue that RJRs merger has
drastically impaired the value of the bonds previously issued to plaintiff by misappropriating the value of
those bonds to finance the LBO and to distribute an enormous windfall to companys shareholders. HELD:
Court approves the LBO. Court insists that if corporations dont want this to happen they should write
it in their contracts creditors could have negotiated a contract that if RJR merges then must pay
creditors first. Creditors considered writing in contract here, but determined it would result in loss of
business.
How does LBO work?
RJR worth $20 billion and creditors have $5 billion in debt
KKR (sub) enters into a merger with RJR (under merger agreement, $15 billion from new group of creditors
to the acquisition sub in return for junk bonds)
shareholders of RJR will cease to be shareholders and will get $14 billion in cash
final result: new entity with $21 billion in assets and combined debt of $20 billion and has only one
shareholder (KKR)
Result of LBO on creditor?
before the merger: company has a lot to loose before creditor is going to take a hit
after the merger: $15 billion in extra debt, if sales drop a tiny bit then unlikely that creditors will get paid
back
Who benefits from LBO?
shareholders of RJR get $14 billion
KKR is hoping it will be able to increase value of RJR (if value of RJR increases from 20 to 23 billion and
KKR has only put in $1 billion then would have tripled their investment)
None of the 5 statutory/equitable protection for creditors detailed below would have been an effective
protection for MetLife creditors
3. Protections for Creditors (listed)

1. Minimum Capital
no US rule for minimum capital; in European corporations it is $25,000
basic problem: minimum is not calibrated to the proposed business e.g. $25,000 is laughable for JP
Morgan and impossible for a mom and pop
additionally, even a small corporation might spend $25,000 on wages in the first month thereby
leaving no guarantee for a creditor
2. Distribution Constraints
3. Fraudulent Transfer
4. Equitable subordination
5. Piercing the Veil
4. Distribution Constraints
Rules have little substantive bite before insolvency
cant pay out of dividends if there is not enough capital but the board decides how much capital they have so
its unlikely that this would ever come up
Directors are joint and severally liable to the corporation for unlawful payment of dividend or unlawful stock
purchase/redemption (DGCL 174)
DGCL 160(a)(1): Every corporation may own and deal with its own shares except: when the capital of the
corporation is impaired or would become impaired by the transaction, a non stock corporation may not
purchase or redeem its own shares for cash or other property and a stock corporation may only do so if such
shares will be retired upon their acquisition and capital of corporation reduced accordingly
Dividends may be paid in cash, property, or in shares of the corporation (DGCL 173)
Dividends are paid out of surplus (or if there is none, out of net profits) (DGCL 170 and 173)
surplus: net assets minus capital (DGCL 154)
net assets: total assets minus total liabilities i.e. equity (DGCL 154)
therefore, Del. Corporations can pay out dividends up to equity capital
capital: what the board resolves it to be so long as it is par value (DGCL 154)
par value: a number determined by the charter (or if authorized by the charter can also be determined by the
board) (DGCL 151(a)); corporation also cant issue shares for consideration less than par value (DGCL
153(a))
in sum: DGCL permits a corporation to pay out almost its entire equity in dividends
DGCL 161(a)(1): equivalent restriction on share repurchase i.e. practically no restriction short of insolvency
It makes sense that limits on dividends and repurchases are the same because they are largely equivalent as
means for payouts to shareholders
5. Fraudulent Transfer
Creditors should be able to claim back an asset from a transferee who obtained it from the debtor without
paying equivalent consideration i.e. wife wire transfers her assets to her husband to shield them if she is
highly indebted
main benefit over distribution constraints is that they also catch transactions where the recipients paid some
(but insufficient) consideration
Bankruptcy Code 548: The trustee may avoid any transfer incurred by the debtor that was made/incurred
within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily:
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became indebted to
(B) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(i) was insolvent on the date that such transfer was made or such obligation was incurred or
became insolvent as a result of such transfer or obligation
(ii) was engaged in business or a transaction for which any property remaining with the debtor
was an unreasonably small capital
(iii) intended to incur (or believed debtor would incur) debts that would be beyond debtors ability
to pay
(iv) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the
benefit of an insider, under an employment contract and not in the ordinary course of
business
Uniform Fraudulent Transfer Act:
Insolvency: a debtor is insolvent if the sum of the debtors debts is greater than all of the debtors assets as a
fair valuation; a debtor who is generally not paying his debts as they become due is presumed to be insolvent
Transfers fraudulent as to Present and Future Creditors: if the debtor made the transfer or incurred the
obligation
with actual intent to hinder, delay or defraud any creditor of the debtor (consider whether
transfer/obligation was to an insider)
without receiving a reasonably equivalent value in exchange for the transfer or obligation
was engaged or was about to engage in a business or a transaction for which the remaining assets of the
debtor were unreasonably small in relation to the business or transaction
intended to incur or believed reasonably that would incur debts beyond his ability to pay as they became due
Transfers Fraudulent as to Present Creditors: fraudulent if the debtor made the transfer/incurred obligation
without receiving a reasonably equivalent value in exchange for the transfer/obligation and the debtor was
insolvent at the time or became insolvent as a result
Remedies of Creditors: creditor may obtain avoidance of the transfer or obligation to the extent necessary to
satisfy creditors claims
In case of MetLife, RJR was able to pay back all of its debt which is why its difficult to argue that their
capital is unreasonably small
6. Equitable Subordination
equitable subordination: the lowering of a priority of a claim because the holder of the claim is found to be
guilty of some kind of improper conduct
in bankruptcy, courts may subordinate some creditors on equitable grounds; they may treat the shareholder
loans like equity (Bankruptcy Code 510(c)(1))
7. Piercing the Corporate Veil

courts can hold shareholders directly liable for corporate debt
courts require at a minimum a unity of interest and ownership between shareholders and the corporation
and they tend to find it if there has been (a) a disregard of corporate formalities (i.e. meetings, minutes) (b) a
commingling of funds and/or (c) undercapitalization
practically speaking: piercing hardly ever occurs in large corporations and rarely in small ones too
B. Others
1. Shareholder Value Norm
shareholder value (shareholder primacy): the ultimate measure of a companys successes is the degree to
which it enhances shareholder value; corporations are to be run for the benefit of shareholders alone
eBay (Del. Ch. 2010) F: eBay owned 28.4% of Craigslist (Jim and Craig together owned majority and
dominated the board). This is an example of a closely held corporation. Under stockholders agreement,
when eBay chose to compete with Craigslist by launching Kijiji, eBay lost certain contractual consent rights
that gave eBay the right to approve or disapprove of a variety of corporate actions at Craigslist. eBay and
Craigslist are very different Craigslist is a for-profit company but operates its business primarily as a public
service. When eBay refused to sell its shares, Jim and Craig put in place: 1. Poison Pill (rights plan) 2.
Staggered Board 3. Right of First Refusal/Dilution (offered a right of first refusal in Craigslists favor in
exchange for 5 shares eBay declined this offer so their stocks were diluted). HELD: Jim and Craig
breached their fiduciary duties owed to eBay by adopting the poison pill and making the right of first refusal
offer but no breach for staggered board.
Staggered Board not defensive measure so use business judgment rule
Poison Pill defensive measures subject to Unocal
Jim/Craig claim there is a threat to their corporate culture of public service

Court: though in Time Warner the court discusses protecting culture, here, this is not a culture buy a business
strategy/sales tactic
Right of First Refusal entire fairness review
The corporate form in which Craigslist operates is not an appropriate vehicle for purely philanthropic ends
at least not when there are other stockholders interest in realizing a return on their investment (having chosen
a for-profit company, Craigslist directors are bound by fiduciary duties and standards that accompany that
form)
2. Preferred vs. Common Stockholders

Trados (see junior/senior conflict) if there is a conflict in constituencies, everything must be done for the
common shareholders
C. Internal Affairs Doctrine

1. Definition
internal affairs doctrine: corporate law is the law of the state of incorporation; this means that Delaware can
attract so many corporate charters only because foreign corporations i.e. corporations with no or few
operations in Delaware can choose to incorporate in Delaware
DGCL 203 (pill is more powerful because in 203 shareholders still have to vote on it and acquirer
can force the vote within 50 days): prevents subsequent merger (business combination) with a
stockholder for 3 years following the time that such stockholder came to own at least 15% of the
outstanding voting stock unless 1. the board approved the acquisition prior to its consummation (i.e.
the old board approved it) 2. the interest stockholder owned at least 85% of the outstanding voting
stock 3. the business combination is approved by the board and by a 2/3 majority vote of the other
stockholders in a meeting
2. CTS (SCOTUS 1987)

F: Indiana passed law that if anyone buys into corporation and buys 20% or more of the corporation then
shares wont carry voting rights until other shareholders endorse their voting rights (similar to DGCL 203)
HELD: DGCL 203s cousin upheld against a constitutional challenge
CTS doesnt hold that internal affairs doctrine is the only rule but comments that its nice everyone applies it
because there is no conflict
Indiana Act is not preempted by Williams Act because the possibility that the Indiana Act will delsay some
tender offer is insufficient to require a conclusion that the Williams Act pre-empts the Indian Act
Indiana Act doesnt violate commerce clause because corporations are by definition entities created by state
law and therefore it is logical that states would define the rights and characteristics of corporations
Court agrees that Indiana has no interest in protecting nonresident shareholders of nonresident corporations
BUT this act only applies to corporations in Indiana
3. Vantage Point (Del. 2005)

F: Examen is a Del. Corporation that has a majority of its business in CA. Examen wanted to merger with
another corporation and merger required shareholder approval (shareholder and major venture capital firm
Venture Point opposed the merger). There is a difference between how votes are counted under Del. Law
and CA law (2115). Vantage Point had enough shares to veto merger under CA standard but not under Del.
standard. Examen files Del. action nasking for a declaration that Del. law applies. HELD: Del. internal
affairs doctrine should apply. Voting rights is an internal affairs doctrine because it involves relationship
between corporation and shareholders. Court says internal affairs doctrine was designed to meet
constitutionality of the commerce clause.
Note: Delaware has a major interest in defending corporations right to incorporate wherever they want and
being able to apply the law of the state where they choose to incorporate; Del. speeds up its final judgment to
only 26 days to beat out a California decision (big advantage of incorporating in Del. is that you get before a
judge that deals with corporate disputes professionally)
4. Lidow (Cal. App. 2012)

F: Lidow was CEO of IR. After accounting irregularities surfaced, Lidow stepped down but sued 18 months
later. IR moved for summary judgment claiming that pursuant to the internal affairs doctrine, Del. law
governed and under Del. law a CEO is barred from bringing a wrongful termination suit. HELD: under the
circumstances alleged here, specifically where a foreign corporation has removed or constructively
discharged a corporate officer in retaliation for that persons complaints of possible harmful or unethical
activity, CA law applies.
Note: Lidow court doesnt want to open war with Delaware. The court agrees with the reasoning of Vantage
Point but comes out different in this case
D. What is the right normative lens for corporate law?

1. The Corporation as a Contract
Ultimate Question: How much contracting should be possible and if there are any other valid concerns to be
addressed by corporate law?
DGCL 102(b)(1): Any provision for the management of the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting, and regulating the powers of the corporation, the
directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any
class or group of members of a non-stock corporation; if such provisions are not contrary to the laws of this
state. Any provision which is required or permitted by any section of this certificate of incorporation
Anyone not satisfied with DGCL 102(b)(7) restriction can be a Limited Liability Company instead where
fiduciary duties may be eliminated by provisions of LLC agreement
2. The Corporation as a Social Entity

passive property owners (shareholders) have placed the community in a position to demand that the
corporation serve not alone the owners or the control but all of society
3. Citizens United (SCOTUS 2010)

F: Federal law prohibits corporations and unions from using their general treasury funds to make
independent expenditures for speech defined as an electioneering communication or for speech expressly
advocating election/defeat of a candidate. Citizens United released a film against Hillary Clinton.
Corporations and unions are barred from using their general treasury funds for express advocacy but can
establish a separate segregated fund (PAC) that only stockholders and employees of the corporation (or
members of the union) can contribute to HELD: The government may regulate corporate political speech
through disclaimer and disclosure requirements but it may not suppress that speech altogether
Dissent: could have spent unrestricted sums to broadcast Hillary so long as it wasnt within 30 days
corporations speech had not been banned
more information in 12-5 R

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SPAMANN CORPORATIONS OUTLINE FALL 2013

unlimited liability favored rich citizens with easy access to capital

Scope (Mandatory Requirements)

5. Ideas from practice exams

II. THE BASICS

A. Fiduciary Duties and Shareholder Litigation No Conflict of Interest

2. Business Judgment Rule (BJR)

3. Limits of the Duty of Care

5. Indemnification and Insurance

6. Strict Liability for Knowing Violations of Law

B. Fiduciary Duties and Shareholder Litigation Conflicted Behavior

2. Entire Fairness Review (EFR)

3. Except: No EFR When Approval By Disinterested Board/Shareholders

1. The corporation is financially able to exploit the opportunity

6. Junior vs. Senior Conflict

Self Dealing: Yes

7. Self-Dealing Decision tree (see on non-outline mode) and Chart

Self Dealing = transaction conferring exclusive benefit (Sinclair) on

the burden lies with

2. Special Litigation Committee

5. Forum Selection Bylaws

2. Written Consent DGCL 228

3. Staggered Boards DGCL 141(d)

4. Cumulative Voting DGCL 214

6. Proxy Access: 14a-11 (struck down)

7. Proxy Expense Reimbursement

8. Inequitable Action is not permissible just because its legally possible

9. Policy Shareholder Rights: What are they for?

New Plant New Jet Proxy Contest

Effect on Corporation +$1000 -$1000 +$1000

Effect on Share +$1 -$1 +$1

Social Welfare Effect +$998 -$998 +$998

Other institutions addressing incentive problems

3. Merger Approval Requirements

4. Merger Appraisal Rights

5. Merger vs. Asset Sale

6. Fiduciary Duty Review?

8. Tender Offer Rules

surviving corporation only in name (Burger King)

charter of the surviving corporation sub

bylaws of the surviving corporation sub

does anything survive the merger?

9. Hostile Tender Offer

10. Schedule 13D Disclosure

11. Summary Chart of Merger Types and Asset Sale

1 Step (shareholder vote required Yes No

2 Step Yes Tender: no

Asset sale No (Hariton) No

12. Control Premium Dilemma

B. M&A Takeover Defenses

2. Types of Takeover Defenses

4. Weapons of Defense (poison pill)

Main difference between Time and QVC

6. Summary of Takeover Law

Court authorizes Poison Pill (Moran)

7. Policy Harvard Shareholders Rights Project

8. Policy Short-term vs. Long-term

9. Policy Compare US to UK Approach

SEC reviews merger

must disclose when you hit 2 days DTR 5.8.3

Unocal Attack: Two tier tender Fictitious: illegal CC36, principle

Moran Defense: poison pill Fictitious: illegal CC21.1(a)

Revlon Defense: asset sale (sells assets Fictitious: illegal CC21.1(b)(iv)