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FiduciaryDuty Obligesthefiduciarytoactinthebestinterestsofhisclientorbeneficiaryandtorefrainfromselfinterested

behaviornotspecificallyallowedbytheemploymentcontract.
a.
Contract/AgencyInterface Thelawofcontractsimposessomelimitsontheprincipalsrightstodischargeanemployee
whilethelawofagencyimposesfiduciarydutiesonagents.
i)
AgencyDefinition Agencyexistswhere:1)oneperson(principal)consentsthatanother(agent)shallactonP'sbehalfand
subjecttoP'scontroland 2)aconsentsoastoact.
b.
Agent'sDuty Anagentisa fiduciary withrespecttomatterswithinthescopeofhisagency.Restatement13.Unless
otherwiseagreed,anagentissubjecttoaduty tohisprincipaltoactsolelyforthebenefitoftheprincipalin allmatters
connectedwithhisagency.Restatement387.
i)
Exception:LogisticalArrangements Anemployeeisfreetomakelogisticalarrangements,suchasfinancingand
leasingplansforanewcompanywhilestillemployed(Hamburger).
i)
PersonalNotes Someuseofrelatedtocustomersispermitted. a)
CustomerLists Maybeusedifreadilyavailablefrompublishedsources. b)
GeneralKnowledge Anemployeemayusegeneralknowledgeandskill obtainedthroughexperienceafterhe
leaveshiscompanyaslongasheisnotusingtradesecrets(Hamburger).
ii)
SolicitingCustomers Priortoseveringtheemploymentrelationship,anemployeecannotsolicitforhimselffuture
businesswhichhisemploymentrequireshimtosolicitforhisemployerbecauseanemployeehasafiduciarydutytothe
employer(Reilly).
ii)
FiduciaryDutyandOpportunism c.
Presumption Employmentatwillispresumedbutmaybeovercomebyevidenceofcontraryintent (expressorimplied). i)
Repeatedoralassurances ofjobsecurity
Anexemplaryemploymentrecord
Anagreementto limitthegroundsfortermination,and
Anoncompetitionagreement.
ExamplesofContraryIntent(Foley): ii)
EmploymentatWill Theemploymentatwilldoctrineisnotabsolute,notonlyaretherepracticallimitationstothedoctrine
(e.g.,reputation)buttherearealsolegalexceptionsthatprotecttheemployeefromirrationaldischarge.
d.
Agent'sFiduciaryDuties i.
WhoisanAgent? Agencyisafiduciaryrelationwhichresultsfromthe1)manifestationofconsentbyonepersontoanother
thattheothershall2)actonhisbehalfand3)subjecttohiscontrol.Rst1.
a.
Actual Existswhentheprincipalmanifests(actualorimplied)consentdirectlytotheagent.SeeUPA7.The
manifestationsareinterpretedfromtheagents perspective.
i)
Notice Thethirdpartycannotbeonnoticethattheagentdidnothaveactualauthority. i)
ConstructiveNotice UPA303allowspartnerstocreateastatementofpartnershipauthority.This,however,
generallycannotcreateconstructivenoticeforapparentauthority.
ii)
Note: Thisisallabouthowthethirdpartyinterpretsthemanifestations.Theagentcancreatemanifestationsofthe
principal.
Apparent(Ostensible) Existswhenanagentiswithoutactualauthority,buttheprincipal1)manifestsconsent(actualor
implied)directlytothethirdpartywhoisdealingwiththeagentand2)thethirdpartyreasonablybelieved thattheagent
hadauthorization.See UPA27.
ii)
Inherent Poweroftheagentderivedsolelyfromtheagencyrelationship.Existsfortheprotectionofpersonsharmedby
ordealingwithaservantorotheragent.See UPA8A.
iii)
TypesofAgencyAuthority b.
Whoistheagent?
Whatisthescopeoftheagentsauthority?
Whatdidtheprincipalcommunicate tothe3rdparty>apparentauthority.
Isthisaninherentauthorityanalysisthatdependsontheposition oftheagentheldandtheauthorityconveyedbythat
position?

Didthe3rdpartyactreasonably,ordidpersonhavenotice(couldbeimplied)oftheabsenceofauthority?>basically
thesamequestions.

StepstoAgencyAnalysis c.
AgencyLawandRelationswithCreditors ii.
Agency A.
GeneralRule(UPA202(a)) Theassociationoftwoormorepersonstocarryon ascoownersabusiness for profit formsa
partnershipwhetherornotthepersons intended toformapartnership.UPA202(a).
a.
DecisionMaking Partnersmakeordinary decisionsbymajorityvote,andextraordinary decisionsunanimously. i)
Termination Partnershiprelationshipterminatedonlythroughdissolution. ii)
FiduciaryDuty Partnersoweeachotherafiduciarydutytoactfairlyandhonestly. iii)
Management Ownershipandmanagementfunctionsaredividedequallytoeachpartner. iv)
ObligationsandLiabilities Allpartnersarejointlyandseverallyliable forallobligationsofthepartnershipwithnolimit
ofthepotentialpersonalliability.
v)
Taxes Ageneralpartnershiphastaxadvantagesoveracorporation. vi)
CharacteristicsofaPartnership b.
Note: Ajointventureisatypeofpartnership.Therefore,thetwoarelegallyindistinguishableinmostjx.
JointVenture Associatesjointoexploitaparticularcompany.Lesspermanentandlesscompletemergingofassetsand
intereststhanapartnership.
i)
Management Limitedpartnershavenomanagementpowerandnoauthoritytoactasagentsincarryingoutthe i)
LimitedPartnership Comprisedofoneormoregeneralpartnersandoneormorelimitedpartners,whichisformedby
filingacertificateoflimitedpartnershipwiththesecretaryofstateinthejxchosenbythepartiesincontrolofthelimited
partnership.
ii)
OtherFormsofPartnership c.
TraditionalNonCorporateBusinessAssociations i.
Partnerships:Governance B.
AgencyandPartnerships I.
.

partnership'sbusiness.Generalpartnersmakeandcarryoutthefirmsbusinesspolicies.
Liability Limitedpartnersarenotpersonallyliableforthepartnership'sobligationwhilegeneralpartnersare
jointlyandseverallyliableforthefirm'sobligations.
ii)
Termination Unlikegeneralpartnerships,withdrawaldoesn'tautomaticallyornecessarilytriggerdissolutionand
liquidationofthelimitedpartnership.Generalpartnersmaywithdrawfromthepartnershipatwill,butlimited
can't.
iii)
Intent Theonlyintentrequiredisintenttoassociatetocarryonascoownersabusinessforprofit.Thereisnospecificintentto
formapartnershiprequired.SeeByker (Twopartieswentintoseveralbusinessventurestogether.Courtdeterminedthatthis
formedageneralpartnershipforownershipofall theirbusinessendeavors).
a.
Losses Inmanyjx(e.g.,NY)theagreementtosharelossesisarequiredelement. i)
HolisticApproach Somejxdonotadheretoastrictsetofrequirementsandjustlooktotherelationshipbetweenthe
partiesonbalancetomakethedetermination.
ii)
Intenttoenter intoajointventure(partnership);
Anagreement,expressorimplied,amongmembersofthegroup;
Acommonpurpose tobecarriedoutbythegroup;
Ajointpecuniaryinterest inthatpurpose;
Anequalright toavoiceinthe directionandcontrol ofthegroup;and
Arighttoshareintheprofits andadutytoshareinanylosses.
StrictApproach Somejx'sareverystrictonthefactorsthatmustbepresent.Forexample,inSouthDakotathefollowing
factorsmustbepresentforajointventuretobefound:
iii)
ExistenceofaPartnership(CommonLaw) Toprovetheexistenceofapartnershiponemustshowtheintenttodivideprofitsof
theventure.Tomakethisdeterminationacourtwillconsidertheacts,dealings,conduct,admissionsanddeclarationsofthe
purportedpartners,inadditiontootherdirectevidence.Theintenttoformapartnershipisevidencebutnotdispositive.See
Hynansky.
b.
Ofadebt ininstallmentsorotherwise;
Forservicesasanindependentcontractor orwagesorothercompensationtoanemployee;
Ofrent;
Ofanannuityorother retirement benefit;
Ofinterestorotherchargeonaloan,eveniftheamountofpaymentvarieswiththeprofitsofthebusiness;or
Forthesaleofthe goodwill ofabusinessorotherproperty byinstallmentsorotherwise.
ExistenceofaPartnership(UPA202(c)(3)) Apersonwhoreceivesashareoftheprofitsispresumed tobeapartner,unlessthe
profitswerereceivedinpayment:
c.
DisclaimingObligations Thepartnershipagreementmaynoteliminatethedutyofloyalty,eliminatetheobligationof
goodfaithandfairdealing,verythepowertodissociateapartner(excepttorequirenoticeinwriting),orrestricttherights
ofthirdparties.UPA103(b).
a)
PartnershipAgreement Relationsamongthepartnersandbetweenthepartnersandthepartnershiparegovernedbythe
partnershipagreement.Totheextentthepartnershipagreementdoesnotprovide,theUPAgovernsrelationsamongpartners
andbtwthepartnersandthepartnership. UPA103(a).
d.
JointandSeveralLiability Allpartnersare jointlyandseverallyliable forallobligationsofthepartnershipunless
otherwiseagreedbytheclaimantorprovidedbylaw.UPA306.
i)
ProfitsandLosses Eachpartnerisentitledtoanequalshare ofthepartnershipprofits andchargeablewithashareofthe
partnership losses inproportiontothepartner'sshareoftheprofits.UPA401(b).
e.
PartnerCompensation Apartnerisnotentitledtoremunerationforservicesperformedforthepartnership,exceptfor
reasonablecompensationforservicesrenderedinwindingupthebusinessofthepartnership.UPA401(h).
f.
LegalNatureoftheRelationship ii.
Property Propertymeansallproperty,real,personalormixed,tangibleorintangible,oranyinteresttherein.UPA
101(11).
i)
General(UPA401(a)(1)&(2)) Eachpartnerisdeemedtohaveanaccountthatis[Credited=Added]/[Charged=Subtracted]
withanamountequaltothemoney plusthevalueofanyotherproperty,netoftheamountofanyliabilities,thepartner
contributestothepartnershipandthepartner'sshareofthepartnership's[Profits]/[Losses].
a.
WindingUp Eachpartnerisentitledtoasettlementofallpartnershipaccountsuponwindingup.Insettlingaccounts,
theprofitsandlossesthatresultedformtheliquidationofthepartnershipassetsmustbecreditedandchargedtothe
partners'accounts...Apartnershallcontributetothepartnershipanamountequaltoanyexcessofthechargesover
credits.UPA807(b).
i)
Profits/Losses Eachpartnergetsanequalshareofprofitsunlessthepartnershipagreementspecifiesotherwise.Lossesare
distributedinproportiontothepartner'sshareofprofits.NOTE: thedefaultruleisnot thatlossesaredividedequally theyare
dividedthewayprofitsaredivided.See UPA401(b).
b.
MinorityRule Somecourtswillfindthatsweatequitypartnerswillnotbearallthelossesofthepartnership.For
example,inKovacik,asweatequitypartnerwasleftpayingmoneywhilehispartnerwhoinvestedonlycapital,lostonly
thatcapitalcontribution.Thepartnerarguedthatthiswasunfairbecausehisworkwasworthsomething.Thecourtupheld
thesweatequitypartnersargument.
i)
SweatEquity Partnerwhocontributessweatequity isnotentitledtocompensationforsaidworkunlessthepartnership
agreementsaysotherwise.
c.
CapitalAccounts iii.
OrdinaryDecisions Adifferencesregardingtheordinarycourseofapartnershiparedecidedbyamajorityofthe
partners.
i)
ExtraordinaryDecisions Actsoutsidetheordinarycourseofthepartnership,suchasanamendment tothepartnership
agreement,maybedoneonlywiththeconsentofall thepartners.
ii)
General(UPA401) Eachpartnerhasequalrights inthemanagementofthepartnership. a.
FailuretoAgree(Covalt) Inatwopartnerpartnership,bothpartnershaveanequalsayindecisions.Thus,changescannotbe
forcedupononepartnerbyanother.Apartner'sfailuretoactupontheotherpartner'srequestdoesnotconstituteabreachof
fiduciaryduty.Thepossibleremedywhenpartiescannotagreeisdissolution.
b.
ManagementofthePartnership i.
Partnerships:FiduciaryDuties C.

GeneralStandard,UPA404 Theonly fiduciarydutiesapartnerowestothepartnershipantheotherpartnersarethei)dutyof
loyalty andii)thedutyofcare.
a.
GeneralStandard,CommonLaw Nothonestyalone,butthepunctilioofhonorthemostsensitive,isthestandardofbehavior.
Thisisaveryhighstandard>higherthanUPA.
b.
GeneralStandards ii.
AppropriationofaPartnershipOpportunity Partnercannotexcludetheotherfromanychancetoenjoytheopportunity
forbenefitthathadcometohimbyvirtueofhisagency.Meninhard.
i)
SelfDealing Afiduciarymaynotengageinselfdealing(placehisinterestsabovethosewhomheowesadutyto).
However,evenwhenapartnerengagesinselfdealing,itdoesnotdeprivehimoftherighttobepaidforhisvested
partnershipinterest.Courtshavediscretionforassigningcompensationduringdisloyaltyperiod.Vigneau.
ii)
DutyofLoyaltyUnderCommonLaw ApunctilioofhonormostsensitiveMeinhard. a.
Toaccounttothepartnershipandholdastrustee foritanyproperty,profit,orbenefitderivedbythepartnerinthe
conductandwindingupofthepartnershipbusinessorderivedfromausebythepartnerofpartnershipproperty,
includingtheappropriationofapartnershipopportunity;
i)
Torefrainfromdealingwiththepartnershipintheconductorwindingupofthepartnershipbusinessasoronbehalfofa
partyhavingan interestadverse tothepartnership;and
ii)
Torefrainfromcompeting withthepartnershipintheconductofthepartnershipbusinessbeforethedissolutionofthe
partnership.
iii)
DutyofLoyaltyUnderUPA404(b) Apartner'sdutyofloyaltytothepartnershipandotherpartnersislimitedtothefollowing: b.
Activities Thepartnershipagreementmayidentifyspecifictypesorcategoriesofactivitiesthatdonotviolatethedutyof
loyalty,ifnotmanifestlyunreasonable;or
i)
Agreement Allofthepartnersoranumberorpercentagespecifiedinthepartnershipagreement mayauthorize or
ratify,afterfulldisclosure ofallmaterialfacts,aspecificactortransactionthatotherwisewouldviolatethedutyofloyalty.
ii)
WaivingDutyofLoyalty(UPA103(b)(3)) Thepartnershipagreementmaynoteliminatethedutyofloyaltyunder404(b) or
603(b)(3),but:
c.
Withoutdemand,anyinformation concerningthepartnership'sbusinessandaffairsreasonablyrequiredfortheproper
exerciseofthepartner'srightsanddutiesunderthepartnershipagreementorthisact;and
i)
Ondemand,anyotherinformation concerningthepartnership'sbusinessandaffairsexceptifthedemandis
unreasonableorotherwiseimproper.
ii)
DutytoDisclose(UPA403(c)) Eachpartnerandthepartnershipshall furnishtoapartner: d.
DutyofLoyalty iii.
NegligentManagement Poor(negligent)managementdoesnotcreateanyrightofactionagainstthatpartnerbyother
membersofthepartnership.SeeFerguson (Weholdehasamatteroflawthatnegligenceinthemanagementoftheaffairs
ofageneralpartnershipdoesnotcreateanyrightofactionagainstthatpartnerbyothermembersofthepartnership).
i)
DutyofCareUnderUPA404(c) Apartnersdutyofcaretothepartnershipandtheotherpartnersintheconductandwinding
upofthepartnershipbusinessislimitedtorefrainingfromengagingingrosslynegligentorrecklessconduct,intentional
misconduct,oraknowingviolationoflaw.
a.
DutyofCare iv.
Dissolution Somedissociationscausedissolution. i)
Buyout Otherdissociationstriggertheleavingpartner'srighttobepaidbybuyout. ii)
Dissociation ApartnercancausedissociationofthepartnershipunderUPA601.Twothingscanhappenafterapartnercauses
dissociation:
a.
Dissolution Triggerswindingup(ortheprocessofliquidation). b.
GeneralFramework i.
DissociationGenerally Dissolutionofanatwillpartnershipbyapartner'sdissociationrequiresthatthepartnershipbewound
up(UPA801).Inotherpartnershipformsthedissociatingpartner'sinterestmaybeboughtoutbytheremainingpartners(UPA
701).
a.
ExpirationofTerm i)
AtWillPartnershipWithdrawal ii)
ExpulsionBonaFideUnderAgreement iii)
DeathorIncapacitation Individualpartnerdiesorbecomesincapacitated. iv)
Bankruptcy Thepartnerbecomesbankrupt. v)
JudicialOrder vi)
EventsCausingNonWrongfulDissolution(noDisassociationunderOldUPA)(OldUPA31) Withoutviolationofthe
agreement,by:
b.
ExpressWill Thepartnership'shavingnoticeofthepartner'sexpresswilltowithdrawasapartner. i)
AgreedEvent Aneventagreedascausingthedissociationinthepartnershipagreement. ii)
ExpulsionbyAgreement Thepartner'sexpulsionpursuanttothepartnershipagreement. iii)
Itisunlawful tocarryonthebusinesswiththepartner; a)
Therehasbeenatransferof(substantially)allofthatpartner'stransferableinterestinthepartnership; b)
Within90daysafterthepartnershipnotifiesacorporatepartnerthatitwillbeexpelledbecauseithasfileda
certificateofdissolution,itscharterhasbeenrevoked,oritsrighttoconductbusinesshasbeensuspendedbythe
jx,thereisnorevocationofthecertificateofdissolution;or
c)
Apartnershiphasbeendissolvedanditsbusinessisbeingwoundup. d)
ExpulsionbyVote Partner'sexpulsionbytheunanimousvoteoftheotherpartners if: iv)
ExpulsionbyJudicialOrder Ontheapplicationbythepartnershiporanotherpartner,thepartner'sexpulsionbyjudicial
determinationbecause:1)partnerengagedinwrongfulconduct,or2)thepartnerwillfullyorpersistentlycommitteda
materialbreachofthepartnershipagreement.
v)
Bankruptcy Thepartnerbecomesbankrupt. vi)
Death death vii)
Others referringtopartnerswhoarenotindividuals. viii)
EventsCausingDissociation(UPA601) Isjustwhetherdissociationexistsnot whether,itiswrongful! c.
Dissociation ii.
Partnerships:Dissolution&Disassociation D.

EventsCausingWrongfulDissociation(UPA602(b)) Disassociationiswrongfulonly1)ifitisinbreachofan expressprovision
ofthepartnershipagreementor2)thepartnershipisforadefinitetermorparticularundertaking,andthepartnerwithdraws,is
expelled,orbecomesbankruptbeforedone.
d.
DissociationPartner'sRight(UPA602(a)) Apartnerhasthepowertodissociateatanytime,rightfullyorwrongfully,by
expresswill.
e.
Dissolutionandwindingupofthepartnership. i)
Ifthereisnodissolution,thedisassociatedpartnermaybeboughtout. ii)
ConsequencesofDissociation(UPA603(a)) Disassociationdoesnotalwaysresultindissolution.Therearetwopossible
consequencesofdisassociation(see801 forwhichresult):
f.
WindingUp(UPA801) Apartnershipisdissolved(dissolution),anditsbusinessmustbe woundup,onlyupontheoccurrence
ofany ofthefollowing:1)dissolutionofanatwillpartnership;2)eventprovidedinthepartnershipagreement;3)judicial
determination todissolvebecauseapartner'sconductmakesitnotreasonablypracticabletocarryonthebusiness.
a.
OrderofDistribution(OldUPA40(b)) Theliabilitiesofthepartnershipshallrankintheorderofpaymentasfollows:1)those
owingto creditors andotherthanpartners;2)thoseowingto partners other thanforcapitalandprofits;3)thoseowingto
partners inrespectofcapital;4)thoseowingtopartners inrespectof profits.
b.
SettlementofAccounts(UPA807) Orderisasfollows:1)creditors,includingtotheextentpermittedbylawpartnerswhoare
creditors;2)anysurplusmustbeappliedtopayincash theshareowedtoeachpartner;3)apartnershallcontributetothe
partnershipanamountequaltoanyexcessofthechargesoverthecreditsinthepartner'saccount.
c.
CapitalAccounts(UPA401(a)(1)) Eachpartnerisdeemedtohaveanaccountthatiscreditedwithanamountequalto
themoneyplusthevalueofanyotherproperty...thepartnercontributestothepartnershipandthepartner'sshareofthe
partnershipprofits.
i)
MinorityException(Kovacik) Whereonepartnercontributesthemoneycapitalasagainsttheother'sskilland
labor,neitherpartyisliabletotheotherforcontributionforanylosssustained.
a)
ProfitsandLosses(UPA401(b)) Eachpartnerisentitledtoanequalshareofthepartnershipprofitsandchargeablewith
ashareofthepartnershiplossesinproportion tothepartner'sshareoftheprofits.
ii)
CapitalContributions d.
OldUPA38(2) Eachpartnerwhohasnotcauseddissolutionwrongfully shallhave:1)theright,asagainsteachpartner
whohascausedthedissolutionwrongfully,todamages forbreachoftheagreement;and 2)thepartnerswhohavenot
causedthedissolutionwrongfully,maycontinuethebusinessinthesamename,duringtheagreedtermforthe
partnership.
i)
Damages(602(c)) Apartnerwhowrongfully dissociatesisliabletothepartnershipandtotheotherpartnersfor
damagescausedbythedissociation.Theliabilityisinadditiontoanyotherobligationofthepartnertothe
partnershiportotheotherpartners.
a)
UPA701(a)(b) Ifapartner'sdissociationdoesnotresultinwindingupofthepartnershipunder801(e.g.,itisa
wrongfuldissociation),thenthepartnershipmustbuyout thedissociatedpartner'sinterestatapriceequaltothegreater
oftheliquidationvalueorthevaluebasedonasaleoftheentirebusinessasagoingconcernwithoutthedissociated
partner.
ii)
WindingUp:WrongfulDissolver e.
Dissolution iii.
DutyofLoyalty(UPA603(b)(1)) Thedutyofloyaltyunder404(b)(1)terminatesupondissolution. i)
DutyofCare(UPA603(b)(2)) Thedutyofcareunder404(c)continuesonlywithregardtomattersarisingbefore
dissolution.
ii)
FiduciaryDutyUponDissolution a.
DissolutionofatWillPartnership Althoughapartnershipatwillmaybedissolvedbytheexpresswillofanypartner,thispower
mustbeexercisedingoodfaith (SeePage Partnercannotusehisrighttodissolvetoexcludehiscopartnersfromabusiness
opportunitythatrightfullybelongstothepartnership).
b.
RemovingClients Theexitingpartnermustbecarefulnottounfairlyremoveclientsfromtheexistingpartnership(See
Meehan Writingletterswithcertainlanguagegavetheexitingpartnersanunfairadvantage).
i)
BurdenofProof Ifthepartnerremovesclientsunfairlytheburdenofproofisonhimtoshowthatbutforhisunfair
actions,theclientstillwouldhavefollowedhimanyway.
ii)
PreparingtoDissociate(Meehan) Aslongasapartnerremainsinthepartnership,hisprioritymustbethecurrentpartnership
apunctilioofhonormostsensitivestillremains.
c.
FiduciaryDutyandPartnershipDissolution iv.
GeneralRule(UPA301(1)) Eachpartnerisanagentforthepartnershipforthepurposesofitsbusiness. a.
InherentAuthority Underagencylaw,apartnercanbejointlyandseverallyliablefortheotherpartner'sbreachofcontract.A
managingpartnerhasinherentauthoritytodowhatevercomesnaturallyintheordinarycourseofbusiness.See P.A.Properties.
b.
ActualAuthority Theplainlanguageofthepartnershipagreementgovernswhetherapartneractedasanagentunderactual
authority.Haymond.Whenanagentexceedshisauthorityheisliabletotheotherpartners.
c.
GeneralRule Apparentauthoritytodoanactiscreatedastoathirdpersonbywrittenorspokenwordsoranyother
conductoftheprincipalwhich,reasonablyinterpreted,causesthethirdpersontobelievethattheprincipalconsentsto
havetheactdoneonhisbehalfbythepersonpurportingtoactforhim.
i)
ProvingApparentAuthority Apparentauthorityisaquestionoffact Factfindermustdeterminewhatthethirdparty
reasonablybelieved.
ii)
ApparentAuthority(UPA301(1)) Eachpartnerisanagentforthepartnershipforthepurposeofitsbusiness.Notethat
businessisanelementhere.Thus,itmustbedeterminedwhetherthebusinessengagedin,isthetypethatthepartnershipcarries
onwith.
d.
DealingwithThirdParties i.
PartnersasAgents E.

II.
NumberofDirectors Thenumberofdirectorsisfixedbythebylaws unlessthearticles fixthenumber.DEL141(b). i)
Directors Thebusinessandaffairsofacorporationaremanagedbyorunderthedirectionofitsboardofdirectors,exceptas
otherwiseprovidedinthearticlesofincorporation.Directorsappointofficersofthecorporation,setdividendpolicy,and
authorizechangestothestructureofthecorporation.
a.
Officers Runthedaytodayactivitiessubjecttooversightbythedirectors. b.
Shareholders Limitedtovotingfordirectors,ormajorfundamentalchanges.Theydonothavedirectcontroloverthe
managementandarenotliablebeyondtheirinvestments.
c.
CorporateControl i.
AnnualMeetings(DEL211(a)(b)) Annualmeetingsareatplaceandtimeprovidedbythebylaws.Thereisnopenaltyfornot
havinganannualmeetinganddecisionsmadewithoutameetingwillbeupheld.However,ashareholdercanstillfilesuittoforce
thecompanytohaveameeting.DEL211(b) permitselectionofdirectorsbyconsentunlessthearticles prohibitelectionby
consent.
a.
SpecialMeetings(DEL211(d)) Specialmeetingsmaybecalledbytheboardorasprovidedbythearticlesorbylaws. b.
WrittenConsent(DEL228) Shareholdersarepermittedtotakeactionbywrittenconsentwithoutameeting,unlessprohibited
bythe articles.
c.
ShareholderMeetings ii.
FormationandFormoftheCorporation A.
StraightVoting PerDEL212,unlessotherwiseprovidedinthearticles,eachshareisentitledtoonevote. a.
CumulativeVoting Thearticles mayprovidethatdirectorsbeelectedbycumulativevoting.DEL214. b.
ByLaws(DEL242(b)) TheboardofDirectorsmustapproveanamendmenttothe articles (orcertificateof
incorporation),andthenitmustbesubmittedtotheshareholdersforavoteatanannualorspecialmeeting.
i)
NumberofVotesforApproval Thearticles orbylaws can,withshareholderapproval,increasethenumberof
votesrequiredbyshareholdertoapproveachangetothearticles.
a)
Articles(DEL109(a)) Shareholdersmayamendthe bylaws unlessthearticles alsopermitthedirectorstoamendthe
bylaws withoutshareholderapproval.
ii)
AmendingtheArticlesandByLaws c.
DefaultRules i.
SourceofVoting(DEL151(a)) articles maydividesharesintoclassesthatmustvotetoapproveanaction. a.
MethodsofClassification PerDEL141(d),sharesofoneclassmayelectaspecifiednumberofdirectorsthatsharesofanother
classcannotvotefor.Analternativeapproachmaybethatdifferentclassesofstockmayhavesignificantlydifferentvoting rights
toelectdirectors.
b.
ClassVoting ii.
Definition Cumulativevotingentitlesashareholdertocumulateoraggregatehisvotesinfavoroffewercandidatesthanthere
areslotsavailable.Thedevicewascreatedtogiveminorityshareholdersincreasedrepresentation.
a.
S Totalnumberofsharesvoting
D Totalnumberofdirectorselected
n (orx) Totalnumberofdirectorsdesiredtobeelectedbyvoter
Formula
n-S
+1
= Numbcr o Sharex nccJcJ to clcct n Jircctors sougbt b.
StaggeredTerms Thearticlesorbylaws(byshareholdervote)candividetheboardinto2or3classesofdirectors,withonly
oneclassbeingelectedeachyear.Theboardshallbedividedasequallyaspossible,andthedirectorsserveatwo orthreeyear
term.
c.
CumulativeVoting iii.
ClassifiedBoard Removalonly forcause unlessthearticles permitremovalwithoutcause. i)
CumulativeVoting Removalwithoutcause permittedunlessvotescastagainstremovalwouldbeenoughtoelectunder
formula;removalforcause,butmajorityvoteandnocumulativevotingformulaexception.
ii)
ForCauseLimitations Somestatespermitacorporationtolimitremovaltoforcauseonly.Delawareis not oneofthose
states.
iii)
GeneralRule(DEL141(k)) Majorityvotebyshareholdersrequiredtoremoveadirectorsubjecttothefollowingexceptions. a.
DirectorRemoval iv.
VotingRights B.
Corporations
Definition Thebusinessjudgmentruleshieldsdirectorsfrompersonalliabilityandinsulatesboarddecisions fromjudicial
review.Ifthedirectorsareentitledtotheprotectionfromtherule,thenthecourtsshouldnotinterferewithorsecondguesstheir
decisions.
a.
Pleading Businessdecisionsunderthebusinessjudgmentruleareprotectedbyarebuttablepresumption.Therefore,amere
baddecisionisnotenoughtoestablishacauseofaction.
b.
Cause Evenifthedecisionisnotprotectedbythebusinessjudgmentrule,theplaintiffmuststillprovethatthedirector'sactions
proximatelycausedthelossasserted.
c.
General i.
EncouragesRiskTaking Directorsareexpectedtotakeriskstomaximizethepotentialforsuccess.W/othebusinessjudgment
rule,directorsmightexercisetoomuchcautionandparalyzetheorganization.
a.
InstitutionalCompetence Judgesarenotbusinessexperts.Moreover,shareholdersmayhaveincentivesthatcouldbeatodds
withtheinterestsofthecorporationandothershareholders.
b.
EconomicEfficiency Allowsdirectorstohavethefreedomtoactwithoutthefearoflitigation.Itisaneconomicallyefficientrule
becausethegainstobemadebyallowingdirectorstotakerisksaregreaterthanthegainstobemadebyallowinglitigation.
c.
Rationale ii.
LackofGoodFaith Plaintiffmustprovefraud,illegality,orconflictofinterest. a.
Waste Lackofarationalbusinesspurpose. b.
GrossNegligence Thefailuretobecomeinformedindecisionmaking. c.
Inattention Thefailuretooverseethecorporation'sactivities d.
OvercomingtheBusinessJudgmentPresumption iii.
TheBusinessJudgmentRule A.
CorporateFiduciaryDuties III.

GeneralRule Thedutyofloyaltyrequiresthatadirector(orofficer)puttheinterestsofthecorporationbeforeselfinterest. a.
SelfServingDirector Directorpersonallytakesanopportunitythatthecorporationlaterassertsrightfullybelongedtoit. i)
ConflictingInterestTransactions Transactionsbetweenthecorporationandthedirector. ii)
TypicalIssues b.
General i.
Inconnectionwiththeperformanceoffunctions asadirector,orundercircumstancesthatshouldreasonablylead
thedirectortobelievethatthepersonofferingtheopportunityexpectsittobeofferedtothecorporation;OR
a)
Throughtheuseofcorporateinformationorproperty,iftheresultingopportunityisonethatthedirectorshould
reasonablybeexpectedtobelievewouldbeofinteresttothecorporation;OR
b)
Anyopportunitytoengageinabusinessactivityofwhichadirectorbecomesaware,either: i)
Anyopportunitytoengageinabusinessactivityofwhicha senorexecutive becomesawareandknowsiscloselyrelated
toabusinessinwhichthecorporationisengagedorexpectstoengage.
ii)
Definition:CorporateOpportunity(ALI) a.
Thedirectorfirstoffersthecorporateopportunitytothecorporationandmakesadisclosureconcerningtheconflictof
interestandthecorporateopportunity;
i)
Thecorporateopportunityisrejectedbythecorporation; and ii)
Therejectionoftheopportunityisfair tothecorporation; a)
Theopportunityisrejectedinadvance,followingsuchdisclosure,bydisinteresteddirectors inamannerthat
satisfiesthestandardsofthebusinessjudgmentrule;or
b)
TheRejectionisauthorized inadvanceorratified,followingsuchdisclosure,bydisinterestedshareholders,andthe
rejectionisnotequivalenttoawasteofcorporateassets.
c)
Either: iii)
Note: Unlessotherwisespecifieddirectoralsoreferstoasenorexecutive. iv)
GeneralRule(ALIApproach) Adirectororseniorexecutivemaynottakeadvantageofacorporateopportunityunless: b.
Rejectionmustbefair tothecorporation; i)
Rejectionmustbemadeinadvanceby disinteresteddirectors inamannerthatsatisfiesthebusinessjudgmentrule; OR ii)
Rejectionmustbemadeinadvanceorratifiedbydisinterestedshareholders solongasitdoesnotamounttocorporate
waste.
iii)
CorporationsRejectionoftheCorporateOpportunity(ALI) Rejectionmustsatisfyoneofthethreecriteria: c.
Thedirectororanassociateofthedirector,isaparty tothetransaction; a)
Thedirectorhasabusiness,financial,orfamilial relationshipwithapartytothetransactionorconduct,andthat
relationshipwouldreasonablybeexpectedtoaffectthedirector'sjudgment withrespecttothetransactionina
manneradversetothecorporation.
b)
Thedirector,anassociateofthedirector,orapersonwithwhomthedirectorhasabusiness,financial,orfamilial
relationship,hasamaterialpecuniaryinterest inthetransactionorconductandthatinterestand(ifpresent)that
relationshipwouldreasonablybeexpectedtoaffectthedirector'sjudgment inamanneradversetothe
corporation;OR
c)
Thedirectorissubjecttoacontrollinginfluence byapartytothetransactionorconductorapersonwhohasa
materialpecuniaryinterest inthetransactionorconduct,andthatcontrollinginfluencecouldreasonablybe
expectedtoaffectthedirector'sjudgment withrespecttothetransactionorconductinamanneradversetothe
corporation.
d)
InterestedDirector Adirectorisinterestedinatransactionifeither: i)
DisinterestedDirectors Theremustbeanaffirmativevote ofamajority,butnotlessthan two,ofthedirectorsontheboardor
onanappropriatecommitteewhoarenotinterested inthetransactionorconductinquestion.
d.
InterestedShareholder Ashareholderisinterestedinatransactionorconductifeithertheshareholderor,totheshareholder's
knowledge,anassociateoftheshareholderisapartytothetransactionorconduct,ortheshareholderisalsoaninterested
directorwithrespecttothesametransaction.
e.
NoConsideration Noconsideration isreceivedinexchangeand forwhichthereisnorationalbusinesspurpose;OR i)
Consideration Ifconsiderationisreceivedinexchange,theconsiderationthecorporationreceivesmustbeso
inadequate invaluethatnopersonofordinarysoundbusinessjudgment woulddeemitworthwhatthecorporationpaid.
ii)
DoctrineofWaste(ALI) Atransactionconstituteswasteofcorporateassetsifitinvolvesanexpenditureofcorporatefundsora
dispositionofcorporateassetsforwhich:
f.
CorporateOpportunityDoctrine:ALIApproach ii.
Thecorporationisfinanciallyabletoexploittheopportunity; i)
Theopportunityiswithinthecorporation'slineofbusiness; ii)
Thecorporationhasaninterest orexpectancy intheopportunity;and iii)
Bytakingtheopportunityforhisown,thecorporatefiduciarywilltherebybeplacedinapositionhostile tohisdutiesto
thecorporation.
iv)
DirectorMayNOTTake(Broz) Adirectormaynottake abusinessopportunityforhisownif: a.
Theopportunityispresentedtothedirectororofficerinhisindividual (notcorporate)capacity; i)
Theopportunityisnotessential tothecorporation; ii)
Thecorporationholdsnointerestorexpectancyintheopportunity;and iii)
Thedirectororofficerhasnotwrongfullyemployed theresourcesofthecorporationinpursuingorexploitingthe
opportunity.
iv)
DirectorMayTake(Broz) Adirectormaytakeacorporateopportunityif: b.
CorporateOpportunityDoctrine:DEApproach iii.
TheDutyofLoyalty B.

Thematerialfacts astothedirector'sorofficer'srelationship orinterest andastothecontractortransactionare
disclosedorareknown totheboardofdirectorsorthecommittee,andtheboardorcommitteeingoodfaith authorizes
thecontractortransactionbytheaffirmativevotesofamajorityofthedisinteresteddirectors,eventhoughthe
disinteresteddirectors belessthanaquorum;OR
i)
Thematerialfacts astothedirector'sorofficer'srelationshiporinterest andastothecontractortransactionare
disclosedorareknown totheshareholdersentitledtovotethereon,andthecontractortransactionisspecifically
approvedingoodfaith byvoteoftheshareholders;OR
ii)
Thecontractortransactionisfair astothecorporation asofthetimeitisauthorized,approvedorratified,bytheboardof
directors,acommitteeortheshareholders.
iii)
DelawareTest(DEL144) Nocontractortransactionbetweenacorporationand1ormoreofitsdirectorsorofficers,or
betweenacorporationandanyothercorporation,partnership,association,orotherorganizationinwhich1ormoreofits
directorsorofficers,aredirectorsorofficers,orhaveafinancialinterest,shallbevoidorvoidablesolelyforthisreasonif:
a.
ConflictofInterestplus SelfDealing Aparentdoesindeedoweafiduciaryduty toitssubsidiarywhenthereareparent
subsidiarydealings.However,thisalone doesnotevoketheintrinsicfairnessstandard.Thisstandardwillbeappliedonlywhen
thefiduciaryduty isaccompaniedbyselfdealing thesituationwhenaparentisonbothsidesofatransaction withits
subsidiary.Selfdealingoccurswhentheparentcausesthesubsidiarytoactinsuchawaythattheparentreceivessomething from
thesubsidiarytotheexclusionof,anddetrimentto,theminoritystockholdersofthesubsidiary.
b.
IntrinsicFairness(SinclairOil) Theparentsconductmustmeettheintrinsicfairnesstest.Theparentissubjectedtoahigh
burdenofprooftosatisfytherequirementthatitstransactionswiththesubsidiarywereobjectivelyfair.
i)
SelfDealingShown Subsidiarymustprovideevidenceofselfdealing.Ifselfdealingisshown,theburdenisontheparent
toproveintrinsicfairnessofthetransaction.
ii)
SelfDealingCannotbeShown Thebusinessjudgmentruleappliesandparentmustshow1)nowaste,2)noimproper
motives,and3)proportionalshare.
iii)
SelfDealingTest(ParentSubsidiaryContext) Whenparenthasreceived1)benefittoexclusionand2)attheexpenseofthe
subsidiary.
c.
InterestedDirector(ALITest) Mustbe1)aparty tothetransaction;2)haveabusiness,financial,orfamilialrelationship toa
partythatwouldreasonablybeexpectedtoaffectthedirector'sjudgment inamanneradversetothecorporation;3)Material
pecuniaryinterestinthetransactionthataffectsjudgment;and4)besubjecttoacontrollinginfluence byapartytothe
transactionorpersonwithapecuniaryinterestthataffectsjudgment.
d.
DisinterestedDirectorApproval Disinteresteddirectorapprovalafterfulldisclosure. i)
Shareholders Shareholderapprovalafterfulldisclosure;OR ii)
IntrinsicFairness Thetransactionwasfair tothecorporation(clearandconvincingevidence). iii)
BurdenofProof Theburdenofproofisontheinteresteddirector(S)todemonstrate: e.
ConflictingInterestTransactions iv.
GrossNegligence Thedutyofcaretogetherwiththebusinessjudgmentrulemakesthestandardveryhigh.Somecourts
characterizethestandardasgrossnegligenceorrecklessness.
a.
General adirectormusthandlethecorporation'saffairsin(i)goodfaith,(ii)withthecareofanordinarilyprudentperson inalike
positionwouldundersimilarcircumstances,(iii)inamannerhereasonablybelieves tobeinthebestinterests ofthecorporation.
i.
AffirmativeDefense evenifdirectorbreachedhisfiduciaryduty,hecanstillarguethatthetransactionwasfair.Ifthe
transactionwasfair,thereisnopersonalliability.
i)
Acquisition(VanGorkom) Inthecaseofanacquisitionthecourtlookedtofourissuestofindbreach:1)failuretoobtain
financialadvice(inside/outside);2)failuretoknowthesaleprocess,3)hastyprocess;and4)failuretoinform.UndertheVan
Gorkom analysisthepresenceofallfourwouldfindabreachofthedutyofcare.
a.
DutyofLoyalty Thedutyofloyaltytothecorporationoritsstockholderscannotbeexculpated. i)
GoodFaith Directorcannotbeexculpatedfromactsoromissionsnotingoodfaith orwhichinvolveintentional
misconduct oraknowingviolationofthelaw.
ii)
ConflictingInterests Directorcannotbeexculpatedfromanytransactionfromwhichthedirectorderivedanimproper
personalbenefit.
iii)
Exculpation(DEL102(b)(7)) InresponsetoVanGorkom thelegislaturecreatedaprovisioneliminatingorlimitingthepersonal
liabilityofadirectorfor monetary damages.Exculpationallowscompaniestoelecttoshielddirectors(andofficers)fromliability
forviolationsoftheirfiduciarydutiesexcept forthefollowingcircumstances:
b.
DecisionBasedBreach ii.
Caremark Doctrine Theboardsdutyofcaredoesnotrequireittoinstallasystemofespionage toferretout wrongdoing.
However,thedutyofcaredoesrequirethatreasonablecontrolsystems beputinplacetodetectwrongdoing,evenwherethe
boardhasnopriorreason tosuspectthatwrongdoingisoccurring.
a.
KnowledgeRequirement Impositionofliabilityabovealsorequiresashowingthatthedirectorsknew thattheywerenot
dischargingtheirfiduciaryobligations.
i)
GrossNegligenceNotSufficient ObviousgrossnegligenceisnotenoughinDE(assumingexculpationclause).Unless
directorsareconscious thattheywerenotdischargingtheirfiduciaryduty,noamountofinattentionwillbeenough.
ii)
ExtremelyHighStandard Aclaimthatdirectorsaresubjecttopersonalliabilityforemployeefailuresispossiblythemost
difficulttheoryincorporatelawuponwhichtowinjudgment(Stone).
iii)
PostStone Test Directorswillhaveliabilityforpooroversightif1)thedirectorsutterlyfailedtoimplement anyreportingor
informationsystemOR 2)havingimplementedsuchasystem,consciouslyfailed tomonitor oroverseeitsoperations,thus
disablingthemselvesfrombeinginformedofrisksorproblemsrequiringtheirattention.
b.
OperationalBasedBreach iii.
Significance Exculpationmeansthatlitigationhasshiftedfromdutyofcareclaimstodutyofgoodfaith. a.
GeneralRule Theobligationofgoodfaithisviolatedintwoways.Disney.First,itsaviolationofgoodfaithtointentionally
harmthecorporation.Second,itsaviolationoftheobligationofgoodfaithtoconsciouslydisregardonesdutiestothe
corporation.Thisrequiresaknowingandcompletefailureofthedirectorstoundertaketheirresponsibilities,notjustabador
evengrosslynegligentdecision.
b.
BadFaith Grossnegligencewithoutmorecannotconstitutebadfaithofthesortthatdeprivesthedirectorsoftheprotectionof
theDELexculpatoryclause.Disney.
c.
DutyofGoodFaith iv.
TheDutyofCare C.

GoodFaith(DEL145(d)) Section 145(d) providesaproceduretodetermineifthedirectoractedingoodfaith.However,
companiesdonothavetofollow145(d) indetermininggoodfaith.Infact,ifacompanyextendsindemnificationunder145(f)
thereisarebuttablepresumption ofgoodfaith.
a.
ExpansiveIndemnification(DEL145(f)) b.
General i.
Success Nocleardefinition,however,inDelaware,asettlementdoesnotamounttosuccess(seeOwensCorning). i)
Definition Directorsuedandsuccessful onthemeritsisautomatically indemnifiedforactualandreasonableexpenses,
includingattorneys'fees.
a.
MandatoryPayment(DEL145(c)) Whendirectororofficeris1)successfulonthemerits,2)indefenseofanaction,suit,or
proceeding,thecorporationshall indemnifyhimagainstactualandreasonable expenses,includingattorneys'fees.
b.
MandatoryIndemnification ii.
Definition Corporationmustelecttoindemnifyundertheseprovisions.Iftheydonot,noindemnification.Practicallyspeaking
almostallcorporationselecttoindemnify.
a.
Direct(3rdParty)Suits(DEL145(a)) SeeStatutorySupplement b.
DerivativeSuits(DEL145(b)) SeeStatutorySupplement c.
PermissiveIndemnification iii.
DirectorIndemnification&Insurance D.
NumberofShareholders Smallnumberofshareholders.InDelaware<30. i)
LimitedLiquidity Thesmallsizeofaclosecorporationcreatesvariousbarrierstoliquidity. ii)
NotPublicallyTraded Sharesinaclosecorporationarenotpublicallytraded. iii)
Characteristics a.
Election(DEL341(a)) Delawarecorporatelawsapplytoallcorporationsunlessthecorporationelectstobecomeaclose
corporationinthecertificateofincorporation.
i)
StatutoryCloseCorporation(DEL141(a)) Thebusinessandaffairsofeverycorporationorganizedunderthischaptershallbe
managedbyorunderthedirectionofa boardofdirectors,exceptasmaybeotherwiseprovidedinthischapterorinits
certificateofincorporation.Ifanysuchprovisionismadeinthecertificateofincorporation,thepowersanddutiesconferredor
imposedupontheboardofdirectorsbythischaptershallbeexercisedorperformedtosuchextentandbysuchpersonasshallbe
providedinthecertificateofincorporation.
b.
Shareholders Lessthan30 i)
RestrictionsonTransfer Stockmusthave1ormoreoftherestrictionsontransferpermittedby202. ii)
PublicOffering Thecorporationshallmakenopublicofferingofstock. iii)
Definition:DELStatutoryCloseCorporation(DEL342(a)) Aclosecorporationisacorporationwhosecertificateof
incorporation containsprovisionsrequiredby102 andalsoprovides:
c.
General i.
DiscretionoftheBoard UnderDEL350,ashareholderagreementamongstockholdersofaclosecorporationisinvalidifit
restrictsofinterfereswiththediscretionorpowersoftheboardofdirectors.
a.
ManagementbyShareholders UnderDEL351,astatutoryclosecorporationmayelectinitscertificateofincorporation tobe
managedbythestockholdersratherthantheboardofdirectors.
b.
StatutesonShareholderAgreements ii.
GeneralPrinciple Thebusinessshallbemanagedbytheboardofdirectors.Thus,agreementsthatsubstantiallyfetter the
discretionoftheboardofdirectorsareunenforceable.
a.
Example: Dodge Companyhadtwoowners.Theybothagreedthatthemajorityownerwouldvotefortheminority
ownerasdirectorandgeneralmanager.Theagreementwasvalidbecausetheagreementwassubjecttotwoexceptions:
1)minorityownercouldbefiredforcause,and2)minorityowner'spaycouldbeadjusted.Itwasalsoimportantthatallof
theshareholdersagreed totheagreement.
i)
ModernRule(NewYork) Anagreementisvalidif1)itdoesnotharm creditors,2)itinvolvesonlyan"innocuousvariance"from
therulethatacorporation'sbusinessshouldbemanagedbytheboardand3)atleastthepersonattackingtheagreementhad
previouslyconsentedtoit(SeeMcQuade;Dodge;Zion).
b.
AgreementsRestrictingBoard'sDiscretion iii.
RestrictingtheBoard avotingagreementmaybeinvalidifitrestrictstheauthorityoftheboardofdirectorsthus
violatingtheprinciplethatthebusinessisrunbytheboardofdirectors.
i)
SellingaVote Onecannotselltheirrighttovote,onlytoagreetovotetogether.Thereforetherearesomeareaswherea
votingagreementmightbeinvalid.
ii)
GeneralRule Votingagreementsarevalid.Ifshareholdersareunabletoreachaconsensus,theneachshareholdermustvotehis
orhersharesaccordingtothewillofthemajority(Ramos).
a.
DelawareLaw(DEL218(c)) Twoormoreshareholdersmayagreeinwritingtoexercisetheirvotingrightsasagreeduponin
theagreement.
b.
ShareholderVotingAgreements iv.
BurdenofProof Theburdenofproofisontheplaintifftoprovethatthebusinessjudgmentruleshouldnotapply i)
GeneralRule(Zidell) Decisionsnottogivedividendswillonlybeinvalidifthereis1)badfaith,2)fraud,3)breachoffiduciary
duty,or4)abuseofdiscretion.
a.
TraditionalRoleofJudicialDeferencetoMajority'sDiscretion v.
Donahue Rule Inaclosecorporationthemajorityowesadutytotheminoritythatisthesameasiftherewasapartnership a
punctilioofanhonormostsensitive(Donahue quotingMeninhard).
a.
Test 1)themajoritymustshowalegitimatebusinesspurpose,2)minoritycanrebutbyshowingalessharmful
approach,3)thecourtthenbalancesthelegitimatebusinesspurposeagainstthelessharmfulalternative.
i)
Wilkes Rule TheDonahue ruleis softened byestablishingathreeparttest: b.
EqualTreatment Entirefairnessdoesnotnecessarilyrequireequaltreatment. i)
BurdenofProof Notethattheburdenofproofisonthedefendant(SeeNixon;SinclairOil). ii)
EntireFairnessTest(Nixon) Whendefendantsareonbothsidesofthetransaction(SelfDealing)theyhavetheburdenof
showingtheentirefairnessofthetransaction.Therearetwoaspectstoentirefairness:1)fairprice,2)fairdealing.
c.
PartnershipasanAnalogy vi.
Organization&Control A.
CloseCorporations IV.

Delaware NooppressioninDelawarebecauseNixon preventsspecialtreatmentforcorporationswhofailtoaffirmatively
becomeclosecorporations.
i)
GeneralRule Mannystateshaveoppressionstatutesthatallowforinvoluntarydissolutionasanequitableremedy. a.
ExAnteRule Conductthatsubstantiallydefeatsthe reasonableexpectations heldbyminorityshareholdersin
committingtheircapitaltotheparticularenterprise(Inre Kemp).
i)
PostExFacto Conductthatisburdensome,harshandwrongful;alackofprobityandfairdealingintheaffairsofa
companytotheprejudiceofsomeofitsmembers;oravisibledeparturefromthestandardsoffairdealing,andaviolation
offairplayonwhicheveryshareholderwhoentrustshismoneytoacompanyisentitledtorely(Gimpel).
ii)
Definition:Oppression Generally,tworulesareapplied: b.
InvoluntaryDissolution(Oppression) i.
General Shareholderscanenterintorepurchaseagreementstogainextraliquidityandgenerallydonothavetobeconcerned
abouttheagreementbeinggroundsforshareholderoppression.
a.
GeneralRule Courtsareinclinedtostrictlyenforcecontractrightsonthegroundsthatclosecorporationparticipantsare
freetonegotiateforprotections(SeeGallagher).
i)
ShareholderDuties Recallthattheshareholderisowedthedutyofloyalty,goodfait,anddutyofcare. a)
EmployeeDuties Dutiesowedtotheemployeearelimitedbecauseoftheatwillemploymentrelationship. b)
TwoIndependentDuties InGallagher thecourtrecognizedthattherearetwoindependentdutiesinthiscontext.Each
dutyshouldbeanalyzedseparately.TheGallagher dissentarguedthatthemajoritydidnotpayenoughattentiontothe
dutyowedtoplaintiffasashareholder.
ii)
Exception:UnexpectedHardship Insomecaseswhentherepurchaseagreementproducesanunexpectedhardship,the
courtwillinferfiduciarydutiesthatcompelthemajoritytojustifyitsactions(SeePedro).
iii)
RepurchaseAgreementsandFiduciaryDuty Issuesarisewhenemployeeownsstockthatiscontingentuponcontinued
employment.Employerthenterminatesemployeeatatimethatallowsemployertorepurchasestockatabetterprice.
b.
ShareholderRepurchaseAgreements ii.
Dissolution&BuyOuts B.
General(Delaware) LLCsarecreaturesofcontract,designedtoaffordthemaximumamountoffreedomofcontract,private
orderingandflexibilitytothepartiesinvolved.Delaware'sLLCActleavestothemembersofanLLCthetaskofarranginga
manager/investorgovernancerelationship;theActgenerallyprovidesdefaultsthatcanbemodifiedbycontract.R&RCapital.
a.
CheckingtheBox AnLLCmayelectto"checkthebox."ThispermitstheLLCtobetreatedlikeapartnershipfortaxpurposes.
Thebenefitofthisisthereisnodoubletaxationlikethereisincorporations(e.g.,taxationatthecorporateanddividendlevels).
b.
Flexibility ThecorporategovernancestructureofanLLCisdictatedbytheLLCagreement.ThecreatorsofanLLCgenerallyhave
agreatamountoffreedominstructuringtheircorporategovernancestructurebecausethecourtsandlegislatureshaveplaced an
emphasisonfreedomofcontract.
c.
Innovations i.
Voting Mattersarisingintheordinarycourseofbusinessaredecidedbyamajorityvote.Mattersarisingoutsidethe
ordinarycourseofbusiness(includingchangestotheLLCagreement)mustbedecidedunanimously.
i)
MemberManaged Morelikeapartnership. a.
ManagerManaged Morelikeacorporationorlimitedpartnership. b.
OrganizationalForms ii.
DefaultRules Unlikecorporatestatutes,LLCstatutescontainveryfewdefaultrules.Mostofthedefaultrulesexisttodealwith
relationshipsbetween thirdparties.
a.
FreedomofContract LLC'saremostlycreaturesofcontractbecausetherearesofewdefaultrules.However,courtscanhave
animpactonthisprinciplebyoptingtointerprettheLLCagreementstictly/liberally(SeeVGS,INC.)
b.
Selling TheliquidityofaunitdependsontheLLCagreement.Somearestructuredmorelikepartnershipsandthushave
lessliquidity.Ontheotherhand,somearemorelikecorporations(someevenpublicallytraded)andthushavemore
liquidity.
i)
Units LLC'sarepartitionedintounitsasopposedtoshares.Themembers/managerscandistributeunitshowtheyseefit.Thus,
ownerstonothavetosplitprofitsequallyliketheyhavetoinpartnerships.
c.
DEPolicy ItisthepolicyoftheDELLCActtogivethemaximumeffecttotheprincipleoffreedomofcontractandtothe
enforceabilityofLLCagreements(DEL181101(b)).Onlywheretheagreementisinconsistentwithmandatorystatutory
provisionswillthemembers'agreementbeinvalidated(ElfAtochem).
i)
OralAgreements LLCagreementcanbeanyagreement,writtenororal,ofthememberormembersastotheaffairsofa
LLCandtheconductofitsbusiness(DEL18101(7)).
ii)
LLCAgreement SetsforthhowtheLLCistooperate.DoesnothavetobesignedbytheLLCitselftobebindingontheLLC.Itis
sufficientifallthememberssigned.SeeElfAtochem.
d.
GeneralStatutoryInformation iii.
Organization&Control A.
DutyofLoyalty Canbealotlikewhatwasseeninthepartnershipcontext(see UPA1997). a.
DutyofCare Generallymorelikecorporationswithanemphasisofthedutyofcare. b.
Limitations Theonlylimittotherighttodisclaimistheimpliedcontractualcovenantofgoodfaithandfairdealing(Bay
Center).
i)
DisclaimingFiduciaryDuties ThepartiestoaLLCagreementhavetheabilitytorestrictoreliminateallfiduciarydutiesandthe
liabilitythereof.
c.
General i.
FrameworkofAnalysis ii.
FiduciaryDuties B.
LimitedLiabilityCompanies V.

ArethereFiduciaryDutiesOwed ThefirststepistoexaminetheLLCagreement toseeifthepartieshavemodified or
exculpated anyorallfiduciaryduties.ThiscansometimesbeamatterofcontractinterpretationbecauseoftenLLCagreements
arepoorlydrafted(seeBayCenter).
a.
USACafes Thoseaffiliatesofageneralpartnerwhoexercisecontroloverthepartnership'sproperty mayfind
themselvesowingfiduciarydutiestoboththepartnershipanditslimitedpartnership(NOTE:applicationof partnership
lawtoLLC).Thescopeofthedutiesowedunderthislineofcasesisunclear.Oneclearduty:dutytonotusecontrolover
thepartnership'spropertytoadvantagethecorporatedirectorattheexpense ofthepartnership.SeeBayCenter.
i)
WhoOwesFiduciaryDutiesandtoWhom Nextdeterminewhooweswhatdutytowhom.ThiscanbecomplicatedbytheLLC
agreementandoftenrequirescontractinterpretation.
b.
WasDutyViolated Analyzefactsbaseduponthedutyowed. c.
Delaware LLCagreementmaynoteliminatetheimpliedcovenantofgoodfaithandfairdealing.R&RCapital. a.
Exculpation iii.
ReasonablyPracticable DEL18802 doesnotspecifywhatacourtmustconsiderinevaluatingthereasonably
practicablestandard,butseveralconvincingfactualcircumstances havepervadedthecaselaw:1)themembers'voteis
deadlocked attheboardlevel;2)theoperatingagreementgivesnomeansofnavigatingaround thedeadlock;and 3)due
tothefinancialconditionofthecompany,thereiseffectively nobusinesstooperate.Thesefactualcircumstancesarenot
individuallydispositive;normusttheyallexist foracourttofinditnolongerreasonablypracticableforabusinessto
continueoperating.FiskVentures.
i)
LegalStandard(Delaware) CourtmayrequirejudicialdissolutionofanLLCwheneveritisnotreasonablypracticable tocarryon
thebusinessinconformitywithaLLCagreement.DEL18802.Section18802hastheobviouspurposeofprovidinganavenueof
reliefwhenalimitedliabilitycompanycannotcontinuetofunctioninaccordancewithitscharteringagreement.FiskVentures.
a.
Waiver WaiveroftherighttopetitionfordissolutionisallowedundertheDELLLCactprovideditdoesnotinterferewiththe
rightsofthirdparties.R&RCapital.
b.
JudicialDissolution i.
FiduciaryDuty Courtsapplyfiduciarydutyofloyaltyprinciplestointhiscontext.Ifthedirector/member'sactionswere
improperlymotivated,thecourtmayvoidthem.
i)
GeneralRule UndercertaincircumstancesthecourtmaydepartfromwhatisclearlyexpressedbytheLLCagreementinorder
tosupportamoreequitableresult.VGSInc.
a.
BalancingEquitablediscretionandRespectforPrivateOrdering ii.
Exit&Liquidity C.
i. SeeHandout
ChoosinganAppropriateCorporateForm A.
ParValue Theminimumamountthecompanycansellthestockfor.Usedtoberequiredbutnowmoststatesallowno
parstock.
i)
ParStock IftheStockhas"parvalue,"statedcapitalisequaltothenumberofsharesoutstandingtimestheparvalueofeach
share.
a.
NoPar Statedcapitalisanarbitraryamountthatdirectorsdecidetoassigntothestatedcapitalaccount. b.
HistoricalCapitalizationRequirementsandTerminology i.
MinimumInitialCapitalizationRequirements(DGCL153,154) Permanentcapitalistermed"Capital."Section154 permitsa
corporation'sdirectorstospecifybyresolutionwhatamountoftheconsiderationpaidforsharesshallconstitutecapital.Theonly
limitonsuchauthorityisthatthecapitalcannotbelessthananamountequaltotheaggregateparvalueofissuedshareshavinga
parvalue.Section153 requiresthatissuedshareswithaparvaluebesoldforatleastparvalue.
a.
QualityandValuationofConsiderationPaidforShares(DGCL152) Traditionalstatutesprohibitedtheissuanceofsharesfor
promissorynotesorfutureservices.TodayDGCL152allowsdirectorstodecidewhatconsiderationissufficientforthepurchase
ofstock.
b.
Surplus Netassetsofthecorporationinexcessofcapital.ORtheexcessofnetassetsovertheparvalueofthe
corporation'sissuedstock.
i)
ImportantObservation ifdistributionsareauthorizedonlyoutofsurplus,thatmeansonecannottouchcapital.Thus,
capitalprovidesanadditionalamountbywhichassetsmustexceedliabilitiesbeforeadistributioncanbemade.
ii)
LimitsonDistributionstoShareholders(DGCL154,170,244) Distributionstoshareholdersaregenerallyonlyauthorizedout
ofsurplus.
c.
DelawareStatutes ii.
i) BalanceSheets Notconclusiveindicatorsofsurplusoralackthereof.Corporationsmayrevalueassetstoshowsurplus,
butperfectioninthatprocessisnotrequired.Directorshavereasonablelatitudetodepartfromthebalancesheetto
calculatesurplus,solongastheyevaluateassetsandliabilitiesingoodfaith,onthebasisofacceptabledata,bymethods
thattheyreasonablybelievereflectpresentvalues,andarriveatadeterminationofthesurplusthatisnotsofaroffthe
markastoconstituteactualorconstructivefraud.
GeneralRule(Klang) Nocorporationmayrepurchaseorredeemitsownsharesexceptoutof"surplus,"orexceptasexpressly
authorizedbyprovisionsofthestatutenotrelevanthere.
a.
Surplus iii.
TheCorporateEntityasanAllocationofEconomicRisk B.
Voluntaryv.InvoluntaryCreditor Therationalefordistinguishingthetortandcontractactionsisthatintortthe
creditoristypicallyaninvoluntarycreditorandincontractthecreditorisavoluntarycreditor.Inotherwords,the
voluntarycreditorcouldhavebargainedforapersonalguaranteeorchosensimplytonotdobusinesswiththe
corporation.
a)
Tortv.Contract Courtsdistinguishbetweentortandcontractclaimsandaremorewillingtopiercetheveilinthetort
context.
i)
GeneralRule Inextremecasescourtswillpiercethecorporateveilandholdsomeorallshareholderspersonallyliableforthe
corporationsdebts.Theremedyofpiercingthecorporateveilisanextremeremedy.Courtsconsideranumberoffactors:
a.
ReachingRealPersons i.
PiercingtheCorporateVeilandUnauthorizedAction C.
TheCorporateFormandRiskAllocation VI.

Undercapitalization Theundercapitalizationfactorismoresignificantincontractcasesunderthetheorythatthe
contractualrelationshipisofavolitionalnature.Thus,thepartyseekingtopiercepresumablycontractedwith
knowledgeoflimitedcapitalization.Itisimportanttoobservethatthevolitionalnaturerationaleisnotalwaysa
soundonebecausecreditorsdonotalwayshaveaccesstoalltheinformation.
b)
NotDispositive Thedistinctionbetweenatortactionandacontractactionisnotdispositive.Therefore,without
moreameretortactionisnotenoughtopierce.
c)
TypicalScenario Typicallytheremaybefraudorwrongdoingifthecorporationhaditsassetssiphonedout,
leavingtoolittletosatisfycreditors.
a)
DirectLiability Ashareholdermaybedirectlyliableforhisactions,particularlyifhisactionsinvolvedmaking
misrepresentationsdirectlytothecreditor.
b)
FraudorWrongdoing Iftherehasbeenagrievousfraudorwrongdoingbytheshareholders,acourtwillbemorelikelyto
piercetheveil.
ii)
ZeroCapital Shareholderinvestsnomoneyatall.Courtsarelikelytopiercetheveilhere. a)
SiphoningProfits Undercapitalizationgenerallyreferstoinitialcapitalization.However,drainingcapitaloutofthe
corporationthroughdividends,salaries,etc.canbeafactorinfavorofpiercingtheveil.Itcanalsobeaformfor
fraudorwrongdoing(above).
b)
FailuretoaddNewCapital Failuretoreplenishcapitalisgenerallynotafactorconsideredtopiercetheveil. c)
BusinessGrowth d)
Undercapitalization Ifthecorporationwasinadequatelycapitalized,acourtwillbesignificantlymorewillingtopierce
thecorporateveil.Inamajorityofcourtseveninadequatecapitalizationaloneisnotenoughtopiercetheveil under
capitalizationisnotanindependentlysufficientgroundtopiercethecorporateveil.SeeConsumer'sCoop.
iii)
Shares Failuretoformallyissueshares. a)
Meetings Notholdingdirectorsorshareholdermeetings. b)
Corporatev.PersonalProperty Failingtosharplydistinguishbetweencorporatepropertyandpersonalproperty. c)
FinancialRecords Corporatefinancialrecordsarenotmaintained. d)
CorporateFormalities Acourtismorelikelytopiercetheveiliftheshareholderfailedtofollowcorporateformalities. iv)
DominationandControl Control,notmeremajorityorcompletestockcontrol,butcompletedomination,notonly
financesbutofpolicyandbusinesspracticeinrespecttothetransactionattackedsothatthecorporateentityastothis
transactionhadatthetimenoseparatemind,willorexistenceofitsown;
i)
Injustice/Deceit Suchcontrolmusthavebeenusedbythedefendanttocommitfraudorwrong,toperpetratethe
violationofastatutoryorotherpositivelegalduty,ordishonestandunjustactincontraventionofplaintiff'slegalrights;
and
ii)
ProximateCause Theaforesaidcontrolandbreachofdutymustproximatelycausetheinjuryorunjustlosscomplained
of.
iii)
AlterEgoTest(Consumer'sCoOp) 3elementsmustbepresenttopiercetheveil: b.
IntertwinedOperations Ifthetwocorporationsoperateasasingleeconomicentityandseparatecorporateformalities
arenotfollowed.
i)
ParentandSubsidiaryUndercapitalized Veilpiercingismorelikelyifthesubsidiaryandparentareoperationportionsof
asinglebusinessandthesubsidiaryisundercapitalized.
ii)
MisleadingPublic Veilpiercingismorelikelyiftheparentandsubsidiarydonotmakeitcleartothepublicwhichentityis
handlingeachparticularaspectofthebusiness.
iii)
InterminglingofAssets Ifparentandsubsidiaryintermingleassetsinformally,piercingismorelikely.Example:
undocumentedtransferofcapitalbetweencompanies.
iv)
UnfairMannerofOperation piercingismorelikelyifthesubsidiarywasoperatedinanunfairmanner. v)
GeneralRule Courtsconsiderseveralfactorstoestablishwhetherthecorporateveilshouldbepiercedandthereforeholdthe
parent vicariouslyliable fortheactionsofthesubsidiary.Generallycourtsseemmorewillingtopierceinthiscontext,however,
thebarisstillveryhigh.
a.
DirectLiability Iftheparentisfoundtohavebeensodeeplyinvolved inconductingtheparticularactivitythatgaverisetothe
claim,theparentitselfcanbehelddirectly liablewithoutreferencetothedoctrineofveilpiercing.
b.
ReachingShareholders(Parent/Subsidiary) ii.
Formalities LLC'sgenerallydonthaveformalitiesthatmustbefollowed.Thus,formalitiesmaynotbeabigfactor
inpiercingtheLLCveil.
a)
Undercapitalization AmoreimportantfactorintheLLCcontext,sincetherearelessformalitiesthatneedtobe
followed.
b)
FactorsConsidered SincetheLLCissomewhatdifferentthanthecorporation,thefactorsusedmaybedifferentand
moredependentupontheshareholderagreement.Alotofcasesinthiscontextturnonwhethertherearegoodorbad
facts.
i)
GeneralRule CanpiercetheLLCveil.ThestandardusedisvirtuallythesameasitisintheCorporatecontext.InsomeLLC
statutesitmayappearthatpiercingisnotallowed.However,courtsassumethatthelegislaturedidnotintendtooverrulethe
commonlawequitabledoctrineofpiercingthecorporateveil.See Kaycee.
a.
PiercingtheLLC iii.
Promoter Apersonwhotakesinitiativeinfoundingandorganizing abusinessorenterprise(e.g.,arrangingnecessarycapitalor
acquiringnecessaryassetsorpersonnel).
a.
Offer Promotertakesanoffer onbehalfofthecompanythatbecomesacontractwhenthecompany
incorporates.
a)
Novation Promotermakesacontractbindinghimselfthatstipulatesthatthecompanywilltake hisplace when
formedthusrelievinghimofpersonalliability(thismustbefull novation,notmerelyassignment).
b)
Indemnification Promoterbindshimselfpersonallyandlookstothecompany,whenformed,for indemnification. c)
Exceptions(RKOStanley) i)
InterpretingIntent Inthesecasesthecourtwilltrytoascertaintheintentofthepartiesbaseduponthecircumstances.
Thisisanequitabledoctrine,thuscourtswillattempttodowhatseemsmostjustinthegivencircumstances.
ii)
GeneralRule(RSTAgency326) Promoterispersonallyliableforapreincorporationcontract,absentcontraryintent. b.
ContractsonBehalfofNonexistentEntities i.
DefectiveorAmbiguousIncorporation D.

Abolished MBCA2.04:"Allpersonspurportingtoactasoronbehalfofacorporation,knowingtherewasno
incorporationunderthisact,arejointlyandseverallyliableforallliability'screatedwhilesoacting.">Courtsinterpret
thisasabolishingthedefactocorporationdoctrine.
i)
DeFactoCorporation Acommonlawdoctrinewhereacorporationexistsinformbutlacksthelegaltechnicalitiesnecessaryto
beacorporation.Underthisdoctrine,courtsrulethatthereisacorporationandthereforepromotersarenotheldpersonally
liable.
c.
Passive/ActiveInvestors Courtstrytoprotectpassiveinvestors frompersonalliability.Ontheotherhand,active
investors whoparticipateinthebusiness'dailyoperationswillnotgetthesameprotection(TimberlineEquipment).
i)
CorporationbyEstoppel Ifcreditordealswiththebusinessasacorporation,itshouldnotbepermittedtolooktothenon
existenceofacorporationtoescapeanyliability.
d.
ActualAuthority Existswhentheprincipalmanifests(actualorimplied)hisconsentdirectlytotheagent(manifestationsfrom
theperspectiveoftheagent).
a.
Apparent(Ostensible)Authority Existswhenanagentiswithoutactualauthority,buttheprincipali)manifests(actualor
implied)hisconsentdirectlytothethirdpartywhoisdealingwiththeagentandii)thethirdpartyreasonablybelievedthatthe
agenthadsaidauthorization.
b.
Note:Thisisallabouthowthethirdpartinterpretsthemanifestations.IFtheagentcreatesmanifestationsanditisreasonable
forthirdpartytointerpretthemasgivingauthoritythenthereisapparentauthority.
ContractDevice Inherentauthorityisanimpliedterminthecontractbetweenagentandprincipal.Itisagapfiller
createdtoachievefairandefficientallocationofthelossesfromanagentsunauthorizedactions.
i)
InherentAuthority Anewerformofauthoritythatexiststoprotectthereasonableexpectationsofoutsiderswhodealwithan
agent.
c.
UnauthorizedActions:AgencyintheCorporateContext ii.
General Adoctrinethathadgreatsignificancewhencorporationswerelimitedinscope.Whenacorporationactedbeyondits
scopeorpower,eitherbystatuteorbyitsarticlesofincorporation,thoseactionswereunenforceableeitheragainstorbythe
corporation.
a.
Charter Ifthecharterexpresslylimitsthecorporationspowers,ashareholdermayobtainaninjunctiononan ultravires
theory.
i)
ReasonablenessRequirement Contributionmustbe1)reasonableinamountinlightofthecorporation'sfinancial
condition,2)bearsomereasonablerelation tothecorporation'sinterest,and3)notbeso'remoteandfanciful'as
toexcitetheoppositionofshareholderswhosepropertyisbeingused.
a)
CharitableDonations Generallyashareholderwilllooseunlessthedonationismanifestlyunreasonable. ii)
StillEmployed Thereisadirectbenefitthecorporationbecausetheemployeepresumablywillworkharderfor
theincentive.Thus,inthiscontextthebenefitwillnotbedefeatedbyshareholdersunlessitisclearlyexcessiveor
baseduponselfdealing.
a)
Retired DirectIncentivejustificationdoesnotapplyinthiscontext.However,courtswillgenerallystretchto
approvethearrangementifitisnotexcessiveorselfdealing.
b)
Pensions,BonusesandOtherFringeBenefits Whetherapension,bonusorotherfringebenefitisbeyondthescopeof
thecompanymaydependonthestatusofthepersonreceivingthebenefit:
iii)
ModernDoctrine Manystateshaveformallyabolishedthedoctrineinstatute.Therearestillafewexceptions,however: b.
UltraVires Doctrine iii.
ProxySolicitations a.
ShareholderProxySolicitations(SEC14a8) b.
ShareholderGovernanceinPublicCorporations i.
Introduction A.
i) Material Whetherthereisasubstantiallikelihoodthatareasonableinvestorwouldconsidertheomittedfactimportant
indecidingwhethertobuyorsellsecurities.
Facts/Opinions Opinionsnotenough. ii)
a) Cautioned Accompaniedwithmeaningfulcautionary statements;OR
b) Immaterial; OR
c) NaturalPersons Plaintifffailstoprovethepersonmadethestatementwithactualknowledgethatitwasfalseor
misleading;OR
d) BusinessEntities Approvedbyanexecutiveofficerwiththeactualknowledgethatthestatementwasfalseor
misleading.
21E(c)SafeHarbor Certainforwardlookingstatement areprotected.Mustbe: iii)
Misrepresentation/Omission UnderSEC14a9 theremustbeamisrepresentationoromissionofamaterialfact. a.
Culpability Commonlawfraudrequiresscienter.Thatis,defendantmusthavehadacertainstateofmindwhencommitting
fraudulentacts.AlthoughthesupremecourthasnotruledonscienterintheSEC14a9 context,severalcircuitcourtshaveruled
thatmerenegligence isenoughtosatisfytheculpabilityrequirement.SeeGerstle.
b.
Reliance/Causation Fraudonthemarket. c.
FraudulentProxyStatements i.
AnyPerson Incontrasttoplaintiffbeingrequiredtobeapurchaserorseller,thereisnosuchrequirementfordefendant.
Thisdoesnotmean,however,thatliabilityforRule10b5violationswillextendtoallcollateralparticipants.Aidersand
abettors,forexample,arenotsubjecttoprivateactionunderrule10b5.
a)
Rationales Topreventvexatiouslitigationandpreventliabilityfromspeculativeclaims(BlueChip). b)
Standing:PurchaserorSellerRequirement Inordertohavestandingtosue,a10b5plaintiffinaprivatedamagesactionmust
havebeeneitherapurchaserorseller ofthesecuritiesthatformthebasisofthematerialomission,misstatement,ordeceptive
conduct(Birnbaum).
a.
SECRule10b5Claim Plaintiffmustshow1)fraudordeceit,2)byanyperson3)inconnectionwith4)thepurchaseorsale5)of
anysecurity.
b.
FraudorDeceit Deceptionisanecessaryelementofanyrule10b5violation.Becauserule10b5focusesondisclosureand
misrepresentation,itdoesnotcoveralltransactionsthatcauseinjuryorotherwiseresultinunfairnesstoinvestors(SantaFe).
c.
DisclosureandBuying/Selling ii.
Disclosure B.
FederalRegulationofSecurities VII.

Materiality Asubstantiallikelihoodthatthedisclosureoftheomittedfactwouldhavebeenviewedbythereasonable
investorashavingsignificantlyalteredthe"totalmix"ofinformationmadeavailable(Levinson).Generally,ifdisclosureof
informationwouldaffectthepriceofthecompany'sstock,theinformationismaterial.
i)
DutytoUpdate Thereisadutytoupdatewhenforwardlookingstatementsstill"alive"inthemarkethave
becomeinaccurateormisleading(InreTimeWarner).
a)
Omissions ii)
Deception/Omission Thedefendantaffirmativelymisrepresentedamaterialfact,oromittedamaterialfactthatmadehis
statementmisleading,orremainedsilentinthefaceofafiduciarydutytodiscloseamaterialfact.
d.
Recklessness NotaddressedbySupremeCourt,butallcircuitsagreethatrecklessness(orgrossnegligence)issufficient.
Recklessnessexistswhencircumstantialevidencestronglysuggestsactualknowledge.
i)
StrongInference Mustbemorethanamerelyplausibleorreasonable itmustbecogentandatleastas
compellingasanyopposinginferenceofnonfraudulentintent."See Tellabs.TodeterminethistheCourtlookedto
theplausibleinferencesandcomparedinahighlyfactsandcircumstancesmanner.Intheend,theinferenceof
scientermustbe"atleastaslikelyas"anyplausableopposinginference.Tellabs.
a)
PleadingScienter PerFRCP9(b),allegationsoffraudmustbepleadedwith"particularity."Thispleadingstandardis
raisedfor10b5claimsbythePSLRA.UnderthePSLRA,thecomplaintmust"statewithparticularityfactsgivingrisetoa
stronginference thatthedefendantactedwiththerequiredstateofmind."
ii)
Scienter Musthavementalstateembracingintenttodeceive,manipulate,ordefraud(Ernst&Ernst). e.
Rebutting Defendantcanrebutbyshowing1)themisrepresentationdidnoteffectthestock'spriceor 2)the
particularplaintiffwouldhavetradedregardlessofthemisrepresentation.SeeLevinson.
a)
Theory Fraudonthemarketisbasedontheefficientmarkethypothesis.Theideaisthattradersrelyonthe
integrityofthestock'spriceinmakingthedecisiontobuyorsellandthatthepricereflectsallpubliclyavailable
information.Thus,ifthereismisinformation,thebuyerorsellerreliesonthatinformationbywayoftheefficient
market.
b)
Criticism Investorsdemonstrablydonotbelievethatstockpricesreflecttruevalue.SeeLevinson (J.,White
Dissenting).Yet,eventhoughthemarketisdrivenbyvaryingperceptionsofvalue,thefraudonthemarkettheory
maybedesirableregulatorypolicy.Withoutit,itcouldbetoohardforplaintiffstobring10b5claims.
c)
FraudontheMarket Falseormisleadingrepresentationsonapublictradingmarket createarebuttablepresumptionof
reliance(Levinson).
i)
Cause/Reliance(N/AforSEC) Thereliancerequirementteststhelinkbetweentheallegedmisinformationandtheplaintiff's
buyselldecision.Ontheotherhand,thecausationrequirementteststhelinkbetweenthemisrepresentationandtheplaintiff's
loss.
f.
g. Damages(N/AforSEC) Notreallycovered.
StatutoryBasis (SEA10(b)) Itshallbeunlawfulforanyperson,directlyorindirectly,bytheuseofanymeans...ofinterstate
commerce...touseoremploy,inconnectionwiththepurchaseorsaleofanysecurity,anymanipulativeordeceptivedeviceor
contrivanceincontraventionof[SECrules].
a.
Rule10b5 Itshallbeunlawfulforanyperson,directlyorindirectly,byuseofanymeansorinstrumentalityofinterstate
commerce,tomakeanyuntruestatementofamaterialfactorto omit tostateamaterialfactinconnectionwiththepurchase
orsaleofanysecurity.
b.
Misrepresentation/Omission Satisfiedbyfailingtodiscloseorrefrainfromtrading. i)
Materiality Whetherthereisasubstantiallikelihoodthatareasonableinvestorwouldconsidertheomittedfact
importantindecidingwhethertobuyorsellsecurities.
ii)
Scienter Musthavementalstatew/intenttodeceive,manipulate,ordefraud(Ernst&Ernst). iii)
iv) Reliance/Cause FraudontheMarket>Falseormisleadingrepresentationsonapublictradingmarket createa
rebuttablepresumptionofreliance(Levinson).Torebutmustshow:1)misrepresentationdidnoteffectstockpriceOR 2)
plaintiffwouldhavetradedanyway.Levinson.
Damages Canbecriminal. v)
ElementsUnderRule10b5 c.
General i.
ConstructiveInsiders Appliesnotonlytoofficers,directors,andotherpermanentinsidersofacorporation,butalsoto
attorneys,accountants,consultants,andotherswhotemporarilybecomefiduciaries(someexpectationofconfidentiality)
ofacorporation.O'Hagan.
i)
InformationfromOutsidetheCompany Iftheinformationcamefromoutsidethecompany,statusasaninsiderhasno
relationtotheinformation>arguethatthereisadutytodiscloserelevantinformationasaninsider.
ii)
GeneralRule SEA10(b)andSECRule10b5areviolatedwhenacorporateinsidertradesinthesecuritiesofhiscorporationon
thebasisofmaterial,nonpublicinformation.Tradingonsuchinformationqualifiesasadeceptivedeviceunder10(b)becausea
relationshipoftrustandconfidenceexistsbetweentheshareholdersofacorporationandthecorporateinsiders.That
relationshipgivesrisetoadutytodiscloseortoabstain fromtrading.O'Hagan.SeealsoTexasGulfSulphur.
a.
ClassicalInsiderTrading ii.
DerivativeLiability Thetippee'sdutytodiscloseorabstainisderivative fromthatoftheinsider'sduty.Dirks. i)
ImproperInformation Thetestiswhethertheinsiderpersonallywillbenefit,directlyorindirectly,fromhis
disclosure.Absentsomepersonalgain(e.g.,quidproquo,gifttofamilymember/friend),therehasbeennobreach
ofdutytostockholders.Andabsentabreachbytheinsider,thereisnotderivativebreach.SeeDirks.
a)
Information Tippeesmustassumeaninsider'sdutytotheshareholdersnotbecausetheyreceiveinsideinformation,but
ratherbecauseithasbeenmadetothem improperly.
ii)
GeneralRule Atippeeassumesafiduciarydutytotheshareholdersofacorporationnottotradeonmaterialnonpublic
informationonlywhen1) theinsiderhasbreachedhisfiduciarydutytotheshareholdersbydisclosingtheinformationtothe
tippee;and 2) thetippeeknowsorshouldknow thattherehasbeenabreach.Dirks.
a.
Tipper/TippeeInsiderTrading iii.
GeneralRule(O'hagan) Misappropriationtheoryholdsthatapersoncommitsfraudinconnectionwithasecuritiestransaction,
andtherebyviolates10(b) andRule10b5 whenhemisappropriatesconfidentialinformationforsecuritiestradingpurposes,in
breachofadutyowedtothesourceoftheinformation.
a.
MisappropriationTheory iv.
InsiderTrading C.

Fulldisclosure(O'hagan) Fulldisclosureforeclosesliabilityunderthemisappropriationtheory:Becausethedeception
essentialtothemisappropriationtheoryinvolvesfeigningfidelitytothesourceoftheinformation,ifthefiduciarydiscloses
tothesourcethatheplanstotradeonthenonpublicinformation,thereisnodeceptivedeviceandthusno10(b)
violation.
i)
SEA14(e)v.10(b) SEC'spowerismuchmorelimitedunder10(b)than14(e).Thatiswhyarulelike14e3(a)is
allowedeventhoughitisbasicallyaparodyofinformationrule.
i)
General Specialprophylacticrulefortradingontheknowledgeofatenderoffer.Anyonewithconfidentialinformationabouta
tenderofferwhoknowstheinformationwasforsomeoneinsidecannottradeonthatinformation.
a.
Personmustpossess materialinformation; i)
Aboutatenderoffer; ii)
Thatisconfidential; iii)
Theofferingperson(offeror); a)
Issuerofsecuritiessought(target);OR b)
Anyoneactingonbehalfoftheofferorortheissuerofsecuritiestobesought(e.g.,lawfirms,accountants,etc.) c)
Whichwasacquiredfrom(directlyorindirectly): iv)
Note: Thereisnotrequirementtohaveanysortofpreexistingfiduciarydutytomaintainconfidentialitylikethereisin
misappropriationtheoryunderrule10b5.
v)
Elements: b.
Takeovers:Rule14e3(a) v.
ConstituentCorporation Participantinthemergerwhoseshareholdersusuallyhavevotingrights. a.
SurvivingCorporation Afterthetransactioniscompleted,thecorporationthatremainsinexistence. b.
DissolvedCorporation Whenacorporationceasestoexist,itssharesarecancelledandthecorporationisformallydissolved
withthestate.Thisdoesnotnecessarilymeanthatithasnocontinuingexistenceincertaincontexts.
c.
i) Perfection Theshareholdermustperfecttheappraisalrightsby1)votingagainstthetransaction(iftherearevoting
rights)and2)informingthecorporationthattheshareholderwillexercisehisrights.
AppraisalRights Ifashareholderhasappraisalrights(looktoarticlesorstatute),theshareholderneednotacceptthe
considerationofferedforthetransaction.Insteadtheshareholdercaninstituteajudicialproceedingtoascertainthefairvalue of
thesharesasofthetimebeforethetransactionwasannounced.
d.
Terminology i.
IdentifyTransaction Thestructureofthetransactionandtheconsiderationpaidcanhaveanimpactonshareholder voting
rights.
a.
b. LooktoArticles Looktothearticles todeterminevotingrights.Thearticles canalwaysprovidespecialrightsthatarenot
otherwiserequiredbystatelaw.
c. LooktoStateLaw IFthearticles dontprovidespecialrules,statecorporationslawwillprovidewhichentitygetsshareholder
votingrightsandappraisalrights.
CompletingaFriendlyDeal(Analysis) ii.
StatutoryMerger a.
a) Exception(251(f)) IFacquiringcompanyisissuinglessthan20%ofitsownshares,oritisnotissuingcashinstead
ofstock,theacquiringcompaniesshareholdersdonot havevotingrights.
ChangestotheArticles Ifthe articles mustbeamendedtocompletethetransactiontheshareholderswillhaveto
vote,evenifitisnotnecessarilyonthetransactionitself.
b)
VotingRights Bothcorporationshavevotingrights.DEL251(c)/252. i)
AppraisalRights ii)
ReverseTriangularMerger b.
VotingRights Mergersub.Mergesintoacquiredcorp.>thistransactionisunder251andcancreateshareholder
votingrightsforacquiredcorp.dependingonthearticlesandconsideration.
i)
ForwardTriangularMerger c.
ShortFormMerger(DEL253) Statutorymergerbutwith90%+ownedacquiringcorp.Ownershipsohighthatnoshareholder
voteisrequired.However,appraisalrights arestillrequired.
d.
iii. TypesofMergers
General A.
Takeovers VIII.

SaleofAssets e.
1) General Theconsiderationusedforthetransactionisimportantbecauseitcanhaveanimpactontheshareholderapprovaland
appraisalrights.
2) Shares Sharesofthesurviving corporationareexchangedforownership.Thesharesusedaregenerallytreasurysharesthatare
authorizedbutunissued.Useunissuedbutauthorizedsharestoavoidshareholderapprovalbecausethe#ofissuedsharesisset
bythearticles.
3) Cash(CashOutMerger) Cashexchangedforownership
4) DebtSecurities
5) HybridSecurities Acombinationofdebtandequity.
6) FractionalShares Ifthemathaddsupsothatsomethinglikeahalfshareisrequired,cashisexchangedforthathalfshare
insteadofanactualhalfshare.
iv. Consideration
Sharesarepubliclytraded; i)
ii) Sharesheldofrecordbymorethan2,000holders ;OR
a) Dilution DilutionoftheownershipshareofthecorporationisNOT achangeinshareownershiptriggeringvoting
rightsunlessprovidedforinthearticles.
iii) Survivingcorpshareholdersdonothave votingrights becausesurvivingcorpissuedlessthan20%ofitsoutstandingshares
inthetransactiontoacquiretheconstituentcorpandnochangeinthearticles orshareownershipinthesurvivingcorp.
a. AppraisalRightsUnderDEL262 ProvidesappraisalformergersunderDEL251 andshortformmergersunderDEL253
unless:
i) Note: Thisprovisiongenerallygivesappraisalrightstotheshareholderoftheacquiredcorp,nottheacquiringcorp.
b. RegainingAppraisalInDelaware DEL262(b)(2) restorestheappraisalrightifitwaslostduetotheforegoingif shareholder
receivesasconsideration forthetransactionanythingotherthan 1)publicallytradedshares(i.e.,nocashexceptfractional
shares)or2)sharesofacorporationsurvivingthemerger.
AppraisalRights v.
Generalrule Whenamergerexistsinsubstancebutnotinform,courtswillfindamergerexistsregardlessofformalities.Two
necessaryfactors:1)theactualmergermusttakeplacesoonaftertheinitialtransaction,and2)thesellercorporationmust
quicklyceasetoexist.RulenotavailableinDelaware(Hariton)butavailableinNewJersey(Applestein)andotherstates.
a.
Mergerv.Acquisition Wheretheacquirercorporationpurchasesallthetarget'sassets,leavingthetargetasamereshell,the
transactionbearsadistinctresemblancetoamerger.However,insomecircumstances,whenthetransactionfallsshortofa
mergertheacquisitionofasubsidiarymayhaveoccurred.
b.
ALIApproach(ALI7.21) seekstolessentheextenttowhichshareholderappraisalrightsaredependentupontheformchosen
forthetransaction.
c.
"DeFacto"Mergers(NotinDelaware) i.
ContractingAroundAppraisalandVotingRights B.
GeneralRule A251 merger,madeforthesolepurposeoffreezingoutminoritystockholders,isanabuseofthecorporate
process;andisacaseofactionforviolationofafiduciarydutyforwhichtheCourtmaygrantsuchreliefasitdeemsappropriate
underthecircumstances.Singer (Delaware).Evenifthesolepurposeisnotfreezingoutminorityshareholders,afiduciary
obligationstillremains.Singer.InsuchacasetheCourtwillscrutinizethecircumstancesfortheentirefairness ofthetransaction.
Singer.
a.
CashOutMergers i.
AppraisalRemedyandFiduciaryDutyBasedJudicialReview C.

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