BUSINESS ORGANIZATIONS

BUSINESSES AND BUSINESS LAWYERS

• Purposes of businesses
o Reasons for starting a business – make money, serve the community,
political reasons, other personal benefits or gains
o Problems faced by business people – start-up capital and organization,
ethical problems, liability (both legal and for debt), employee relations
o Two views of why businesses operate
 Milton Friedman – to create value – businesses are “for-profit”
enterprises
 Ben and Jerry’s – businesses are developed to implement social
changes
• Role of the business lawyer – describe the risks and rewards to potential business
owners and other owners so they can make informed decisions about their
business
o Life cycle of a business – creation, funding, growth, acquisition or divestiture,
winding down and liquidation
o Who is the client (and why is this a difficult question)
 Formation issues – look at what type of business is being formed
 Ongoing representation
 Legal ethics
 Company v management v owners v other constituencies (3rd parties,
lenders)
• Problem 28-2 – when people start wearing multiple hats, then be
more aware!
• Ralph Nader – “zealous” representation is bad for business
o Seeking to do justice is the ultimate goal of being a business lawyer and
talking to the client
• Financial records and leverage
o Income statement – shows the financial condition during a period of time;
contains sales, expenses, and other various things – essentially calculates
the profit for a business organization
o Cash-flow statement – details what CASH comes in and out of the business
o Balance sheet – snapshot at a moment in time; contains Assets, Liabilities,
and Owner’s Equity
 Formula: A = L + OE
o Problem 26-1 – conservatism – these sheets show lower of purchase price or
FMV of an asset; high estimates of liabilities are usually put on the
statements
o Leverage – taking on increased debt to run a business
 This increases the ROI, but it is damaging because it accelerates profits
AND losses
• Types of business structures (4) – AGENCY LAW FLOWS THROUGH ALL OF
THESE
o Sole proprietorship – default form with one owner doing business
o Partnership – two or more individuals engaged in a business (general vs.
limited)
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 o Corporations – creatures of the state in which they are formed; articles of
incorporation create the business (subject to state law)
 Tax distinction – C Corporation vs. S Corporation
o Limited liability companies – business registered with the state that
contains elements of both a partnership and corporations

AGENCY LAW (3 major players – Agent, Principal, and 3rd party)

• The agency relationship – a fiduciary relationship between an AGENT and a
PRINCIPAL (RSA 1), where there is a manifestation of consent by P to A to act on
P’s behalf AND acceptance by A
o There needs to be agreement by both parties AND some form of direction or
control by P over A
o Agent – person who by mutual assent (1) acts on behalf of another and (2)
is subject to the other’s control
 RSA 385 – duty to obey – Unless otherwise agreed, A is subject to a
duty to obey all reasonable directions regarding the manner of
performing a service that he has contracted to perform
• Unless he is privileged to protect his own or another’s interests,
A is subject to a duty not to act in matters entrusted to him on
account of P contrary to directions of P, even though the terms of
the employment prescribe that such directions shall not be given
 General Agent – A holds a position with P that is very important (officer
of corporation); acts on a series of transaction for P
 Special Agent – A is hired by P for certain tasks or for a specific
purpose
o Principal – person on whose behalf and subject whose control an agent acts
– duty to pay expenses/compensation, duty to perform
 Disclosed P – RSA 4(1) – 3rd party is aware that A is acting on behalf of
P and knows the identity of P; if A has authority, A may bind P and A is
NOT a party to the agreement – RSA 320
 Partially disclosed P – RSA 4(2) – 3rd party is aware that A is acting on
P’s behalf but is NOT aware of P’s identity; if A has authority, A may
bind P but A is a party to the agreement
 Undisclosed P – RSA (3) – 3rd party is NOT aware A is acting on behalf of
P and is not aware of P’s identity; if A has authority, then he becomes
part of the agreement and is liable for any damages
 Nonexistent or incompetent P – both A and 3rd party know the status of
P; A may NOT bind P and A becomes a party to the agreement – RSA
326
• Authority – the power of A to affect the legal relations of P by acts done in
accordance with P’s manifestations of consent to him (AGENTS CANNOT CREATE
THEIR OWN AUTHORITY)
o Actual authority – RSA 7, 26 – actual authority exists if P’s words (written
or spoken) or conduct would lead a reasonable person in A’s position to
believe that P had authorized him to act
 Express authority – the literal words of P that grant authority to A
 Implied authority (incidental authority) – acts that are usual and
incidental to the act directly authorized, including acts reasonably

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 necessary or generally considered appropriate to accomplish the
agency
o Apparent authority – RSA 8, 27 – manifestation of authority of A by P that
reaches 3rd party and that the 3rd party reasonably believes; A has apparent
authority on P’s behalf in relation to a 3rd party IF the words or conduct of P
would lead a reasonable person to believe that P had authorized A to so act
 Focus in on P’s actions that lead a person to reasonably believe A had
the power to act
 Look for a position of power – A expresses something or wears
something that gives 3rd party the idea that A has the authority to act
on behalf of P
 Focus: REASONABLE EXPECTATIONS of 3rd party
o Inherent authority – RSA 8A – A has power arising from the agency
relationship and not dependent on express authority or apparent authority;
exists for the protection of persons harmed by or dealing with a servant or
other agent (doesn’t normally apply to special agents)
 RSA 161 – a general agent for a disclosed or partially disclosed P
subjects P to liability for acts done on his behalf which usually
accompany or are incidental to trxns which A is authorized to conduct
if, although they are forbidden by P, the other party reasonably
believes that A is authorized to act on behalf of P and has no notice
that he is not so authorized
• Other ways to bind P
o Ratification – RSA 143 – upon ratification with knowledge of material facts, P
becomes responsible for contracts and conveyances made for him by one
purporting to act on his behalf as if the trxn had been authorized, if there has
been no supervening loss of capacity by P or change in law which would
render illegal the authorization or performance of such a transaction
 Ex: janitor signs renter up and then LL goes down to renew lease –
ratification
o Estoppel – RSA 8B
 A person who is not otherwise liable as a party to the trxn purported to
be done on his account, is nevertheless subject to liability to persons
who have changed their positions because of their belief that the trxn
was entered into by or for him, if
• He intentionally or carelessly caused such belief, or
• Knowing of such belief and that others might change their
positions because of it, he did not take reasonable steps to notify
them of the facts
 An owner of property who represents to 3rd persons that another is the
owner of the property or who permits the other so to represent, or who
realizes that 3rd persons believe that another is the owner of the
property, and that he could easily inform the 3rd persons of the facts, is
subject to the loss of the property if the owner disposes of it to 3rd
persons who, in ignorance of facts, purchase the property or otherwise
change their position with reference to it
 Change of position – payment of money, expenditure of labor, suffering
a loss, or subjection to legal liability
 Ex: LL cashes renter’s checks for a couple of months and then tries to
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 kick him out when another renter offers to pay more – no way because
there is reliance
• Extent of and termination of A’s authority – existence and extent of A’s duties to P
are determined by the terms of the agreement between the parties, interpreted in
light of the circumstances under which it is made, except to the extent that fraud,
duress, illegality, or the incapacity of one or both of the parties modifies it or
deprives it of legal effect
o If no agreement exists, then either P or A can terminate at will; an
irrevocable agency can exist if it is coupled with an interest
o Master – a principal who employs A to perform service in his affairs and who
controls or has the right to control the physical conduct of A in the
performance of the service
 Master is subject to liability for torts of servants committed while
acting within their scope of employment
 Master NOT subject to liability for torts of servant acting OUTSIDE
scope of employment, unless:
• Master intended the conduct or consequences, or
• Master was negligent or reckless, or
• Conduct violated a non-delegable duty of the master, or
• Servant purported to act or speak on behalf of principal and
there was reliance upon apparent authority
o Servant – A employed by a master to perform service in his affairs whose
physical conduct in the performance is controlled or is subject to the right to
control by the master
 Not all agents are servants (servants are usually employees under A
LOT of control)
o Independent Contractor – person who contracts with another to do
something for him but who is not controlled by the other nor subject to the
others right to control with respect to his physical conduct in performance
(may or may not be an agent)
o Factors to distinguish between servant and independent contractor
 The extent of control which, by agreement, master may exercise over
details of the work
 Whether or not the one employee is engaged in a distinct occupation
or business
 Kind of occupation, with reference to whether, in the locality, work is
usually done under the direction of the employer or by a specialist
without supervision
 Skill required
 Who supplies the materials
 Length of employment
 Method of payment
 Whether the work is part of regular business of employer
 Whether or not parties believe they are creating an agency relationship
o Scope of employment (if agent has NOT breached duty of care, then he can
get indemnification from principal) – this is mostly a RESPONDEAT SUPERIOR
analysis
 To be within the scope of employment, conduct must be of the same
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 general nature as that authorized, or incidental to the conduct
authorized
 Factors to consider:
• Whether or not the act is one commonly done by servants
• Time, place, and purpose of the act
• Previous relations between master and servant
• Extent to which business is apportioned between different
servants
• Master’s expectations and whether the instrumentality that
caused harm was furnished by the master
 Detour – different route, but still in the scope of employment
 Frolic – A does something completely separate and apart from his
employment
• Liability under agency relationships
o Binding the P – simple negligence is not enough to cause a breach of a duty
between A and P; if there is gross negligence or recklessness, then no
indemnification
 If A transacts with a 3rd party on behalf of P, the trxn is legally binding
on the 3rd party and P, provided:
• A acted within the scope of his authority, or
• Even if A exceeded his authority, P ratified the act
 If A operates outside actual authority, but P is bound (i.e. due to
apparent or inherent authority), then A has breached his fiduciary duty
(i.e. duty to obey) to P and is liable for P’s actual damages
o A’s duty of loyalty – agent must not put his own interests ahead of P’s in any
matter relating to the agency relationship
• Problems 39-1, 40-2, 40-3, 42-1, 42-2, 42-3
• Hayes v National Service Industries – H sued NSI alleging wrongful discharge
and got a lawyer; lawyer negotiate settlement and H wasn’t satisfied; court held
that lawyer ha apparent authority to bind H; H would have needed to tell lawyer
and NSI that she restricted any settlement negotiations; this was reasonable
because it is normal procedure for lawyers to negotiate for their clients

SOLE PROPRIETORSHIPS
• Generally – this is the default category where there is only ONE business owner
(natural person)
• No distinction is made between the business entity and the individual running the
business
o They are treated as one for legal purposes
• State filing is NOT necessary – business automatically starts
• Business may apply for a “d/b/a” designation – “doing business as” (this is simply a
different name that the owner may use for his business

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PARTNERSHIPS (use RUPA provisions)
• Generally
o Partnership: RUPA 101(6) – an association of two or more PERSONS to carry
on as co-owners a business for profit formed under 202, predecessor law, or
comparable law of another jurisdiction
 RUPA 202 – the association of two or more persons to carry on as co-
owners a business for profit forms a partnership
 RUPA 101 (10) – PERSON: individual, corporation, business trust,
estate, trust, partnership, association, joint venture, government,
governmental subdivision, agency, or other instrumentality, legal, or
commercial entity
 RUPA 201 – Partnership is an entity separate from its partners
• LLP continues to be the same entity that existed before the filing
of a statement of qualification under 1001
o Aggregate vs. Identity theories – how to interpret the code provisions
o Compare and contrast with sole proprietorship
 Q 75-1, 2, 3 – partnership CANNOT be a sole proprietorship or
corporation; BUT a corporation CAN be a partner because “person” is
very broad
o Sources of partnership law – (1) partnership agreement, (2) statutory
provisions (RUPA) and (3) common law and equity
 RUPA 103: Relations among the partners and between partners and the
partnership are governed by the partnership agreement; to the extent
the agreement does not otherwise provide, RUPA governs the relations
among and between the partners
 The partnership agreement MAY NOT:
• vary the rights and duties under Section 105 except to eliminate
the duty to provide copies of statements to all of the partners
• unreasonably restrict the right of access to books and records
• eliminate the duty of loyalty, but
o the partnership agreement may identify specific types or
categories of activities that do not violate the duty of
loyalty, if not manifestly unreasonable; or
o all of the partners or a number or percentage specified in
the partnership agreement may authorize or ratify, after
full disclosure of all material facts, a specific act or
transaction that otherwise would violate the duty of loyalty
• unreasonably reduce the duty of care
• eliminate the obligation of good faith and fair dealing, but the
partnership agreement may prescribe the standards by which
the performance of the obligation is to be measured, if the
standards are not manifestly unreasonable
• vary the power to dissociate as a partner under Section 602(a),
except to require the notice under Section 601(1) to be in writing
• vary the right of a court to expel a partner
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 • vary the requirement to wind up the partnership business in
cases specified in Section 801(4), (5), or (6)
• vary the law applicable to a limited liability partnership under
Section 106(b); or
• restrict rights of third parties
 Q 77-1, 2 – don’t need a written partnership agreement or a lawyer,
but it is advisable
o Partner as a fiduciary – RUPA 404 – partners owe a duty of loyalty and a
duty of care to the partnership and the other partners, along with
obligation of good faith and fair dealing
 Duty of Loyalty – duty to account for profits or property received; duty
to refrain from acting on behalf of a party having an adverse interest to
the partnership (conflict of interest); duty to refrain from competing
with partnership business
 Duty of Care – duty to refrain from engaging in grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of the
law
• Simple negligence is NOT a breach of this duty
o Partnership property – RUPA 203 and 204: property acquired by a partnership
is property of the partnership and not of the partners individually
 Property is partnership property if acquired in the name of
• The partnership, or
• One or more partners with an indication in the instrument
transferring title to the property of the person’s capacity as a
partner or of the existence of a partnership but without an
indication of the name of the partnership
 Property is acquired in the name of the partnership by a transfer to
• The partnership in its name, or
• One or more partners in their capacity as partners in the
partnership, if the name of the partnership is indicated in the
instrument transferring title to the property
 Property is presumed to be partnership property if purchased with
partnership assets, even if not acquired in the name of the partnership
or of one or more partners with an indication in the instrument
transferring title to the property of the person’s capacity as a partner
or of the existence of a partnership
 Property acquired in the name of one or more of the partners, without
an indication in the instrument transferring title to the property of the
person’s capacity as a partner or of the existence of a partnership and
without use of partnership assets, is presumed to be a separate
property, even if used for partnership purposes
 Q 79-1, 2, 3, 4 – property owned by a partner BEFORE the formation of
the partnership is NOT partnership property unless it is transferred to
the partnership
• Agency and partnership decision making
o Two forms of disputes that occur
 Disputes between partners – ordinary course vs. non-ordinary course
 disputes with 3rd parties
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o RUPA 301 – each partner is an agent of the partnership
 An act of partner, including execution of an instrument in the
partnership name, for apparently carrying on in the ordinary course the
partnership business or business of the kind carried on by the
partnership binds the partnership, UNLESS the partner had no
authority to act for the partnership in the particular matter and the
person with whom the partner was dealing knew or had received notice
that the partner lacked authority
 An act of a partner which is not apparently for carrying on in the
ordinary course the partnership business binds the partnership only if
the act was authorized by the other partners
o RUPA 401(f) – each partner has equal rights in the management and conduct
of the partnership business
o RUPA 401(j) – a difference arising as to a matter in the ordinary course of
business may be decided by a MAJORITY OF THE PARTNERS; an act outside
the ordinary course of business and an amendment to the partnership
agreement may be undertaken only with the consent of ALL THE PARTNERS
o RUPA 404 – DUTY OF LOYALTY, CARE, GOOD FAITH – to partners and the
partnership
 (a) The only fiduciary duties a partner owes to the partnership and the
other partners are the duty of loyalty and the duty of care set forth in
subsections (b) and (c).
 (b) A partner's duty of loyalty to the partnership and the other partners
is limited to the following:
• (1) to account to the partnership and hold as trustee for it any
property, profit, or benefit derived by the partner in the conduct
and winding up of the partnership business or derived from a use
by the partner of partnership property, including the
appropriation of a partnership opportunity
• (2) to refrain from dealing with the partnership in the conduct or
winding up of the partnership business as or on behalf of a party
having an interest adverse to the partnership; and
• (3) to refrain from competing with the partnership in the conduct
of the partnership business before the dissolution of the
partnership
 (c) A partner's duty of care to the partnership and the other partners in
the conduct and winding up of the partnership business is limited to
refraining from engaging in grossly negligent or reckless conduct,
intentional misconduct, or a knowing violation of law
 (d) A partner shall discharge the duties to the partnership and the
other partners under this [Act] or under the partnership agreement and
exercise any rights consistently with the obligation of good faith and
fair dealing
 (e) A partner does not violate a duty or obligation merely because the
partner's conduct furthers the partner's own interest
 (f) A partner may lend money to and transact other business with the
partnership, and as to each loan or transaction the rights and
obligations of the partner are the same as those of a person who is not
a partner, subject to other applicable law
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 o Q 81-1, 2, 3 – partnership is obligated to pay 3rd parties if the agreement
says so; if agreement says nothing, partnership might still be obligated to
pay
o Meinhard v Salmon – Co-adventurers vs. Partners – co-adventurers are
subject to the same fiduciary duties akin to those of partners; S was in the
title for a leased building and M provided the money for the investment
which was to last for 20 years; S made a new agreement with G (building
owner) to renovate other buildings without telling M; court held that S
breached the DUTY OF LOYALTY (the punctilio of an honor the most sensitive)
because he excluded his partner from any chance to compete and make
money in the new agreement; if S had approached G, then it would have
been permissible for him to undertake the opportunity
 Key point in time: the date when the opportunity COMES to the
business
 GR – you must involve other partners if agreement is renewed or
extended in any way; If the agreement was separate from M and S
venture, instead of an extension, then it would have been permissible
as well.
 RUPA 102(d) – a person receives notification when it:
• Comes to the person’s attention; or
• Is duly delivered at the person’s place of business or at any other
place held out by the person as a place for receiving
communications
o Q 88-1, 89-1, 2, 90-8 – partners CANNOT vary the rights of 3rd parties!!
• Liability and tax matters
o RUPA 305 – partnership liable for partner’s actionable conduct (simple
negligence not enough)
 Partnership is liable for loss or injury caused to a person, or for a
penalty incurred, as a result of a wrongful act or omission, or other
actionable conduct, of a partner acting in the ordinary course of
business of the partnership or with authority of the partnership
 If, in the course of the partnership business or while acting with
authority of the partnership, a partner receives or causes the
partnership to receive money or property of a person not a partner,
and the money or property is misapplied by a partner, partnership is
liable for the loss
o RUPA 306 – joint and several liability
 All partners are liable jointly and severally for all obligations of the
partnership unless otherwise agreed by the claimant or provided by
law
 A person admitted as a partner into an existing partnership is not
personally liable for any partnership obligation incurred before the
person's admission as a partner
 An obligation of a partnership incurred while the partnership is a
limited liability partnership, whether arising in contract, tort, or
otherwise, is solely the obligation of the partnership. A partner is not
personally liable, directly or indirectly, by way of contribution or
otherwise, for such an obligation solely by reason of being or so acting
as a partner.
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 o RUPA 307 – actions by and against partnership and partners
 Partnership may sue and be sued in the name of the partnership
 An action may be brought against the partnership and, to the extent
not inconsistent with 306, any or all of the partners in the same or
separate action
 A judgment against a partnership is not by itself a judgment against a
partner; judgment against a partnership may not be satisfied from a
partner’s assets unless there is also a judgment against the partner
 (EXHUASTION RULE) Judgment creditor of a partner may not levy
execution against the assets of the partner to satisfy a judgment based
on a claim against the partnership unless the partner is personally
liable for the claim under 306 and:
• See provisions in 307
o RUPA 401 (c) – partnership shall reimburse partner for any payments made
and indemnify a partner for liabilities incurred by the partner in the ordinary
course of the business of the partnership or for the preservation of its
business or property
o Collecting on judgment
 Tortfeasor partner – creditor may execute judgment directly against the
tortfeasor partner irrespective of its collection efforts against the
partnership, as such partner is personally liable for his actions
• If simple negligence, then partner has indemnification and
contribution rights
• If gross negligence, then partner breaches duty of care and has
no rights
 Non-tortfeasor partner (EXHAUSTION RULE) – creditor must first seek
to collect from the partnership assets; if creditor cannot satisfy
judgment, then he can go to the partner; creditor must first exhaust all
partnership assets or have some other reason to go after him
• If partner makes a personal guarantee, then creditor can sue
AND collect
o Q 92-1, 2, 3, 4, 6
• Select partnership matters concerning growth
o Capital contributions (non-contributing partners)
o Outside lenders – personal guarantees
o New partners – requires unanimous consent unless changed by partnership
agreement; A new partner is NOT liable for any partnership obligation
incurred before the person’s admission as a partner
o Q 95-1, 2
• How do partners make money; use of partnership earnings
o Partner salaries
 98-1 (401h) – partner is not entitled to remuneration for services
performed for the partnership, except for reasonable compensation for
services rendered in winding up the business of the partnership
 98-2 (401j) – if a partner wants to prevent an increase in partner
salaries, he must obtain unanimous consent from ALL of the partners
(outside of ordinary course of business)
 98-3 – one partner CANNOT compel other partners to pay him a salary
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 unless ALL the partners agree to do so
o Distribution of profits – allocation of profits and losses is governed by the
partnership agreement; there must be unanimous approval to change
allocation amounts
 RUPA 401(a) – each partner is deemed to have an account that is:
• Credited with an amount equal to the money plus the value of
any other property, net of the amount of any liabilities, the
partner contributes to the partnership and partner’s share of the
partnership profits, and
• Charged with an amount equal to the money plus the value of
any other property, net of the amount of any liabilities,
distributed by the partnership to the partner and the partner’s
share of the partnership losses
 98-1, 2, 99-3 – distributions are in the ordinary course of business
(contrast with salaries) and this would only need a MAJORITY to be
increased
 Partner is liable for taxes on his share of the profits, even if he hasn’t
taken a distribution
o Sales generally – distinguish between sales of an ownership interest to a
3rd party and the sale of an interest back to the partnership (redemption)
 RUPA 502 – only ECONOMIC RIGHTS of a partner can be transferred:
share of profits or losses, and right to receive distributions; the interest
is personal property
 RUPA 503 – transfer of partner’s transferable interest
• A transfer, in whole or in part, of a partner's transferable interest
in the partnership:
o is permissible
o does not by itself cause the partner's dissociation or a
dissolution and winding up of the partnership business; and
o does not, as against the other partners or the partnership,
entitle the transferee to participate in the management or
conduct of the partnership business, to require access to
information concerning partnership transactions, or to
inspect or copy the partnership books or records
• A transferee of a partner's transferable interest in the
partnership has a right:
o to receive, in accordance with the transfer, distributions to
which the transferor would otherwise be entitled
o to receive upon the dissolution and winding up of the
partnership business, in accordance with the transfer, the
net amount otherwise distributable to the transferor; and
o to seek under (6) a judicial determination that it is
equitable to wind up the partnership business
• In a dissolution and winding up, a transferee is entitled to an
account of partnership transactions only from the date of the
latest account agreed to by all of the partners
• Upon transfer, the transferor retains the rights and duties of a
partner other than the interest in distributions transferred

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 • A partnership need not give effect to a transferee's rights under
this section until it has notice of the transfer
• A transfer of a partner's transferable interest in the partnership
in violation of a restriction on transfer contained in the
partnership agreement is ineffective as to a person having notice
of the restriction at the time of transfer
 RUPA 504 – Charging orders (creditor’s exclusive remedy)
• A court can give a judgment creditor the right to receive
partnership distributions to which debtor partner would
otherwise be entitled to satisfy a judgment
• A charging order constitutes a lien on the judgment debtor's
transferable interest in the partnership. The court may order a
foreclosure of the interest subject to the charging order at any
time. The purchaser at the foreclosure sale has the rights of a
transferee
• At any time before foreclosure, an interest charged may be
redeemed:
o by the judgment debtor
o with property other than partnership property, by one or
more of the other partners; or
o with partnership property, by one or more of the other
partners with the consent of all of the partners whose
interests are not so charged
 Q 100-1, 2, 3 – if new guy buys interest FROM partnership, then he has
managerial rights and can make decisions
 Creel v Lilly – C sold Nascar stuff as sole proprietor, then formed
partnership with L and A; C died and his wife wanted the business
terminated; L and A wanted to buyout wife’s interest and continue the
business; partnership agreement governed in this case so there was no
need to look at the model rules; agreement stated that business would
continue instead of mandatory forced sale so wife couldn’t force the
business to close
o Buy-sell agreements – an agreement that governs the sale of any ownership
interest
• Partnership dissociation – withdrawal of a partner; discontinuation of partner’s
association
o Two main things that can happen when a partner dissociates:
 Buyout of the dissociated partner’s interest – go to Article 7, OR
 Dissolution of the partnership – go to Article 8
o RUPA 602 – partner’s power to dissociate (partnership agreement can require
it to be in writing)
 A partner has power to dissociate at any time, rightfully or wrongfully,
by express will
 A partner's dissociation is wrongful only if:
• it is in breach of an express provision of the partnership
agreement; or
• in the case of a partnership for a definite term or particular
undertaking, before the expiration of the term or the completion
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 of the undertaking:
o the partner withdraws by express will, unless the
withdrawal follows within 90 days after another partner's
dissociation by death or otherwise under Section 601(6)
through (10) or wrongful dissociation under this subsection;
o the partner is expelled by judicial determination under
Section 601(5);
o the partner is dissociated by becoming debtor in
bankruptcy; or
o in the case of a partner who is not an individual, trust other
than a business trust, or estate, the partner is expelled or
otherwise dissociated because it willfully dissolved or
terminated
 A partner who wrongfully dissociates is liable to the partnership and to
the other partners for ACTUAL damages caused by the dissociation.
The liability is in addition to any other obligation of the partner to the
partnership or to the other partners
o RUPA 601 – events causing dissociation (applies if partnership agreement
says nothing)
 the partnership's having notice of the partner's express will to
withdraw as a partner or on a later date specified by the partner
 an event agreed to in the partnership agreement as causing the
partner's dissociation
 the partner's expulsion pursuant to the partnership agreement
 the partner's expulsion by the unanimous vote of the other partners if:
• it is unlawful to carry on the partnership business with that
partner
• there has been a transfer of all or substantially all of that
partner's transferable interest in the partnership, other than a
transfer for security purposes, or a court order charging the
partner's interest, which has not been foreclosed
• within 90 days after the partnership notifies a corporate partner
that it will be expelled because it has filed a certificate of
dissolution or the equivalent, its charter has been revoked, or its
right to conduct business has been suspended by the jurisdiction
of its incorporation, there is no revocation of the certificate of
dissolution or no reinstatement of its charter or its right to
conduct business; or
• a partnership that is a partner has been dissolved and its
business is being wound up;
 on application by the partnership or another partner, the partner's
expulsion by judicial determination because:
• the partner engaged in wrongful conduct that adversely and
materially affected the partnership business
• the partner willfully or persistently committed a material breach
of the partnership agreement or of a duty owed to the
partnership or the other partners under Section 404; or
• the partner engaged in conduct relating to the partnership

13
 business which makes it not reasonably practicable to carry on
the business in partnership with the partner
 the partner's:
• becoming a debtor in bankruptcy
• executing an assignment for the benefit of creditors
• seeking, consenting to, or acquiescing in the appointment of a
trustee, receiver, or liquidator of that partner or of all or
substantially all of that partner's property; or
• failing, within 90 days after the appointment, to have vacated or
stayed the appointment of a trustee, receiver, or liquidator of the
partner or of all or substantially all of the partner's property
obtained without the partner's consent or acquiescence, or
failing within 90 days after the expiration of a stay to have the
appointment vacated
 in the case of a partner who is an individual:
• the partner's death
• the appointment of a guardian or general conservator for the
partner; or
• a judicial determination that the partner has otherwise become
incapable of performing the partner's duties under the
partnership agreement
o RUPA 701 – Purchase of dissociated partner’s interest
 If a partner is dissociated from a partnership without resulting in a
dissolution and winding up of the partnership business under Section
801, the partnership shall cause the dissociated partner's interest in
the partnership to be purchased for a buyout price
• Buyout price – the amount that would have been distributable
to the dissociating partner under Section 807(b) if, on the date of
dissociation, the assets of the partnership were sold at a price
equal to the greater of the liquidation value or the value based
on a sale of the entire business as a going concern without the
dissociated partner and the partnership were wound up as of
that date.
• Interest must be paid from the date of dissociation to the date of
payment
 Damages for wrongful dissociation, and all other amounts owing,
whether or not presently due, from the dissociated partner to the
partnership, must be offset against the buyout price.
 A partnership shall indemnify a dissociated partner whose interest is
being purchased against all partnership liabilities, whether incurred
before or after the dissociation, except liabilities incurred by an act of
the dissociated partner under Section 702
 If no agreement for the purchase of a dissociated partner's interest is
reached within 120 days after a written demand for payment, the
partnership shall pay, or cause to be paid, in cash to the dissociated
partner the amount the partnership estimates to be the buyout price
and accrued interest, reduced by any offsets and accrued interest
under subsection (c).

14
  If a deferred payment is authorized under subsection (h), the
partnership may tender a written offer to pay the amount it estimates
to be the buyout price and accrued interest, reduced by any offsets
under subsection (c), stating the time of payment, the amount and
type of security for payment, and the other terms and conditions of the
obligation
 The payment or tender required by subsection (e) or (f) must be
accompanied by the following:
• a statement of partnership assets and liabilities as of the date of
dissociation
• the latest available partnership balance sheet and income
statement, if any
• an explanation of how the estimated amount of the payment was
calculated; and
• written notice that the payment is in full satisfaction of the
obligation to purchase unless, within 120 days after the written
notice, the dissociated partner commences an action to
determine the buyout price, any offsets under subsection (c), or
other terms of the obligation to purchase
 A partner who wrongfully dissociates before the expiration of a definite
term or the completion of a particular undertaking is NOT entitled to
payment of any portion of the buyout price until the expiration of the
term or completion of the undertaking, UNLESS he establishes to the
satisfaction of the court that earlier payment will not cause undue
hardship to the business of the partnership. A deferred payment must
be adequately secured and bear interest
 A dissociated partner may maintain an action against the partnership,
pursuant to Section 405(b)(2)(ii), to determine the buyout price of that
partner's interest, any offsets under subsection (c), or other terms of
the obligation to purchase. The action must be commenced within 120
days after the partnership has tendered payment or an offer to pay or
within one year after written demand for payment if no payment or
offer to pay is tendered. The court shall determine the buyout price of
the dissociated partner's interest, any offset due under subsection (c),
and accrued interest, and enter judgment for any additional payment
or refund. If deferred payment is authorized under subsection (h), the
court shall also determine the security for payment and other terms of
the obligation to purchase
o Q 102-1, 2, 3, 111-4, 113-6, 7 – Buyout price = greater of liquidation value
OR the value of the business as a going concern less the partner that
withdraws
o Liability of dissociating party – if dissociating partner gives NOTICE to 3rd
parties, then he is NOT liable for any debts; but if 3rd party reasonably
believes he is still a partner, then he is liable for any debts for up to 2 years;
even if statement of withdrawal is filed, he would still be liable for 90 days
(RUPA 703)
• Partnership Dissolution – triggers the end of a partnership – dissolution is
outside the ordinary course of business and thus needs a unanimous vote
o RUPA 801 – events causing dissolution and winding up
15
  in a partnership at will, the partnership's having notice from a partner,
of his express will to withdraw as a partner
 in a partnership for a definite term or particular undertaking:
• within 90 days after a partner's dissociation by death or
otherwise under Section 601(6) through (10) or wrongful
dissociation under Section 602(b), the express will of at least half
of the remaining partners to wind up the partnership business,
for which purpose a partner's rightful dissociation pursuant to
Section 602(b)(2)(i) constitutes the expression of that partner's
will to wind up the partnership business
• the express will of all of the partners to wind up the partnership
business; or
• the expiration of the term or the completion of the undertaking
 an event agreed to in the partnership agreement
 an event that makes it unlawful for all or substantially all of the
business of the partnership to be continued, but a cure of illegality
within 90 days after notice to the partnership of the event is effective
retroactively to the date of the event
 on application by a partner, a judicial determination that:
• the economic purpose of the partnership is likely to be
unreasonably frustrated
• another partner has engaged in conduct relating to the
partnership business which makes it not reasonably practicable
to carry on the business in partnership with that partner; or
• it is not otherwise reasonably practicable to carry on the
partnership business in conformity with the partnership
agreement; or
 on application by a transferee of a partner's transferable interest, a
judicial determination that it is equitable to wind up the partnership
business:
• after the expiration of the term or completion of the undertaking,
if the partnership was for a definite term or particular
undertaking at the time of the transfer or entry of the charging
order that gave rise to the transfer; or
• at any time, if the partnership was a partnership at will at the
time of the transfer or entry of the charging order that gave rise
to the transfer
o RUPA 802(b) – at any time after the dissolution of a partnership and before
the winding up of its business is completed, all of the partners, including any
dissociating partner other than a wrongfully dissociating partner, may waive
the right to have the partnership's business wound up and the partnership
terminated. In that event:
 the partnership resumes carrying on its business as if dissolution had
never occurred, and any liability incurred by the partnership or a
partner after the dissolution and before the waiver is determined as if
dissolution had never occurred; and
 the rights of a third party accruing under Section 804(1) or arising out
of conduct in reliance on the dissolution before the third party knew or

16
 received a notification of the waiver may not be adversely affected
o Q 114-1, 2, 3, 4
• The winding up process – partnership business is wound up, existing K’s
completed, creditors paid
o RUPA 807 – settlements of accounts and contributions among partners
 In winding up a partnership's business, the assets of the partnership,
including the contributions of the partners required by this section,
must be applied to discharge its obligations to creditors, including, to
the extent permitted by law, partners who are creditors. Any surplus
must be applied to pay in cash the net amount distributable to
partners in accordance with their right to distributions under
subsection (b).
 Each partner is entitled to a settlement of all partnership accounts
upon winding up the partnership business. In settling accounts among
the partners, profits and losses that result from the liquidation of the
partnership assets must be credited and charged to the partners'
accounts. The partnership shall make a distribution to a partner in an
amount equal to any excess of the credits over the charges in the
partner's account. A partner shall contribute to the partnership an
amount equal to any excess of the charges over the credits in the
partner's account but excluding from the calculation charges
attributable to an obligation for which the partner is not personally
liable under Section 306
 If a partner fails to contribute the full amount required under
subsection (b), all of the other partners shall contribute, in the
proportions in which those partners share partnership losses, the
additional amount necessary to satisfy the partnership obligations for
which they are personally liable under Section 306. A partner or
partner's legal representative may recover from the other partners any
contributions the partner makes to the extent the amount contributed
exceeds that partner's share of the partnership obligations for which
the partner is personally liable under Section 306
 After the settlement of accounts, each partner shall contribute, in the
proportion in which the partner shares partnership losses, the amount
necessary to satisfy partnership obligations that were not known at the
time of the settlement and for which the partner is personally liable
under Section 306
o Q 115-1, 2
• Partnership termination – business ceases, assets are sold, partners are entitled
to cash if any is left
o RUPA 802(a) – partnership continues after dissolution only for the purpose of
winding up its business. The partnership is terminated when the winding up
of its business is completed
• “Freeze-Out” of a partner – occur when majority partners push a minority
partner out; usually because of oppression or like circumstances
o Page v Page – partnership’s major creditor was a corporation owned by P
and P wanted to terminate the partnership; court held that this was an “at-
will” partnership and P had the right to expressly withdrawal UNLESS there
was bad faith; case was remanded so D could try to prove bad faith – here, D
17
 did have a good cause of action for breach of duty of good faith and the
partnership will dissolve
o Q 132-1, 2, 3
• Limited Partnerships
o Generally; compare with partnerships
 Limited partners are NOT personally liable for debts; they are only
liable for taxes on distributions to them, whereas general partners are
liable for all of it
o Formation of a limited partnership (Q 752-1) – a filing needs to be made with
the state in order to put the world on notice that some of the partners are
not subject to personal liability
 RULPA 303
o Decision-making in a limited partnership – under current law, limited
partners are allowed to participate in management decisions without
incurring liability for those decisions
o Liability issues – Course Supp. Item 2
o Q 755-1, 2 – if a limited partner takes over general control of the partnership,
then he might become personally liable for any debts incurred

CORPORATIONS – owners (shareholders) are not personally liable for any debts; the
corporation is run by management (directors, officers, and employees) and is a separate
legal entity

A. General matters and formation of a corporation

• Sources of corporate law
o State statutes (MBCA) – corporations are a creature of state law
o Organizational documents – articles of incorporation, bylaws, and other
agreements
o Case law (common law)
o Federal statutes
• State of incorporation/qualifying as a foreign corporation – Incorporation can occur
in any state, but most corporations incorporate in state that it does business in
o Delaware is a popular state because their laws are corporation-friendly
o Q 154-1, 3 – to qualify as a foreign corporation there must be sufficient
minimum contacts (very fact intensive) and the requirements in the state
statute must be followed
• Forming a corporation
o MBCA 2.01 – one or more persons may act as the incorporator or
incorporators of a corporation by delivering articles of incorporation to the
secretary of state for filing
o MBCA 2.03 – Unless a delayed effective date is specified, the corporate
existence begins when the articles of incorporation are filed
 Secretary of state’s filing of the articles is conclusive proof that the
incorporators satisfied all conditions precedent to incorporation except
in a proceeding by the state to cancel or revoke the incorporation or
involuntarily dissolve the corporation
o Articles of Incorporation (MBCA 2.02) – document that puts world on notice
that corporation is doing business (prevail over the bylaws because they are

18
 a PUBLIC document)
 The articles of incorporation MUST set forth:
• a corporate name for the corporation that satisfies the
requirements of section 4.01;
• the number of shares the corporation is authorized to issue;
• the street address of the corporation's initial registered office and
the name of its initial registered agent at that office; and
• the name and address of each incorporator
 The articles of incorporation MAY set forth:
• the names and addresses of the individuals who are to serve as
the initial directors;
• provisions not inconsistent with law regarding:
o the purpose or purposes for which the corporation is
organized;
o managing the business and regulating the affairs of the
corporation
o defining, limiting, and regulating the powers of the
corporation, its board of directors, and shareholders;
o a par value for authorized shares or classes of shares;
o the imposition of personal liability on shareholders for the
debts of the corporation to a specified extent and upon
specified conditions;
• any provision that under this Act is required or permitted to be
set forth in the bylaws;
• a provision eliminating or limiting the liability of a director to the
corporation or its shareholders for money damages for any
action taken, or any failure to take any action, as a director,
except liability for (A) the amount of a financial benefit received
by a director to which he is not entitled; (B) an intentional
infliction of harm on the corporation or the shareholders; (C) a
violation of section 8.33; or (D) an intentional violation of
criminal law; and
• a provision permitting or making obligatory indemnification of a
director for liability (as defined in section 8.50(5)) to any person
for any action taken, or any failure to take any action, as a
director, except liability for (A) receipt of a financial benefit to
which he is not entitled, (B) an intentional infliction of harm on
the corporation or its shareholders, (C) a violation of section 8.33
or (D) an intentional violation of criminal law.
 Articles of incorporation need not set forth any corporate powers
enumerated in this Act.
o Bylaws – not required to be filed in the state of incorporation because they
are internal documents; they essentially tell how the corporation runs and
what management does
 MBCA 2.06 – The incorporators or board of directors shall adopt initial
bylaws
 The bylaws may contain any provision for managing the business and
regulating the affairs of the corporation that is not inconsistent with
19
 law or the articles of incorporation
o Q 143-1, 2
• Pre-incorporation transactions – REMEMBER: if several guys get together BEFORE
incorporation, then a partnership technically exists and those rules must be
followed as well
o Promoters – acts on behalf of the corporation and does most everything in
preparation; promoter must take SOME action
 MBCA 2.04 – all persons purporting to act as or on behalf of a
corporation, knowing there was no incorporation under this act, are
jointly and severally liable for all liabilities created while acting (basis
for promoter liability)
• Agency law kicks in here too because promoter is an agent of the
corporation; Promoter becomes a party to the K if the corporation
is non-existent
 Q 144-1, 145-2, 3, 4 – after the corporation is formed, the promoter is
still liable UNLESS the 3rd party that entered into the transaction with
the corporation relieves him of liability (novation)
o Incorporators – files the documents with the secretary of state; liability only
extends to screwed up filings

B. Issuing Stock and Associated Matters – Financing a corporation

• Authorized Shares (MBCA 6.01) – the number of shares that a corporation can issue
(maximum)
o The articles of incorporation must set forth any classes of shares and series
of shares within a class, and the number of shares of each class and series,
that the corporation is authorized to issue. If more than one class of shares
or series of shares is authorized, the articles of incorporation must prescribe
a distinguishing designation for each class or series and must describe, prior
to the issuance of shares of a class or series, the terms, including the
preferences, rights, and limitations, of that class or series. Except to the
extent varied as permitted by this section, all shares of a class or series must
have terms, including preferences, rights and limitations, that are identical
with those of other shares of the same class or series.
o The articles of incorporation must authorize (1) one or more classes of
shares that together have unlimited voting rights, and (2) one or more
classes of shares (which may be the same class or classes as those with
voting rights) that together are entitled to receive the net assets of the
corporation upon dissolution.
o The articles of incorporation may authorize one or more classes or series of
shares that:
 have special, conditional, or limited voting rights, or no right to vote,
except to the extent otherwise provided by this Act;
 are redeemable or convertible as specified in the articles of
incorporation:
• at the option of the corporation, the shareholder, or another
person or upon the occurrence of a specified event;
• for cash, indebtedness, securities, or other property; and
• at prices and in amounts specified, or determined in accordance
with a formula;
20
  entitle the holders to distributions calculated in any manner, including
dividends that may be cumulative, non-cumulative, or partially
cumulative;
 have preference over any other class of shares with respect to
distributions, including dividends and distributions upon the dissolution
of the corporation
• Issued and Outstanding Shares (MBCA 6.03) – shares that are currently in hands of
stockholders
o A corporation may issue the number of shares of each class or series
authorized by the articles of incorporation; shares that are issued are
outstanding shares until they are reacquired, redeemed, converted, or
cancelled
o The reacquisition, redemption, or conversion of outstanding shares is subject
to the limitations of subsection (c) of this section and to section 6.40
o At all times that shares of the corporation are outstanding, one or more
shares that together have unlimited voting rights and one or more shares
that together are entitled to receive the net assets of the corporation upon
dissolution must be outstanding.
• Share issuance (MBCA 6.21 (b and c)) – validly issued, fully paid, and non-
assessable
o (b) The board of directors may authorize shares to be issued for
consideration consisting of any tangible or intangible property or benefit to
the corporation, including cash, promissory notes, services performed,
contracts for services to be performed, or other securities of the corporation
o (c) Before the corporation issues shares, the board of directors must
determine that the consideration received or to be received for shares to be
issued is adequate. That determination by the board of directors is
conclusive insofar as the adequacy of consideration for the issuance of
shares relates to whether the shares are validly issued, fully paid, and non-
assessable
o (d) When the corporation receives the consideration for which the board of
directors authorized the issuance of shares, the shares issued therefore are
fully paid and non-assessable
o (f)
 An issuance of shares or other securities convertible into or rights
exercisable for shares, in a transaction or a series of integrated
transactions, requires approval of the shareholders, at a meeting at
which a quorum consisting of at least a majority of the votes entitled to
be cast on the matter exists, if:
• the shares, other securities, or rights are issued for consideration
other than cash or cash equivalents, and
• the voting power of shares that are issued and issuable as a
result of the transaction or series of integrated transactions will
comprise more than 20 percent of the voting power of the shares
of the corporation that were outstanding immediately before the
transaction
 In this subsection:
• For purposes of determining the voting power of shares issued
and issuable as a result of a transaction or series of integrated
21
 transactions, the voting power of shares shall be the greater of
(A) the voting power of the shares to be issued, or (B) the voting
power of the shares that would be outstanding after giving effect
to the conversion of convertible shares and other securities and
the exercise of rights to be issued
• A series of transactions is integrated if consummation of one
transaction is made contingent on consummation of one or more
of the other transactions
• Classes of stock – determines voting and dividend rights
o MBCA 6.02 – terms of class or series determined by board of directors
 If the articles of incorporation so provide, the board of directors is
authorized, without shareholder approval, to:
• classify any unissued shares into one or more classes or into one
or more series within a class
• reclassify any unissued shares of any class into one or more
classes or into one or more series within one or more classes, or
• reclassify any unissued shares of any series of any class into one
or more classes or into one or more series within a class
 (b) If the board of directors acts pursuant to subsection (a), it must
determine the terms, including the preferences, rights and limitations,
to the same extent permitted under section 6.01, of:
• any class of shares before the issuance of any shares of that
class, or
• any series within a class before the issuance of any shares of
that series
 (c) Before issuing any shares of a class or series created under this
section, the corporation must deliver to the secretary of state for filing
articles of amendment setting forth the terms determined under
subsection (a).
 (d) Before issuing any shares of a class or series created under this
section, the corporation must deliver to the secretary of state for filing
articles of amendment, which are effective without shareholder action,
that set forth:
• the name of the corporation;
• the text of the amendment determining the terms of the class or
series of shares
• the date it was adopted; and
• a statement that the amendment was duly adopted by the board
of directors
o Common stock – simple stock
o Preferred stock – any class of stock that has a preference over another class
of stock (dividend, liquidation, redemption rights)
o Certificate of Determination – document that establishes the rights of certain
stockholders; board approval is needed if new rights of shares of stock
change the rights of other shares
o Par value – amount per share that a share is worth before it is sold to the
public; this is the minimum price that a share of stock can be sold to the
public for
22
  Stated capital – includes at least the aggregate par value of all issued
shares
 Capital surplus – additional paid-in capital that may be distributed back
to shareholders in the form of dividends
 Q 150-1, 8 – ratio of shares and how many shares one has determines
voting power, right to dividends, etc.
• Stock markets and liquidity – how easily the market place can absorb a transaction
o Distinguish between issuance, in which corporation sells their own shares to
someone else and 3rd part transaction, in which the stocks are traded in a
market
o When the corporation sells increased number f shares, illiquidity is increased
• Dividends – payments to shareholders of profits based on stock ownership

C. Ultra Vires (without power) and Intra Vires (within power) Acts – Corporate
Powers
• Purposes (MBCA 3.01) – Every corporation incorporated under this Act has the
purpose of engaging in any lawful business unless a more limited purpose is set
forth in the articles of incorporation
• General Powers (MBCA 3.02) – Unless its articles of incorporation provide
otherwise, every corporation has perpetual duration and succession in its
corporate name and has the same powers as an individual to do all things
necessary or convenient to carry out its business and affairs, including without
limitation power:
o to sue and be sued, complain and defend in its corporate name
o (2)to have a corporate seal, which may be altered at will, and to use it, or a
facsimile of it, by impressing or affixing it or in any other manner
reproducing it
o to make and amend bylaws, not inconsistent with its articles of incorporation
or with the laws of this state, for managing the business and regulating the
affairs of the corporation;
o to purchase, receive, lease, or otherwise acquire, and own, hold, improve,
use, and otherwise deal with, real or personal property, or any legal or
equitable interest in property, wherever located
o to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of
all or any part of its property;
o to purchase, receive, subscribe for, or otherwise acquire; own, hold, vote,
use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and
with shares or other interests in, or obligations of, any other entity
o to make contracts and guarantees, incur liabilities, borrow money, issue its
notes, bonds, and other obligations (which may be convertible into or include
the option to purchase other securities of the corporation), and secure any of
its obligations by mortgage or pledge of any of its property, franchises, or
income
o to lend money, invest and reinvest its funds, and receive and hold real and
personal property as security for repayment
o to be a promoter, partner, member, associate, or manager of any
partnership, joint venture, trust, or other entity;
o to conduct its business, locate offices, and exercise the powers granted by
this Act within or without this state;
23
 o to elect directors and appoint officers, employees, and agents of the
corporation, define their duties, fix their compensation, and lend them
money and credit
o to pay pensions and establish pension plans, pension trusts, profit sharing
plans, share bonus plans, share option plans, and benefit or incentive plans
for any or all of its current or former directors, officers, employees, and
agents
o to make donations for the public welfare or for charitable, scientific, or
educational purposes
o to transact any lawful business that will aid governmental policy
o to make payments or donations, or do any other act, not inconsistent with
law, that furthers the business and affairs of the corporation
• Ultra Vires Acts (MBCA 3.04)
o Except as provided in subsection (b), the validity of corporate action may not
be challenged on the ground that the corporation lacks or lacked power to
act
o A corporation's power to act may be challenged:
 in a proceeding by a shareholder against the corporation to enjoin the
act;
 in a proceeding by the corporation, directly, derivatively, or through a
receiver, trustee, or other legal representative, against an incumbent
or former director, officer, employee, or agent of the corporation
o In a shareholder's proceeding under subsection (b)(1) to enjoin an
unauthorized corporate act, the court may enjoin or set aside the act, if
equitable and if all affected persons are parties to the proceeding, and may
award damages for loss (other than anticipated profits) suffered by the
corporation or another party because of enjoining the unauthorized act.
• AP Smith v Barlow – board of directors donated $1500 to Princeton and company
argued it was an ultra vires act because the company was formed before the law
went into effect and the certificate of incorporation did not authorize such
donations; company also argued that common law did not allow it either
(management cannot donate funds for philanthropic reasons unless it is beneficial
to the company); court held that the law allowing donations applied retroactively
and that the board could make the donation
• Q 10-1, 11-1

D. Liability of Shareholders
• GR – no personal liability of shareholders – MBCA 6.22
o A purchaser from a corporation of its own shares is not liable to the
corporation or its creditors with respect to the shares except to pay the
consideration for which the shares were authorized to be issued or specified
in the subscription agreement
o Unless otherwise provided in the articles, a shareholder of a corporation is
not personally liable for the acts or debts of the corporation except that he
may become personally liable by reason of his own acts or conduct
• Contractual exceptions – corporation can alter the contract to make a shareholder
liable, such as a personal guarantee
• Piercing the Corporate Veil – a combination of factors that allows P to pierce the
corporation and go after a shareholder (usually a majority shareholder)
24
 o Dewitt Truck v W Ray Fleming Fruit – RF got trucks to deliver his fruit;
truck company owed $15,000 and RF went bankrupt so RF made a personal
guarantee on the debt; court held that creditor could pierce the corporate
veil because RF was using the corporation as a façade to do business – he
didn’t have board meetings, didn’t know about shares issued, he took money
from the corporation; creditor was essentially led to believe he was dealing
only with RF
 Factors to Consider (Q 164-1) – undercapitalization (not enough
funds to operate – determined at the time shares are purchased or
when money is taken out), failure to observe corporate formalities,
non-payment of dividends, insolvency of the debtor corporation at the
time, siphoning funds of the corporation by dominant shareholder
(fraud), non-functioning of other directors or officers, absence of
corporate records, fact that the corporation is a façade for the
operations of the dominant stockholder
o In re Silicon Breast Implants – Bristol was parent of MEC, which was
selling breast implants; issue was whether a corporation who is the sole
shareholder of a subsidiary can be held liable for wrongful action; court
applied similar factors as Fleming Fruit and held that corporate veil could be
pierced here because B execs were board of directors of MEC, B provided
money for testing, B marketed the implants, revenue went directly to B, and
MEC essentially acted as a bank account for B; P essentially thought they
were buying implants from Bristol
 Q 173-1
• Enterprise Liability – ALL of the brother or sister corporations engaged in a given
industry form a collective enterprise getting direction from a single source – the
ultimate parent
o Walkovszky v Carlton – 10 taxi companies all owned by the same actor but
each is separately incorporated; court held that enterprise liability pierces
the walls of one corporation not to go after the assets of a shareholder, BUT
to go after the assets of related companies
 The companies have to be engaged in the same BUSINESS PURPOSE –
subsidiaries are formed for that same purpose
o For liability, the enterprise as a whole would be liable and the assets of all of
the members would be available to pay claims against the enterprise
• Secondary sales of stock – this is very rare

E. Management and other constituents of a corporation

• The Board of Directors – NOT agents of the corporation; but look out for multiple
hats; manage the business, set policy, select officers and other agents
o Requirements for and duties of Board (MBCA 8.01) – Except as provided in
7.32, each corporation must have a board of directors; all corporate powers
shall be exercised by or under the authority of, and the business and affairs
of the corporation managed by or under the direction of, its board of
directors, subject to any limitations in the articles or 7.32
o Qualification of Directors (MBCA 8.02) – The articles of incorporation or
bylaws may prescribe qualifications for directors. A director need not be a
resident of this state or a shareholder of the corporation unless the articles of
incorporation or bylaws so prescribe
25
o Five major procedural questions to ask (Course Supp. Item 3; Q 186-1, 2):
 Who has the power to call or convene meetings?
 What notice is required for meetings?
 How many directors must be present to constitute a quorum?
 What vote is required for approval of a resolution?
 May the board act informally?
o Meetings (MBCA 8.20)
 The board of directors may hold regular or special meetings in or out of
this state
 Unless the articles of incorporation or bylaws provide otherwise, the
board of directors may permit any or all directors to participate in a
regular or special meeting by, or conduct the meeting through the use
of, any means of communication by which all directors participating
may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in
person at the meeting
o Action without a meeting (MBCA 8.21)
 Unless the articles of incorporation or bylaws provide otherwise, action
required or permitted by this Act to be taken at a board of directors'
meeting may be taken without a meeting if the action is taken by all
members of the board. The action must be evidenced by one or more
written consents describing the action taken, signed by each director,
and included in the minutes or filed with the corporate records
reflecting the action taken
 Action taken under this section is effective when the last director signs
the consent, unless the consent specifies a different effective date
 A consent signed under this section has the effect of a meeting vote
and may be described as such in any document
o Notice of a meeting (MBCA 8.22)
 Unless the articles of incorporation or bylaws provide otherwise,
regular meetings of the board of directors may be held without notice
of the date, time, place, or purpose of the meeting
 Unless the articles of incorporation or bylaws provide for a longer or
shorter period, special meetings of the board of directors must be
preceded by at least two days' notice of the date, time, and place of
the meeting. The notice need not describe the purpose of the special
meeting unless required by the articles of incorporation or bylaws
o Waiver of notice (MBCA 8.23)
 A director may waive any notice required by this Act, the articles of
incorporation, or bylaws before or after the date and time stated in the
notice. Except as provided by subsection (b), the waiver must be in
writing, signed by the director entitled to the notice, and filed with the
minutes or corporate records.
 A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director at the
beginning of the meeting (or promptly upon his arrival) objects to
holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.

26
 o Quorum and Voting (MBCA 8.24)
 Unless the articles of incorporation or bylaws require a greater number
or unless otherwise specifically provided in this Act, a quorum of a
board of directors consists of:
• a majority of the fixed number of directors if the corporation has
a fixed board size; or
• a majority of the number of directors prescribed, or if no number
is prescribed the number in office immediately before the
meeting begins, if the corporation has a variable-range size
board.
 The articles of incorporation or bylaws may authorize a quorum of a
board of directors to consist of no fewer than one-third of the fixed or
prescribed number of directors determined under subsection (a).
 If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the board of directors unless
the articles of incorporation or bylaws require the vote of a greater
number of directors.
 A director who is present at a meeting of the board of directors or a
committee of the board of directors when corporate action is taken is
deemed to have assented to the action taken unless: (1) he objects at
the beginning of the meeting (or promptly upon his arrival) to holding it
or transacting business at the meeting; (2) his dissent or abstention
from the action taken is entered in the minutes of the meeting; or (3)
he delivers written notice of his dissent or abstention to the presiding
officer of the meeting before its adjournment or to the corporation
immediately after adjournment of the meeting. The right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
• Officers – they ARE agents of the corporation; execute board decisions, manage
day to day operations
o A corporation has the offices described in its bylaws or designated by the
board of directors in accordance with the bylaws.
o The board of directors may elect individuals to fill one or more offices of the
corporation. An officer may appoint one or more officers if authorized by the
bylaws or the board of directors.
o The bylaws or the board of directors shall assign to one of the officers
responsibility for preparing minutes of the directors' and shareholders'
meetings and for maintaining and authenticating the records of the
corporation required to be kept under sections 16.01(a) and 16.01(e).
o The same individual may simultaneously hold more than one office in a
corporation.
o Duties of Officer (MBCA 8.41) – Each officer has the authority and shall
perform the duties set forth in the bylaws or, to the extent consistent with
the bylaws, the duties prescribed by the board of directors or by direction of
an officer authorized by the board of directors to prescribe the duties of
other officers.
• Shareholder Agreements (OWNERS) – elect board of directors, vote on major
corporate actions or fundamental changes
o MBCA 7.32 Agreements – shareholder agreement that permits agreements
27
that would be unenforceable under traditional notions of acceptable
corporate practice
 An agreement among the shareholders of a corporation that complies
with this section is effective among the shareholders and the
corporation even though it is inconsistent with one or more other
provisions of this Act in that it:
• eliminates the board of directors or restricts the discretion or
powers of the board of directors;
• governs the authorization or making of distributions whether or
not in proportion to ownership of shares, subject the limitations
in section 6.40;
• establishes who shall be directors or officers of the corporation,
or their terms of office or manner of selection or removal;
• governs, in general or in regard to specific matters, the exercise
or division of voting power by or between the shareholders and
directors or by or among any of them, including use of weighted
voting rights or director proxies;
• establishes the terms and conditions of any agreement for the
transfer or use of property or the provision of services between
the corporation and any shareholder, director, officer or
employee of the corporation or among any of them;
• transfers to one or more shareholders or other persons all or part
of the authority to exercise the corporate powers or to manage
the business and affairs of the corporation, including the
resolution of any issue about which there exists a deadlock
among directors or shareholders;
• requires dissolution of the corporation at the request of one or
more of the shareholders or upon the occurrence of a specified
event or contingency; or
• otherwise governs the exercise of the corporate powers or the
management of the business and affairs of the corporation or the
relationship among the shareholders, the directors and the
corporation, or among any of them, and is not contrary to public
policy.
 An agreement authorized by this section shall be:
• (1) set forth (A) in the articles of incorporation or bylaws and
approved by all persons who are shareholders at the time of the
agreement or (B) in a written agreement that is signed by all
persons who are shareholders at the time of the agreement and
is made known to the corporation;
• (2) subject to amendment only by all persons who are
shareholders at the time of the amendment, unless the
agreement provides otherwise; and
• (3) valid for 10 years, unless the agreement provides otherwise.
 The existence of an agreement authorized by this section shall be
noted conspicuously on the front or back of each certificate for
outstanding shares or on the information statement required by section
6.26(b). If at the time of the agreement the corporation has shares

28
 outstanding represented by certificates, the corporation shall recall the
outstanding certificates and issue substitute certificates that comply
with this subsection. The failure to note the existence of the agreement
on the certificate or information statement shall not affect the validity
of the agreement or any action taken pursuant to it. Any purchaser of
shares who, at the time of purchase, did not have knowledge of the
existence of the agreement shall be entitled to rescission of the
purchase. A purchaser shall be deemed to have knowledge of the
existence of the agreement if its existence is noted on the certificate or
information statement for the shares in compliance with this
subsection and, if the shares are not represented by a certificate, the
information statement is delivered to the purchaser at or prior to the
time of purchase of the shares. An action to enforce the right of
rescission authorized by this subsection must be commenced within
the earlier of 90 days after discovery of the existence of the agreement
or two years after the time of purchase of the shares.
 An agreement authorized by this section shall cease to be effective
when shares of the corporation are listed on a national securities
exchange or regularly traded in a market maintained by one or more
members of a national or affiliated securities association. If the
agreement ceases to be effective for any reason, the board of directors
may, if the agreement is contained or referred to in the corporation's
articles of incorporation or bylaws, adopt an amendment to the articles
of incorporation or bylaws, without shareholder action, to delete the
agreement and any references to it.
 An agreement authorized by this section that limits the discretion or
powers of the board of directors shall relieve the directors of, and
impose upon the person or persons in whom such discretion or powers
are vested, liability for acts or omissions imposed by law on directors
to the extent that the discretion or powers of the directors are limited
by the agreement.
 The existence or performance of an agreement authorized by this
section shall not be a ground for imposing personal liability on any
shareholder for the acts or debts of the corporation even if the
agreement or its performance treats the corporation as if it were a
partnership or results in failure to observe the corporate formalities
otherwise applicable to the matters governed by the agreement.
 Incorporators or subscribers for shares may act as shareholders with
respect to an agreement authorized by this section if no shares issued
when the agreement is made
o Villar v Kiernan – V was in a bad situation with K; K broke an agreement
that said they wouldn’t get salaries, only distributions; K was hired as a
consultant and got paid a salary; V claimed the agreement was valid; K
argued it was invalid because it wasn’t in writing as required by state
statute; court held that the agreement was INVALID because it wasn’t in
writing – this is an express requirement in the state statute (7.32 agreements
must comply EXACTLY with the rules)

F. Voting Agreements and Shareholder Matters

29
• Voting Agreements
o Director voting agreements – valid if they elect board of directors; invalid if
they elect the board as officers (unless it is a 7.32 agreement)
 McQuade v Stoneham – S became majority shareholder and McQ
and McG got smaller shares; they made an agreement in which they
took different officer positions; McQ and S got into an argument and
McQ was fired and kicked off Board of Directors; court held that S could
do this because it was in the best interest of the corporation; court
held that the agreement was invalid because it restricted the board
from properly managing the company – directors could not agree to
make themselves officers
o Shareholder voting agreements – contrast with director voting agreements
 MBCA 7.31 – voting agreements – (a) Two or more shareholders may
provide for the manner in which they will vote their shares by signing
an agreement for that purpose. A voting agreement created under this
section is not subject to the provisions of section 7.30; (b) A voting
agreement created under this section is specifically enforceable
 Ringling Brothers – shares divided between R, H, and N; R claimed
that her and H agreed to vote for the same directors and H claims that
the agreement was invalid because she wanted to vote differently than
the agreement stated; court held that agreement was valid and that H
must vote accordingly because shareholders have the ability to make
voting agreements and they are absolutely enforced
• Shareholder voting – Electing directors, removing directors, and filling vacancies
o MBCA 7.21 – voting entitlement of shares
 Except as provided in subsections (b) and (c) or unless the articles of
incorporation provide otherwise, each outstanding share, regardless of
class, is entitled to one vote on each matter voted on at a
shareholders' meeting. Only shares are entitled to vote.
 Absent special circumstances, the shares of a corporation are not
entitled to vote if they are owned, directly or indirectly, by a second
corporation, domestic or foreign, and the first corporation owns,
directly or indirectly, a majority of the shares entitled to vote for
directors of the second corporation.
 Subsection (b) does not limit the power of a corporation to vote any
shares, including its own shares, held by it in a fiduciary capacity.
 Redeemable shares are not entitled to vote after notice of redemption
is mailed to the holders and a sum sufficient to redeem the shares has
been deposited with a bank, trust company, or other financial
institution under an irrevocable obligation to pay the holders the
redemption price on surrender of the shares.
o 8.03 – number and election of board of directors
 A board of directors must consist of one or more individuals, with the
number specified in or fixed in accordance with the articles of
incorporation or bylaws.
 The number of directors may be increased or decreased from time to
time by amendment to, or in the manner provided in, the articles of
incorporation or the bylaws.
 Directors are elected at the first annual shareholders' meeting and at
30
 each annual meeting thereafter unless their terms are staggered under
section 8.06.
o 8.06 – staggered terms for directors – The articles of incorporation may
provide for staggering the terms of directors by dividing the total number of
directors into two or three groups, with each group containing one-half or
one-third of the total, as near as may be. In that event, the terms of directors
in the first group expire at the first annual shareholders' meeting after their
election, the terms of the second group expire at the second annual
shareholders' meeting after their election, and the terms of the third group, if
any, expire at the third annual shareholders' meeting after their election. At
each annual shareholders' meeting thereafter, directors shall be chosen for a
term of two years or three years, as the case may be, to succeed those
whose terms expire.
o 8.08 – removal of directors by shareholders
 The shareholders may remove one or more directors with or without
cause unless the articles of incorporation provide that directors may be
removed only for cause.
 If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to
remove him.
 If cumulative voting is authorized, a director may not be removed if the
number of votes sufficient to elect him under cumulative voting is
voted against his removal. If cumulative voting is not authorized, a
director may be removed only if the number of votes cast to remove
him exceeds the number of votes cast not to remove him.
 A director may be removed by the shareholders only at a meeting
called for the purpose of removing him and the meeting notice must
state that the purpose, or one of the purposes, of the meeting is
removal of the director.
o 8.10 – vacancy on the board
 Unless the articles of incorporation provide otherwise, if a vacancy
occurs on a board of directors, including a vacancy resulting from an
increase in the number of directors:
• the shareholders may fill the vacancy;
• the board of directors may fill the vacancy; or
• if the directors remaining in office constitute fewer than a
quorum of the board, they may fill the vacancy by the affirmative
vote of a majority of all the directors remaining in office.
 If the vacant office was held by a director elected by a voting group of
shareholders, only the holders of shares of that voting group are
entitled to vote to fill the vacancy if it is filled by the shareholders.
 A vacancy that will occur at a specific later date (by reason of a
resignation effective at a later date under section 8.07(b) or otherwise)
may be filled before the vacancy occurs but the new director may not
take office until the vacancy occurs.
• Forms of voting
o MBCA 7.28 – voting for directors and cumulative voting
 Unless otherwise provided in the articles of incorporation, directors are
elected by a plurality of the votes cast by the shares entitled to vote in
31
 the election at a meeting at which a quorum is present.
• Straight voting – for each shareholder for each position up for
election, the number of votes equals the number of shares; top
vote getters are elected
• Normal v Plurality – majority shareholder has significant power
under this type of voting scheme because he can elect an entire
board
 Shareholders do not have a right to cumulate their votes for directors
unless the articles of incorporation so provide. A statement included in
the articles of incorporation that [all] [a designated voting group of]
shareholders are entitled to cumulate their votes for directors (or
words of similar import) means that the shareholders designated are
entitled to multiply the number of votes they are entitled to cast by the
number of directors for whom they are entitled to vote and cast the
product for a single candidate or distribute the product among two or
more candidates.
• Cumulative Voting – unlike straight voting, cumulative allows
shareholders to accumulate all of their votes and split them
among a few candidates or even cast all of them for one
candidate; this increases the chances of at least some board
representation for minority shareholders
• Cumulative voting only affects the election of directors; it does
not apply to any other shareholder voting at meetings of
shareholders; such as whether to approve an amendment to the
articles or a merger with another corp.
• Q 201-1, 3
• Formula for smart voting: (S/D+1) + “1” = shares needed to
elect one director
o (S/D+1) – tells how many shares are needed to tie
o “1” – the amount needed to round up to number of votes
needed to win
 Shares otherwise entitled to vote cumulatively may not be voted
cumulatively at a particular meeting unless:
• the meeting notice or proxy statement accompanying the notice
states conspicuously that cumulative voting is authorized; or
• a shareholder who has the right to cumulate his votes gives
notice to the corporation not less than 48 hours before the time
set for the meeting of his intent to cumulate his votes during the
meeting, and if one shareholder gives this notice all other
shareholders in the same voting group participating in the
election are entitled to cumulate their votes without giving
further notice.
• Supermajority provisions – Distinguish between majority of outstanding shares
and majority of shares present (so long as quorum is present) (MBCA 7.27 –
quorum generally and greater quorum or voting requirements)
o The articles of incorporation may provide for a greater quorum or voting
requirement for shareholders (or voting groups of shareholders) than is
provided for by this Act.

32
 o An amendment to the articles of incorporation that adds, changes, or deletes
a greater quorum or voting requirement must meet the same quorum
requirement and be adopted by the same vote and voting groups required to
take action under the quorum and voting requirements then in effect or
proposed to be adopted, whichever is greater.
• Fundamental corporate changes – mostly involves changes in the organization
of the business
o Normally, first step is board recommending approval
o Second step is shareholder approval
• Mechanics of the voting procedures of meetings – Shareholder Meetings
o Annual Meeting (MBCA 7.01)
 A corporation shall hold a meeting of shareholders annually at a time
stated in or fixed in accordance with the bylaws.
 Annual shareholders' meetings may be held in or out of this state at
the place stated in or fixed in accordance with the bylaws. If no place is
stated in or fixed in accordance with the bylaws, annual meetings shall
be held at the corporation's principal office.
 The failure to hold an annual meeting at the time stated in or fixed in
accordance with a corporation's bylaws does not affect the validity of
any corporate action.
o Special Meeting (MBCA 7.02)
 A corporation shall hold a special meeting of shareholders:
• on call of its board of directors or the person or persons
authorized to do so by the articles of incorporation or bylaws; or
• if the holders of at least 10 percent of all the votes entitled to be
cast on any issue proposed to be considered at the proposed
special meeting sign, date, and deliver to the corporation's
secretary one or more written demands for the meeting
describing the purpose or purposes for which it is to be held,
provided that the articles of incorporation may fix a lower
percentage or a higher percentage not exceeding 25 percent of
all the votes entitled to be cast on any issue proposed to be
considered. Unless otherwise provided in the articles of
incorporation, a written demand for a special meeting may be
revoked by a writing to that effect received by the corporation
prior to the receipt by the corporation of demands sufficient in
number to require the holding of a special meeting.
 If not otherwise fixed under sections 7.03 or 7.07, the record date for
determining shareholders entitled to demand a special meeting is the
date the first shareholder signs the demand.
 Special shareholders' meetings may be held in or out of this state at
the place stated in or fixed in accordance with the bylaws. If no place is
stated or fixed in accordance with the bylaws, special meetings shall
be held at the corporation's principal office.
 Only business within the purpose or purposes described in the meeting
notice required by section 7.05(c) may be conducted at a special
shareholders' meeting.
o Action without a meeting (MBCA 7.04)

33
  Action required or permitted by this Act to be taken at a shareholders'
meeting may be taken without a meeting if the action is taken by all
the shareholders entitled to vote on the action. The action must be
evidenced by one or more written consents bearing the date of
signature and describing the action taken, signed by all the
shareholders entitled to vote on the action, and delivered to the
corporation for inclusion in the minutes or filing with the corporate
records.
 If not otherwise fixed under sections 7.03 or 7.07, the record date for
determining shareholders entitled to take action without a meeting is
the date the first shareholder signs the consent under subsection (a).
No written consent shall be effective to take the corporation action
referred to therein unless, within 60 days of the earliest date appearing
on a consent delivered to the corporation in the manner required by
this section, written consents signed by all shareholders entitled to
vote on the action are received by the corporation. A written consent
may be revoked by a writing to that effect received by the corporation
prior to the receipt by the corporation of unrevoked written consents
sufficient in number to take corporate action.
 A consent signed under this section has the effect of a meeting vote
and may be described as such in any document.
 If this Act requires that notice of proposed action be given to nonvoting
shareholders and the action is to be taken by unanimous consent of
the voting shareholders, the corporation must give its nonvoting
shareholders written notice of the proposed action at least 10 days
before the action is taken. The notice must contain or be accompanied
by the same material that, under this Act, would have been required to
be sent to nonvoting shareholders in a notice of meeting at which the
proposed action would have been submitted to the shareholders for
action.
o Notice of meeting (MBCA 7.05)
 A corporation shall notify shareholders of the date, time, and place of
each annual and special shareholders' meeting no fewer than 10 nor
more than 60 days before the meeting date. Unless this Act or the
articles of incorporation require otherwise, the corporation is required
to give notice only to shareholders entitled to vote at the meeting.
 Unless this Act or the articles of incorporation require otherwise, notice
of an annual meeting need not include a description of the purpose or
purposes for which the meeting is called.
 Notice of a special meeting must include a description of the purpose
or purposes for which the meeting is called.
 If not otherwise fixed under section 7.03 or 7.07, the record date for
determining shareholders entitled to notice of and to vote at an annual
or special shareholders' meeting is the day before the first notice is
delivered to shareholders.
 Unless the bylaws require otherwise, if an annual or special
shareholders' meeting is adjourned to a different date, time, or place,
notice need not be given of the new date, time, or place if the new
date, time, or place is announced at the meeting before adjournment.
34
 If a new record date for the adjourned meeting is or must be fixed
under section 7.07, however, notice of the adjourned meeting must be
given under this section to persons who are shareholders as of the new
record date.
o Waiver of notice (MBCA 7.06)
 A shareholder may waive any notice required by this Act, the articles of
incorporation, or bylaws before or after the date and time stated in the
notice. The waiver must be in writing, be signed by the shareholder
entitled to the notice, and be delivered to the corporation for inclusion
in the minutes or filing with the corporate records.
 A shareholder's attendance at a meeting:
• waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting
objects to holding the meeting or transacting business at the
meeting;
• waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in
the meeting notice, unless the shareholder objects to considering
the matter when it is presented.
o Record owner/street name and Record date (MBCA 7.07)
 The bylaws may fix or provide the manner of fixing the record date for
one or more voting groups in order to determine the shareholders
entitled to notice of a shareholders' meeting, to demand a special
meeting, to vote, or to take any other action. If the bylaws do not fix or
provide for fixing a record date, the board of directors of the
corporation may fix a future date as the record date.
 A record date fixed under this section may not be more than 70 days
before the meeting or action requiring a determination of shareholders.
 A determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting
unless the board of directors fixes a new record date, which it must do
if the meeting is adjourned to a date more than 120 days after the date
fixed for the original meeting.
 If a court orders a meeting adjourned to a date more than 120 days
after the date fixed for the original meeting, it may provide that the
original record date continues in effect or it may fix a new record date.
o Proxies – 7.22 – shareholder can be present by (1) proxy or (2) physical
presence
 A shareholder may vote his shares in person or by proxy.
 A shareholder or his agent or attorney-in-fact may appoint a proxy to
vote or otherwise act for the shareholders by signing an appointment
form or by an electronic transmission. An electronic transmission must
contain or be accompanied by information from which one can
determine that the shareholder, the shareholder's agent, or the
shareholder's attorney-in-fact authorized the electronic transmission.
 An appointment of a proxy is effective when a signed appointment
form or an electronic transmission of the appointment is received by
the inspector of election or the officer or agent of the corporation
authorized to tabulate votes. An appointment is valid for 11 months
35
 unless a longer period is expressly provided in the appointment.
 An appointment of a proxy is revocable unless the appointment form or
electronic transmission states that it is irrevocable and the
appointment is coupled with an interest. Appointments coupled with an
interest include the appointment of:
• a pledgee;
• a person who purchased or agreed to purchase the shares;
• a creditor of the corporation who extended it credit under terms
requiring the appointment;
• an employee of the corporation whose employment contract
requires the appointment; or
• a party to a voting agreement created under section 7.31.
 The death or incapacity of the shareholder appointing a proxy does not
affect the right of the corporation to accept the proxy's authority
unless notice of the death or incapacity is received by the secretary or
other officer or agent authorized to tabulate votes before the proxy
exercises his authority under the appointment.
 An appointment made irrevocable under subsection (d) is revoked
when the interest with which it is coupled is extinguished.
 A transferee for value of shares subject to an irrevocable appointment
may revoke the appointment if he did not know of its existence when
he acquired the shares and the existence of the irrevocable
appointment was not noted conspicuously on the certificate
representing the shares or on the information statement for shares
without certificates.
 Subject to section 7.24 and to any express limitation on the proxy's
authority stated in the appointment form or electronic transmission, a
corporation is entitled to accept the proxy's vote or other action as that
of the shareholder making the appointment.
o Quorum – 7.25
 Shares entitled to vote as a separate voting group may take action on
a matter at a meeting only if a quorum of those shares exists with
respect to that matter. Unless the articles of incorporation or this Act
provide otherwise, a majority of the votes entitled to be cast on the
matter by the voting group constitutes a quorum of that voting group
for action on that matter.
 Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for
any adjournment of that meeting unless a new record date is or must
be set for that adjourned meeting.
 If a quorum exists, action on a matter (other than the election
of directors) by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes
cast opposing the action, unless the articles of incorporation
or this Act require a greater number of affirmative votes.
 An amendment of articles of incorporation adding, changing, or
deleting a quorum or voting requirement for a voting group greater
than specified in subsection (a) or (c) is governed by section 7.27.

36
  The election of directors is governed by section 7.28
• Course supp. 4; Q 204-1, 2

G. Problems with Close Corporations and Related Matters

Selling Shares of Stock
o Generally – the more private the corporation, the more difficult it is to sell
shares of stock
 Redemption – selling shares of stock back to the corporation
 Partnership dissociation – partner leaving the business
o Equal Access Rule (APPLIES ONLY TO CLOSE CORPORATIONS) – if the
stockholder whose shares were purchased was a member of the controlling
group, the controlling stockholders must offer each stockholder an equal
opportunity to sell a RATABLE number of shares to the corporation at an
identical price
 Donahue v Rod Electric – dad wanted to sell back his shares to the
close corporation because he wanted to retire; P (a minority
shareholder) wanted to sell back her shares as well but RE said no
because they didn’t have enough money; court held that all
shareholders should have an equal access to sell back shares because
there is no readily available market for stock of close corporations;
majority shareholders should not breach their fiduciary duty of good
faith when buying back shares
 TRIGGER – when corporation makes the decision to buy back any
shares
 Q 597-1, 2, 3, 4 – equal access rule can be altered by bylaws or articles
of incorporation
o Shareholder Buy-Sell agreements – K requiring the corporation or the other
shareholders to purchase shares in certain situations at a certain price
 At a minimum, these should contain:
• Trigger event
• Purchase price mechanisms
• Method or source of payment
• Who the parties are and what they are dealing with in the
agreement
 Funding considerations
 Types of agreements – One-way agreements, Cross-purchase
agreement, Redemption agreement, Wait and see agreement
 Other mechanics – valuing a business (goodwill multiplier, rate of
return on assets, last X years average earnings, capitalization factor,
combination book value, capitalization of net earnings); tailoring the
agreement; corporate notice of these arrangements
• Close Corporations – corporations with (1) a small number of stockholders, (2) no
ready market for the corporate stock, and (3) substantial majority stockholder
participation in the management, direction, and operations of the corporation
o Overview of the problems in close corporations – advantages and
disadvantages
 Why buy stock in a close corporation – more control over management
 Ways the majority can oppress the minority – various means
37
  How the minority can fight back – equal access, voting agreements,
etc.
o Salaries – paid to someone working for the corporation
 Hollis v Hill – dispute between H and Hill because H wasn’t working
hard enough; Hill eventually kicked H out of the business; court held
that Hill breached his fiduciary duty to H because he didn’t have the
authority to kick H out of the business, but H let him walk all over him;
H was still allowed to work there and receive a salary for his work
 Factors to consider
• whether the corporation typically distributes its profits in the
form of salaries
• whether the shareholder/employee owns a significant percentage
of the firm’s shares
• whether the shareholder/employee is a founder of the business
• whether the shares were received as compensation for services
• whether the employee expects the value of shares to increase
• whether employee has made a significant capital contribution
• whether the employee has demonstrated a reasonable
expectation that the returns from the investment will be obtained
through employment; and
• whether stock ownership is a requirement of employment
 Q 444-2, 3, 4, 5, 6
 Gianotti v Hamway – statute said court had full power to liquidate
assets of a corporation in certain situations involving fraud, illegality,
or oppression; court held that oppression occurred and the exclusive
remedy was dissolution because the burden shifted to D to prove that
compensation was reasonable and he didn’t meet this burden; D had
the burden because he was an interested director receiving increased
compensation from corporate funds
 Q 460-1, 2, 3 – money damages were not an option because they
weren’t in the statute
o Distributions – board of directors personally liable for unlawful distributions
 MBCA 6.40(c) – distributions to shareholders
• (a) A board of directors may authorize and the corporation may
make distributions to its shareholders subject to restriction by
the articles of incorporation and the limitation in subsection (c).
• (b) If the board of directors does not fix the record date for
determining shareholders entitled to a distribution (other than
one involving a purchase, redemption, or other acquisition of the
corporation's shares), it is the date the board of directors
authorizes the distribution.
• (c) No distribution may be made if, after giving it effect:
o (1) the corporation would not be able to pay its debts as
they become due in the usual course of business; or
o (2) the corporation's total assets would be less than the
sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) the amount that would be
needed, if the corporation were to be dissolved at the time
38
 of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are
superior to those receiving the distribution.
• (d) The board of directors may base a determination that a
distribution is not prohibited under subsection (c) either on
financial statements prepared on the basis of accounting
practices and principles that are reasonable in the circumstances
or on a fair valuation or other method that is reasonable in the
circumstances.
 MBCA 8.33 – directors liability for unlawful distributions
• (a) A director who votes for or assents to a distribution in excess
of what may be authorized and made pursuant to section 6.40(a)
or 14.09(a) is personally liable to the corporation for the amount
of the distribution that exceeds what could have been distributed
without violating section 6.40 or 14.09(a) if the party asserting
liability establishes that when taking the action the director did
not comply with section 8.30.
• (b) A director held liable under subsection (a) for an unlawful
distribution is entitled to:
o (1) contribution from every other director who could be
held liable under subsection (a) for the unlawful
distribution; and
o (2) recoupment from each shareholder of the pro-rata
portion of the amount of the unlawful distribution the
shareholder accepted, knowing the distribution was made
in violation of section 6.40(a) or 14.09(a).
• (c) A proceeding to enforce:
o (1) the liability of a director under subsection (a) is barred
unless it is commenced within two years after the date (i)
on which the effect of the distribution was measured under
section 6.40(e) or (g), (ii) as of which the violation of
section 6.40(a) occurred as the consequence of disregard
of a restriction in the articles of incorporation, or (iii) on
which the distribution of assets to shareholders under
section 14.09(a) was made; or
o (2) contribution or recoupment under subsection (b) is
barred unless it is commenced within one year after the
liability of the claimant has been finally adjudicated under
subsection (a).
 Zidell v Zidell – P quit his job because the corporation wouldn’t
double his salary; dividends then were paid, but corporation wouldn’t
pay them to P and he sued to get them; P had burden of proving bad
faith; court held that P did not meet his burden because corporation
had sufficient evidence that the dividend policy was reasonable; court
held that directors were NOT interested in this case
 Q 468-1, 2, 469-4 – if P had been fired, then he might have met his
burden
• Shareholder oppression issues – INVOLUNTARY DISSOLUTION
o MBCA 14.30 – grounds for judicial dissolution – The court may dissolve a
39
 corporation in a proceeding by a shareholder if it is established that:
 the directors are deadlocked in the management of the corporate
affairs, the shareholders are unable to break the deadlock, and
irreparable injury to the corporation is threatened or being suffered, or
the business and affairs of the corporation can no longer be conducted
to the advantage of the shareholders generally, because of the
deadlock;
 the directors or those in control of the corporation have acted, are
acting, or will act in a manner that is illegal, oppressive, or fraudulent;
 the shareholders are deadlocked in voting power and have failed, for a
period that includes at least two consecutive annual meeting dates, to
elect successors to directors whose terms have expired; or
 the corporate assets are being misapplied or wasted;
o MBCA 14.34 – election to purchase in lieu of dissolution
 In a proceeding under section 14.30(2) to dissolve a corporation that
has no shares listed on a national securities exchange or regularly
traded in a market maintained by one or more members of a national
or affiliated securities association, the corporation may elect or, if it
fails to elect, one or more shareholders may elect to purchase all
shares owned by the petitioning shareholder at the fair value of the
shares. An election pursuant to this section shall be irrevocable unless
the court determines that it is equitable to set aside or modify the
election.
 An election to purchase pursuant to this section may be filed with the
court at any time within 90 days after the filing of the petition under
section 14.30(2) or at such later time as the court in its discretion may
allow. If the election to purchase is filed by one or more shareholders,
the corporation shall, within 10 days thereafter, give written notice to
all shareholders, other than the petitioner. The notice must state the
name and number of shares owned by the petitioner and the name and
number of shares owned by each electing shareholder and must advise
the recipients of their right to join in the election to purchase shares in
accordance with this section. Shareholders who wish to participate
must file notice of their intention to join in the purchase no later than
30 days after the effective date of the notice to them. All shareholders
who have filed an election or notice of their intention to participate in
the election to purchase thereby become parties to the proceeding and
shall participate in the purchase in proportion to their ownership of
shares as of the date the first election was filed, unless they otherwise
agree or the court otherwise directs. After an election has been filed by
the corporation or one or more shareholders, the proceeding under
section 14.30(2) may not be discontinued or settled, nor may the
petitioning shareholder sell or otherwise dispose of his shares, unless
the court determines that it would be equitable to the corporation and
the shareholders, other than the petitioner, to permit such
discontinuance, settlement, sale, or other disposition.
 If, within 60 days of the filing of the first election, the parties reach
agreement as to the fair value and terms of purchase of the
petitioner's shares, the court shall enter an order directing the

40
 purchase of petitioner's shares upon the terms and conditions agreed
to by the parties.
 If the parties are unable to reach an agreement as provided for in
subsection (c), the court, upon application of any party, shall stay the
section 14.30(2) proceedings and determine the fair value of the
petitioner's shares as of the day before the date on which the petition
under section 14.30(2) was filed or as of such other date as the court
deems appropriate under the circumstances.
 Upon determining the fair value of the shares, the court shall enter an
order directing the purchase upon such terms and conditions as the
court deems appropriate, which may include payment of the purchase
price in installments, where necessary in the interest of equity,
provision for security to assure payment of the purchase price and any
additional costs, fees, and expenses as may have been awarded, and,
if the shares are to be purchased by shareholders, the allocation of
shares among them. In allocating petitioner's shares among holders of
different classes of shares, the court should attempt to preserve the
existing distribution of voting rights among holders of different classes
insofar as practicable and may direct that holders of a specific class or
classes shall not participate in the purchase. Interest may be allowed
at the rate and from the date determined by the court to be equitable,
but if the court finds that the refusal of the petitioning shareholder to
accept an offer of payment was arbitrary or otherwise not in good
faith, no interest shall be allowed. If the court finds that the petitioning
shareholder had probable grounds for relief under paragraphs (ii) or
(iv) of section 14.30(2), it may award to the petitioning shareholder
reasonable fees and expenses of counsel and of any experts employed
by him.
 Upon entry of an order under subsections (c) or (e), the court shall
dismiss the petition to dissolve the corporation under section 14.30,
and the petitioning shareholder shall no longer have any rights or
status as a shareholder of the corporation, except the right to receive
the amounts awarded to him by the order of the court which shall be
enforceable in the same manner as any other judgment.
 The purchase ordered pursuant to subsection (e), shall be made within
10 days after the date the order becomes final unless before that time
the corporation files with the court a notice of its intention to adopt
articles of dissolution pursuant to sections 14.02 and 14.03, which
articles must then be adopted and filed within 50 days thereafter. Upon
filing of such articles of dissolution, the corporation shall be dissolved
in accordance with the provisions of section 14.05 through 14.07, and
the order entered pursuant to subsection (e) shall no longer be of any
force or effect, except that the court may award the petitioning
shareholder reasonable fees and expenses in accordance with the
provisions of the last sentence of subsection (e) and the petitioner may
continue to pursue any claims previously asserted on behalf of the
corporation.
 Any payment by the corporation pursuant to an order under
subsections (c) or (e), other than an award of fees and expenses
pursuant to subsection (e), is subject to the provisions of section 6.40.
41
o Massachusetts Rule – judicial solution (common law) to close corporation
problems; shareholders stand in a fiduciary relationship with one another
 Remedy – equitable relief; court uses a balancing test to award what is
fair
 Four step analysis
• Did the controlling shareholders freeze-out a minority
shareholder? – P’s initial burden (must show oppression)
• Did the controlling shareholders have a legitimate business
purpose for their action? – D now has the burden
• Can the minority shareholder show a less harmful alternative to
the action taken by the controlling shareholders? – P’s final
burden of proof
• Court balances the legitimate business purpose against the less
ahrmful alternative
 Wilkes v Springside Nursing – 4 guys entered into nursing home
business and then W got fired after a dispute and was kicked off board
of directors; court held there was oppression because W was fired for
no reason; court held D could not provide a legitimate business
purpose because there was no showing of misconduct by W; directors
breached their duty of good faith here
o New York Rule – legislative (statutory) solution to close corporation
problems with important interpretation by the courts – statute didn’t define
oppression so the court defined it; shareholders reasonable expectations
shall be protected from oppression
 Remedy – statutory dissolution unless court sees otherwise
 Process:
• Oppression arises when majority conduct substantially defeats
expectations that, objectively viewed, were BOTH reasonable
under the circumstances AND were central to the decision to join
the venture
• Once a prima facie case of oppressive conduct is set forth, D
may demonstrate the existence of an adequate alternative
remedy (buyout of shares is always a possibility)
• Court will then have broad latitude in fashioning alternative
relief, but should not hesitate to order dissolution when
appropriate
• Protection is only for minority shareholders whose reasonable
expectations were frustrated and who has no adequate means of
recovering his investment
 Wollman v Littman – parties claimed they were in deadlock and
could not reach an agreement so they wanted the court to figure it out
for them; court held that deadlock did not necessarily trigger
dissolution so it remanded the case to determine if the deadlock in this
case warranted judicial dissolution
 In re Kemp & Beatley – G and D mad because they weren’t receiving
distributions from the corporation; court looked at statute and defined
the word oppression and said that the reason G and D entered into the
venture was to receive distributions and run the company; court held

42
 that these expectations were reasonable and D couldn’t come up with
a viable alternative remedy so dissolution or forced buyout were the
best options
o Michigan Rule – legislative (statutory) solution to close corporation
problems; shareholders rights AS shareholders are to be protected from
oppressive conduct
 Remedy – look to statute; dissolution is main remedy
 Test – Oppression arises ONLY when the conduct substantially
interferes with the interest of a shareholder AS A shareholder
• Interests protected – dividends, meeting requirements, etc.
• Interests not protected – employment, other stuff
 Franchino v Franchino – D fired P from the company and then
elected a new board of directors to kick P off board; P sued because he
thought he had been oppressed; court looked to statute that defined
oppression as effecting the rights of a shareholder as a shareholder;
court held that P had not been oppressed because employment was
NOT a right as a shareholder; there was no right as a shareholder at
stake here

H. Miscellaneous Information regarding corporations

• Limited Liability Companies – derivative of corporations and partnerships
o Generally – most popular form of business today; permits owners (often
called members) to have the option to exercise direct managerial power over
the affairs of the business without risking personal liability
 Owners get the benefit of pass-through taxation
 Sources of LLC law – ULLCA 103 (very similar to RUPA 103)
o Formation – must file articles of organization with a state
o Decision-making and operations – owners have the option to manage the
business
 Operating agreements govern internal affairs of LLC (similar to
partnership agreement or corporate bylaws); Most LLCs are extremely
flexible (mostly default rules)
 Member-managed – like a partnership
 Manager-managed – like a corporation
• Taxation of business entities
o Flow through – informational tax return and the new income or loss flows
through to the owners
 Partnership, S corporation, LLCs with more than 1 member
o Double taxation – business entity pays tax o its net income and the owners
then include dividends on their individual tax returns
 C corporation
o Disregarded entity – the entity is disregarded for tax purposes (default rule);
the owner reports income and expenses directly on his own tax return
 LLC’s with only 1 member, sole proprietorships

I. Directors’ Duties (EACH DIRECTOR IS DEALT WITH SEPARATELY)

• MBCA 8.30 (Standards of Conduct)
o Each member of the board of directors, when discharging the duties of a
43
 director, shall act (1) in good faith (duty of good faith), and (2) in a manner
the director reasonably believes to be in the best interest of the corporation
(duty of loyalty)
o The members of the board or a committee of the board, when becoming
informed in connection with their decision-making function or devoting
attention to their oversight function, shall discharge their duties with the
care that a person in a like position would reasonably believe appropriate
under similar circumstances (duty of care)
• MBCA 8.31 (Standards of Liability for Directors)
o A director shall not be liable to the corporation or its shareholders for any
decision to take or not to take action, or any failure to take any action, as a
director, unless the party asserting liability in a proceeding establishes that:
 any provision in the articles of incorporation authorized by section
2.02(b)(4) or the protection afforded by section 8.61 for action taken in
compliance with section 8.62 or 8.63, if interposed as a bar to the
proceeding by the director, does not preclude liability; and
 the challenged conduct consisted or was the result of:
• action not in good faith; or
• a decision
o which the director did not reasonably believe to be in the
best interests of the corporation, or
o as to which the director was not informed to an extent the
director reasonably believed appropriate in the
circumstances; or
• a lack of objectivity due to the director's familial, financial or
business relationship with, or a lack of independence due to the
director's domination or control by, another person having a
material interest in the challenged conduct
o which relationship or which domination or control could
reasonably be expected to have affected the director's
judgment respecting the challenged conduct in a manner
adverse to the corporation, and
o after a reasonable expectation to such effect has been
established, the director shall not have established that the
challenged conduct was reasonably believed by the
director to be in the best interests of the corporation; or
• a sustained failure of the director to devote attention to ongoing
oversight of the business and affairs of the corporation, or a
failure to devote timely attention, by making (or causing to be
made) appropriate inquiry, when particular facts and
circumstances of significant concern materialize that would alert
a reasonably attentive director to the need therefor; or
• receipt of a financial benefit to which the director was not
entitled or any other breach of the director's duties to deal fairly
with the corporation and its shareholders that is actionable under
applicable law.
o The party seeking to hold the director liable:
 for money damages, shall also have the burden of establishing that:

44
 • harm to the corporation or its shareholders has been suffered,
and
• the harm suffered was proximately caused by the director's
challenged conduct; or
 for other money payment under a legal remedy, such as compensation
for the unauthorized use of corporate assets, shall also have whatever
persuasion burden may be called for to establish that the payment
sought is appropriate in the circumstances; or
 for other money payment under an equiable remedy, such as profit
recovery by or disgorgement to the corporation, shall also have
whatever persuasion burden may be called for to establish that the
equitable remedy sought is appropriate in the circumstances.
• Business Judgment Rule – presumption that in making a business decision, the
directors of a corporation acted on an informed basis, in good faith, and in the
honest belief that the action taken was in the best interest of the corporation (look
for ANY rational basis for the decision)
o Honest business decisions made in good faith on the basis of reasonable
investigation are not actionable even though the decision is mistaken,
unfortunate, or even disastrous
o The party attacking the decision as a breach of the duty of care must rebut
the presumption that the board’s business judgment was an informed one
 Standard – GROSS NEGLIGENCE
o BJR does not apply where:
 The directors engaged in fraud, illegality, or conflict of interest (duty of
loyalty analysis), or
 Where the directors did not exercise an informed business judgment
(duty of care analysis)
o Burden shifting – if the shareholder succeeds in rebutting the presumption of
the BJR, the directors are liable to the corporation for any damages that their
actions proximately caused; at this point, the directors may argue (1) that
their actions were not the proximate cause of the harm and/or (2) the
shareholders suffered no damages
o There must be a DECISION to have protection under BJR
• Directors’ Duty of Care (remember MBCA 2.02(b)(4) can limit director liability)
o Duty of care and the BJR
 Shlensky v Wrigley – P (minority shareholder) mad because Cubs
don’t play night games when all other teams do – thinks it is hurting
revenue; none of the courts that heard this case decided whether it
was a good or bad decision – they all said it was a decision for the
directors (application of business judgment); court held that P did not
rebut the presumption because the director’s procedure in making the
decision was okay – P can sell his shares if he is mad
 Q 261-1, 2
o Breaches of the duty of care – ACTION – whether directors were “reasonably
informed” under the circumstances
 Smith v Van Gorkom – CEO gave oral speech at a special meeting
with no information or reports and then the board approved sale of the
company for $55 per share (cash out merger); individual shareholders

45
 got pissed and claimed directors made a bad decision; court applied a
“reasonably informed” test and held that the directors were not
reasonably informed because they had no information to base their
decision on; directors needed information to determine if the price was
sufficient for sale
 Q 275-2, 3, 4, 6, 7, 277-10
o Breaches of the duty of care – INACTION – whether director was reasonably
informed and whether the inaction proximately caused P’s claimed loss
 Barnes v Andrews – P (receiver) claimed D breached the duty of care
because he took no action to help the failing business; court held that
D did breach his duty of care because he didn’t keep himself informed,
BUT P did not get any damages because there was no proximate cause
in this case – P couldn’t prove that D’s inaction caused the company’s
losses
 Q 282-1, 2, 3, 5 – there is no legal requirement for a director to be a
specialist, but if he does have some knowledge, then he must bring it
to the table
 Francis v United Jersey Bank – husband died; wife did nothing, even
when she had notice, when her sons stole money from the company;
court held that there was proximate cause here because she could
have stopped this from happening
 Graham v Allis Chalmers – several employees of the corporation
pleaded guilty to antitrust violations (price fixing) and thereby caused
damage to the corporation; P sued directors claiming that they violated
their duty of care by failing to monitor the employees sufficiently to
uncover the problem; court held that the directors wee not required to
set up monitoring system until they had some reason to suspect that
their employees were not being honest
o Procedural aspects of the duty of care
 In re Caremark – company fined $250,000,000 and P alleged
directors didn’t have sufficient oversight regarding their employees
actions; court held that directors did NOT breach their duty of care
because they had no notice of employee violations – their monitoring
system was adequate under the circumstances; court approved a
settlement that increased monitoring would be used in the future;
court used a different reasonable standard than the one used in Allis
Chalmers because the standard had changed
 Q 290-1, 2
o Substantive aspects of the duty of care – if there is a waiver provision, sue
for recklessness or intentional conduct
 McCall v Scott – P alleged that directors were engaged in fraud
because the company was growing too quickly; court analyzed the
conduct as intentional because the P alleged conduct that approached
recklessness; court held that only 5 directors were liable for their
actions because the company had adopted a waiver provision similar
to MBCA 2.02(b)(4) that limited director liability
 Q 296-1, 2, 3, 4
o Using the Articles of Incorporation to limit directors’ liability for duty of care
violations – MBCA 2.02(b)(4) – (b) The articles of incorporation may set forth
46
 a provision eliminating or limiting the liability of a director to the corporation
or its shareholders for money damages for any action taken, or any failure to
take any action, as a director, except liability for (A) the amount of a financial
benefit received by a director to which he is not entitled; (B) an intentional
infliction of harm on the corporation or the shareholders; (C) a violation of
section 8.33; or (D) an intentional violation of criminal law
o When may directors rely on others – 8.30 (c), (d), and (e)
 In discharging board or committee duties a director, who does not have
knowledge that makes reliance unwarranted, is entitled to rely on the
performance by any of the persons specified in subsection (e)(1) or
subsection (e)(3) to whom the board may have delegated, formally or
informally by course of conduct, the authority or duty to perform one
or more of the board's functions that are delegable under applicable
law.
 In discharging board or committee duties a director, who does not have
knowledge that makes reliance unwarranted, is entitled to rely on
information, opinions, reports or statements, including financial
statements and other financial data, prepared or presented by any of
the persons specified in subsection (e).
 A director is entitled to rely, in accordance with subsection (c) or (d),
on:
• one or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the
functions performed or the information, opinions, reports or
statements provided;
• legal counsel, public accountants, or other persons retained by
the corporation as to matters involving skills or expertise the
director reasonably believes are matters (i) within the particular
person's professional or expert competence or (ii) as to which the
particular person merits confidence; o
• a committee of the board of directors of which the director is not
a member if the director reasonably believes the committee
merits confidence.
• Directors’ Duty of Loyalty – P must show conflict of interest, then D must show
action was fair
o MBCA 8.30 (a) (2) sets out the duty of loyalty
o Duty of loyalty issues generally arise in 3 situations:
 Director competes with the corporation
 Director takes a corporate opportunity
 Director has a personal or pecuniary interest in the decision (self-
dealing or conflict of interest)
o Duty of care v. duty of loyalty – the lines becomes blurry so always plead in
the alternative; finding that a conflict of interest does not exist may turn the
issue into a duty of care analysis
 Duty of loyalty deals with a decision in which the director has a conflict
of interest, whereas duty of care can be breached without a conflict of
interest
 If conflict of interest exists, then BJR DOES NOT apply; conflict of
interest transaction is presumed to be a breach, unless the directors
47
 can meet certain procedural and substantive requirements
• Conflict of interest might arise with FAMILY – spouse, children
residing in the home, or people over whom the director has
dominion and control
• Look for lack of objectivity and SELF-DEALING
• There is a SUBJECTIVE AND OBJECTIVE component to the analysis
 Remedy for duty of care – director or officer is liable for all damages
that the decision proximately caused the corporation, even if the
directors have made no gain from the wrongful action (subject to
2.02(b)(4))
 Remedy for duty of loyalty – rescission of the transaction; if rescission
not feasible, director or officer is liable for whatever benefit the
corporation did not, but should have received
o Competing with the corporation
 Directors – they CAN compete with the corporation as long as they act
in good faith AND they don’t use corporate resources OR cripple or
injure the business at issue (only 1 director will suffice) – can compete
in good faith
• You can prevent directors from competing in articles of
incorporation or non-compete clause
• Regenstein v J Regenstein – JR owned Whitehall store; 3 of
JR’s directors owned the Mirror; P alleged that the Mirror was
directly competing with Whitehall and taking business away from
Whitehall; court held that since there were no facts that alleged
bad faith, then the directors were allowed to compete with the
corporation’s store
• Q 299-2, 3, 300-6
• Officers – RSA 393 – unless otherwise agreed, an agent is subject
to a duty not to compete with the principal concerning the
subject matter of his agency
o Usurping corporate opportunities
 Corporate Opportunities Test (ALI Principles of Corporate
Governance) – applies to directors AND senior executives
• Corporate Opportunity
o Any opportunity to engage in a business activity of which a
director or senior executive becomes aware, in connection
with performance of functions as a director or senior
executive, or under circumstances that should reasonably
lead them to believe that the person offering the
opportunity expects it to be offered to the corporation, or
o Any opportunity to engage in a business activity of which a
director or senior executive becomes aware, through use of
corporate information or property, if resulting opportunity
is one that they should reasonably be expected to believe
would be of interest to the corporation
o Any opportunity to engage in a business activity of which a
senior executive becomes aware and knows is closely
related to a business in which the corporation is engaged

48
 or expects to engage
• GR – a director or senior executive may not take advantage of a
corporate opportunity unless:
o The director or senior executive offers the corporate
opportunity to the corporation and makes disclosure
concerning the conflict of interest and the opportunity
o The corporate opportunity is rejected by the corporation
o Either:
 The rejection of the opportunity is fair to the corp.
(SUBSTANTIVE)
 The opportunity is rejected in advance, following
disclosure, by disinterested directors, or in case of a
senior executive who is not a director, by a
disinterested superior, in a manner that satisfies the
standards of the BJR (PROCEDURAL), or
 The rejection is authorized in advance or ratified,
following disclosure, by disinterested shareholders,
and the rejection is not equivalent to a waste of
corporate assets (PROCEDURAL)
• Burden of Proof – a party who challenges the taking of a
corporate opportunity has the burden of proof, except that if
such party establishes that the requirements of (a)(3)(B) or (C)
are not met, the director or senior executive has the burden of
proving that the rejection and the taking of the opportunity were
fair to the corp.
• Ratification
• Special rule concerning delayed offering – reasonable time after
suit is filed
• Northeast Harbor v Harris – H bought 2 different properties
near the golf course of which she was president without first
informing the board; board got mad when H decided to develop
the properties; court applied the ALI test and held that the G
property was a corporate opportunity because H learned about
because of her presidency; H couldn’t show it was procedurally
fair because she didn’t initially disclose
• Q 309-1, 2, 3
 Line of Business Test (Common Law) – 8 Factor Test: corporate
fiduciary always has the burden of proof (don’t make fairness
distinctions)
• When director cannot take an opportunity
o The corporation is financially able to exploit the
opportunity
o The opportunity is within the corporation’s line of business
o Corporation has an interest or expectancy in the
opportunity
o By taking the opportunity for his own, fiduciary will thereby
be placed in a position inimicable to his duties to the
corporation

49
 • When director can take an opportunity
o Opportunity is presented to the officer or director in his
individual and not his corporate capacity
o Opportunity is not essential to the corporation
o Corporation holds no interest or expectation in the
opportunity
o Director or officer has not wrongfully employed the
resources of the corporation in pursuing or exploiting the
opportunity
• Broz v CIS – B is directors of CIS and owner of RFBC; B
approached by M to buy cellular service; M didn’t want to talk to
CIS because CIS was selling off all of their services; B took the
opportunity and CIS got mad; court applied the Line of Business
Test and held that B didn’t usurp a corporate opportunity under
the existing factors – B didn’t need to inform CIS of the deal
because CIS couldn’t even purchase themselves; if B had
approached CIS and they rejected, then he would have been free
from suit
• Q 316-1, 2, 3
o Interested director transactions – self-dealing: being on both sides of the
transaction – if P shows that procedure was bad, then burden shifts to
corporate fiduciary
 Judicial Action (MBCA 8.61) – a directors conflicting interest transaction
may not be enjoined, set aside, or give rise to an award of damages or
other sanctions, in a proceeding by a shareholder or by or in the right
of the corporation, because the director or any person with whom or
which he has a personal, economic, or other association, has an
interest in the transaction, if:
• Directors action respecting the transaction was at any time taken
in compliance with 8.62 (P has burden)
• Shareholders action respecting the transaction was at any time
taken in compliance with 8.63, or (P has burden)
• The transaction, judged according to the circumstances at the
time of commitment, is established to have been fair to the
corporation (fiduciary has burden)
 MBCA 8.62 – Director Action
• Directors' action respecting a transaction is effective for
purposes of section 8.61(b)(1) if the transaction received the
affirmative vote of a majority (but no fewer than two) of those
qualified directors on the board of directors or on a duly
empowered committee of the board who voted on the
transaction after either required disclosure to them (to the extent
the information was not known by them) or compliance with
subsection (b); provided that action by a committee is so
effective only if:
o all its members are qualified directors; and
o its members are either all the qualified directors on the
board or are appointed by the affirmative vote of a
majority of the qualified directors on the board.
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 • If a director has a conflicting interest respecting a transaction,
but neither he nor a related person of the director specified in
section 8.60(3)(i) is a party to the transaction, and if the director
has a duty under law or professional canon, or a duty of
confidentiality to another person, respecting information relating
to the transaction such that the director may not make the
disclosure described in section 8.60(4)(ii), then disclosure is
sufficient for purposes of subsection (a) if the director (1)
discloses to the directors voting on the transaction the existence
and nature of his conflicting interest and informs them of the
character and limitations imposed by that duty before their vote
on the transaction, and (2) plays no part, directly or indirectly, in
their deliberations or vote.
• A majority (but no fewer than two) of all the qualified directors on
the board of directors, or on the committee, constitutes a
quorum for purposes of action that complies with this section.
Directors' action that otherwise complies with this section is not
affected by the presence or vote of a director who is not a
qualified director.
• For purposes of this section, qualified director means, with
respect to a director's conflicting interest transaction, any
director who does not have either (1) a conflicting interest
respecting the transaction, or (2) a familial, financial,
professional, or employment relationship with a second director
who does have a conflicting interest respecting the transaction,
which relationship would, in the circumstances, reasonably be
expected to exert an influence on the first director's judgment
when voting on the transaction.
 MBCA 8.63 – standard: if shareholder action results in waste, then
director action is most likely wrong; sets out a higher vote requirement
– majority of QUALIFIED shares OUTSTANDING
• Shareholders' action respecting a transaction is effective for
purposes of section 8.61(b)(2) if a majority of the votes entitled
to be cast by the holders of all qualified shares were cast in favor
of the transaction after (1) notice to shareholders describing the
director's conflicting interest transaction, (2) provision of the
information referred to in subsection (d), and (3) required
disclosure to the shareholders who voted on the transaction (to
the extent the information was not known by them).
• For purposes of this section, qualified shares means any shares
entitled to vote with respect to the director's conflicting interest
transaction except shares that, to the knowledge, before the
vote, of the secretary (or other officer or agent of the corporation
authorized to tabulate votes), are beneficially owned (or the
voting of which is controlled) by a director who has a conflicting
interest respecting the transaction or a related person of the
director, or both.
• A majority of the votes entitled to be cast by the holders of all
qualified shares constitutes a quorum for purposes of action that
51
 complies with this section. Subject to the provisions of
subsections (d) and (e), shareholders' action that otherwise
complies with this section is not affected by the presence of
holders, or the voting, of shares that are not qualified shares.
• For purposes of compliance with subsection (a), a director who
has a conflicting interest respecting the transaction shall, before
the shareholders' vote, inform the secretary (or other officer or
agent of the corporation authorized to tabulate votes) of the
number, and the identity of persons holding or controlling the
vote, of all shares that the director knows are beneficially owned
(or the voting of which is controlled) by the director or by a
related person of the director, or both.
• If a shareholders' vote does not comply with subsection (a) solely
because of a failure of a director to comply with subsection (d),
and if the director establishes that his failure did not determine
and was not intended by him to influence the outcome of the
vote, the court may, with or without further proceedings
respecting section 8.61(b)(3), take such action respecting the
transaction and the director, and give such effect, if any, to the
shareholders' vote, as it considers appropriate in the
circumstances.
 Self-dealing transactions – the modern approach is that these
transactions are not automatically void or voidable; rather, the burden
is on the director/officer to show:
• Substantive fairness – the transaction was fair and reasonable,
whether or not disclosed, to the corporation; or
o Fair price – any price which an unrelated party might be
willing to pay or willing to accept following a normal arms
length transaction
o Benefit to the corporation – transaction must be reasonably
likely to yield favorable results from the perspective of
furthering corporate business
o Fair process – the director having a conflict of interest must
deal with the corporation honestly and in good faith
• Procedural fairness – disinterested directors or qualified
shareholders approved the transaction after the interested
directors full disclosure (MBCA 8.61 (b)) – this is what P must
argue if the transaction is approved by someone
 HMG Courtland v Gray; Q 323-1, 2 – G and F were directors of HMG;
G negotiated real estate deal with NAF; F owned part of NAF and G
indirectly owned part of NAF; F disclosed his status, but neither G nor F
disclosed G’s status; court held that both G and F were liable because
a material fact was left out of the disclosure; there was no fair dealing
here because F and G were interested and didn’t fully disclose
 Cookies Food Products v Lakes and Q 333-1, 2, 334-1 – Cook
created BBQ sauce and put plant in place with investors, including H,
to improve the job market (no oppression because expectations were
met); investors claimed H was self-dealing because he was getting all
sorts of benefits, took over distribution; profits increased and H bought
52
 majority share of stock; court applied MBCA 8.61 test and added an
additional element of good faith, honesty, and fairness; court
approached the procedural analysis and held that H didn’t have to
disclose because there were enough disinterested directors to approve
the transaction
 Lewis v Vogelstein – motion to dismiss was denied; on remand, the
entire discussion will revolve around whether the one-time options
were a waste of corporate assets; option plan approved by
shareholders because all directors were interested; P claimed proxy
statement was misleading because it didn’t contain PV of stock options
(procedural attack); court held that there was adequate disclosure so P
had burden to show WASTE of corporate assets (unanimous
shareholder approval required in waste standard)
 MBCA 8.11 – Compensation of Directors – Unless the articles of
incorporation or bylaws provide otherwise, the board of directors may
fix the compensation of directors
o Transactions with controlling shareholders
 Sinclair Oil v Levien – SO owned 97% of S; P (common stockholders)
owned 3% of S; P claimed they were being paid too much in dividends
and the money should be reinvested in the corporation; court applied
the BJR because shareholders were receiving the same dividend
benefit that S was; court held that P could not meet their burden of
proof because the dividend policy was a valid business judgment and
MBCA 8.33 was not violated
 Q 472-2

J. Derivative Actions – actions brought on corporation’s behalf against corporate

fiduciaries or 3rd parties
• Contrast with direct actions – brought on the shareholder’s own behalf against
either corporate fiduciaries or the corporation itself
o The distinction matters because various procedural hurdles need to be met
in derivative actions in order for P to bring the suit
o Eisenberg v FTL – FT own FTC, which created FTL, which merged with FT;
shareholders of FT then own shares of FTC and they were mad because their
votes were diluted; court held that this was not a derivative suit because the
injury was to the shareholders themselves and not the corporation; the suit
was direct
o Q 342-1, 2
• Standing – MBCA 7.41(Contemporaneous Owner Rule) – A shareholder may not
commence or maintain a derivative proceeding unless the shareholder:
o was a shareholder of the corporation at the time of the act or omission
complained of or became a shareholder through transfer by operation of law
from one who was a shareholder at that time; and
o fairly and adequately represents the interests of the corporation in enforcing
the right of the corporation.
o Q 347-1, 348-2, 3, 4, 5
• Joiner of other parties
o Corporation is named as a “nominal” defendant since its interests are at
stake
53
 o Breaching directors are named as “actual” defendants
• Demand on directors
o Universal Demand: MBCA 7.42 – No shareholder may commence a derivative
proceeding until:
 a written demand has been made upon corporation to take suitable
action; and
 90 days have expired from the date the demand was made unless the
shareholder has earlier been notified that the demand has been
rejected by the corporation or unless irreparable injury to the
corporation would result by waiting for the expiration of the 90 day
period.
o Equitable Demand: Delaware Rule – demand does not need to be made if it
would be futile: P must allege particularized facts which create a reasonable
doubt that:
 The directors are disinterested and independent, or
 The challenged transaction was otherwise the product of a valid
exercise of business judgment
 Marx v Akers – P alleged that directors and senior executives were
being paid too much; court applied the DL rule that demand does not
need to be made if it would be futile; court held that P made
conclusory allegations instead of alleging particularized facts about
whether directors were disinterested; suit dismissed
 Q 364-1, 2
• Special Litigation committees and dismissal of derivative suits
o Special litigation committees – group of disinterested people that board
appoints in response to a demand to pursue a derivative suit; committee has
full power to make litigation decisions
 Committee usually comprised of directors who did not participate in
the decision and cannot be named as defendants
o When a shareholder wants to file a derivative suit, three things can happen
 Board can reject the demand and shareholder is kicked out of the suit
 Board can reject based on a business judgment so shareholder needs
to show particular facts in the complaint, or
 Board can ignore the demand, in which case BJR does not apply for
inaction
o Dismissal of an action (MBCA 7.44)
 A derivative proceeding shall be dismissed by the court on motion by
the corporation if one of the groups specified in subsections (b) or (f)
has determined in good faith after conducting a reasonable inquiry
upon which its conclusions are based that the maintenance of the
derivative proceeding is not in the best interests of the corporation.
 Unless a panel is appointed pursuant to subsection (f), the
determination in subsection (a) shall be made by:
• a majority vote of independent directors present at a meeting of
the board of directors if the independent directors constitute a
quorum; or
• a majority vote of a committee consisting of two or more
independent directors appointed by majority vote of independent
54
 directors present at a meeting of the board of directors, whether
or not such independent directors constituted a quorum.
 None of the following shall by itself cause a director to be considered
not independent for purposes of this section:
• the nomination or election of the director by persons who are
defendants in the derivative proceeding or against whom action
is demanded;
• the naming of the director as a defendant in the derivative
proceeding or as a person against whom action is demanded; or
• the approval by the director of the act being challenged in the
derivative proceeding or demand if the act resulted in no
personal benefit to the director.
 If a derivative proceeding is commenced after a determination has
been made rejecting a demand by a shareholder, the complaint shall
allege with particularity facts establishing either (1) that a majority of
the board of directors did not consist of independent directors at the
time the determination was made or (2) that the requirements of
subsection (a) have not been met.
 If a majority of the board of directors does not consist of independent
directors at the time the determination is made, the corporation shall
have the burden of proving that the requirements of subsection (a)
have been met. If a majority of the board of directors consists of
independent directors at the time the determination is made, the
plaintiff shall have the burden of proving that the requirements of
subsection (a) have not been met.
 The court may appoint a panel of one or more independent persons
upon motion by the corporation to make a determination whether the
maintenance of the derivative proceeding is in the best interests of the
corporation. In such case, the plaintiff shall have the burden of proving
that the requirements of subsection (a) have not been met.
o Two part test for analyzing Special Committee Decisions
 Procedural component – corporation has the burden to prove
independence, good faith, and a reasonable investigation
 Substantive component – court applied its own business judgment to
determine if the committee’s decision was an appropriate one
o Auerbach v Bennett – board appointed special litigation committee after
suit was brought against 4 directors; committee recommended dismissal and
issue was whether BJR prevented this decision from being made; court held
that it could only consider the PROCEDURAL aspects of the committee’s
decision and since these were okay, the court didn’t get to the substantive
aspect
o Zapata v Maldonado – court applied the two part test above when the
board appointed new directors to a special committee; court held that there
are inherent conflicts of interest in these situations, so they remanded so
lower court could follow the new rule
o Q 371-1, 2, 3, 383-1
• Security for expenses – this is no longer required by the MBCA
• Demand on shareholders – this is rare, but some states require that demand be
made on shareholders before filing a derivative suit
55
 • Right to jury trial – There is normally no right to a jury trial because the 7th
Amendment does not apply to state courts, but P may be able to argue that that
underlying action is law and may then have a jury
• Court approval of disposition – MBCA 7.45 – A derivative proceeding may not be
discontinued or settled without the court's approval. If the court determines that a
proposed discontinuance or settlement will substantially affect the interests of the
corporation's shareholders or a class of shareholders, the court shall direct that
notice be given to the shareholders affected.
• Recovery – any recovery in a derivative action goes directly to the corporation
because the suit was brought on behalf of the corporation

K. Mergers and Acquisitions

• Voluntary dissolution of a corporation (CONTRAST with Involuntary
Dissolution)
o MBCA 14.02(e) – Unless the articles of incorporation or the board of directors
acting pursuant to subsection (c) require a greater vote, a greater number of
shares to be present, or a vote by voting groups, adoption of the proposal to
dissolve shall require the approval of the shareholders at a meeting at which
a quorum consisting of at least a majority of the votes entitled to be cast
exists.
o Process – approval by board; approval by shareholders; winding up and
payment to creditors; notice to known and unknown claimants; payment to
shareholders of remnants
• Types of Mergers
o Stock Acquisition – buying stock; Board doesn’t need to be involved
 Cash for Stock
 Stock for Stock (share exchange)
 Liability – no direct liability for obligations of the target; purchaser is a
stock holder and indirectly inherits the liabilities and obligations of the
target
o Asset Acquisition – buying assets; Board involved because corporation is
involved
 Cash for assets
 Stock for assets
 Liability – generally the purchaser does NOT assume the target’s
liabilities and obligations unless otherwise agreed or imposed by law –
operation of law may impose some obligations
o Statutory Merger
 Stock for stock merger (straight merger)
 Stock and cash for stock
 Cash out merger (Van Gorkom)
 Short form merger (parent/subsidiary)
 Small scale merger (MBCA 11.04(g))
 Liability – surviving corporation assumes the liabilities of the target by
operation of law
• Structure of a merger (MBCA 11.02)
o One or more domestic business corporations may merge with one or more
domestic or foreign business corporations or eligible entities pursuant to a
56
 plan of merger, or two or more foreign business corporations or domestic or
foreign eligible entities may merge into a new domestic business corporation
to be created in the merger in the manner provided in this chapter.
o The plan of merger must include:
 the name of each domestic or foreign business corporation or eligible
entity that will merge and the name of the domestic or foreign
business corporation or eligible entity that will be the survivor of the
merger;
 the terms and conditions of the merger;
 the manner and basis of converting the shares of each merging
domestic or foreign business corporation and eligible interests of each
merging domestic or foreign eligible entity into shares or other
securities, eligible interests, obligations, rights to acquire shares, other
securities or eligible interests, cash, other property, or any combination
of the foregoing;
 the articles of incorporation of any domestic or foreign business or
nonprofit corporation, or the organic documents of any domestic or
foreign unincorporated entity, to be created by the merger, or if a new
domestic or foreign business or nonprofit corporation or
unincorporated entity is not to be created by the merger, any
amendments to the survivor's articles of incorporation or organic
documents; and
 any other provisions required by the laws under which any party to the
merger is organized or by which it is governed, or by the articles of
incorporation or organic document of any such party.
o Terms of a plan of merger may be made dependent on facts objectively
ascertainable outside the plan in accordance with section 1.20(k).
o The plan of merger may also include a provision that the plan may be
amended prior to filing articles of merger, but if the shareholders of a
domestic corporation that is a party to the merger are required or permitted
to vote on the plan, the plan must provide that subsequent to approval of the
plan by such shareholders the plan may not be amended to change:
 the amount or kind of shares or other securities, eligible interests,
obligations, rights to acquire shares, other securities or eligible
interests, cash, or other property to be received under the plan by the
shareholders of or owners of eligible interests in any party to the
merger;
 the articles of incorporation of any corporation, or the organic
documents of any unincorporated entity, that will survive or be created
as a result of the merger, except for changes permitted by section
10.05 or by comparable provisions of the organic laws of any such
foreign corporation or domestic or foreign unincorporated entity; or
 any of the other terms or conditions of the plan if the change would
adversely affect such shareholders in any material respect.
• Small Scale Mergers (MBCA 11.04 – action on plan of merger)
o (e) Unless the articles of incorporation, or the board of directors acting
pursuant to subsection (c), requires a greater vote or a greater number of
votes to be present, approval of the plan of merger or share exchange
requires the approval of the shareholders at a meeting at which a quorum
57
 consisting of at least a majority of the votes entitled to be cast on the plan
exists, and, if any class or series of shares is entitled to vote as a separate
group on the plan of merger or share exchange, the approval of each such
separate voting group at a meeting at which a quorum of the voting group
consisting of at least a majority of the votes entitled to be cast on the
merger or share exchange by that voting group is present.
o (g) Unless the articles of incorporation otherwise provide, approval by the
corporation's shareholders of a plan of merger or share exchange is not
required if:
 the corporation will survive the merger or is the acquiring corporation
in a share exchange;
 except for amendments permitted by section 10.05, its articles of
incorporation will not be changed;
 each shareholder of the corporation whose shares were outstanding
immediately before the effective date of the merger or share exchange
will hold the same number of shares, with identical preferences,
limitations, and relative rights, immediately after the effective date of
change; and
 the issuance in the merger or share exchange of shares or other
securities convertible into or rights exercisable for shares does not
require a vote under section 6.21(f).
• Short Form Merger (MBCA 11.05 – merger between parent and subsidiary)
o A domestic parent corporation that owns shares of a domestic or foreign
subsidiary corporation that carry at least 90 percent of the voting power of
each class and series of the outstanding shares of the subsidiary that have
voting power may merge the subsidiary into itself or into another such
subsidiary, or merge itself into the subsidiary, without the approval of the
board of directors or shareholders of the subsidiary, unless the articles of
incorporation of any of the corporations otherwise provide, and unless, in the
case of a foreign subsidiary, approval by the subsidiary's board of directors
or shareholders is required by the laws under which the subsidiary is
organized.
o If under subsection (a) approval of a merger by the subsidiary's shareholders
is not required, the parent corporation shall, within ten days after the
effective date of the merger, notify each of the subsidiary's shareholders that
the merger has become effective.
• Effects of a merger on constituent corporations and shareholders of the
target corporation
o Problem 625-1
o MBCA 11.07 – When a merger becomes effective:
 the corporation or eligible entity that is designated in the plan of
merger as the survivor continues or comes into existence, as the case
may be;
 the separate existence of every corporation or eligible entity that is
merged into the survivor ceases;
 all property owned by, and every contract right possessed by, each
corporation or eligible entity that merges into the survivor is vested in
the survivor without reversion or impairment;
 all liabilities of each corporation or eligible entity that is merged into
58
 the survivor are vested in the survivor;
 the name of the survivor may, but need not be, substituted in any
pending proceeding for the name of any party to the merger whose
separate existence ceased in the merger;
 the articles of incorporation or organic documents of the survivor are
amended to the extent provided in the plan of merger;
 the articles of incorporation or organic documents of a survivor that is
created by the merger become effective; and
 the shares of each corporation that is a party to the merger, and the
interests in an eligible entity that is a party to a merger, that are to be
converted under the plan of merger into shares, eligible interests,
obligations, rights to acquire securities, other securities, or eligible
interests, cash, other property, or any combination of the foregoing,
are converted, and the former holders of such shares or eligible
interests are entitled only to the rights provided to them in the plan of
merger or to any rights they may have under chapter 13 or the organic
law of the eligible entity.
o When a share exchange becomes effective, the shares of each domestic
corporation that are to be exchanged for shares or other securities, interests,
obligations, rights to acquire shares or other securities, cash, other property,
or any combination of the foregoing, are entitled only to the rights provided
to them in the plan of share exchange or to any rights they may have under
chapter 13.
o A person who becomes subject to owner liability for some or all of the debts,
obligations or liabilities of any entity as a result of a merger or share
exchange shall have owner liability only to the extent provided in the organic
law of the entity and only for those debts, obligations and liabilities that arise
after the effective time of the articles of merger or share exchange.
o The effect of a merger or share exchange on the owner liability of a person
who had owner liability for some or all of the debts, obligations or liabilities
of a party to the merger or share exchange shall be as follows:
 The merger or share exchange does not discharge any owner liability
under the organic law of the entity in which the person was a
shareholder or interest holder to the extent any such owner liability
arose before the effective time of the articles of merger or share
exchange.
 The person shall not have owner liability under the organic law of the
entity in which the person was a shareholder or interest holder prior to
the merger or share exchange for any debt, obligation or liability that
arises after the effective time of the articles of merger or share
exchange.
 The provisions of the organic law of any entity for which the person
had owner liability before the merger or share exchange shall continue
to apply to the collection or discharge of any owner liability preserved
by paragraph (1), as if the merger or share exchange had not occurred.
 The person shall have whatever rights of contribution from other
persons are provided by the organic law of the entity for which the
person had owner liability with respect to any owner liability preserved
by paragraph (1), as if the merger or share exchange had not occurred.
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• Stages of the acquisition process
o Negotiate letter of intent
o Negotiate purchase agreement or plan of merger
o Board approval – course supplement item 10 and problem 626
 Target corporation
 Surviving corporation
o Shareholder approval
 Target corporation
 Surviving corporation
o Due diligence period
o Closing – documents of transfer or the articles of merger
• Shareholder protections – (1) shareholder vote, (2) appraisal rights, (3) sue
directors who approved the merger for breach of duty of care, or (4) sue directors
who approved the merger for breach of duty of loyalty
• Appraisal rights (dissenters’ rights): MBCA 13.02 (DON’T APPLY TO SHORT FORM
MERGERS)
o A shareholder is entitled to appraisal rights, and to obtain payment of the fair
value of that shareholder's shares, in the event of any of the following
corporate actions:
 consummation of a merger to which the corporation is a party (i) if
shareholder approval is required for the merger by section 11.04 and
the shareholder is entitled to vote on the merger, except that appraisal
rights shall not be available to any shareholder of the corporation with
respect to shares of any class or series that remain outstanding after
consummation of the merger, or (ii) if the corporation is a subsidiary
and the merger is governed by section 11.05;
 consummation of a share exchange to which the corporation is a party
as the corporation whose shares will be acquired if the shareholder is
entitled to vote on the exchange, except that appraisal rights shall not
be available to any shareholder of the corporation with respect to any
class or series of shares of the corporation that is not exchanged;
 consummation of a disposition of assets pursuant to section 12.02 if
the shareholder is entitled to vote on the disposition;
 an amendment of the articles of incorporation with respect to reduction
of shares
o Appraisal rights shall not be available for the holders of shares of any class or
series of shares which is:
 listed on the New York Stock Exchange or the American Stock
Exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.; or
 not so listed or designated, but has at least 2,000 shareholders and the
outstanding shares of such class or series has a market value of at
least $ 20 million (exclusive of the value of such shares held by its
subsidiaries, senior executives, directors and beneficial shareholders
owning more than 10 percent of such shares).
o Articles of incorporation may limit or eliminate appraisal rights
o A shareholder entitled to appraisal rights may not challenge a completed

60
 corporate action for which appraisal rights are available unless such
corporate action:
 was not effectuated in accordance with the applicable provisions of
chapters 10, 11 or 12 or the corporation's articles of incorporation,
bylaws or board of directors' resolution authorizing the corporate
action; or
 was procured as a result of fraud or material misrepresentation.
o MBCA 13.01(4) – fair value means the value of the corporation's shares
determined:
 immediately before the effectuation of the corporate action to which
shareholder objects;
 using customary and current valuation concepts and techniques
generally employed for similar businesses in the context of the
transaction requiring appraisal; and
 without discounting for lack of marketability or minority status except,
if appropriate, for amendments to the articles pursuant to section
13.02(a)(5).
o HMO-W v SSM, problems 638-1, 4 – SSM proposed merger; HMO got VR to
give valuation report of $18 million, then HMO said that the value was only
$7 million during the court proceedings; SSM argued that this valuation was
error; court held that HMO was worth $10 million because it was its job to
determine fair value and that all factors must be considered; court also held
that no minority discount should be applied because minority shareholders
should be protected in these situations
• Actions for breach of the duty of loyalty in mergers
o Generally – the duty of loyalty analysis remains the same, except we are in
merger land
o Weinberger v UOP – S wanted to merge with UOP and become controlling
shareholder; S had 6 of 13 directors on UOP board; 2 UOP/S directors
prepared a feasibility study with UOP information and tuned it over to S,
which valued UOP at $21-24 per share; UOP pissed because S used their info
to conduct the study and breached their duty of loyalty; court held that
directors had the burden of establishing substantive fairness (fair dealing
and fair price); court held that directors did breach their duty of loyalty and
awarded shareholders $24 per share because that is what company was
really worth
o Q 650-2, 3, 4, 6
• Sales of all, or substantially all, assets
o MBCA 12.01(1) – disposition of assets not requiring shareholder approval –
No approval of the shareholders of a corporation is required, unless the
articles of incorporation otherwise provide: (1) to sell, lease, exchange, or
otherwise dispose of any or all of the corporation's assets in the usual and
regular course of business
o MBCA 12.02(a) – shareholder approval of certain dispositions – A sale, lease,
exchange, or other disposition of assets, other than a disposition described in
section 12.01, requires approval of the corporation's shareholders if the
disposition would leave the corporation without a significant continuing
business activity. If a corporation retains a business activity that represented
at least 25 percent of total assets at the end of the most recently completed
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 fiscal year, AND 25 percent of either income from continuing operations
before taxes OR revenues from continuing operations for that fiscal year, in
each case of the corporation and its subsidiaries on a consolidated basis, the
corporation will conclusively be deemed to have retained a significant
continuing business activity.
o Effects of the transaction, particularly successor liability
 Four situations when liability is typically imposed
• Purchaser expressly or impliedly agrees to assumption of
liabilities
• Transaction amounts to a consolidation or merger of the two
companies
• The purchasing corporation is merely a continuation of the selling
corporation, or
• The transaction is entered into fraudulently to escape liability for
debts
 Determining when liability is imposed on successor corporation under
mere continuation principle
• No adequate cash consideration was given for the predecessor
corporations assets and made available for meeting the claims of
its unsecured creditors; OR
• One or more persons were officers, directors, or stockholders of
both corporations before and after the buyout
 Franklin v USX – P alleged that asbestos exposure came from
predecessor of USX; WPS was the original company, whose assets were
bought by ConCal, whose assets were bought by ConDel, who merged
with USX; issue was whether USX had successor liability because of
these transactions; court held that USX assumed the liabilities of
ConDel and that ConCal acquired the liabilities of WPS via a K
agreement; BUT liability was NOT assumed by ConDel when it
purchased ConCal, so USX is off the hook
 Q 666-1, 2, 3
o De Facto Merger Doctrine – if the asset acquisition has the effect of a merger,
shareholders receive merger-type voting and appraisal rights
 As the Franklin case demonstrates, a creditor of the selling corporation
may try to use the de facto merger doctrine to impose liability on the
buying corporation
o Board and shareholder approval – boards most likely need to approve of the
sale under 8.01
 Katz v Bergman – issue was whether shareholder approval of sale of
assets was needed; court held that shareholder approval was needed
because there was no significant business activity left after the sale of
the assets; court said it was a sale made in the regular course of
business instead of a sale that was an unusual transaction
 Course Supp. Item 10 – Safe harbor provision in 12.02(a) – 25% of
Assets AND (1) 25% Revenue OR (2) 25% Profit

L. TENDER OFFERS
• Definition – A bidder makes a “tender offer” for the stock of a corporation by

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 inviting shareholders through general solicitation or advertisement to tender their
shares for purchase at a stated price (one way to takeover)
o The stated price is generally at a substantial price premium over the stock
market price of the target corporation
o Typically, a bidder conditions the tender offer upon receiving a specified
percentage of the target’s shares, sufficient to convey control to the bidder
o Consideration is normally cash, but may often be cash, stock, preferred
stock, debt, or any combination of those
• Hostile vs. Friendly Takeovers
o Hostile – one that incumbent management and the board of directors
oppose; board may adopt various defensive measures to try to thwart a
hostile takeover
o Friendly – one that management and the board support
o Line between hostile and friendly may be blurred when a hostile bid induces
the target to seek out a more appealing acquirer (WHITE KNIGHT)
• Defensive measures generally
o State law may be favorable
o Article based defenses – staggered boards, poison pills (preferred stock
purchase plan), supermajority requirements
o White Knight defenses
 stock lock-up agreements – A board may sell its stock, or an option to
purchase its stock, to a third party (i.e., white knight) who will support
the incumbent management
 crown jewels lock-up agreements – The corporation can sell its prized
assets or subsidiaries (the “crown jewels”) to a third party (white
knight) or it can grant a third party an option to purchase the crown
jewels, which option may sometimes be made exercisable only if a
hostile bidder acquires a specified percentage of the target’s shares
 no-shop clauses – A board that enters into an agreement for a merger
or other corporate combination (whether with a white knight or
otherwise) may agree that it will not recommend the combination to
the shareholders, that it will not shop around for a more attractive
deal, or both
 break-up fees
o Leveraged Buyout defense
o Golden Parachute agreements
o Pac Man defense – who can come up with sufficient financing to buy out the
other
o Employee stock plan defense
o Regulatory/litigation/antitrust defenses
• Unocal Test – When board considers a pending takeover bid it has an obligation to
determine whether the offer is in the best interests of the corporation and its
shareholders (enhanced duty before BJR will apply) – in the face of inherent
conflicts, directors must show that they had reasonable grounds for
believing that a danger to corporate policy and effectiveness existed
because of another person’s stock ownership AND that the board’s
response was reasonable under the circumstances
o Good faith and reasonable investigation will meet this burden in most

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 circumstances
o Unocal v Mesa Petroleum – M offered to purchase U so they could control
the corporation; M owned 13% and they wanted another 37% for $54 per
share; M’s offer included junk bonds as a back-end part of the deal; in
response, U said it would buy the remaining shares for $72 in senior debt
and M sued; court held that there was a threshold analysis before BJR is
applied; court held that M’s offer was a reasonable threat because the price
was inadequate it was coercive; U’s decision was reasonable under the
circumstances; BJR comes into play after threshold conducted
o Q 681-1, 2
• Duties of the board when the corporation is up for sale
o Revlon Duties – maximize shareholder value in a given sale – keep the sale
open to all bidders
 Revlon applies when the corporation moves away from protecting its
business and becomes an auctioneer on the open market to other
potential acquirers
 Revlon v MacAndrews – PP made tender offer at 47.50; R went to F,
who made a higher offer; PP and F went back and forth and finally, R
and F signed an agreement that would bind them; PP sued and R
argued they had BJR protections pursuant to Unocal; court held that
BJR did not apply because R took action that signified it was for sale; R
was no longer defending its corporation when PP increased their bid; R
was essentially an auctioneer; court held that R did not maximize
shareholder value because the auction was shut down when it made a
deal with F
 Q 691-2
o Paramount v Time, problems 707-1,2, 3 – Time wanted to expand business
so they decided to merge with Warner; P then offered $175 per share for
Time; Time then structured the deal as a stock for cash buyout of Warner so
shareholders would not need to approve the agreement and so P would not
have any influence over shareholders; court held that Time’s action were
reasonable under a Unocal standard because they were responding to a
reasonable threat to their corporate environment and long-term deal with
Warner
o Paramount v QVC, problem 728-2 – QVC wanted to takeover P; P pissed so
they found Viacom to buy them out; court held that P was in Revlon land
because they were essentially selling control of their corporation since the
public owned P and Redstone owned Viacom; Redstone would become the
majority owner after the deal; court held that actions were not reasonable
under Revlon because they shut down the auction and didn’t maximize
shareholder value
• Federal regulation of takeovers
o Williams Act – passed in 1968 and it amends the Securities Exchange Act of
1934 to regulate tender offers
 Added 13(d), (e), and 14(d), (e), and (f) to the Exchange Act
 Mandates disclosure of stock accumulations of more than 5% of the
target’s equity securities (Toehold Acquisitions)
 Mandates disclosure and regulates the terms of tender offers
o Schedule 13-D disclosures
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 The acquirer’s (and any group member’s) identity and background
The source and the amount of funds for making the purchase
The number of the target’s shares that the acquirer holds
Any arrangements that the acquirer has with others concerning
target’s shares
 The acquirer’s purposes for the acquisition and its intentions with
respect to the target
o Substantive Terms of Tender Offers
 Minimum open period – the tender offer must be left open a minimum
of 20 business days (14e-1)
 All-holders rule – tender offer must be open to all shareholders of the
same class and not exclude any shareholders from tendering (14d-
10(a)(1)); an exclusionary self-tender is unlawful
 Best price – each shareholder must be paid the best price paid to any
other shareholder (14d-10(a)(2))
 Withdrawal rights – shareholders can withdraw their shares (revoke
their tenders) at any time while the tender offer is open (14d-7)
 Pro rata purchases – when the bidder seeks only a portion of all the
shares (partial tender offer) and the shareholders tender more than the
bidder seeks, bidder must purchase the tendered shares on a pro rata
basis (14d-8)

M. INISDER TRADING
• Federal Securities Laws
o The Securities Act of 1933 – governs offers and sales of securities
o The Securities Exchange Act of 1934 – Williams Act; Reporting obligations;
Proxies – corporation may send out mass proxies so a meeting will have a
quorum of voters to vote on a particular resolution
o Select federal securities related statutes - Public Utility Holding Company
Act, Trust Indenture Act, Investment Company Act, Investment Advisors Act,
ERISA, Sarbanes-Oxley
o State “Blue Sky” laws
• Insider trading in general
o Classic example – corporate fiduciary trades (buys or sells) shares of his
corporation using material non-public information obtained through his
corporation position – is there a duty and to whom is it owed?
o Corporate fiduciary exploits his informational advantage (a corporate asset)
at the expense of the corporation’s shareholders or others who deal in the
corporation’s stock
• Applicable Rules
o Section 10b
 It shall be unlawful for any person, directly or indirectly, by the use of
any means or instrumentality of interstate commerce or the mails, or
any facility of any national securities exchange – to use or employ, in
connection with the purchase or sale of any security registered on a
national securities exchange or any security not so registered, . . . any
manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the SEC may prescribe as necessary or

65
 appropriate in the public interest or for the protection of investors
o Rule 10b-5 – It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce or the mails, or
any facility of any national securities exchange
 To employ ay device, scheme, or artifice to defraud,
 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 light
of the circumstances under which they were made, not misleading, or
 To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person
 IN CONNECTION WITH THE PURCHASE OR SALE OF ANY
SECURITY
o Rule 10b5-1 – purchase or sale on the basis or material non-public
information in breach of a duty of trust or confidence – elements
 There must have been a purchase or sale – no transaction, no liability
 On the basis of (scienter requirement – person was aware of the
material non-public information when he made the purchase or sale)
• Exception – Affirmative Defense (see review of issues below)
 Material – a reasonable investor would consider the information
important to a buy-sell decision
 Non-public information – confidential and not made known to the
public; remains non-public until a reasonable period of time has passed
 Breach of duty of trust or confidence – duty may run directly, indirectly,
or derivatively to the issuer, shareholders, or other person who is the
source of the material non-public information
o Rule 10b5-2 – definitions of duty of trust or confidence
 Recipient agreed to maintain the information in confidence
 Persons involved have a history, pattern, or practice of sharing
confidences so the recipient had reason to know the communicator
expected the recipient to maintain the information’s confidentiality
 Communicator was a spouse, parent, child, or sibling of the recipient,
unless the recipient can show that there was no reasonable
expectation of confidentiality
• Types of people involved in these situations (Course Supp. Item 12)
o Pure insiders – corporate fiduciary (officer, director, employee) entrusted
with confidential information that uses material, non-public information to
buy or sell the corporation’s stock
o Temporary or Constructive Insiders – person with a direct relationship of trust
or confidence with the corporation through rendering professional advice to it
who uses the information from that connection to buy or sell stock
o Misappropriators (Outsiders) – outsiders with no relationship of trust or
confidence to the corporation, but who have a duty of trust or confidence to
the source of the material non-public information (tippees)
• Theories of Liability for Insider Trading
o Common Law Fraud
 Special Facts Doctrine – a fiduciary of a corporation has a duty to
disclose “special facts” when engaging in a stock transaction with a
stockholder of the corporation – fiduciary must seek out the
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 stockholder
• Generally covers any facts that a reasonable investor would
consider important in making a decision on whether to buy or sell
shares
• Duty arises when the fiduciary takes some action on the stock
 Goodwin v Agassiz – G sold some stock in mining company and A
just so happened to buy it at the same time because he had a thesis
by a geologist that said business would be good; issue was whether A
committed common law fraud because he didn’t disclose this
information to G; court held that A did not have a duty to disclose
because it was an arm’s length transaction and G didn’t even know
who he was selling his stock to
o Traditional Theory
 Abstain or Disclose Rule – a person in a position of trust or confidence
under 10b5-1 must disclose (generally via press release) the material,
non-public information before trading in securities whose value would
be effected by such information
• If such person is unwilling or unable to disclose the information,
he must refrain from trading until a reasonable time after the
information becomes public
• Standard for materiality of info – whether a reasonable man
would attach importance to the info when determining his choice
of action
• Q 527-1, 2, 4
• SEC v Texas Gulf – TGS executives found lucrative minerals in
Canada and kept it secret, then bought TGS stock; and the price
increased; issue was whether the mineral info was material to
see if disclosure was necessary; court held that info was material
and TGS executives violated 10b-5(3) by not disclosing; the
insiders were trading on unequal footing
 Failure to disclose – under the traditional theory, people that have no
connection to the corporation do not have a duty to disclose
• Chiarella v US – C came across info from company while acting
as a printer; C then traded on that merger info and made money;
court held that C was not guilty and didn’t have a duty to
disclose because he was a complete stranger to the corporation
and had no connection or duty to them; misappropriation theory
advanced by dissent not addressed by majority because it wasn’t
in the jury instructions
o Tipper and Tippee Theory
 Tipper – must have duties to corporation (Cady, Roberts duties) AND
receive some benefit or personal gain – insiders, temporary insiders,
and outsiders with a duty of trust or confidence who knowingly make
improper “tips” of material nonpublic information. The tip is improper
if the tipper anticipates a personal benefit, such as pecuniary gain or
reputational benefit, from making the tip
• Sub-tipper – Liability extends to sub-tippers who know (or should
know) a tip is material nonpublic information and came from
someone who tipped improperly.
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 • The tipper or sub-tipper can be held liable even though he does
not trade, so long as a tippee or sub-tippee down the line
eventually trades
 Tippee – must have information come from tipper (know or should have
known that there has been a beach by the tipper) – those without a
duty of trust or confidence violate 10b-5 if they knowingly trade on
improper tips. A tippee is liable for trading after obtaining material,
nonpublic information that he knows (or has reason to know) came
from a person who breached a duty of trust or confidence.
• Duty of trust or confidence applies to the tippee derivatively
through the tipper (or sub-tipper).
• Sub-tippees tipped by a tippee have a duty not to trade, if they
know (or should know) the information came from a breach of
duty
 Dirks v SEC – D received info from S about fraud; D tried to expose
the fraud at EF and people starting selling the stock; SEC argued that D
was a tippee and S was a tipper and everyone in the chain was guilty
of insider trading; court held that S was not a tipper because he didn’t
receive any personal gain from giving this info to D; court held that D
was not a tippee because there was no derivative liability and D was
only trying to expose the fraud
o Misappropriation Theory
 GR – a person commits fraud in connection with a securities
transaction, and violates 10b-5, when he misappropriates confidential
information for securities trading purposes, in breach of a duty owed to
the source of the information
• Fiduciary’s purpose defrauds the principal of the exclusive use of
that info
• If fiduciary discloses to source, then no more liability
 US v O’Hagen – GM wanted to buy Pills; O’s firm worked for GM and O
got a hold of this info and then traded on it and made money; court
applied the misappropriation theory and held that O was guilty of
insider trading because he traded the securities and was involved in
deception; if O had disclosed the info to the SOURCE, then his liability
would have been eliminated because there was no longer any
deception involved
• Review of Issues presented
o Standing in civil action – SEC, party to whom duty is owed, derivative actions
o Material information – reasonable investor would consider the information
important to a buy-sell decision
o Scienter – must know or should have know
o Damages – SEC – disgorgement of profits or damages for the amount of loss
avoided AND a civil penalty equal t 3 times the profit made or loss avoided
o Additional defenses – before obtaining the material non-public information, a
person:
 Entered into a binding K to purchase or sell the security
 Instructed another person to purchase or sell the security, or
 Adopted a written plan for trading securities

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 o Criminal liability – DOJ – criminal fine up to $100,000 AND jail sentence up to
10 years
• Short Swing Profits and Section 16(b) liability
o Strict liability statute
o Who is liable? – directors, officers, and shareholders that own more than 10%
of the stock
 Directors and officers must only be in that capacity for ONE of the
transactions within the 6 month period
 Shareholders have to be 10% owners for BOTH transactions for liability
to attach
o How long are they liable for? – 6 months – must match a buy and a sell within
the 6 month period of time (ANY buy and sell)
 The LOWEST buy and the HIGHEST sell are the numbers you want
 If there is no profit on a matching transaction, then no liability
o Once liability is attached, then money is paid back to the corporation

N. SECURITY DISTRIBUTION
• Security – SEC gives security a broad definition to cover a multitude of different
things
o Test for whether something is an investment K – whether the scheme
involves an investment of money in a common enterprise with profits to
come solely from the efforts of others
 The effect must be material to the business
o SEC v Edwards – E was CEO of ETS and sold payphones to the public; ETS
offered leaseback and management agreements to the public, who did not
have to do anything, but collect the profits from the agreements; issue was
whether the agreements were investment K’s; court held that E was guilty
because he offered the agreements, which were investment K’s because ETS
was managing the profits; don’t distinguish between fixed and variable
returns
• Registration of a security – there is a legal obligation to register a security with the
SEC unless there is an exemption that applies
o Section 5 – makes it unlawful for any person or entity to make use of
transportation or communication faculties to offer securities for sale without
first registering them with the SEC
o Process for registration
 Pre-filing period – don’t change anything you are doing ; don’t prime
the market for the sale; this is also known as the quiet period
 Waiting Period (occurs after filing registration) – no one can buy any of
the securities and only the prospectus can be distributed
 Post Effective Period – company can sell their securities after SEC gives
the ok on disclosure that company gave
o Initial Public Offerings - company sells securities for the first time
o Debt offerings – don’t happen very often
o All SECURITIES offerings, unless an exemption applies
• Exemption from registration – congress generally exempts securities that are
regulated by someone else
o Intrastate Offering Exemption: Section 3(a)-11 – the registration
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 provisions do not apply to:
 Any security which is part of an issue offered and sold only to persons
resident within a single state or territory, where the issuer of such
security is a person resident and doing business within, or if a
corporation, incorporated by and doing business within, such state or
territory
o Rule 147 Safe Harbor provision
 Corporation incorporated in state;
 At least 80% of assets in state;
 At least 80% of revenues come from operations in state; and
 Use 80% of offering proceeds in state;
 ALSO, securities must come to rest in state – safe harbor held for at
least 9 months by all purchasers (distinguish investor from underwriter
– underwrite does not fit into this rule)
• Exempted transactions
o Private Offering Exemption: Section 4 – Registration provisions of
Section 5 do not apply to:
 (1) transactions by any person other than an issuer, underwriter, or
dealer
 (2) transactions by an issuer not involving any public offering
o Public offering – whether the particular class of persons to whom the offering
is made have access to information that would allow them to make an
informed decision – if this information is within the person’s knowledge, then
no registration is necessary because it would be a private offering
 SEC v Ralston – R offered securities to lots of employees without
registering them with SEC; R argued that offering was private and SEC
argued the offering was public; court held that the offering was public
because the employees did not have access to information that would
allow them to make informed decisions – the employees were low-level
and did not have much authority; R was essentially taking advantage
of the employees
• Regulation D exemptions
o Rule 504 – small offerings of less than $1 million in securities
o Rule 505 – offerings of less than $5 million in securities to “accredited
investors” and less than 35 normal people
 It is assumed that accredited investors have info to make informed
decisions
 Disclosure documents are needed for any non-accredited investors that
the offering is made to
 Be concerned with “Natural Person” classifications – directors, officers,
or executives; natural persons with net worth of over $1 million; and
natural persons who make $200,000 single or $300,000 married
o Rule 506 – unlimited safe-harbor provision that allows offerings to non-
accredited investors that are considered “sophisticated” – have sufficient
financial and business experience that would allow them to make informed
decisions when investing their money

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Partner and Shareholder Traditional Rules
Partnership
Owners have management authority
Profits and losses are equally allocated
Owners determine distributions to each
other
Interests are not freely transferable
Unlimited liability
Owners are fiduciaries to each other
Limited terms and dissolution is easy
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Corporation
Owners do not have management authority
No allocation of profits and losses
Board of directors determines distributions
and dividends paid to stockholders
Interests are freely transferable
Limited liability
Shareholders are not fiduciaries and can
act in their own interest
Perpetual term and dissolution is difficult