I.

Chapter 1 Agency Chart of different types of agency:

1. Who is an Agent? Groton v. Doty A. Gay Jenson Farms Co v. Cargill 2. Liability of Principal to Third Parties in Contract A. The Agents Authority Mill Street Church of Christ v. Hogan Three-Seventy Leasing Corporation v. Ampex Corporation Watteau v. Fenwick B. Ratification Botticello v. Stefanovicz Ultimately ended up with 85,000 for lease with option to purchase Deed shows co-owners: Husband/Wifehusband is doing all of the negotiating. P wanted to act on his option to purchase. Husband/Wife say no. TCP. Husband was acting on behalf of wife. Agency AC what do they say about marital status? Marital Status alone does NOT create agency. How is this different fan Mrs. Dee (car case). Theres no ACTUAL agency. No manifestation here. P argues, even if no agency, wife recognized the K by accepting payment. But does this conduct ratify the agency?. She was unaware of the full details. 1. Knowledge/action that shows knowledge; AND 2. Benefit requirement. Court says $ going in to marital account is not enough by itself. Bottom of page 27 is a good definition for ratification, just need conduct to match. Ratification is a means by which the principal can say, my agent didnt have the right to enter into this contract, but Im glad she did so. Accordingly, Ill affirm the transaction and agree to be bound by the Contract

C. Estoppel Hoddeson v. Koos Bros Woman goes into furniture store. Buys furniture from someone who wasnt a salesman! No actual agency. No manifestation. 2 innocents The Store The Customer Agency is IMPOSED. Estoppel Theory. Store is estopped from denying agency. Store was in best position to prevent this type of harm. D. Agents Liability on the Contract Atlantic Salmon A/S v. Curran 1977 Marketing Design Corp Formed. Original Purpose, sell motor vehicles. 1983 marketing design corp Dissolved. 1987 DBA MD d/b/a Boston Seafood. Contracts: 1985/1987 Atlantic Salmons <---> Boston Seafood. OR Boston Seafood Exchange. (Used both names). When Curran (Defendant) signed checks, he signed as treasurer for Boston Seafood Agent. Gave Business Cards w/ his name, his position and Boston Seafood exchange Defendant argues, dont sue me individually, Im acting as an agent of MD! *If agent is acting on behalf of principal, agent has duty of disclosing. Even if its on public record, its the agents duty to disclose, NOT the others duty to find out. **Aside: DBA Doing Business As 3. Liability of Principal to Third Parties in Tort A. Servant Versus Independent Contractor Franchisors: Making a system Dominos/Dunkin Donuts etc. Sometimes a Franchisor exerts enough control over the franchisee, its an agency.

Go to franchise agreement and see how much control the franchisor has over franchisee. DD controlling how HOT the coffee isagency. Humble Oil and Refining Co v. Martin Schneider (owner of gas station) <----> Humble Oil. Terms of K: S: Paid operator expenses; hiring H: Required reports Pays 75% of utilities Financial Control Car rolls off lot. Hits Martin and 2 kids. Only Financial Control? Or day to day control? Not just that Humble controlled but had the right to control! Hoover v. Sun Oil Company Barrone <----> Sunoco Barrone to purchase oil from Sun. Sun Products COULD sell other products Sell Sun Products only under SUNOCO name Set hours Bears the risk SUNOCO: Advertising costs Supplied equipment Reports Requires things to makintain identity Fire starts at rear of car while gas was being put in. John Smilgh employee starts fire. Court: Finds NO AGENCY Independent K! Factors: Barone bears all of the risk of loss. Contra Humble: only bore 75% of risk. Barone sets hours of operation The reports that are requires are NOT of the like that control day to day operation/management.

Murphy v. Holiday Inns, Inc. Bettsy-Linon Ltd d/ba Holiday Inn <----> Holiday Inn Is this independent K or AGENCY? Control? Color Scheme Architecture Signage Slip and Fall! All of the things listed under control only go to protect the brand. **Not going to day to day operation. Difference: Need Hot Coffee vs Need Coffee at 142.3 degrees B. Tort Liability and APPARENT Agency Difference between apparent authority and apparent agency: Apparent Authority: holding out with title (Law Professor). Apparent Agency: DIFFERENT. Trying to figure out about if theres an agency. When you walk into a storeis there a holding out of agency? Miller v. McDonalds Corp p 47 P eating Big Mac, bit into a stone! McDonalds franchise agreement with 3K Did franchise agreement give McDonalds right to control 3K. Look and feel of McDonalds? Yes Follow McDonalds system VERY MUCH Methods for food/bev and prep/handling P wants to sue McDonalds. Person who sold the burger is 3K! (not McDonalds). Have to prove AGENCY between 3K and McDonalds. When P walked in, it LOOKS/APPEARS as an agency! Franchise agreement says NO AGENCY, but, this is NOT determinative. Its a facts and circumstances test. DC Defendant, no agency. AC Found for P, YES AGENCY Remember, apparent agency creates an agency where there otherwise isnt one. Apparent Authority expands the authority of an actual agent.

Problem page 51: 25 Motels want to come together under trade name. Stationary Room rates similar Uniforms Remodel Lobbies Form Finest Motels Required to make payments for advertising and for policy compliance. Hires Hilton executive, wants to line up to Hiltons standards. Is there agency relationship? Is there sufficient control? Remember: standards to protect tradename will NOT be enough for control. **If not enough control, is there apparent agency. To avoid apparent agency: frame certificate D/B/A and put it on the wall. Still a balancing act. Cant Hide it!!! Servant vs Independent Contractor Ex. Hire roofing co. to redo roof. If Roofer does something, am I liable as principal? Look at K. Time/Price, independent K. If one of his helpers falls/hurts, they could make claim against your homeowners insurance. Make sure the independent K has workers comp. Servant Relationship Employer/Employee Employer usually dictates a lot of control C. Scope of Employment Employer/Employee (little chart) Servant

Ira s. Bushey and Sons, Inc v. United States Bushy allowing boat to be dry dock. Sailor gets drunk, comes back and turns some valves etc. Floods the dry dock. Ship keels over! Sailor does NOT have actual authority to turn the wheels, NOR does he have apparent authority. US Gov. says yes agency, BUT what he did was NOT authorized by the US. Bushy argues, OK but if it was w/in scope of employment then can imply authority. Reasonably foreseeable by the US government. They were in the best position to stop it! Engaging in course of conduct subject to Employers control. The wider the diversion, the more likely it will be held outside of scope. (I drove 50 miles out of my way) Manning v. Grimsley Pitcher for Baltimore Orioles. Ross Grimsley was being heckled in Bullpen at Fenway, he turns and fires a ball at the bleachers. Orioles never gave actual authority to throw ball at fans. No Apparent authority either BUT This was w/in scope. AGENCY CHART

D. Statutory Claims Arguello v. Conoco, Inc. E. Liability for Torts for Independent Contractors Majestic Realty Associates v. Toti Contracting Demolition, city is paying. Independent K for demolishing. Is City controlling? NO, non-agent, independent K., Typically: If independent-K screws up, principal is NOT liable. BUT, this action (taking down a building) is inherently dangerous! Cannot exculpate your liability.

City should make sure independent-K has big insurance policy that ALSO covers the city. 4. Fiduciary Obligation of Agents Agent has a duty to deal openly with employer and to fully disclose to the employer information about matters affecting the companys business. Do not act on account of adverse party. No Compete. A. Duties During Agency Reading v. Regen British soldier helps smuggle goods through security in Cairo while wearing his uniform. No question of agency here. Breaches Fiduciary duty now agent is liable to principal. Consequence: Has to give up any profits he made to the principalbut here the profits were from illegal activity. Rash v. JV Intermediate Ltd (Agent) Rash--(run division)--> TV (principal) <--(pay)-Rash owns scaffolding and other companies. (TIPS) Scaffolding was actually K by JV! A sub-K. KV now gets OWN scaffolding division. TIPS still in business (in competition) and doing well. Rash says, Im an agent but this is outside the scope at the time JV ad no scaffolding division. Written K therminates BUT employment/conduct continues. Not acting solely for the benefit of the principal. Rash needed to disclose. Not enough that P said you CAN do this. Agent has to say I DID this B. Duties During and after termination of agency: herein of Grabbing and Leacing Town and Country House and Home Service Inc v. Newbury. P75 What if agency is terminated: what happens to fiduciary duty? Here, they create the exact same business after terminating agency. Using customer lists and trade secrets that they acquired as an employee. Basically stealing someone elses intangible property. Not really a breach of fiduciary duty, but the misappriortion of property.

IP: non-tangible idea/process. Trade Secret: most all states have statute. McShane Case (TWEN) Cluck-U Uniforms Was McShane dressed in a cluck-u uniform? NO The Court uses the word apparent authority but mean apparent agency. The uniform gives the impression of apparent agency The perception of agency! Car accident Can definitely sue the driver, McShane. But want to sue Cluck-U! What did the Court look at? Franchise agreement! What did this agreement provide for? Control factors: Uniforms, Dcor, Signage. They did not grant SJ, let go to trial. Marriott Case Toppel v. Marriott Intl Franchisor----Franchisee Franchise agreement In this K, the actual mama (franchisor) was NOT a party to the K. But in the agreement there are a # of duties that run to the Franchisor. Denied SJ need more facts on the day to day inferences under the franchise agreement. Argue: actual agency and then in the alternative apparent agency. Subaru Case Facts and circumstances test. Just because K says independent K does not mean it is! Leasing Co ---> Dealership. Wants wife to be authorized driver. She gets into accident. Look to the K between leasing Co and Dealership. Look to see if dealer is leasing Cos agent. Control over day to day operations? (or right to control). K says Dealer was limited to titling the vehicle. That is dealers one function. BUT look to facts and circumstances. Buyer ONLY talks to car dealer.

How does Court hold? Agency did not exist. Kind of a bad case. Doesnt really get decided on facts and circumstances test. Edible Arrangements Bad fruit poisoning. Actual agency? Look to control in K Standards Appearance Performance Right to control too: right to enter, right to inspect. Computer system control Right to terminate Apparent Agency Still argue actual but then would argue apparent agency in the alternative. How deeply do they control delivery? II. Chapter 2 Partnerships 1. What is a Partnership? And who are the Partners? Uniform Partnership Act 6 No intent needed No writing needed Partners are joint and severally liable. Partnership Chart

A. Partners Compared With Employees Fenwick v. Unemployment Compensation Commission Beauty Shop Arline is employee. Written Agreement Profit sharing. Call it a partnership

Sharing of profits (in lieu of giving raise) Employee = 0 risk Employer = control Written agreement says partnership, filed a partnership tax return. BUT What it says is not outcome determinative. Just a factor. Its whether or not partnership is established from the facts and circumstances. B. Partners Compared With Lenders Martin v. Peyton PPF - - - - - - (Lend good securities) -- - - -> KNK [borrower, financial difficulties] <----Speculative Securities - - | 4% profits | Option to buy into KNK | Veto Powers on other secs (owes money) Ability to look at books -> third parties Hall = Manager Resignations in Escrow Writing never used the term partnership KNK goes under Labled as loan agreement but again, this is NOT outcome determinative. 2 parties Sharing profits Engaged in similar business No shared losses/investment of capital. NO PARTNERSHIP HERE! All of the provisions here are to PROTECT/SECURE the loan! Could also argued agency. Veto power, hall as manager, resignations in escrow. --Control, unimportant in partnership but important in agency! Still could be seen as protecting the lending interest though. Southex Exhibitions Inc v. Rhode Island Builders Association SEM in the business of putting on trade/expo shows. RIBA Ks w/ SEM for SEM to produce shows -Sponsor -Use RIBA brand -SEM -> get all license Losses Capital Sharing Profits 55% SEM, 45% RIBA

SEM assigns their position to Southex RIBA terminates Southex assets partnership RIBA says independent contractor Court finds: No partnership! Its an independent-K. SEM using RIBAs name. If 3rd party was suing, could try to use apparent agency. C. Partnership by Estoppel p93 *Need a holding out plus reliance Young v. Jones Equitable remedy here! NY: big cheese P&W Price Waterhouse <--(licenses name)--> Accounting firm can use their name. Licensing agreement: is there no actual agency. Apparent agency. Investorinvestment tanks. There was a holding out BUT there was no reliance. (Dont have this in agency estoppel) Is there apparent Agency? Well theres a holding out, but is it enough? Not by itself. Partnership chart

2. Fiduciary Obligations of Partners A. Introduction Meinhard v. Salmon M+S <----(lease 20 years)--- Gerry (landlord) M-capital S-Manager Now its a profitable venture Salmon<----(lease)-----Landlord Proposes Salmont to take on sky scraper project at that location (after 20 yr lease). S does not tell M! Remember, partners owe The Duty of Finest Loyalty to another. Issue: how long does a partner owe a fiduciary duty to co-partner? Only have to disclose opportunities that go towards the purpose of the partnership. *Partnership opportunity Doctrine: question of fact. When I become a partner, am I excluded from being a partner in any and all other business? Most partnerships: no outside work at ALL Some say: just no compete [jumping ahead to Limited Partnership] 1. Filing 2. Written Limited P agreement. Parties are called limited partners Enjoy limited personal liability Cannot participate in Management Who does the management? The general partner! Unlimited personal liability Sometimes see this general partner formed as a corporation or LLC. *what duties does a general partner owe a limited partnership? Fiduciary duty of loyalty. **Can you modify this, waive this, fiduciary duty by K? Set a standard if its met, then its deemed that the fiduciary duty is fulfilled? Some jurisdictions can waive totally by K Most say no, no waiver BUT can define/modify it by K. Should have provisions defining purpose of partnership Maybe even define what a partnership opportunity is.

Sandvick v. LaCrosse Empire Oil<----(purchase)-----Oil and Gas leases | | -Lacrosse -H H and L buy Top-Off Leases (extending) the above leases. Did not disclose to other partners in Empire Oil Making a distinction between partnership and join venture 4 factors on page 105 1. Contribution by the parties of money, property, time, or skill in some common undertaking, but the contributions need not be equal or of the same nature. 2. a proprietary interest and right of mutual control over the engaged property; 3. an express or implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and 4. an express or implied contract showing a joint venture was formed. Here they needed to disclose it. B. Grabbing and Leaving Meehan v. Shaughnessy Meehan and Boyle are partners at law firm [Partnership] | | ||| M B other partners Things they do pre-notice 1. Recruit associates 2. Contact Clients 3. Send Letters to clients That theyre going to be leaving and starting new firm. Used partmer letter head, employees, postage. First meeting not candid. Second meeting they disclosed. Non-disclosure = an evasion/lack of candor. Went to NY and had convo with client Pursuant to written agreement 3 mos notice for transition Did M and B breach their fiduciary duty? Yes

When? **When asked if they are leaving and they did not disclose this is when breach of duty occurs. The stuff BEFORE was NOT in violation of duty of loyalty. But what about contacting clients and sending letters to clients? Not fair to firm. No Opportunity to compete. Court says poaching employees is OK though. SRF disagrees w/ this. [In MA, letter sent out by firm stating lawyer is leaving, where do you want your file to go] C. Expulsion Lawlis v. Kightlinger and Gray (the boozer case). [Partnership, law firm] | | | | Lawliss Other partners Lawliss was an alcoholic Mew w/ Dr. Retained title of Senior Partner but Reduced case load/salary Said no more chances but gave him a 2nd chance Wampler oral notice--> Lawliss youre not going to make it Senior partner meeting: expel Lawliss. 7 to 1 vote. Issues: Wampler telling him was the expulsion and there was no vote. Court says no, this was not expulsion. 2. Expulsion was violation of good faith/fair dealing. Alleges it was for a predatory purpose partner to associate ratio Court disagrees, that was NOT the purpose of his expulsion. 3. Partnership Property UPA 24 Each partner has an equal right in use/possession of partnership property but ONLY for the purpose of the partnership (no title interest).

Putnam v. Shoaf Map out partnership by hand:

Shoaf then discovers embezzlement occurred while Putnam was partner. Sues Putnam wants to share in recovery, but is NO LONGER a partner When she sold to Shoaf, she gave up that right. 4. The Rights of Partners in Management 18(h) Majority vote, but to modify partnership agreement, need unanimity. (can K around this) National Biscuit Company v. Stroud [Strauds Food Center] -------($$$)------> NABISCO | | <------(bread)---| | Freeman Stroud 50% 50% If partnership doesnt pay, they are both jointly and severally liable. Stroud tells NABISCO no more bread Both partners have a say. Majority Vote. BUT here 2 people are 50/50. Need unaminity. Freeman says send more bread! Pship doesnt payNABISCO sues Stroud alone. Step 1: try to get partner to agree. Step 2: If no, going to have to dissolve partnership. Because, so long as partnership exists . . . either one can bind the partnership. Could alsos et up 3rd party arbitrator __ Ethical issues when 2 or more people come to you. Cam either represent ONE. Get in writing! Or represent neither. Merely scrivener parties give business deal Strongly urge each of them to get separate counsel.

K around meinhart problem/issue. Summers v. Dooley [General Partnership Trash] | | | | S (50%) D (50%) -> Disabled, hired replacement at own expense CSO doesnt offset summers 4 yrs later, S wants to hire 3rd EE. D says no. [Drafter should have thought about deadlock!] Summers sues D to pay expenses of EE Summers LOSES Doesnt control majority. What if 3rd employee isnt getting paid? Can sue summers Can also sue partnership/Dooly (Summers is an agent of Pship, and Dooley is Joint/severally liable) Day v. Sidley and Austin Day establishes Wash DC office for S&A. Has corner office. S&A want to merge w/Lieberman firm a small upstart. No S&A partner would be worse off Day loses his corner office Day doesnt like this, resigns, sues. Fraud/Misrepresentation. How does Court interpret? Only meant legal rights! Not his physical stature in the firm. Fiduciary Duty By resigning, Day diminishes his rights. Duty to disclose LEGAL RIGHTS, not the trappings of your office! ___ UPA 29,30-39 29 Dissolution Defined *30 Partnership not Terminated by Dissolution Continues through winding up.

31 Causes Death, buy out, resignation, disability, mental, end of Pship term. Pship for specific undertaking Good idea to have whereas clauses, otherwise Parol Evidence rule bars it. (What is it that made parties enter into K). 5. Partnership Dissolution A. The Right to Dissolve Owen v. Cohen [General Partnership, bowling ally] | | | | O (50%, P) C (50%, D) Oral K. Cohen being a dick. Owen gave $7Know he wants out Owen files for Judicial dissolution w/ Court. Wants judicial Decree so that he doesnt have a fiduciary duty to Cohen anymore. Appoint receiver. If I load $$ to Pship. I can only be paid back by Pship. Judicial Decreemeans Owen hasnt breached K, can still collect loan. Collins v. Lewis [General Pship] | | | | L C puts 600,000 in. | Manages, oversees construction Collins says no more $! Files for Judicial Dissolution Written agreement, specified 30 years. You agreed to pay $, you stopped paying. Collins should sue lawyer. Lawyer should have realized that 30 yrs is a LONG time to be the money guy. When you stop being a partner you may have breached your K

Page v. Page B. The Consequences of Dissolution Prentiss v. Sheffel Pav-Saver Corporation v. Vasso Corporation C. The Sharing of Losses Kovacik v. Reed D. Buyout Agreements G & S Investments v. Belman 6. Limited partnerships Limited partnership agreement writing is MANDATORY If you want to enjoy limited liability of limited partnership, you need CERTIFICATE and a WRITING. Certificate: Name of limited partnership Get name from client XYZ Check sec state site to see if name is taken or not prior to filing. But also check TRADEMARKS nationwide! Could get a surprise cease and decist letter.

Holzman v. De Escamilla

III. Chapter 3 The Nature of the Corporation Separates ownership from control. Draw little chart:

Need to file certificate of formation. In MA called articles of organization Owners enjoy limited personal liability. Limited Partners CANNOT participate in management. BUT not the case in corps. Owners CAN manage and it wont destroy limited liability.

Delaware General Corp Law 102 Contents of birth certificates (SRF term) 141(a) The business and affairs shall be managed by the board of directors. the inmates are running the asylum Closely Held Small number of shareholders C Corp vs S. Corp S.Corp= small number of shareholders. $ flows to the shareholders who THEN report on their taxes. Closely Held Privately Held Publically traded [Duty of shareholders changes depending on which one youre classified as] Privately Held No fiduciary duty. Just need to show legitimate business purpose and not solely to oppress other shareholders. Closely Held Shareholders have fiduciary duty to other Shareholders (Not in DE tho) MA recently enacted benefit corpsee handout?? Huh? But typically going to be looking at for-profit corp statutes. What happens if you agree /K with a corp before they file? [Southern-Gulf of Main v. Camcroft] these business deals prior to incorporation are called promoters. 1. Promoters and the Corporate Entity If you have done pre-incorporation contracting. There are ways to make these into Corp dealings. 1. Novation Slim chancethe big guy in contract will want to keep you signed under personal. 2. Indemnification: indemnify person as promoter Can be done by a board vote, by the corporation What if Corp doesnt have money? You can still go after person.

Southern-Gulf Marine Co No 9 v. Camcraft, Inc Barrett Boat - - - Camcroft Southern Gulf to be formed in Texas At time of K, no corp. Barett DBA so. Gulf. - would have individual liability Barrett signs personally AND as president De Jure Corp At time of K, SoGulf was NOT a de jure corp. BUT maybe Corporation by ESTOPPEL SoGulf eventually incorporates in Caymans. No objection from Camcroft. Shit goes down. Camcroft NOW says this entity didnt exist! This is not who we Kd with Also: there is such a thing as a de facto corp Not going to let some third party ministerial error be used to deny corp status. Once were in equity courtunder the discretion of the judge. 2. The Corporate Entity and Limited Liability Why would you want to separately incorporate something? Risk Management! Chart:

Walkovsky v. Carlton Carlton owned 10 corps, 100% *Shareholder can only lose what they put into corporation. They are all engaged in the same business. 2 cabs, minimum insurance. Corp1 ----- tort claimant. Clear that he can sue this corp 1, but how about the other 9 corps? Can they get to Carlton personally? If this was partnershiptort claimant would be golden. Have to pierce the corporate veil. But state statute sets public policy as to what happens But if you find shareholder treats corp as private piggybank, then you can pierce. P wants to look at all 10 corps as a single enterprise.

But no single bank account, no single accounting records, etc etc Sea-Land Services v. Pepper Source (REVERSE PIERCE) Pepper Source stiffs sea land on freight cost. Diagram!

Marchese has basically rolled his entire life into the corporation. OKeven if we pierce down to him, hes got nothing! Now reverse pierce back up. How to reverse pierce? 1. Unity of interest and ownership that the separate personalities of the corp and the individual (or other corps) no longer exist. 2. If we dont reorganize them as one, then there is fraud/injustice. _____ Liability of Owners (of a business) Draw chart:

Roman Catholic Archbishop of San Francisco v. Sheffield READ In re Silicone Gel Breast Implants Products Liability Litigation Possible for a corp to own the shares of another corp. If one owns 100%, then we have a parent corp and a subsidiary corp NOT REQUIRED to own 100%....sometimes parent and subsidiary can file together even if Not 100%. For tax/accounting purposes. Called consolidated return Need 50% or more tho. Long periods w/o board meetings. Didnt even do its own deals. Bristol did in its name. Same minutes. Parent Co also set employment policies Facts and circumstances test 195 Common directors

Common business departments Consolidated financial statements Parent finances the sub Parent caused the incorporation of sub Grossly inadequate capital of the sub Parent pays the salaries and expenses Sub gets all business from the parent Parent uses the subs property as own Daily operations are co-mingled No separate books, minutes, etc. *general rule: courts are more sympathetic to piercing the corp veil with tort claims than K claims. Tort claimants dont pick who injures them. Frigidaire Sales Corporation v. Union Properties Map out chart:

P says M and B cant be both General Partners AND Ltd Partners! Court says: NO, thats OK. Here the Ltd partners did NOT ACTUALLY engage in Management in their Ltd partnership capacity. _________ Rights of Owners: Chart!

What tool is available to shareholders to encourage Directors to do or not do certain things? Voting yesbut what else?? (voting is not all that powerful). Shareholder suits! (direct and Derivitive) 3. Shareholder Derivative Suits Direct and Derivitive Direct: Shareholder has sued a director you have harmed me specifically. Derivitive: No alleged specific harm for himself. Im stepping into shoes of corp. and Im suing ON BEHALF of corp - Any recovery goes to corp. this encourages directors to do the right thing DE Corp Statute Ability of shareholders to sue derivatively sometimes incorporated into corporate. Statute. Sometimes in Civ. Pro. Success is very very rare Policy: 1. Management authority is restored in Directors - Shareholder suits intrude on this 2. Shareholders are viewed as putting $ in Right to get information inspection Rights are Very Limited. Have to plead with particularity (more than notice pleading) . Hard to w/o info. [One requirement of filing derivitive suitNEED to plead w/ particularities. NOT notice pleading] DE Law 220 Inspection of books and records How do shareholders find out info so that they can plead with particularity. (a)(1) Stockholder (b) What rights stockholder has in order to get access and make copies of various docs. other books and records how does your state define this?? For a long time MA records did NOT include financial information. Need proper purpose how s THIS defined? Hurdles: 1. Sue w/ particularity 2. Limited rights to access to books/records/info

Model Business Corp (IS NOT a statute, like a restatement) 16 (p263) Gives broader rights to shareholders, but some of it is still vague. DE Corp Law 141 Directors Powers Conduct/manage affairs of corp. Remember, derivative suits are brought on behalf of corp. So these essentially are intruding on role of directors. [MA, in closely held corp. shareholders can elect NOT to hire directors have a democracyhas its problems. Not many of these entitites) DE Corp: Standard imposed on directors? has been developed through case law. Contra MBC 8.30 Statutory duty for directors. GOOD FAITH Reasonably believes to be in the best interest of the corp. Directors: Decision making function + Oversight Function Boards have a preference to mentor instead of monitoring. A. Introduction Cohen v. Beneficial Industrial Loan Corp Eisenberg v. Flying Tiger Line, Inc Merger: Like a marriage [Corp A] <--(merge)--> [Corp B] | | | | | Shareholders <------ Shareholders (go to corp A) Shareholders of B are issued shares of A. P here is arguing that Merger was a power play move to dilute shareholders (Ps) voter rights. CHART:

Shareholders are residual claimantscreditors get paid BEFORE shareholders. Having real assets in the company is goodsomething to liquidate. But now that its just a holding companyshareholders (Eisenberg) are pissed. Directors can recommend merger but need shareholder approvalthey got it! 2/3 vote. Via proxy documentthats OK. Derivative Suit chart (again):

Test p207: Whether object of lawsuit is to recover on action belonging directly to stockholders OR to whether it is to compel the performance of corp. acts which good faith requires the directors to take in order to perform their duty. Post a bond: Many states require Ps to post a bond. Strike Suits: Hippies in the 60s would buy 1 share and start filing derivative suits. Professor: Legislature says Get out of here you damn hippies Legislature 1. Who is a shareholder 2. Post a bond. B. The Requirement of Demand on the Directors Grimes v. Donald [DSC communication - - - - - Board of Directors Publically traded CO] - - - - - CEO Donald | | | | Shareholders | K with Donald DSC in K w/ Donald: - K to go until his 75th bday, some provisions to nice benefits if he is unfairly terminated. - * Can activate these benefits if he feels hes being unfairly treated. K says: Donald is responsible for management Statute says the BOARD is responsible for management! [oh-oo]

Huge economic disincentive to monitorbecause as soon as they say ya but Donald is going to do something to them? Grimes is shareholder: Sees this and says Im unhappy because 1. Board has abdicated their management role(direct); 2. Waste (the compensation package) (derivative). Should there be brought as direct? Or Derivative? Boards do AND CAN delegate management power BUT, grimes says that its complete abdication. Because if there is any monitoringDonald is going to say terminate them! [Is this direct or derivative?] Court says its a direct claim. Waste, due care, excessive compensation are derivative/ Abdication is direct. Court: Grimes did not plead with enough particularities. (Bottom p 213) The Business Judgment Rule! 1. Courts give great deference to directors; courts feel ill equipped. From this flows The business judgment rule So long as you have made a judgment that s not tainted by fraud, bad faith, or illegality, self interest.then its OK! So abdication fails. 2. Waste (excessive comp) This is a derivative action. Demand Requirement Shareholders must put demand on directors. Why? Better to solve disputes w/in corp firstmaybe directors didnt know. If they fail to make demand: must allege w/ particularity that demand is futile. 1. Maj of board has material financial or material interest; 2. Maj. Of board is incapable of acting independently; 3. Underlying the action is not the product of a valid exercise of business judgment. Once you do that, youre arguing that the decision is not protected by Business Judgment Rule. Need to prove fraud/illegality. Whos Corp is this anyways? 2 schools of thought. 1. Shareholder Primacy School shareholders are true owners

2. Director Primacy School (majority of jurisdictions). If shareholders dont like it, they can get off the bus. 220 of DCL:

Shareholder suits chart (again):

By making demand, you are saying that there is no personal interest. [rare that shareholders make demand]

Marx c. Akers [IBM] - - - - - - - - - - - - - - Board of Directors 18 (pub traded) __________|___________ | | Outside (15) Inside (3) Inside Directors: People who ALSO serve as executive management They know a LOT about the co. Outside Directors: People who only serve directorily Not serving as management AT THAT companybut could be serving as management somewhere else What is shareholder complaining of here? Dervative. Excessive compensation to: Executives and Directors.

No demand by Shareholder: argue that it would be futile majority of directors have an interest. Purposes of Demand: 1. Maybe directors didnt know it 2. Protection from harassment suits 3. Discourage strike suits. If outside directors say in favor they dont have self interest. Demand 2 prong test: 1. Demand was excused (outside director voting) so OK lower court was wrong to dismiss. 2. But now have to prove that actions that directors took constitutes corporate waste. Assume shareholder survives both prongs of Demand testnot have to deal with THIS.???wtf Role of Special Committees C. The Role of Special Committes Auerback v. Bennett [GTE(pub traded) ] - - - - - Board | - - - - - Executive Management | Plaintiff Auerbah Shareholder ? Alleging that directors committed bribes/kickbacks Management begins report supply that to board. Board they do their own using William Cutter and Arthur Anderson - publically traded company. -- This is how Auerbach learns of the doings, institutes derivative action. Board is 15 members. Action is only brought against 4 directors. NO demand is given files complaint. Successful. Board forms a Special Litigation Committee 3 people outside the original 15 + outside counsel. They found kickbacks etc. But nonetheless, they decided to dismiss. What does P say?

The 3 SLC members are NOT disinterested because they were appointed by board. court says No. Taint does not flow from tainted group to new group. What is the standard? -Court CAN look at reasonableness of methods/Procedures also can look into the prejudice/bias of members; but -Substantive decision of Committee is protected by the Business Judgment Rule. Zapata Corp v. Maldonado [Zapata Corp] - - - - - Board | | | - - - - - Executive Management Shareholders Breach of Fiduciary Duty No demand. All directors are named as Defendants and Participate in Acts alleged. How many directors at time of bad acts? 10 Directors SLC 2 new directors (No taint per Auerbach case) Committee says dismiss (shocker) p.236 Adds 3rd element to SLC. The Court reserves the right to determine whether or not a reasonable person could come to same decision. Seemed to be doing away w/ BJR. _______ Chart!

In Re Oracle Corp v. Derivative Litigation See book notes. DE corp Law 141(e). Direcotrs allowed to rely on managerial reports.

4. The Role and Purposes of Corporations A.P. Smith Mfg. Co. v. Barlow [Corp] - - - - - - Board of Directors | | Shareholders want corp to use their money to make money (shareholders in general) 1930 Statute: allows board to make judgments including philanthropic. Justh as to be in furtherance of corp. ----VERY BROAD. Corporate Social Responsibility Benefit Corps give even stronger protection to boards who are donating $$ - puts shareholders on notice. Dodge v. Ford Motor Co [Ford Motor Co] - - - - - - - - - - - - - - - - - - Board | | | (paying Dividends is decided by the board) | | Shareholders | Henry Ford (58%) Dodge Bros (10%) Board decides: 1. No Special Dividends 2. Increase Workers Salaries 3. Expand their plant AND lower cost of Model T Dodge Bros are pissed, they sue. Saying that these actions are inconsistent with mission/purpose of organization. Doge wins: - That dividend has to be paid BUT the rest they lose on! Henrys purposes are good. Shlensky v. Wrigley (baseball) Whatever board decided, we uphold. Unless Fraud, illegality or self dealing. Decided not to electrify lights. OK. Business Judgment Rule IV. Chapter 4 The Limited Liability Company 1. Formation Water, Waste, and Land d/b/a Westec v. Lanham 2. The Operating Agreement Elf Atochem North America inc v. Jaffari

Fisk Ventures, LLC v. Segal 3. Piercing the LLC veil Kaycee Land and Livestock v. Flahive 4. Fiduciary Obligation McConnell v. Hunt Sports Enterprises 5. Additional Capital Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc 6. Dissolution New Horizons Supply Cooperative v. Haack V. Chapter 5 The Duties of Officers, Directors, and Other Insiders 1. The Obligations of Control: Duty of Care Kamin v. American Express Company Diagram:

Board decides not to sell these new shares from DLJbut distributes them down to shareholders in form of dividend. Shareholders have a problem with this. Better NOT to sell. If you sold sharesit would be a losscould use it as a tax deduction. So they sue derivatively. Court: No cause of action! No fraud alleged, self dealing, illegality, etc. The decision is protected by the Business Judgment Rule. Why BJR? Court not in right place to manage corps If directors are always successfully suednot going to get qualified people to serve in that capacity.

__________ Leverage Buy Out: Could be any 3rd party Management Buy Out: LBO being lead by Sr. Management Both are essentially the same kind of Transaction. Put own cash down, then borrow $ from the assets of the company theyre using to secure loan. Using assets to secure loan from Bankits a secured transactiongreat deal! Smith v. Van Gorkom Trans Union corp diagram.

Publically traded stock prce is value for a minority share. Majority position is going to be more $! Outside directors were CEOs elsewheredo they have a bias for their CEO? Hes like me Gorkom is 65 and is reaching mandatory retirement age. 38$/sh, maybe I can structure a better deal. Talks to senior management - initially wants to do a management buy out. 38-50/share. - Van G wants 55 Van G meets with social acquaintance Pritzer. At this point, no discussions with board about putting company up for sale (maybe just a few in Management) Van G is the one who decided 55.no real appraisal. Just a # thats good for him. Stocking Horse: Pritzer worried about someone else coming in and saying 56 a share!

Solution: Give me the option to buy at Market Price (38!) Right before the deal goes down. Then Ill sell it to the guy who bout at 56. VG and P have met 3x really decided what deal would be. Then calls special meeting of Board. (Sr. Management reaction was completely negative). At board meeting, no memo or info, just 20 minute oral presentation. Not even a copy of the merger agreement OR summary thereof. Board doesnt know details of writings (there are none) No methodology for arriving at 55 or the fact that he proposed the amount. Meet again next day. Board approves the merger. Signs the agreement at formal social gathering. 1st merger agreement did not provide that transunion could continue to accept offersamended so that they could. Is this protected by Bus Judgment Rule? Presumption that Directors acted on informal basis in good faith and in the honest belief that the action taken was in the best interests of the co. P317: Board did NOT adequately inform themselves on price and why co. was up for sale. Accused of Rubber Stamping. -uninformed as to intrinsic value of co. advisable to get someone to appraise? -at minimum, grossly negligent DE corp law 141(e): can rely on reports from management and outside experts. OK, what is report from management Here VG lacked substance, uninformed about same doc that he wanted board to sign. This Court is a little more strict than most DE Courts. Cant follow management blindly, holds directors liable. By Submitting it to shareholders (Ds thing good argument) they are abdicating their responsibility. no excuse for not inquiring into the deal more. *After case: Legislature acted! DE Corp Law: 102(7) Exculpates directors for any personal liability for breaking their duty of care! Really, all this case did was set forth PROCEDURES..if you follow them youre golden. Get outside expert Board meeting for longer than 20 minutes

Francis v. United Jersey Bank On call 2. Duty of Loyalty A. Directors and Managers Directors have duty of care and duty of loyalty Bayer v. Beran [Calanese Corp] - - - - - - Board | - - - - - Senior Management | WifeSenior management K for advertisementwho might be singing - - The wife! Shareholder allegesbreach of loyalty. Husband approving the K $--> wife *Self dealing? Duty of loyalty claims: (1) heightened scrutiny; (2) Have to prove inherent fairness/good faith - that K is normal, no different than it would be with anyone else Court holds: This is OK Legitimate interest, and terms are inherently fiar (any other 3rd party would get no less/no more). This was very informalnot really collective approval. But still allow it. The informal action of talking around bubbler is OK.. Why? Look at the nature of corp...very informal, everyone knows eachother. Standard for Law firm, Chart:

Fiduciary Duty Chart

Benihana of Tokyo v. Benihana, Inc Diagram:

Hire someone investment banker here are your financing options * recomments issuance of convertible preferred stock. Also issues a board book Abdo serves on board of Benihana AND Beneficiary Finance Corp. sold to him (BFC) *Now, instead of BOT owning 50.96%...they own 36.5% Rocky/Stepmom are pissed. They sue. 1. Fiduciary Duties Here, had outside expert, AND board books etc. (unlike smith v. van gorkom)

So OK! OK how about Abdo serving on Board of Benihana and BFC? Court looks at: Majority of Disinterested directors voted for it. 1. Full board knew it (disclosure) 2. Disinterested directors approved! C corp equity chart

Common vs Preferred Stock Prioritizes residual between shareholders. After creditors then to preferred then to common. You can give preferred certain heightened voting rights Look to articles of org. Section on capitalization B. Corporate Opportunities Broz v. Cellular Information Systems, Inc In re eBay inc Shareholders Litigation C. Dominant Shareholders Sinclair Oil Corp v. Levien Zahn v. Transamerica Corp D. Ratification Fliegler v. Lawrence In re Wheelabrator Technologies inc Shareholders Litigation 3. The Obligation of Good Faith A. Compensation In re The Walt Disney Co Derivative Litigation B. Oversight Stone v. Ritter

SKIP!!!!!!!! A bunch of stuff! VI. Chapter 6 Problems of Control 1. X 2. X 3. Control in Closely Held Corporations Ringling Bros Barnum and Bailey Combined Shows v. Ringling McQuade v. Stoneham Clark v. Dodge Galler v. Galler Ramos v. Estrad 4. Abuse of Control Wilkes v. Springside Nursing Home Ingle v. Glamore More Motors Sales Inc Brodie v. Jordan Smith v. Atlantic Properties Jordan v. Duff and Phelps Inc 5. Control Duration and Statutory Dissolution Alaska Plastics v. Coppock Haley v. Talcott Pedro v. Pedro Stuparich v. Harbor Furniture 6. Transfer of Control Frandsen v. Jensen-Sundquist Agency Zetlin v. Hanson Holdings Perlman v. Feldmann Essex Universal Corporation v. Yates VII. Chapter 6 Problems of Control