BA Outline

Business Associations: Outline
Table of Contents
1. BUSINESS ASSOCIATIONS: OUTLINE..............................................................................4 1.1 INTRODUCTION................................................................................................................4 1.1.1 CHOOSING A FORM OF ORGANIZATION..............................................................4 1.2 PARTNERSHIP FORM.......................................................................................................5 1.2.1 GENERAL PARTNERSHIPS.......................................................................................5 1.2.2 DISSOLUTION & DISSOCIATION.............................................................................6 1.3 CORPORATE FORM...........................................................................................................8 1.3.1 WHERE AND HOW TO INCORPORATE...................................................................8 1.3.2 DEFECTIVE INCORPORATION.................................................................................9 1.3.3 PIERCING THE CORPORATE VEIL..........................................................................9 1.4 THE CORPORATE STRUCTURE....................................................................................10 1.4.1 GENERAL ALLOCATION OF POWERS..................................................................10 1.4.2 BOARD OF DIRECTORS...........................................................................................11 1.4.3 OFFICERS...................................................................................................................11 1.4.4 SHAREHOLDER ACTION.........................................................................................12 1.5 ISSUANCE OF SECURITIES............................................................................................12 1.5.1 PUBLIC OFFERINGS - INTRODUCTION................................................................12 1.6 SHAREHOLDERS INFORMATION RIGHTS & THE PROXY SYSTEM.....................14 1.6.1 SHAREHOLDER INSPECTION OF BOOKS & RECORDS.....................................14 1.6.2 REPORTING REQUIREMENTS FOR PUBLICLY-HELD COMPANIES................14 1.6.3 IMPLIED PRIVATE ACTIONS UNDER PROXY RULES.......................................14 1.6.4 COMMUNICATIONS BY SHAREHOLDERS..........................................................14 1.6.5 PROXY CONTESTS...................................................................................................15 1.6.6 IMPROVED PUBLIC DISCLOSURE BY CORPORATION.....................................15 1.7 CLOSELY-HELD CORPORATIONS...............................................................................15 1.7.1 INTRODUCTION.......................................................................................................15 1.7.2 SHAREHOLDER VOTING AGREEMENTS, VOTING TRUSTS & CLASSIFIED STOCK 15 1.7.3 AGREEMENTS RESTRICTING THE BOARDS DISCRETION.............................15 1.7.4 SHARE TRANSFER RESTRICTIONS.......................................................................15 1.7.5 RESOLUTION OF DISPUTES, INCLUDING DISSOLUTION................................16 1.8 THE DUTY OF CARE & THE BUSINESS JUDGMENT RULE.....................................17 1.8.1 INTRODUCTION.......................................................................................................17 1.8.2 STANDARD OF CARE..............................................................................................17 1.8.3 BUSINESS JUDGMENT RULE.................................................................................17 1.8.4 RECENT STATUTORY CHANGES TO DIRECTOR LIABILITY...........................18 1.9 THE DUTY OF LOYALTY.............................................................................................18 1.9.1 SELF-DEALING TRANSACTIONS..........................................................................18 1.9.2 EXECUTIVE COMPENSATION...............................................................................19 1.9.3 CORPORATE OPPORTUNITY DOCTRINE & RELATED PROBLEMS................20 1.9.4 SALE OF CONTROL..................................................................................................21 1.9.5 OTHER DUTIES OF CONTROLLING SHAREHOLDERS......................................22 1.10 SHAREHOLDERS SUITS............................................................................................22 1.10.1 INTRODUCTION......................................................................................................22 1.10.2 REQUIREMENTS FOR A DERIVATIVE SUIT......................................................22 1.10.3 DEMAND ON BOARD REQUIREMENT OF DERIVATIVE SUIT....................23 1.10.4 SETTLEMENT OF DERIVATIVE SUITS...............................................................23 1.10.5 INDEMNIFICATION & D&O INSURANCE...........................................................23 1.11 STRUCTURAL CHANGES: MERGERS & ACQUISITIONS........................................24 1.11.1 CORPORATE COMBINATIONS GENERALLY....................................................24 Philip Larson Page 2
Business Associations: Outline 1.11.2 CORPORATE COMBINATIONS PROTECTING SHAREHOLDERS................26 1.11.3 RECAPITALIZATIONS HURTING THE PREFERRED SHAREHOLDERS......28 1.11.4 FREEZEOUTS...........................................................................................................28 1.11.5 TENDER OFFERS, ESPECIALLY HOSTILE TAKEOVERS.................................29 1.12 DIVIDENDS & SHARE REPURCHASES....................................................................32 1.12.1 DIVIDENDS PROTECTION OF CREDITORS.....................................................32
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1. BUSINESS ASSOCIATIONS: OUTLINE

1.1 1.1.1 INTRODUCTION CHOOSING A FORM OF ORGANIZATION
A. Nature of Partnerships: there are two kinds of partnerships: 1) general partnerships and 2) limited
partnerships a. General Partnerships: A general partnership is any association of two or more people who carry on a business as co-owners. A general partnership can come into existence by operation of law, with no formal papers signed or filed. A partnership is general unless special requirements for limited partnerships are complied with. i. Bailey v. Broder (existence of a partnership ultimately depends upon the individuals intent to do the acts that in law constitute a partnership, such as sharing profits and losses, contributing capital, and exercising control over day-to-day operations.) ii. Capital vs. Service Contributions: an agreement to share losses has been found not to be a necessary condition for a partnership to exist when one person has provided services and the other capital to a common enterprise. b. Limited partnerships: A limited partnership can only be created where: 1) there is a written agreement among the partners, and 2) a formal document is filed w/ state officials. i. Two types of partners: limited partnerships have two types of partners: 1) general partners, who are each liable for all the debts of the partnership, and 2) limited partners, who are not liable for the debts of the partnership beyond the amount they have contributed. B. Limited liability: corporations and partnerships differ with respect to limited liability. a. Corporation: a shareholders liability is normally limited to the amount he has invested. However, occasionally the courts can pierce the corporate veil. b. Partnership: liability in a partnership depends on whether it is general or limited. i. General: in general partnerships, all partners are individually liable for the obligations of the partnership. ii. Limited: in a limited partnership, the general partners are individually personally liable but the limited partners are liable only up to the amount of their capital contribution. However, limited partners lose this limit if they actively participate in the management of the partnership. iii. Limited Liability Partnership (LLP): many states now allow a third type called an LLP in which each partner may participate fully in the business affairs w/o becoming liable for the entitys debts. C. Management a. Corporation: corporations follow the principle of centralized management. The shareholders participate only by electing a board of directors. The board of directors supervises the corporations affairs, with dayto-day control resting with the officers. b. Partnerships: management is usually not centralized. In a general partnership, all partners have an equal voice (unless they otherwise agree). In a limited partnership, all general partners have an equal voice unless they otherwise agree, but limited partners may not participate in management. D. Continuity of Existence: a corporation has perpetual existence. In contrast, a general partnership is dissolved by death or, usually, withdrawal of a general partner. A limited partnership is dissolved by withdrawal or death of a general partner, but not a limited partner. E. Transferability: ownership interests in a corporation are readily transferable (shareholder simply sells his stock). A partnership interest, by contrast, is not readily transferable (all partners must consent to the admission of a new partner). F. Federal Income Tax: corp. and part. have different tax liabilities. a. Corporations: corp. is taxed as a separate entity meaning it must file its own tax return. This can lead to double taxation in which firms are taxed on corporate profits and shareholders are taxed on corporate dividend payments.
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b. Partnership: partnerships, by contrast, are not separately taxable entities. The partnership files an
information return, but actual tax is paid by each individual thereby avoiding double taxation. c. Subchapter S corporation: if corporation would like to be taxed approximately like partners in a partnership, they can do this by electing to be a Subchapter S corporation. These are not taxed at the corporate level. Instead, each shareholder pays a tax on his portion of the corporations profits. Summary: a a. Corporations are superior: if 0) owners want to act as a separate legal entity, 1) owners want limited liability, 2) free transferability of interests is important, 3) centralized management is important (e.g. a lot of owners), 4) continuity of existence in the face of withdrawal or death of an owner is important. b. Partnerships are superior: when 1) simplicity and inexpensiveness of creation and operation of enterprise are important, and 2) tax advantages are significant, to avoid double taxation or shelter other income. Limited Liability Corporations (LLCs): fastest-growing form of organization since the 1990s. All states have special statutes recognizing and regulating them. LLCs incorporate the best features of both corporations and partnerships. a. Advantages vs. standard partnership: biggest advantage of LLC compared to general or limited partnership is that each member of the LLC is liable only to the extent of their capital contribution, even if they actively participate in the business. b. Taxed as partnership: the biggest advantage compared with a standard C corporation is that the LLCs members can elect whether to have the entity treated as a partnership or a corporation. If treated as a partnership, the entity becomes a pass-through entity and therefore avoids the double-taxation of dividends that shareholders typically suffer from. PARTNERSHIP FORM GENERAL PARTNERSHIPS partnership law. The UPA controls unless the partners have otherwise agreed. The RUPA limits partners ability to agree to certain terms (such as eliminating the duties of loyalty or good faith). a. Management Duties: all partners have equal rights in the management and conduct of the partnership business. Ordinary matters require a majority vote of the partners while extraordinary matters in contravention of the partnership agreement require a unanimous vote. b. Duty of Candor: partners must give any partner access to full information regarding all things affecting the partnership business. c. Profits and Losses: partnerships profits and losses are shared according to the partnership agreement. Absent an agreement, partners share profits and losses equally, regardless of their respective capital contributions. However, when one party contributes money and the other labor, neither party is liable to the other for contribution for any loss sustained. i. Service vs. Capital Contributions 1. Kovacik v. Reed (joint venture in which P provided capital and D provided services. Venture lost money and issue was how to attribute losses. P wanted D to cover some of his capital loss. Held: if services partner is reimbursed for service expenses, they owe 50% of capital losses. If they are not reimbursed, the expectation is that they do not share losses.) 2. Call option: Johnsen says that D basically had a call option here. He has an incentive to take risks with the enterprise because he doesnt suffer the downside. In general, when you own a call option you have an incentive to increase riskiness because you dont suffer the consequences of the downside but you do benefit from the upside. 3. Shamloo v. Ladd (partnership to create yarn. P provided services and D $75k in capital. P got his capital back b/f distribution of profits. D wants reimbursement for sweat equity prior to distribution of profits. Held: absent an agreement, a partner is not entitled to compensation for rendering services for the partnership other than profits.)
G.
H.
1.2 1.2.1
A. In General: most states rely on the Uniform Partnership Act (UPA) or the Revised UPA (RUPA) as a basis for
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B. Definition: General Partnerships: A general partnership is any association of two or more people who carry on a C.
business as co-owners. A general partnership can come into existence by operation of law, with no formal papers signed or filed. A partnership is general unless special requirements for limited partnerships are complied with. Determining the Legal Nature of the Relationship: sharing profits is prima facie evidence of a partnership. Joint ownership of property, contribution of capital, and exercising control over operations are other evidence. a. Bailey v. Broder (existence of a partnership ultimately depends upon the individuals intent to do the acts that in law constitute a partnership, such as sharing profits and losses, contributing capital, and exercising control over day-to-day operations.) Partner as a Fiduciary: the RUPA limits the partners fiduciary duties to the duty of loyalty (accounting, competing, and assets), the duty of care (gross negligence, reckless conduct, intentional misconduct), and good faith and fair dealing. a. Duty of Loyalty - General Partners: joint venturers and general partners owe one another a duty of the finest loyalty. i. General Duty of Loyalty: 1. Meinhard v. Salmon (P and D were coventurers in a hotel lease. Prior to expiration of that lease, D agreed to lease the same property and an adjacent property w/o notifying P. Held: while the enterprise continues, joint venturers owe a duty of the finest loyalty.) ii. Self-Dealing: where there is self-dealing, the self dealing partner has burden of proving his actions were intrinsically fair to the partnership. 1. Vigneau v. Storch (P engaged in secret self-dealing and got kicked out of partnership. He wants his share of the profits and his capital contribution. D says he doesnt have to pay because P violated his fiduciary duty of loyalty. Held: D can go after Ps profits but not after his capital contribution. The damages must be proportional to the wrong. After D shows self-dealing, P has burden of proving the entire fairness of his transactions to the partnership. 2. Opportunistic Withdrawal a. Meehan v. Shaughnessy (two lawyers (Ps) left a lawfirm to start their own firm. The partnership agreement anticipated removal of clients. They made secret preparations and sent letters soliciting clients. Held: partners owe each other a fiduciary duty of utmost good faith and loyalty. Ps have burden of proving the clients they took would have consented to the removal absent breach of loyalty). b. Duty of Care i. Management of Partnerships Business & Affairs: except where partners expressly agree to the contrary, all partners have equal rights in the management and conduct of the business of the partnership. 1. Covalt v. High (P and D orally agreed to formation of partnership for purchasing real estate and constructing an office. P resigned from his corporate position but remained a S/H and a partner with D. P demanded that D increase the monthly rent for the partnership real estate leased to corporation and D refused. Held: except where partners expressly agree to the contrary, all partners have equal rights in the management and conduct of the partnership. Remedy? Dissolution) ii. Negligence: negligence in the management of the affairs of a general partnership or joint venture do not create any right of action against that partner by other members of the partnership. 1. Ferguson v. Williams (Williams invested funds in a venture running short on cash for 25% of the business. He participated actively in the business, paying bills, securing loans, inspecting buildings, etc. Venture failed and he sued for negligence. Held: poor management by one partner will not give rise to an action by the other partners. Each active partner is responsible to police the venture and to minimize poor decisions. Williams was not a passive investor.) c. Contracting for Absolute Discretion
D.
1.2.2 DISSOLUTION & DISSOCIATION A. Basic Framework
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a. Definition: dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on, as distinguished from the winding up, of the business. Dissolution does not terminate the partnership; it is merely a change in the legal relationship of the partners. The partnership continues until the winding up of the partnership affair is complete. b. Effect of Dissolution: Dissolution terminates the actual authority of any partner to act as an agent for either the partnership or the other partners, except in winding up partnership affairs. c. Causes of Dissolution i. By act of the partners 1. Per partnership agreement: 2. By will of partner 3. Mutual assent 4. Expulsion of partner: a bona fide expulsion of a partner done pursuant to a power reserved in the partnership agreement will cause dissolution of the partnership, and the expelling partners are not liable for any losses caused thereby. ii. By operation of law: dissolution can occur on the happening of an event making it illegal for the partnership to continue (e.g. absent agreement to the contrary, a partnership is dissolved on the death or bankruptcy of any partner). iii. By decree of the court: a court can decree dissolution of partnership for incompetence, and improper conduct. Winding Up: winding up is the process of settling partnership affairs after dissolution. During the process, actual authority exists to carry out necessary acts to wind up the business. Generally, only transactions designed to terminate rather than carry on the business are within the scope of the partners actual authority a. Capital contribution: a partner is entitled to the return of his capital contribution upon dissolution, reimbursement for reasonable expenses and personal liabilities incurred while conducting the partnership business, and remuneration for winding up the business. b. Under the UPA: generally, a partners sole remedy against co-partners is an equitable suit for dissolution and/or an accounting for winding up the business. c. Effect of Dissociation where business is not wound up: when the partnership continues, the partnership must buy out the dissociated partners interest in the partnership based on the greater of the amount distributable to the partner if the partnership assets were sold at liquidation value or their value if the partnership were sold as a going concern w/o the dissociated partner (minus any damages if the partner wrongfully dissociated). Interest must be paid on the buyout price from the date of dissociation to the date of payment and the partnership must indemnify the dissociated partner against all partnership liabilities except those incurred by him after dissociation that bind the partnership. Dissociation: because it is now common for a partner to leave the partnership and the partnership to continue, RUPA substitutes the term dissociation for many of the UPA concepts of dissolution. Dissociation does not necessarily cause a dissolution and winding up of the partnership, a. Effect of Dissociation: dissociation does not necessarily terminate the partnership, but it does terminate a partners right to participate in the business and his duty to refrain from competing with the business. b. Events causing dissociation: i. Partnerships receipt of the partners notice of withdrawal. ii. Happening of an event anticipated in partnership agreement. iii. Partners expulsion pursuant to partnership agreement or the partners unanimous vote. iv. The death of the partner. c. Wrongful Dissociation: a partner who wrongfully dissociates is liable for any damages caused thereby. Dissociation is wrongful where 1) it is in breach of an express provision of the partnership agreement, or 2) the partnership is for a definite term or particular undertaking and the partner withdraws, is expelled, or becomes bankrupt before the end of the term. i. Drashner v. Sorenson (P wrongfully dissociated from partnership by breaching the partnership agreement, dirving recklessly and going to jail, going to bars during working hours, and withdrawing money for personal use. Held: P wrongfully dissociated by making it impossible to carry on the partnership.)
B.
C.
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ii. Expelling a Partner by Judicial decree: partner may be expelled from partnership for 1)
engaging in wrongful conduct that materially and adversely affected the business, 2) willfully committed a material breach of the partnership agreement or other duty to partners, or 3) engaged in conduct making it impractical to carry on business with these partners. McCormick v. Brevig (despite the RUPA, the court forced liquidation saying it was impractical to carry on the business). iii. Innocent partners: innocent partners have the right to damages from the partner who dissolves the partnership in violation of the agreement, the right to purchase the business provided they pay the wrongfully dissolving partner the value of his interest based on liquidation value not going concern (minus damages), and the right to wind up partnership affairs. iv. Going Concern: the wrongfully withdrawing partner gets no portion of the going concern value, only his portion of the liquidation value of the partnership. Note: liquidation value is usually easy to calculate but calculating the going concern can get very tricky. D. Fiduciary Duties in Dissolution a. Fiduciary Limits on Dissolution At Will: most general partnerships are at-will meaning that any partner may dissolve the partnership at any time. After dissolution, any former partner can force a liquidating sale of the business. i. Drashner v. Sorenson (supra, if this was an at-will partnership, it would not be wrongful dissociation. Court found it was for a term because the term was at least until the money was paid back) ii. Freezeout: even where there is an at will partnership rather than a term partnership, a partner may not use dissociation to freezeout another partner in bad faith to gain the benefits of the business for themselves. 1. Page v. Page (P and D were partners in a linen business. Each contributed $43k and in 1958 it turned a profit. P wanted declaratory judgment that the partnership was at will which he could terminate. Held: when no definite term or particular undertaking is specified, a partnership may be dissolved by the express will of any partner. Hope of profitability does not alone make a partnership for a term. However, the power to dissolve must be exercised in good faith and not to freeze out a copartner. b. Fiduciary Limits on Expulsion of Unwanted Partners: the right to expel deficient partners not measuring up to shared values and expectations of partnership is subject to partnership law, including fiduciary duty. i. Whistleblower at Lawfirm: Bohatch v. Butler & Binion (P was expelled from lawfirm for reporting suspected overbilling by another partner. Held: a lawfirm does not owe a partner a fiduciary duty not to expel her for reporting unethical conduct. A partnership is under no duty to retain a whistleblowing partner). 1.3 1.3.1 CORPORATE FORM WHERE AND HOW TO INCORPORATE (usually DE). a. Closely held: in closely held corporations, incorporation usually takes place in the state where the principle place of business is located. b. Publicly held: in publicly held corporations, incorporation is usually in DE because it has a well-defined, predictable body of law, and is pro-management. Mechanics of incorporating: a a. Articles of Incorporation: to form a corp., incorporators must file a document w/ the Secretary of State. This document is called the articles of incorporation or charter. i. Amending: articles can be amended at any time. However, any class of stockholders who would be adversely affected by the amendment must approve the amendment by majority vote. MBCA 10.04.
A. DE vs. headquarters state: incorporators must choose b/w incorporating in headquarters state or somewhere else
B.
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b. Bylaws: after corp. is formed, bylaws are adopted. The corp.s bylaws are rules governing the corp.s
internal affairs (e.g. date, time and place of annual meeting; number of directors; listing of officers; what constitutes quorum for directors meetings, etc.) ii. Amending: Bylaws are not usually filed with the Secretary of State and can usually be amended by either the board of directors or the shareholders. 1.3.2
A. B. C.
D.
DEFECTIVE INCORPORATION Definition: a defect in corporations formation raises the question whether S/Hs are liable for the corporations debts and whether corporation could legally contract. De Jure corporation: arises when substantial compliance with all mandatory conditions precedent to incorporation such as signing and filing articles as well as paying fees. De facto doctrine: at C/L, if a person made a colorable attempt to incorporate in good faith, a de facto corporation would be found. This would be enough to shelter the would-be incorporator from personal liability that would otherwise result (from being considered a general partnership). a. Modern View: most states have abolished this doctrine and expressly impose personal liability on anyone purporting to do business as a corporation while knowing incorporation has not occurred. MBCA 2.04. Corporation by estoppel: C/L also applies the corporation by estoppel doctrine, whereby a creditor dealing with the business as a corporation and agrees to look to the corporations assets rather than the shareholders assets is estopped from denying the corporations existence. This survives in some states as judge-made law. PIERCING THE CORPORATE VEIL liable for the corporations debts.
1.3.3
A. Generally: in extreme cases, courts may pierce the corporate veil, and hold some or all shareholders personally B. Individual shareholders: if the corporations shares are held by individuals, here are some factors courts look at in
deciding whether to pierce the corporate veil. The most common combination is inadequate capitalization plus failure to follow corporate formalities. a. Tort v K: courts more likely to pierce the veil in a tort case (where creditor is involuntary) than in a K case (where the creditor is voluntary). b. Personal Guarantees: stockholder holds himself out as being personally liable. c. Fraud: veil more likely to be pierced where there is grievous fraud or wrongdoing by the shareholders. (sole shareholder siphons out profits) d. Inadequate capitalization: veil piercing is most likely if the corporation has been inadequately capitalized, although this usually has to be combined with another factor. i. Zero capital: when shareholders invest no money whatsoever, courts are especially likely to pierce the veil. 1. Minton v. Cavaney (leading case for proposition that corporate veil can be pierced solely for inadequate capitalization. Here, stock was never issued so there was NO capital at all. The company operated a swimming pool it leased). ii. Siphoning: capitalization may be inadequate b/c there is not enough initial capital, or b/c profits are siphoned out as earned. However, failure to put in additional capital will not typically be considered inadequate capitalization. e. Failure of Formalities: court is more likely to pierce the veil if the shareholders failed to follow corporate formalities in running the business, such as never formally issuing shares, not holding directors meetings, and co-mingling of personal and company funds. f. Illegality: corporate veil is pierced where S/Hs seek to engage in an act on behalf of corporation which corporation is prohibited from by law or agreement. Parent/Subsidiary: if shares are held by a parent organization, court may pierce the veil and make parent liable for debts of the subsidiary. a. General rule No Liability: generally, a corporate parent shareholder is not liable for the debts of the subsidiary (just as individual shareholders are not liable for the corporations debts). i. Dominance over subsidiary is NOT enough: just b/c the parent can dominate the affairs of the subsidiary is not enough to give rise to piercing the veil. Therefore, the fact that the parent 1)
C.
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drains excess cash from the subsidiary, 2) demands veto power over many decisions of subsidiary, etc. are not grounds for piercing. Factors: however, like in the individual-shareholder case, certain acts by the parent may make veil piercing more likely. These factors include: i. Separate Formalities: parent and subsidiary failing to follow separate corporate formalities (e.g. they have the same board and dont hold separate directors meetings). ii. Misleading: if the public is misled about which entity is operating which business. iii. Intermingling: if the assets of parent & subsidiary are intermingled. iv. Subsidiary is inadequately capitalized: if the parent & subsidiary are operating pieces of the same business and subsidiary is undercapitalized. v. Subsidiary Operated Unfairly: subsidiary is forced to sell at cost to the parent. Single economic entity theory: in DE, the veil will be pierced only when two companies operate as a single economic entity, assuming there is no fraud on creditors. i. Walkovsky v. Carlton (sole S/H of 10 corporations each owning two cabs that carried only the statutory minimum insurance and for which there was otherwise no significant capital invested, is not personally liable to a pedestrian injured by one of the cabs. The pedestrian failed to allege the corp.s were undercapitalized, assets intermingled, and organized for personal use. ii. Bartle v. Home Owners Coop (creditors were aware the subsidiary was functioning as an arm of the parent so they were estopped to disregard its corporate entity.) Enterprise liability theory: courts sometimes treat brother/sister organizations (two subsidiaries w/ common parent) as being a single enterprise with each liable for the debts of the other siblings.
b.
c.
d.
1.4 1.4.1
THE CORPORATE STRUCTURE GENERAL ALLOCATION OF POWERS
A. Traditional Scheme: the traditional scheme is as follows: a. Shareholders: shareholders act principally by 1) electing and removing directors, and 2) approving or
disapproving fundamental or non-ordinary changes (e.g. mergers & acquisitions).
b. Directors: manage the corporations business. They formulate policy and appoint officers to carry out the
policy.
c. Officers: the corporations officers administer the day-to-day affairs of the corporation, under the B.
supervision of the board. Power of Shareholders: main powers of shareholders are: a. Elect & Remove Directors: they have the power to elect and remove directors i. Election: shareholders typically elect the directors at the annual meeting and directors typically serve a one-year term. MBCA 8.05(b). ii. Fill vacancies: usually have the right to elect directors to fill vacancies (although the BoD also typically has this power). iii. Removal: at C/L, shareholders had little power to remove directors during his term. Today, most statutes allow shareholders to remove directors even w/o cause. MBCA 8.08(a). b. Amending the Articles & Bylaws: shareholders can amend the articles of incorporation or the bylaws. c. Fundamental changes: shareholders get to approve or disapprove of fundamental changes that are not in the ordinary course of business (e.g. mergers, sales of substantially all of the companys assets, dissolution, etc.) Power of Directors: the directors manage the affairs of the corporation. a. Shareholders cant give orders: the shareholders cant typically order the BoD to take a particular action. b. Supervisory role: BoD does not typically operate the corp. day to day. They appoint officers, and supervise the manner in which the officers conduct the operations. Power of Officers: corporations officers are appointed by the BoD and can be removed by the board.
C.
D.
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1.4.2
BOARD OF DIRECTORS
A. Election: elected by the shareholders. a. Straight vs Cumulative: the vote for directors can be straight or cumulative. In most states, cumulative
voting is allowed unless the articles of incorporation explicitly exclude it. i. Cumulative: in cumulative voting, if there are D director seats open and shareholder has S shares, he can allocate S x D votes for any single director. This makes it more likely that a minority shareholder can keep at least one seat on the board. 1. Removal: typically, if cumulative voting is allowed, a director cant be removed if the number of votes that would have been sufficient to elect him under cumulative voting is voted against the removal. ii. Straight: in straight voting, if there are D director seats open and shareholder has S shares, shareholder can vote at most S for any single director. Number of Directors: typically fixed in either the Articles of Incorporation or the bylaws. Removal of Directors: modern statutes typically allow directors to be removed by a majority vote of shareholders, with or without cause. a. Removal by board: most states do not allow a director to be removed by his fellow directors, even for cause. b. Adlerstein v. Wertheimer (P, Chairman & CEO, sued directors for not giving him notice of a meeting that resulted in removing him from his corporate position. P was deliberately kept unaware. Held: while the meeting was a board meeting, the actions taken are invalid. While not in direct conflict with the bylaws, Ds actions did not satisfy the minimum standard of fairness in how BoD must conduct its business. Directors Meetings: a. Regular v Special: there are two types of board meetings. A regular meeting is one occurring at a regular interval, usually specified in the bylaws. A special meeting is any other meeting. b. Notice: No notice is necessary for a regular meeting. But prior notice (2 days under MBCA) is required for a special meeting. c. Quorum: board may only act if a quorum is present. Usually, quorum means a majority of the total directors. (e.g. if 9 directors, 5 must be present for quorum. i. Super majority: most statutes permit the articles or bylaws to make quorum more than a majority which is useful as a control device in closely-held corporations. ii. Present at vote: quorum must be present at the time the vote is taken to constitute an act of the board. Therefore, if a meeting starts with quorum and directors leave so there is no quorum, any vote doesnt count. Act of Board: the board typically takes action by a vote of the majority of directors present at the meeting. a. Higher number: Articles of Incorporation can require a higher percentage. b. Meeting required: typically, action can only be taken at a meeting. i. Unanimous written consent: most states allow directors to act w/o a meeting if they give their unanimous written consent to the proposed action. MBCA 8.21(a). ii. Telephone meetings: many states now permit directors to act by means of a telephone conference call. iii. Ratification: if the board learns of an action taken by an officer, and the board does not object, the board may be deemed to have ratified the action, or the board may be estopped from not honoring it. The result is as if the board had formally approved the action in advance. Committees: the full board may appoint various committees. Generally, committees can take any action which could be taken by the full board. However, there are limitations. For example, the MBCA says committees may not fill board vacancies, amend the articles of incorporation or bylaws, propose actions for shareholder approval, or authorize share repurchases. OFFICERS
B. C.
D.
E.
F.
1.4.3
A. Meaning of officer: officer are the executives in the corporation, usually appointed by the BoD.
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B. Right to hire & fire: officers can be hired or fired by the board without cause, even if there is an employment K C.
(although the officer can then sue for breach). Authority to act for corporation: the officer is an agent of the corporation, and his authority is governed by agency law. Officers can bind the corporation based on the following four theories: a. Express actual authority: express actual authority can be given to the officer by the bylaws or by a resolution adopted by the board. b. Implied actual authority: authority that is inherent in the office. Authority that is inherent in the particular post of the officer. i. President: the pres. is typically held to have implied actual authority to engage in ordinary business transaction, such as hiring and firing non-officer-level employees and entering into ordinary-course contracts. c. Apparent authority: an officer has apparent authority if the corporation gives observers the appearance that the agent is authorized to act as he is acting. Elements are: 1) the corporation, by acts other than those of the officer, must indicate to the world that the officer has the authority to do the act, and 2) the P must be aware of those corporate indications and rely on them. i. President: apparent authority often flows simply from the fact that the corporation has given him title. ii. Blackburn v. Witter (D acted as investment adviser to P while working at Co. D had P sell him some stock in exchange for a personal note. When Ds fraud came to light P sued both D and Co. Held: a principal who puts an agent in position that enables the agent, apparently acting within his authority, to commit fraud, is liable to 3rd parties for the fraud.) d. Ratification: under doctrine of ratification, if a person w/ actual authority to enter into a transaction learns of a transaction, and either expressly affirms it or fails to disavow it, the corporation may be bound. P will have to show that the corporation received benefits under the K, or that P relied to his detriment on the existence of the K. SHAREHOLDER ACTION
1.4.4
A. Meetings: nearly all states require a corporation to hold an annual meeting of shareholders. MBCA 7.02(a). a. Hoschett v. TSI (P moved to force D to hold an annual meeting of S/Hs so directors could be elected. Held:
annual meetings are required, in part to minimize the risk that directors will try to thwart S/Hs voting rights to elect different directors or modify corporate structure) b. Special meeting: corporations can also hold special meetings of shareholders. c. Who can call meeting: the board may call a special meeting, as well as anyone else authorized by the bylaws. In DE, shareholders cant call a special meeting. The MBCA allows holders of 10% of shares to call a special meeting. Quorum: for a vote of the shareholders meeting to be effective, there must be a quorum present. This must be a majority of the outstanding shares. However, percentage may be reduced by the bylaws. Vote required: once quorum is present, the traditional rule is that shareholders will be deemed to have approved the proposed action only if a majority of the shares actually present vote in favor of the action. In this case, abstentions are equivalent to a vote against. Under the MBCA 7.25(c), abstentions are treated like votes not cast. a. Breaking quorum: once quorum is present, quorum is deemed to exist even if shareholders leave. b. Written consent: nearly all states allow shareholders to act by unanimous written consent w/o a meeting. i. DE 228(a): allows shareholder action by written consent of the same number of votes that would be needed to approve the action in a meeting. c. Cyberspace: some states allow shareholder meetings to occur on the Internet. ISSUANCE OF SECURITIES PUBLIC OFFERINGS - INTRODUCTION
B. C.
1.5 1.5.1
A. Generally: public offerings of securities are extensively regulated by the 33 Act.

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a. Section 5: 5 makes it unlawful to sell any security in interstate commerce, unless a registration
statement is in effect. This registration statement must contain a large amount of information about the security being offered, and about the company offering it. 5 also prohibits sale of a security unless there is delivered to the buyer a prospectus that contains more information. b. Disclosure: the entire scheme for regulating public offerings works by compelling extensive disclosure. The SEC does not review the substantive merits of the offering. B. Security definition: the 33 Act defines security very broadly and includes stocks, bonds, investment contracts, etc. a. Sale of all stock: even when owners of a closely-held business sell all of the stock in the company to a single buyer, this is still a sale of a security so it must comply with the public-offering requirements (unless an exemption applies). Timber Co. v. Landreth. C. Purpose of 33 Act: the truth in securities law has two basic objectives 1) disclosure - require investors receive information concerning securities being offered for public sale, and 2) prevent fraud prohibit deceit, misrepresentations, and other fraud in connection with the sale of securities. D. Exemptions: not all securities must be registered with the SEC. Exemptions exist for 1) private offerings to a limited number of people, 2) offerings of limited size, 3) intrastate offerings, and 4) securities of state, local and federal governments. E. Case Law a. SEC v. W.J. Howey Co. (definition of an investment K) i. Facts: Howey (D) are Florida corporations that offer units of citrus grove development coupled with a K for cultivating, marketing, and remitting the net proceeds to the investor. There are no fences, all the produce is pooled, most investors were professionals unfamiliar w/ citrus industry. ii. Issue: Does a land sale K, a warranty deed, and a service K constitute an investment K under 2(1) of the 33 Act? Yes. iii. HOWEY RULE: An investment contract is : 1. 1) a contract, transaction or scheme whereby a person invests his money, 2. 2) in a common enterprise, and is 3. 3) led to expect profits solely from the efforts of a third party. b. SEC v. Edwards - Fixed returns: horizontal commonality may exist when promised returns are fixed rather than variable, as long as there is still pooling of investor funds. SEC v. Edwards. i. Facts: Sales and leaseback arrangement for purchasing payphones. They combined this with a management contract where the people who purchased the payphone collected a fixed amount. They put up $7500 and in exchange they got $81/month getting a 14% rate of return. Is interest typically profit? No. Guy goes bankrupt. The SEC sues them saying they broke the registration requirement for selling a security without registering it. ii. Issue: Typically, when we think of expectation of profit, we think of something where you retain some residual risk. Here, the risk is simply a default risk (that they would go into bankruptcy). The moral is that when we talk about corporate finance, you have lenders and stockholders. Stockholders are said to hold the residual claim. However, in some sense lenders have a residual claim in the event of default (e.g. bankruptcy). iii. Edwards Claim: he made the argument that this was a fixed claim and therefore was not a security under the Howey test. c. Timber Co. v. Landreth sale of a company can be the sale of a security. d. SEC v. Ralston Purina Co. (for a private offering exemption, a companys employees are just as much members of the investing public as anyone else) i. Facts: SEC objected to a companys private offering of stock to its key employees. The company did not register the stock with the SEC. The court held the exemption did not apply. ii. Issue: does the private offering exemption automatically apply when an offer of stock is made to a limited number of employees? No. iii. Rule: when using the private offering exemption, the focus should be on the need of the offerees for the protections afforded by the registration requirements.
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iv. Assessment: this changed the landscape b/c the Court said that the nature of the offering (number,
size, manner) was not as important as the nature of the offerees (sophistication and amount of information they have). v. Notes: the applicability of 4(2) should turn on whether the particular class of persons affected need the protection of the Act. Efficient Market Hypothesis a. Weak: occurs when the stock price reflects all available information about the past price of a security. You cant beat the market by knowing past stock prices. b. Semi strong: when a security price reflects all publicly available information. You cant beat the market using public information. c. Strong: security price reflects all information, whether or not the information is publicly available. You cant beat the market because all information is already accounted for in stock price. SHAREHOLDERS INFORMATION RIGHTS & THE PROXY SYSTEM SHAREHOLDER INSPECTION OF BOOKS & RECORDS
F.
1.6 1.6.1
A. Generally: state law generally gives shareholders the right to inspect the corp.s books and records. a. C/L: S/H must show a proper purpose. b. MBCA: does not give holders an automatic right to inspect sensitive materials like minutes of board B.
meetings and accounting records or the shareholder list. S/H must make a demand in good faith and for proper purpose. Proper Purpose: shareholder can inspect records if there is a proper purpose. Evaluation of investment usually is proper while unrelated personal goals are not typically proper. If the S/H wants to get access of the shareholders list to contact fellow shareholders to take group action, this is typically proper while the pursuit of merely social or political goals typically is not proper. REPORTING REQUIREMENTS FOR PUBLICLY-HELD COMPANIES 2) have assets of > $5M and a class of stock held by 500 or more people. These companies must make continuous disclosures to the SEC under 12 of the 34 Act. Proxy Voting: proxy voting is the method of casting shareholder votes in all situations except where the S/H attends the shareholders meeting. a. Revocation: a proxy is revocable by the shareholder even if the proxy itself says it is irrevocable. i. Coupled w/ an interest: if the proxy states it is irrevocable and the proxy is coupled with an interest, then it is irrevocable. IMPLIED PRIVATE ACTIONS UNDER PROXY RULES of proxy rules. P must show 1) there was a material misstatement or omission in the proxy materials, 2) a causal link b/w the misleading materials and some damage to S/Hs, 3) that D was at fault (negligence. Remedies can include an injunction against the transaction, setting aside an existing transaction (rare), or damages. 1.6.4 COMMUNICATIONS BY SHAREHOLDERS
1.6.2
A. What is publicly-held? basically, companies that either 1) have stock traded on a national securities exchange, or B.
1.6.3
A. Generally: the SC ahs recognized an implied private right of action on behalf of individuals injured by a violation
A. Two methods: a S/H may solicit her fellow shareholders to obtain their proxies either bearing the expense or not. a. S/H bears expense: a shareholder willing to bear the expense of communicating with other shareholders, b.
has a right to do so. Management must either mail the S/Hs materials or give the S/H the list so he can do it directly. Corporation bears expense: sometimes a S/H can get a shareholder proposal submitted in managements own proxy materials. However, many types of proposals are excluded including if it is not significantly related to corporations business, relates to the election of directors, or if it relates to the conduct of ordinary business operations.
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1.6.5
PROXY CONTESTS on a proposal. Most proxy contests involve the election of directors, but others occur for things like whether to adopt a poison pill. a. Rosenfeld v. Fairchild Engine & Airplane Corp. (incumbents are entitled to be reimbursed or indemnified by corp. for proxy campaign expenses; insurgents are only reimbursed if they obtain control of BoD).
A. Definition: a proxy contest is a competition b/w management and a group of outside insurgents to obtain S/H votes
1.6.6
IMPROVED PUBLIC DISCLOSURE BY CORPORATION disclosure occurs when a company gives certain professional investors information that the public isnt given until later. Sarbanes-Oxley Act: under Sarbox, passed by Congress in 2002, CEOs and CFOs must certify the accuracy of each quarterly and annual filing with the SEC, and members of the audit committee must be independent from company. Outside auditors must also be much more independent than before. Moreover, whistleblowers get protection. CLOSELY-HELD CORPORATIONS INTRODUCTION market for the corporations stock, and 3) there is substantial participation in management by majority stockholders. Significance of status as closely-held: close corporations present special problems relating to control and many devices are used to insure that minority stockholders are not taken advantage of by the majority holders.
A. Regulation FD: regulation FD, enacted by the SEC, stops a company from making selective disclosure. Selective B.
1.7 1.7.1
A. What is a close corporation? This is one where there is 1) a small number of stockholders, 2) a lack of a ready B.
1.7.2 SHAREHOLDER VOTING AGREEMENTS, VOTING TRUSTS & CLASSIFIED STOCK A. Voting Agreements: a shareholder voting agreement is an agreement in which two or more S/Hs agree to vote
together as a unit on certain matters. They are generally valid and can be enforced in court requiring specific performance. 1.7.3 AGREEMENTS RESTRICTING THE BOARDS DISCRETION agreement will violate the principle that the business be managed by the BoD. If a court finds that the BoD has been unduly fettered, it may refuse to enforce the agreement. Present law: most courts typically uphold even shareholder agreements that substantially curtail board discretion as long as it 1) does not injure any minority shareholder, 2) does not injure creditors or the public, and 3) does not violate any statutes. SHARE TRANSFER RESTRICTIONS letting shareholders veto the admission of new colleagues and help preserve the existing balance of control. Enforcement: today, share transfer restrictions are generally enforced, as long as they are reasonable. Techniques: there are 5 major techniques for restricting share transfers. a. First refusal: under a right of first refusal, a S/H cannot sell shares to an outsider w/o first offering the corporation or other shareholders a right to buy those shares at the same price and terms as those at which the outsider is proposing to buy. b. First option: similar to the right of first refusal except the price is determined by the agreement creating the option. c. Consent: stock transfers may only be made subject to the consent of the BoD or other S/Hs. d. Stock buy-back: a buy-back right is given to the corporation to enable it to buy back a holders shares on the happening of certain events such as the persons retirement or termination.
A. Problem Generally: if the S/Hs agree to restrict the discretion of the board as directors, there is a risk that the B.
1.7.4
A. Why used: the S/Hs of a close corporation will often agree to limit the transferability of shares in a corporation, B. C.
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e. Buy-sell agreement: similar to a buy-back, except that the corporation is obligated to purchase the shares D.
and agrees in advance to a set price. Notice and Consent: not everybody is bound by a share transfer restriction. a. Signor: the S/H that signs the agreement is bound. b. Subsequent purchaser w/o notice: a person who purchases w/o actual knowledge of the restriction is generally not bound. Valuation: most transfer restrictions require some valuation to be placed on the stock at some point. There are four basic ways: a. Book value: the value of the corporations assets minus liabilities. This for the most part ignores going concern value. b. Capitalized earnings method: parties use a formula that attempts to estimate the future earnings of the business and then discount these earnings to present value. c. Mutual agreement method: parties agree upon a fixed valuation and agree that from time to time they will agree to an adjusted number to reflect changes in market value. d. Appraisal: parties agree to use a neutral third-party appraiser to determine the value. Funding of buy-sell arrangements: there are two main ways to fund a buy-sell agreement. a. Life insurance: can be purchased on each S/H in an amount sufficient to cover the estimated purchase price for the holders shares. b. Installment payments: parties can agree that the shares will be purchased by an installment method with a down payment followed by quarterly or annual payments, usually paid out of the earnings of the business. Requirement of reasonableness: transfer restrictions are only upheld if they are reasonable. a. Outright prohibition and consent requirements: courts are especially likely to strike down an outright prohibition on the transfer or a provision that shares cant be sold w/o the consent of the other S/Hs if they can withhold consent arbitrarily. RESOLUTION OF DISPUTES, INCLUDING DISSOLUTION
E.
F.
G.
1.7.5
A. Dissension & Deadlock: courts often have to deal with dissention and deadlock among the stockholders. B. Voluntary vs. Involuntary Disslolution a. Voluntary: requires S/H approval and is effective upon filing with the state. b. Involuntary dissolution: S/H owning a set amount of stock may petition. Close corporations sometimes
permit any holder to petition. Grounds for involuntary dissolution include: 1) deadlock, 2) illegal or oppressive or fraudulent acts, 3) waste or misapplication of assets, 4) abandonment of business, and 5) expiration of the corporations term. Some jurisdictions find it oppressive when a minority is expelled from the corporation. i. Avoiding dissolution: Ct may order alternative relief such as a buy out at a reasonable price. Dissolution: the major judicial remedy for dissension and deadlock is a court order that the corporation be involuntarily dissolved. Dissolution means that the corporation ceases to exist as a legal entity, the assets are sold off, the debts paid, and any surplus is given to the S/Hs. a. No general right: not state gives a S/H an automatic right to a judicially-ordered dissolution. Each state has specific grounds that are strictly construed on which dissolution is granted. b. MBCA: 14.30(2) says that a S/H must show one of 4 things to get dissolution: 1) the directors are deadlocked, 2) those in control have acted in a manner that is illegal, oppressive, or fraudulent, 3) the S/Hs are deadlocked and have failed to elect new directors for at least two consecutive annual meetings, or 4) the corporations assets are being misapplied or wasted. c. Judges discretion: most states hold that even if the criteria are met the judge has the discretion to refuse to award dissolution (e.g. if it would be unfair to one or more S/Hs). d. Remedy for Oppression: most states allow dissolution to be granted as a remedy for oppression of a minority S/H (e.g. 1. majority holder sells property to corporation at inflated prices, 2. majority tries to squeeze P out by refusing to pay him either a salary or dividends.) e. Buy-out in lieu of dissolution: many statutes say the opposing party has the right to buy-out the shares of the party seeking dissolution at a judicially-supervised fair price.
C.
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D. Alternatives to Dissolution: alternatives include 1) arbitration, 2) court appointment of provisional director (to
break a deadlock), 3) court appointment of a custodian (to run the business), 4) appointment of a receiver (to liquidate the business), and 5) a judicially-supervised buy-out in lieu of dissolution. a. Fiduciary obligation of majority to minority: a few states (inc. MA) have formulated a theory that the majority in a close corporation owes the minority a fiduciary duty to behave in good faith. This typically is violated when the majority causes the corporation to take action that has no legitimate business purpose. 1.8 1.8.1 THE DUTY OF CARE & THE BUSINESS JUDGMENT RULE INTRODUCTION with the level of care which a reasonable person in similar circumstances would use. a. Damages v Injunction: if director or officer violates the duty of due care, and the corp. loses money, the director/officer will be personally liable to pay money damages to the corporation. b. Rare: it is very rare for directors and officers to be found liable for breach of the duty of due care. It is usually b/c there is some amount of self-dealing but not enough for the court to find a formal violation of duty of loyalty. 1.8.2 STANDARD OF CARE circumstances. a. Egregious cases: liability for breach of due care is generally imposed only when the director or officer behaves recklessly or with gross negligence. Objective standard: the standard is an objective one. However, if the director has special skills that go beyond what an ordinary director would have, he must use them. Reliance on experts & committees: directors are usually entitled to rely on experts, reports prepared by insiders, and action taken by a committee of the board, but only if the reliance was reasonable. Passive negligence: director is usually not liable for failing to detect wrongdoing by officers or employees. However, if the director is on notice of facts suggesting wrongdoing, he cannot close his eyes and has a duty to investigate. Causation: even if a director or officer has violated the duty of due care, he is only liable for damages that are the proximate result of his conduct. BUSINESS JUDGMENT RULE Function of Rule: the business judgment rule saves many actions from being held to be violations of the duty of due care. a. Relation to duty of due care: the duty of due care imposes a fairly stern set of procedural requirements for directors actions; 2) once these procedural requirements are satisfied, the business judgment rule supplies a much easier standard to satisfy wrt the substance of the business decision. i. Schlensky v. Wrigley (strong presumption of propriety for disinterested decisions of BoD absent fraud, illegality or a conflict of interest. Here, Schlensky didnt want the Chicago Cubs playing games at night. Held: BJR applies. If everybody is zigging, we wont penalize you for zagging) Requirements: the BJR basically provides that a substantively-unwise decision by a director or officer will not by itself constitute a lack of due care. However, there are three requirements the director must meet for application of BJR: a. No self-dealing: for BJR to apply, the director must not have a personal interest in the transaction. Any self-dealing will take him outside the rules protection. b. Informed decision: the decision must have been an informed one. That is, the director must have gathered at least a reasonable amount of information about the decision before making it.
A. Duty Generally: the law imposes on a director or officer a duty of care wrt the corp.s business. They must behave
A. Basic standard: director or officer must behave as a reasonably prudent person would behave in similar
B. C. D. E.
1.8.3
A.
B.
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i. Gross negligence standard: most likely the gross negligence standard applies to the issue of
whether a decision was an informed one. 1. Smith v. Van Gorkom (Directors held to have breached their duty of care by quickly deciding to accept a take it or leave it offer to sell them the company, even though it represented nearly a 50% premium over the market price for the shares. Court applied a gross negligence standard. Therefore, since it was an uninformed decision BJR does not apply. Directors failed to show transaction was entirely fair because they failed on fair dealing. Court never even got to fair price.) c. Rational decision: finally, the director or officer must have rationally believed that his business judgment was in the corporations best interest. The decision does not have to be substantively reasonable, but has to be at least rationally believed to be good (i.e. not totally crazy). i. No review of substances of underlying decision: the court will tyupically focus on the decisionmaking process rather than the merits of the underlying decision. Exceptions: even when there is no self-dealing, the decision was informed, and rational, the BJR does not apply in two more situations: a. Illegal: if the act taken or approved by the director or officer is a violation of a criminal statute, the D will lose the benefit of the business judgment rule. Miller v. American Telephone (BJR does not apply b/c directors made illegal political contributions) RECENT STATUTORY CHANGES TO DIRECTOR LIABILITY Some approaches include: a. Amendment: some states allow the S/Hs to amend the Articles of Incorporation to eliminate or reduce directors personal liability for violations of the duty of due care. b. Looser standard: some states have made the standard of care looser, so only outrageous conduct is covered. c. Limit on money damages: some states limit money damages. d. Indemnification: most states allow the corporation to indemnify directors & officers for liability for breach of the duty of due care.
C.
1.8.4
A. Some approaches: some states have tried to restrict the liability of directors for breaches of the duty of due care.
1.9
1.9.1
THE DUTY OF LOYALTY SELF-DEALING TRANSACTIONS controlling S/H) and the corp. are on opposite sides of a transaction, 2) the key player has helped influence the corporations decision to enter the transaction, and 3) the key players personal financial interests are potentially in conflict with the financial interests of the corp. a. Sinclair Oil v. Levien (parent corporation with 97% control of subsidiary caused it to pay $70M more in dividends than it earned in profits. Minority S/H complained that this weakened the subsidiary so it could not expand operations. Held: court protected parent saying that BJR applies unless there is self dealing. Here, majority and minority S/Hs benefited equally from the dividend payments. Parent did not receive an exclusive benefit) Modern Rule on self-dealing transactions: courts will frequently intervene to strike down and award damages for self-dealing transactions. a. Generally: generally, self-dealing transactions are treated as follows: i. Fair: if the transaction is fair to the corporation, the court will uphold it, regardless of whether the transaction was approved by disinterested directors or ratified by the S/Hs. ii. Waste/fraud: if the transaction is so unfair that it amounts to waste or fraud against the corp., the court will void it at the request of a S/H. This is true even if it was approved by a majority of disinterested directors or ratified by the S/Hs.
A. Definition: a self-dealing transaction is one in which three conditions are met: 1) a Key Player (officer, director or
B.
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1. Standard for Waste: typical definition is very restricted. A transaction is not

invalidated as constituting waste unless it is an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation received adequate consideration. Brehm v. Eisner. 2. Executive Compensation: if there is substantial consideration received by the corporation, and if there is a good faith judgment by the directors that the transaction is worth while, there should be no finding of waste even if it is unreasonably risky. iii. Middle ground: if the transaction is not fair but does not constitute fraud or waste, the presence or absence of director approval and/or S/H ratification will make a difference. b. Avoiding invalidation: three ways that a proponent of a self-dealing transaction can avoid invalidation: 1) showing approval by majority of disinterested directors after full disclosure, 2) ratification by S/Hs after full disclosure, 3) by showing the transaction was fair when made. Disclosure + board approval: a transaction cant be avoided by the corp. if it was authorized by a majority of the disinterested directors after full disclosure. a. What must be disclosed: 1) material facts about the conflict, and 2) material facts about the transaction. i. When must disclosure be made: some courts say it must be made before the transaction. Others allow it to be ratified after the fact. ii. Materiality: facts that have a significant likelihood that a reasonable S/H would consider it important. TSC Industries v. Northway. b. Who is disinterested director: A director will be interested if either: 1) he or an immediate family member has a financial interest in the transaction, 2) he or a family member has a relationship with the other party to the transaction that would reasonably be expected to affect his judgment about the transaction. c. Quorum: a quorum for the vote of the disinterested directors merely has to consist of a majority of the disinterested directors, not a majority of total directors. d. Immunization of unfairness: even if approved or ratified by disinterested directors, the transaction may still be struck down if the unfairness is very great. However, the burden or proof shifts to the person attacking the transaction to show fraud or waste. Disclosure + S/H ratification: a self-dealing transaction will be validated if fully disclosed to the S/Hs and then ratified by a majority of them. a. MBCA: says the ratification must be a majority of disinterested S/Hs. Fairness as Key Criterion: self-dealing transactions can be validated by showing that it is, under the circumstances, fair to the corporation. The fairness test will suffice even if the transaction was not approved by disinterested directors or S/Hs. Fairness is based on the facts as they were known at the time of the transaction. a. No prior disclosure: most courts will uphold a fair transaction even if it was never disclosed by the key player to his fellow executives, directors or S/Hs. Indirect conflicts: A self-dealing transaction can be found where the key player is only indirectly a party to the transaction (e.g. he owns an equity position in the other party large enough to effect his judgment). Remedies for violation: 1) rescission normally courts will rescind the transaction if possible, 2) damages if it cant be rescinded, court will award restitutionary damages. Key player will have to pay back to the corporation any benefit he received beyond what was fair. EXECUTIVE COMPENSATION this is technically a self-dealing transaction. However, courts are reluctant to strike down decisions about executive compensation and receive the protection of the BJR. Directors decision will be sustained so long as it is rational, informed, and made in good faith. a. Directors compensation must be authorized in advance. Directors can establish their own compensation b. Officers are entitled to reasonable compensation but it cannot be excessive. c. Retroactive compensation is wasteful. d. BJR shields compensation and retirement plans even though in many cases there is self-dealing.
C.
D. E.
F. G.
1.9.2
A. Business Judgment Rule: if an officer or director influences a corporations decision about his own compensation,
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B. Consideration: in deferred compensation plans, some courts insist the plan be set up so that the executive gets paid C.
1.9.3 only if he remains with the company. Thus a grant of stock options to all executives regardless of whether they stay might be struck down for lack of consideration. Excessive compensation: even if a compensation scheme has been approved by a majority of disinterested directors, or ratified by S/Hs, the court may still overturn it if it is excessive or unreasonable. CORPORATE OPPORTUNITY DOCTRINE & RELATED PROBLEMS Competition w/ Corporation: a director or senior executive may not compete with the corp., where this competition is likely to harm the corporation. a. Approval or ratification: conduct that would otherwise be prohibited as disloyal may be validated by being approved by disinterested directors or ratified by S/Hs. Key player must make a full disclosure of the conflict and the competition he proposes to engage in. b. Preparation to compete: courts will find that a key player has violated his duty of loyalty even if he just prepares to compete (rather than actually competing) while still in the corporations employ. The court often will order the insider to return all salary he earned during the period of preparation. i. Community Counselling Service v. Reilly (after submitting a letter of resignation but still employed with Community Counselling Service, Reilly solicited three potential CCS clients for himself. Held: breach of duty of loyalty & candor - employees cant solicit future business which his employment requires him to solicit for his employer) ii. Hamburger v. Hamburger (D made financing and leasehold arrangements for a company he planned to start while working for P. Immediately upon resignation he began soliciting Ps customers. Held: an employee is free to make logistical arrangements while still employed by another company. He is also entitled to use his general knowledge and skill to start a new company). c. Competition after end of employment: if the executive first leaves the corporation, and only then begins preparations or actual competition, this does not constitute a violation of the duty of loyalty. The insider may not use the corporations trade secrets. Use of Corporate Assets: a key player cant use corporate assets if the use either 1) harms the corporation, or 2) gives the key player a financial benefit. Corporate Opportunity Doctrine: a director or senior executive may not usurp for himself a business opportunity that is found to belong to the corporation. Such an opportunity is said to be a corporate opportunity a. Effect: if a key player is found to have taken a corporate opportunity, the taking is per se wrongful and the corporation may recover damages equal to the loss it has suffered or even the profits it would have made had it been given the chance to pursue the opportunity. b. Four tests: four different tests are used depending on the court to determine whether an opportunity is a corporate opportunity. i. Interest or expectancy: the corporation has an interest in an opportunity if it already has some contractual right regarding the opportunity. ii. Line of Business test: an opportunity is a corporate one if it is closely related to the corp.s existing or prospective activities. iii. Fairness test: court measures overall unfairness, based on the particular facts, that would result if the insider took the opportunity for himself. iv. Combination: some courts combine the line of business and fairness tests requiring both to be satisfied to find an opportunity a corporate one. c. Other Factors: regardless of which test is used, these factors are also relevant: 1) whether opportunity was offered to insider as an individual or as a corporate manager, 2) whether insider learned of the opportunity while acting in the role of the corp.s agent, 3) whether insider used corporate resources to take advantage of the opportunity, 4) whether the opportunity was essential to the corp.s well being, 5) whether corp. is closely or publicly held, 6) whether person taking opportunity is an outside director or a full-time executive, and 7) whether corporation had the ability to take advantage of the opportunity.
A.
B. C.
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d. Who is bound: generally, courts apply this only to directors, full-time employees, and controlling S/Hs. e. f. g.
1.9.4 Thus, S/Hs w/ a non-controlling interest are not subjected to the doctrine. Rejection by corporation: if the insider offers the opportunity to the corp. and they reject the opportunity by a vote of the disinterested directors, the insider may pursue the opportunity but must make full disclosure. Corporations inability to take advantage: courts are split about whether it is a defense that the corporation would have been unable to take advantage of the opportunity. Remedies: normal remedy is for the court to order the imposition of a constructive trust and key player may be ordered to account for all profits earned from the opportunity.
SALE OF CONTROL premium price. a. Control block defined: a person owns a controlling interest if he has the power to use the assets of the corporation however he chooses. A majority owner will always have a controlling interest, but the converse is not true: a less-than-majority interest will often be controlling. b. Generally allowed: the general rule is that a controlling S/H may sell his control block for a premium and may keep the premium for himself. i. Exceptions: there are a number of exceptions to this rule including: 1) looting exception, 2) the sale of vote exception, and 3) the diversion of collective opportunity exception. Looting Exception: a controlling S/H may not sell his control block if he knows or suspects that the buyer intends to loot the corp. by unlawfully diverting its assets. a. Mental state: If S/H knows or strongly suspects the buyer will loot, he may not sell. If seller recklessly disregards the possibility of looting, the same rule applies. b. Excessive price: excessive price alone is not enough to put the seller on notice that the buyer intends to loot. But an excessive price combined with other factors (e.g. liquid and readily saleable nature of the companys assets) may be deemed to put the seller on notice. Sale of Vote Exception: controlling S/H may not sell for a premium where the sale amounts to a sale of his vote. a. Majority stake: if the controlling S/H owns a majority interest, the sale of vote exception will not apply. Thus, even if the controlling S/H specifically agrees that he will ensure that a majority of the board resigns so that the buyer is able to immediately elect his own majority of the board, this will not be deemed to be a sale of vote. b. Small stake: if the seller has a very small stake (e.g. < 20%) in the corp, and promises to use his influence over directors to induce them to resign so the buyer can elect disproportionately mange directors, the sale of vote exception is likely to be applied. c. Working Control: where seller has working control, and promises to deliver the resignations of a majority of directors so that the buyer can receive working control, courts are split. d. Separate payment: if the K for sale explicitly provides for a separate payment for the delivery of directors resignations and election of the buyers nominees to the board, this will be a sale of vote. Diversion of collective opportunity exception: A court may find that a corp. had a business opportunity, and that the controlling S/H has constructed the sale of his control block in such a way as to deprive the corporation of this business opportunity. If so, the seller is not allowed to keep the control premium. a. Perlman v. Feldman (ABC Corp. had interest-free loans from customers. President sold control block of ABC to those customers who got rid of the interest-free loans. President diverted the business opportunity and was not allowed to keep the premium he received b/c he basically sold a corporate asset) b. XXX v. XXX (if buyer proposes to buy entire company, but seller changes nature of deal to talk buyer into just buying sellers control block at a premium, a court may take away sellers right to keep the premium saying that all shareholders deserve the right to participate)
A. Generally: in some situations, the court will prevent a controlling S/H from selling that controlling interest at a
B.
C.
D.
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1.9.5 OTHER DUTIES OF CONTROLLING SHAREHOLDERS fiduciary duty to minority S/Hs, although a few have recognized the fiduciary duty in closely-held corporations. Donahue v. Rodd Electrotype. Duty of complete disclosure: when a controlling S/H deals with the non-controlling S/Hs, it owes the latter a duty of complete disclosure wrt the transaction. Parent/Subsidiary relations: when the controlling S/H is another corporation (e.g. parent/subsidiary context), the same rules generally apply: a. Dividends: when a parent corp. controls the dividend policy of a subsidiary this is basically self-dealing. However, as long as dividends are paid pro rata to all S/Hs (including the parent), courts will rarely overturn the subsidiarys dividend policy even if it was dictated by the needs of the parent. b. Other types of self-dealing: other self-dealing transactions b/w parent & subsidiary will be struck down if they are unfair to the minority S/Hs of the subsidiary, and were entered into on the subsidiarys side by a board dominated by directors appointed by the parent. (e.g. subsidiary sells oil to parent at low prices. Parent has burden of proving the transaction is fair to subsidiary and subsidiarys minority S/Hs). c. Corporate opportunities: if a parent takes for itself an opportunity that should have belonged to the subsidiary, the court will apply the corporate opportunity doctrine and void the transaction. d. Disinterested directors: a parent can avoid liability for self-dealing and taking corporate opportunities from subsidiaries by having the truly disinterested directors of the subsidiary form a special committee that negotiates at arms length with the parent on behalf of the subsidiary. SHAREHOLDERS SUITS INTRODUCTION remedy is the S/Hs Derivative Suit, in which an individual S/H (typically an outsider) brings suit in the name of the corporation against the individual wrongdoer. a. Against insider: a derivative suit may in theory be brought against some outside 3rd party that has wronged the corporation, but it is usually brought against an insider, such as a director, officer or major S/H. Distinguish derivative from direct suit: not all suits by S/Hs are derivative; in some situations, a S/H may sue the corporation, or insiders directly. a. Illustration of derivative suits: most cases brought against insiders are for breach of fiduciary duties of care or loyalty are derivative suits. E.g. 1) suits against board members for failing to use due care, 2) suits against an officer for self-dealing, 3) suits to recover excessive compensation paid to an officer, 4) suits to reacquire a corporate opportunity usurped by an officer. b. Illustration of direct actions: here are some suits that are generally direct: 1) action to enforce holders voting rights, 2) action to compel payment of dividends, 3) action to prevent mgmt from improperly entrenching itself (e.g. enjoining the enactment of a poison pill), 4) suit to prevent oppression of minority S/Hs, 5) suit to compel inspection of the companys books and records. Consequences of distinction b/w Direct & Derivative: P typically wants action to be direct and not derivative because if it is direct P gets: 1) simpler procedural requirements (doesnt have to have owned stock at the time the wrong occurred), 2) does not have to make a demand on the BoD or face having the action terminated if the corp. doesnt want to pursue it, 3) he can probably keep all or part of the recovery. REQUIREMENTS FOR A DERIVATIVE SUIT the time the acts complained of occurred (the contemporaneous ownership rule), 2) he must still be a S/H at the time of the suit, and 3) he must make a demand upon the BoD, requesting that the board attempt to obtain redress for the corporation. Contemporaneous ownership: P must have owned shares at the time of the transaction of which he complains. a. Continuing wrong exception: P can sue to challenge a wrong that began before he bought his shares, but that continued after the purchase.
A. Possible general fiduciary duty: almost no courts have held that a controlling S/H owes any kind of general B. C.
1.10
1.10.1
A. What is a derivative suit: when a person who owes the corporation a fiduciary duty breaches the duty, the main
B.
C.
1.10.2
A. Summary: there are three main requirements that P must meet for a derivative suit: 1) he must have been a S/H at
B.
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b. Who is a S/H? P must have been a S/H at the time of the wrong. It will be sufficient if he was a C. D. E.
preferred S/H or held a convertible bond (convertible into companys equity). Also, it will be enough that P is a beneficial owner even if he is not the owner of record. Continuing Ownership: P must continue to own the shares not only until the time of suit, but until the moment of judgment. If P has lost his S/H status b/c the corporation has engaged in a merger in which P was compelled to give up his shares, some courts excuse the continuing ownership requirement. Demand on the BoD: P must make a written demand on the BoD b/f commencing the derivative suit. The demand asks the board to bring a suit or take other corrective action. Only if the BoD refuses to act may P commence suit. Demand on S/Hs: many states require P to also make a demand on the S/Hs b/f instituting the derivative suit, but only where practical.
1.10.3 DEMAND ON BOARD REQUIREMENT OF DERIVATIVE SUIT A. Demand Excused: the requirement that P demand the BoD pursue the action prior to starting a S/H derivative suit is
excused if it would be futile. For example, if the BoD is accused of participating in the wrongdoing. a. DE view: in DE, demand is not excused unless P carries the burden of showing a reasonable doubt about whether the board is disinterested and independent. Independent Committee: today, the corp. typically responds to Ps demand by appointing an independent committee of directors to study whether the suit should be pursued. Usually, the committee will conclude that the suit should not be pursued, and the court will often give this recommendation the protection of the business judgment rule and therefore terminate the action b/f trial. MBCA requires the court to dismiss the action if the committee votes to discontinue the action in good faith after conducting a reasonable inquiry. SETTLEMENT OF DERIVATIVE SUITS
B.
1.10.4
A. Judicial approval: most states require settlements of derivative suits to be approved by the court. B. Corporate recovery: payments made in connection with the action must be received by the corporation, not by the
P.
a. Pro rata recovery: usually the corporation gets the recovery, but occasionally this will be unjust. In these
situations, the court may order some or all of the recovery to be distributed to individual S/Hs on a pro rata basis. This happens where the wrongdoers remain in substantial control of the corp. so that recovery paid to the corp. might be diverted once again by the same people. 1.10.5 INDEMNIFICATION & D&O INSURANCE losses he incurs by virtue of his corporate duties. a. Mandatory: in most statutes, the two situations where a corp. is required to indemnify an officer or director are 1) when the director/officer is completely successful in defending himself against the charges, and 2) when the corp. has previously bound itself by charter, law or K to indemnify. b. Permissive: nearly all states, in addition to these two mandatory indemnification situations, allow permissive indemnification in some circumstances. i. Third party suits: in suits brought by 3rd parties (not brought by the corp. or a S/H suing derivatively), the corp. can indemnify the director if he 1) acted in good faith, 2) was pursuing what he reasonably believed to be the best interests of the corp., and 3) had no reason to believe his conduct was unlawful. ii. Derivative suit: if the suit is brought by or on behalf of the corporation (e.g. derivative suit), the indemnification rules are stricter. Corporation may not indemnify director or officer for a judgment on behalf of the corporation, or for a settlement payment. But, if D is not found liable on the claim they may indemnify D for litigation expenses. iii. Fines & Penalties: D may be indemnified for a fine or penalty he has to pay, unless: 1) he knew or had reason to believe his conduct was unlawful, or 2) the deterrent function of the statute would be frustrated. c. Who decides? Decision whether D should be indemnified is made by independent members of the BoD.
A. Indemnification: all states have statutes dealing w/ when the corp. may indemnify a director or officer against
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B. Insurance: nearly all large companies today carry directors & officers (D&O) liability insurance. Most states
explicitly allow the corp. to purchase such insurance. D&O may cover certain expenses even where those expenses could not be indemnified. a. Typical policy: typical policy excludes many types of claims where D or O acts dishonestly, engages in self-dealing, etc. b. Practical effect: money paid to the corp. as a judgment or settlement in a derivative action can usually be reimbursed to the D or O under the D&O policy. 1.11 1.11.1 STRUCTURAL CHANGES: MERGERS & ACQUISITIONS CORPORATE COMBINATIONS GENERALLY Merger-type deals: a merger-type transaction is one in which S/Hs of M (merged company) will end up mainly with stock of A (acquiring company) as they payment for surrendering control of M and Ms assets. There are four main structures for a merger-type deal: a. Statutory: a statutory merger can be done by following procedures set out in the state corporation statute. M ceases to exist as a legal entity and A continues its existence. i. Consequence: after merger, A owns all of Ms assets and is responsible for Ms liabilities. All Ks that M had with 3rd parties are now Ks with A. The shareholders of M usually get stock in A (or, under some provisions, may receive cash rather than stock in A). b. Stock-for-stock exchange (stock swap): the second method is the stock swap in which A makes a separate deal with each shareholder of M, giving them stock in A in exchange for their stock in M. c. Stocks-for-assets exchange: third form is the stocks for assets exchange. Here, in step one A gives stock to M and M transfers substantially all of its assets to A. In step two, which usually but not necessarily follows, M dissolves and distributes A stock to its shareholders. After the second step, the net result is basically the same as a statutory merger. d. Triangular or subsidiary mergers: finally, we have triangular or subsidiary mergers. i. Forward triangular merger: in the forward triangular merger, the A creates a subsidiary for the purpose of the transaction. Usually, the subsidiary has no assets except shares of stock in the parent. The target is then merged into As subsidiary. 1. Rationale: this is very similar to the stock-for-stock exchange except that all minority interests in M are automatically eliminated. Also, the deal does not have to be approved by As S/Hs, unlike a direct merger of M into A. ii. Reverse merger: the other type of triangular merger is the reverse triangular merger. This is the same as the forward triangular merger except As subsidiary merges into the target, rather than having the target merge into the subsidiary. Here, M survives but ends up a subsidiary of A. 1. Advantages: this is better than a stock-for-stock swap b/c it automatically eliminates all M shareholders, which the stock-for-stock swap does not do. It is better than a simple merger of M into A b/c 1) A does not assume all of Ms liabilities, and 2) As S/Hs do not have to approve it. It is better than a forward triangular merger b/c M survies as an entity and thus preserves K rights and tax advantages better than if M disappeared. Sale-type transactions: a sale-type transaction is one in which Ms S/Hs receive cash or bonds, rather than As stock, in return for their interest in M. There are two main sale-type structures: a. Asset Sale & Liquidation: Here, Ms board approves a sale of all or substantially all of Ms assets to A, and the proposed sale is approved by a majority of Ms S/Hs. M conveys its assets to A and M receives cash, or perhaps A debt. M then usually dissolves and pays cash or debt to its S/Hs in proportion to their holdings in a liquidating distribution. b. Stock sale: the second is a stock sale. Here, no corporate level transaction takes place on the M side. Rather, A buys stock from each M shareholder for cash or debt i. Tender offer: one common form of stock sale is the tender offer in which A publicly announces that it will buy all or a majority of shares offered to it by M. c. Main differences: these are the main differences between an asset-sale and a stock-sale technique.
A.
B.
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i. Corporate action by target: the asset sale requires corporate action by M and the stock sale does
not. Thus, Ms board must approve the asset sale, but not the stock sale. ii. Shareholder vote: the asset sale will have to be formally approved by a majority of Ms S/Hs, whereas stock sale is not subjected to S/H vote (each S/H simply decides whether to tender their stock). iii. Elimination of minority S/Hs: in an asset-sale, A is guaranteed to get Ms business w/o any remaining interest on the part of Ms S/Hs. In a stock sale, A may be left with some M holders with a minority interest in M (although, if the state allows for a plan of exchange, the minority can be eliminated). iv. Liabilities: in an asset sale, A has a good chance of escaping Ms liabilities (subject to the law of fraudulent transfers, the bulk sales provisions of the UCC, and the possible use of the de facto merger doctrine. In a stock sale, A will effectively take Ms liabilities along with its assets. v. Tax treatment: tax treatment of an asset sale is much less favorable for the seller than is a stock sale. C. Approvals for sale-type deals: a. Asset Sale: in the case of an asset sale, approvals work as follows: i. Target side: on Ms side: 1) Ms BoD must approve, and 2) Ms S/H must approve by majority of all votes that could be cast, not just a majority of votes cast (MBCA requires just a majority of the shares actually voting, as long as quorum is present). 1. The substantially all assets test: not every sale of assets triggers this obligation. It must be substantially all of Ms assets and M must be left w/o a significant continuing business activity. ii. Acquirer side: on As side of the asset-sale transaction, 1) As BoD must approve, and 2) As S/Hs do not need to approve. b. Stock sale: in the case of a stock sale, each M S/H would decide whether to sell his stock to A and no approval of Ms board or S/Hs is necessary. i. Back end merger: once A got control of M by acquiring most of Ms shares, it might want to conduct a back-end merger and this would normally require a vote of Ms BoD and S/H. But each of these votes would probably be a formality because of As majority ownership and board control of M. D. Approval for merger-type deals: this is how approvals work for merger-type deals a. Statutory merger: in a traditional statutory merger i. Board approval: BoD of both M and A must approve. ii. Holders of target: S/Hs of M must approve by majority vote of the shares permitted to vote. iii. Holders of survivor: S/Hs of A also must approve by majority vote (except in whale/minnow merger. iv. Classes: under some statutes, if there are different classes of stock, each class must separately approve the merger. v. Small-scale (whale/minnow) mergers: if M is being merged into a much larger A, the S/Hs of A need not approve. Under DE and MBCA, any merger that does not increase the outstanding shares of the surviving corporation by more than 20% need not be approved by the survivors S/Hs. vi. Short-form mergers: under most statutes, including DE and MBCA, if one corporation owns 90% or more of the stock of another, the latter may be merged into the former without S/H approval of either corporation. b. Hybrids: here is how approvals work for hybrid transactions, those that are merger type but not pure statutory mergers. i. Stock-for-stock exchange: in a stock-for-stock exchange, the proposal: 1) must be approved by As BoD but NOT by As S/Hs, and 2) need NOT be formally approved by Ms S/H or Ms BoD (although in a sense each S/H votes by deciding whether to tender his shares).
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ii. Stock-for-assets deal: in this case, 1) As BoD must approve but S/H approval is not required (as iii.
long as there are enough authorized but unissued shares to fund the transaction), and 2) Ms BoD must approve and the S/Hs must also approve it. Triangular mergers: 1. Forward merger: here, in a subsidiary merger, 1) As BoD and S/H must both approve (but this is often a formality), and 2) both Ms BoD and S/Hs must approve (as with any merger). 2. Reverse merger: basically the same as the forward merger.
1.11.2
CORPORATE COMBINATIONS PROTECTING SHAREHOLDERS investment at a price determined by a court to be fair. a. Mergers: in almost all states, a S/H of either company involved in a merger has appraisal rights if he had the right to vote on the merger. i. Whale-minnow: when M merges into a much larger A, such that a vote of As S/Hs was not required, As S/Hs do not get appraisal rights. ii. Short-form merger: however, shareholders of the subsidiary in a short-form merger (e.g. corp. owns 90% or more of the stock of target) do get appraisal rights even though they would not get to vote on the merger. b. Asset sales: in most states S/Hs of a corporation selling substantially all of its assets also get appraisal rights. i. Sale for cash, followed by quick dissolution: if the selling corporation liquidates soon after the sale and distributes the cash to the S/Hs, then usually there are no appraisal rights. MBCA (no appraisal rights where liquidation and distribution of cash proceeds occurs w/i one yr after the sale). DE does not give appraisal rights to S/Hs of corporation that sells its assets. c. Publicly-traded exception: many states deny the appraisal remedy to S/Hs of a company whose stock is publicly traded (and so does the MBCA in most situations). d. Triangular mergers: in the case of a forward triangular merger, As S/Hs do not get appraisal rights but Ms S/Hs will get appraisal rights. In a reverse triangular merger, As S/Hs do not get appraisal rights and Ms S/Hs will get appraisal rights if A is statutorily merging with M but not in a stock swap. e. Procedures: here are the usual procedures for appraisal. i. Notice: at the time the merger or sale is announced, corp. must notify the S/H that he has appraisal rights. ii. Notice of payment demand by holder: the holder must then give notice to the corp., before the S/H vote, that he demands payment of the fair value of his shares. Also, the holder must not vote in favor of the transaction. iii. Deposit of shares: the holder must deposit his shares with the company. iv. Payment: the companys obligations vary from state to state. In some cases, the corp. doesnt pay anything until the court determines the value. Under MBCA, the corp. must at least pay the amount that it concedes is the fair value of the shares with the rest due upon a court decision. f. Valuation: court then determines the fair value of the dissenters shares, and corp. must pay this value. i. Dont consider the transaction itself: fair value must be determined without reference to the transaction that triggers appraisal rights. ii. No minority or nonmarketability discount: most courts do not reduce the value of Ps shares to reflect that P held a minority or non-controlling interest. The court usually takes the value of the whole company and divides by the number of shares. iii. DE Block method: most cts use the DE block valuation method which considers three factors: 1) the market price just prior to the transaction, 2) the net asset value of the company, and 3) the earnings valuation of the company. These three factors can be weighted however the court chooses.
A. Appraisal Rights: Appraisal rights give dissatisfied S/Hs in certain circumstances a way to be cashed out of his
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1. Abandoned in DE: DE itself no longer requires use of the DE block approach. In DE,
other evidence of valuation, such as valuation studies and expert testimony can be included. g. Exclusivity: appraisal rights are the exclusive remedy available to an unhappy S/H in some, but not all, circumstances. i. Illegality: if the transaction is illegal, or procedural requirements have not been met, the S/H can generally get the transaction enjoined, instead of having to be content with the appraisal rights. ii. Deception: similarly, if the company deceives its S/Hs and thereby secures approval of the transaction, S/H can attack the transaction rather than accept appraisal rights. iii. Unfair: however, if the S/H merely contends the transaction is a bad deal for the S/Hs or is in some sense unfair, appraisal normally is the exclusive remedy. However, if the unfairness is due to self-dealing by corporate insiders, the court may grant an injunction. De Facto Merger Doctrine: under the de facto merger doctrine, the court treats a transaction which is not literally a merger, but which is the functional equivalent of a merger, as if it were one. The most common result of the doctrine is that selling stockholders get appraisal rights. Also, selling stockholders may get the right to vote on a transaction, and the sellers creditors may get a claim against the buyer. a. Only occasionally accepted: only a few courts have accepted the de facto merger doctrine. They typically only do so when the target has transferred all of its assets and then dissolves, and when the targets S/Hs receive most of their consideration as shares in the acquirer rather than cash and/or bonds. i. Farris v. Glen Alden Corp. (Glen Alden Corp. Agrees to buy all the assets of List Corp, a much larger company. Glen Alden pays for these by issuing a large amount of its own stock to List so that List will end up owning 75% of Glen Alden. Glen Alden assumes Lists liabilities and List will dissolve and its assets the 75% - will be distributed to List S/Hs. The purpose of this setup was to deny the S/Hs of Glen Alden appraisal rights, which they would have had if Glen Alden was selling all its assets to List but wouldnt have if Glen Alden bought List. Held: this was a de facto merger, so Glen Aldens S/Hs have appraisal rights). b. Usually rejected: most courts, including DE, reject the de facto merger doctrine. c. Successor liability: even courts that normally reject the de facto merger doctrine may apply it to deal with problems of successor liability. (e.g. A acquires all of Ms assets, and carries on Ms business. Normally, Ms liabilities dont pass to A unless A explicitly assumed them in the purchase K. But a tort claimant injured by a product manufactured by M b/f the sale might be permitted to recover against A, on the theory that A should be treated as if M had merged into it. Judicial review of substantive fairness: cts will sometimes review the substantive fairness of a proposed acquisition or merger. This is much more likely when there is a strong self-dealing aspect to the transaction. a. Arms length combination: if the buyer and seller do not have a close pre-existing relationship at the time they negotiate the deal, courts will rarely overturn the transaction as being substantively unfair. In DE, for instance, the person attacking the transaction as substantively unfair must: 1) bear the burden of proof on the fairness issue, and 2) show the price was so grossly inadequate as to amount to constructive fraud. This is hard. b. Self-dealing: however, if the transaction involves self-dealing, the court will give much stricter scrutiny and, in DE, will use the entire fairness test. i. Two-step acquisition: this test is applied in two-step acquisitions. E.g. A attempts to acquire M by means of two-step hostile tender offer. A first buys 51% of M for $35/share. As second step, it then seeks to merge M into A and pay remaining M S/Hs $25/share (after announcing its plans to take the 2nd step if the 1st step succeeded). An unhappy M S/H might succeed in getting a ct to enjoin this second-step back-end merger on the grounds that it is substantively unfair. However, in this scenario the ct would probably scrutinize the transaction carefully and uphold it on the grounds that all S/Hs were treated equally and knew what they were getting into. ii. Parent/Subsidiary: similarly, a ct will take a close look for possible self-dealing where the transaction is a parent-subsidiary merger. E.g. A owns 80% of M with the other 20% owned by small public shareholders. Most M directors were appointed by A. A proposes to merge w/ M, w/ each share of M being exchanged for a share of A. Nearly all public M minority holders oppose the merger, but A uses its 80% ownership to approve the merger. A ct probably would closely
B.
C.
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scrutinize this merger b/c As dominance of M amounted to self-dealing. Therefore, A will bear the burden of showing that the merger terms were entirely fair to the minority holders of M, and the ct will enjoin the transaction if this showing is not made. (Note: A could guard against this problem by having M negotiate its side of the merger by the use of only independent directors, i.e. those not dominated by A). 1.11.3
A. B.
C.
RECAPITALIZATIONS HURTING THE PREFERRED SHAREHOLDERS Problem: a BoD dominated by common S/Hs (as is usually the case) may try to help the common S/Hs at the expense of the preferred S/Hs. Typically, the common S/Hs try to cancel an arrearage in preferred dividends, so that the common holders can receive a dividend. Two methods: there are two basic recapitalization methods by which the common S/Hs can attempt to eliminate the accrued preferred dividends. a. Amending articles of incorporation: first, they can amend the articles to eliminate the accrued dividends (but in most states, the preferred S/Hs will have to agree as a separate class that this amendment should take place). b. Merger: second, the corporation can be merged into another corporation, with the survivors articles not providing for payment of any accrued preferred dividends (again, in most states preferred get to vote on the merger as s separate class. However, in DE they dont have this right). Courts dont interfere: courts are generally reluctant to interfere with such anti-preferred recapitalizations, even where the plans seem to be objectively unfair to the preferred holders. However, the preferred holders do generally get appraisal rights.
1.11.4
FREEZEOUTS A. Meaning of freezeout: a freezeout is a transaction in which those in control of a corporation eliminate the equity ownership of the non-controlling S/Hs. a. Distinguished from squeezeout: generally, a freezeout describes techniques where the controlling S/Hs legally compel the non-controlling S/Hs to give up their common stock ownership. Squeezeout, by contrast, describes methods that do not legally compel the outsiders to give up their shares, but in a practical sense coerce them into doing so. Squeezeouts are especially common in closely-held corporations. b. Three contexts: there are three contexts in which a freezeout is likely to occur: 1) as the second step of a two-step acquisition transaction (e.g. A buys 51% of M and then eliminates the other 49% through some sort of merger); 2) where two long-term affiliates merge (e.g. controlling parent eliminates the publiclyheld minority interest in the subsidiary), and 3) where the company goes private (e.g. insiders cause the corporation to no longer be registered with the SEC, listed on a stock exchange and/or be actively traded over the counter). c. General Rule: in evaluating a freezeout, the court will usually: 1) try to verify that the transaction is basically fair; and 2) scrutinize the transaction especially closely in view of the fact that the minority holders are being cashed out (rather than being given stock). B. Techniques for carrying out a freezeout: a. Cash-out merger: the leading freezeout technique is the simple cash out merger in which the insider causes the corporation to merge into a well-funded shell, and the minority holders are paid cash in exchange for their shares, in an amount determined by the insiders. (e.g. Majority owns 70% of M (700k of 1M shares) and wants to freeze minority holders. Majority creates A, a company in which he is the sole S/H, and funds it with $1M. He causes M and A to agree to a merger under which the shares are exchanged in the merger for the $1M, $1/share. Majority gets $700k to pay down the $1M investment, and the minority gets $300k. b. Short-form merger: a freezeout may also be done via the short-form merger statute. If A owns 90% or more of M, then in most states at As request, M can be merged into A with all M S/Hs paid off in cash rather than stock in A. c. Reverse stock split: a freezeout may be carried out by means of a reverse stock split. Using, say, a 600:1 reverse stock split, nearly all outsiders may end up with a fractional share. Then, the corporation can compel the owners of the fractional shares to exchange their shares for cash.
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C. Federal law on freezeouts: a. 10b-5: a minority S/H may be able to attack a freezeout on the grounds that it violates the SEC Rule 10b-5.
If there has been full disclosure, then P is unlikely to convince the court that 10b-5 has been violated, not matter how unfair the freezeout may seem to the court. However, if the insiders have concealed or misrepresented material facts about the transaction, the court may find a 10b-5 violation. Total Fairness test: successful attacks on a freezeout transaction are more likely to derive from state rather than federal law. Since freezeouts often involve self-dealing by the insiders, state courts will closely scrutinize the fairness of the transaction. a. General test: the freezeout must meet at least the first, and often the second, of these tests: 1) the transaction must be basically fair, taken in its entirety, to the minority S/Hs, and 2) the transaction must be undertaken for some valid business purpose. b. Basic Fairness: for the transaction to be basically fair, most courts require: 1) a fair price, 2) fair procedures by which the BoD approved the transaction, and 3) adequate disclosure to the minority S/Hs about the transaction. i. Weinberger v. UOP, Inc (Signal owns more than 50% of UOP, w/ balance owned by public. 4 directors of UOP are also directors of Signal, their primary loyalty. Two directors prepare a feasibility study saying $24 is a fair price for Signal to pay for the balance of UOP. Signal then offers $21/share. Non-Signal-affiliated UOP directors are not told about the $24/share feasibility study. Deal goes through. Held: does not meet the test of basic fairness to UOPs minority shareholders. Price was not fair, procedures were not fair no real negotiations b/w companies, and disclosure was not fair public was never told about feasibility study.) ii. Independent Committee: parent-subsidiary mergers are much more likely to be found fair if the public minority S/Hs of subsidiary are represented by a special committee of independent directors not affiliated with the parent. c. Business Purpose test: in addition to the basically fair test for the transaction, some courts will strike down the freezeout of minority S/Hs unless it serves a valid business purpose. Therefore, even if there is a fair price, the insiders cant put a transaction through w/ sole purpose to eliminate the minority S/Hs. i. Going private: business purpose test is especially likely to be flunked when the transaction is a going-private one rather than a two-step acquisition or a merger of long-term affiliates. ii. DE abandons: DE has abandoned the business purpose requirement, leaving only the basic fairness test. d. Closely-held corporations: if the freezeout takes place in the context of a close corporation, most courts will probably scrutinize it more closely than in the public-corporation context. i. e.g. Person A owns 70% of company and tries to coerce Person B to sell his 30% stake. A fires B, cuts off his salary and refuses to pay dividends, then offers to buy Bs shares for a fraction of their true value. Ct will probably strike this down saying it is unfair and does not give B any reasonable way to make a return on investment. TENDER OFFERS, ESPECIALLY HOSTILE TAKEOVERS shares for cash or securities at a price higher than the previous market price. a. Used in hostile takeovers: a cash tender offer is the most common way of carrying out a hostile takeover. A hostile takeover is the acquisition of a publicly held company (the target) by a buyer (the bidder) over the opposition of the targets management. b. Williams Act: tender offers are principally regulated by the Williams Act, part of the 34 Act. Disclosure by 5% owner: any person who directly or indirectly acquires more than 5% of any class of stock in a publicly held corporation must disclose that fact with the SEC. Investor must disclose his purpose in buying the shares including intent to seek control. It is due within 10 days following acquisition. Rules on tender offers: these are the main rules imposed by the Williams Act upon tender offers: a. Disclosure: any tender offeror (at least one who, if his tender offer is successful, will own 5% or more of a companys stock) must make extensive disclosures including his identity, funding and purpose.
D.
1.11.5
A. Definition of tender offer: a tender offer is an offer to S/Hs of a publicly-held corporation to exchange their
B. C.
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b. Withdrawal rights: any S/H who tenders to a bidder has the right to withdraw his stock from the tender
offer at any time while the offer remains open. If the tender offer is extended for any reason, the withdrawal rights are similarly extended. c. Pro rata rule: if a bidder offers to buy only a portion of the outstanding shares, and the holders tender more than the number than the bidder has offered to buy, the bidder must buy in the same proportion from each S/H. d. Best Price rule: if the bidder increases his price b/f the offer has expired, he must pay this higher price to each S/H. e. 20-day minimum: a tender offer must be kept open for at least 20 business days. If the bidder changes the price or number of shares, he must hold the offer open for another 10 days after the announcement of the change. f. Two-tier front-loaded tender offers: none of these rules prevent bidder from making a two-tier, frontloaded tender offer in order to pay a premium for a majority and then conduct a back-end merger of the balance at a less attractive price. Definition of tender offer: there is no official definition of tender offer a. Eight factors: courts and the SEC take into account eight factors making it more likely that a tender offer is being conducted: 1) active and widespread solicitation of the targets public S/Hs, 2) solicitation of a substantial percentage of targets stock, 3) an offer to purchase at a premium over the prevailing price, 4) firm rather than negotiable terms, 5) an offer contingent on receipt of a fixed minimum number of shares, 6) a limited time period for the offer, 7) the pressuring of offerees to sell their stock, and 8) a public announcement from the buyer that he will be acquiring the stock. b. Vast quantities not sufficient: simply purchasing large quantities of stock, without at least some of these factors, does not constitute a tender offer. c. Privately negotiated purchases: a privately-negotiated purchase, even of large amounts of stock, usually is not considered a tender offer. This is true even if the acquirer does this simultaneously with a number of large stockholders. d. Open-market purchases: usually there is no tender offer where the acquirer makes open-market purchases (e.g. on the NYSE), even if a large percentage is bought. State regulation of hostile takeovers: many states attempt to discourage hostile takeovers. a. Modern statutes: dont prevent the bidder from buying the shares, but they instead deprive him of the benefit of the shares by: 1) preventing the bidder from voting the shares unless certain conditions are satisfied, or 2) preventing bidder from conducting a back-end merger into the bidders shell, or 3) requiring the bidder to pay a fair price in any back-end merger. b. DE Act: 203 is the DE Antitakeover statute. It prohibits any business combination (including a back-end merger) b/w the corporation and an interested stockholder for three years after the stockholder buys his shares. Anyone who buys more than 15% of a companys stock is covered. The net effect is that anyone who buys less than 85% of a DE corporation cannot for 3 years conduct a back-end merger and therefore 1) cant use the targets assets as security for a loan to finance the share acquisition, and 2) cant use the targets earnings and cash flow to pay off the acquisition debt. Defensive maneuvers: here are some of the defensive maneuvers that a targets incumbent management may use to defeat a hostile bidder. a. Pre-offer techniques: sometimes called shark repellants, these must typically be approved by a majority of the targets S/Hs. i. Super-majority provision: target may amend articles of incorporation to require that more than a simple majority of targets S/Hs approve any merger or major sale of assets. ii. Staggered board: a target might put in place a staggered board of directors, making it harder for a hostile bidder to gain control immediately even if he has a majority of the shares. iii. Anti-greenmail amendment: target may amend charter to prohibit paying of greenmail, so as to discourage any hostile bidder bent on receiving greenmail (basically a bribe not to takeover the company and sell off all its assets).
D.
E.
F.
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iv. New class of stock: target might create a 2nd class of common stock and require that any merger or
asset sale be approved by each class. The 2nd class could then be placed with ppl friendly to the management (e.g. family, employee stock ownership). v. Poison pill: these plans try to make bad things happen to the bidder if it obtains control of the target, thereby making the target less attractive to the bidder. 1. Call plans: gives stockholders the right to buy cheap stock in certain circumstances. When a flipover is reached (say outsider buys 20%, for instance), the holder of the right has an option to acquire shares at cheap price diluting the outsiders percentage. 2. Put plans: if a bidder buys some but not all of the targets shares, the put gives each target shareholder the right to sell back his remaining shares in the target at a predetermined fair price. 3. No Approval required: S/H approval is not generally required for a poison pill plan and sometimes can be implemented after a hostile bid has emerged. b. Post-offer techniques: these are techniques used after a hostile bid has surfaced. i. Defensive lawsuits: targets mgmt can institute defensive lawsuits alleging breach of state-law fiduciary duties or federal securities law. ii. White knight defense: find a white knight that will acquire the target instead of letting the hostile bidder do so. The white knight is given a special inducement to enter the bidding process. iii. Defensive acquisition: target might make itself less attractive by arranging a defensive acquisition that would cause the target to take on a lot of debt. iv. Corporate restructuring: target may restructure itself in a way that raises short-term stockholder value. v. Greenmail: target may pay greenmail to the bidder. vi. Pac man defense: target may tender for the bidder. State response to defensive maneuvers in hostile takeovers: bidder has a much better chance of showing that the targets defensive maneuvers violate state law. a. Business Judgment Rule: in DE, the target and its management will get the protection of the business judgment rule (and therefore the defensive measures will be upheld) under the following circumstances summarized in Unocal v. Mesa. i. Reasonable grounds: BoD and management must show they had reasonable grounds for believing there was a danger to the corporations welfare from the takeover attempt. Therefore, they cannot use the defensive measures simply to entrench themselves in power they must reasonably believe they are protecting S/Hs interests, not their own. Some dangers that constitute reasonable grounds include: 1) a reasonable belief the bidder would change the business practices of the corp. in a way that would harm the companys ongoing business, 2) a reasonable fear that the particular takeover attempt is unfair or coercive, such as a two-tier front-loaded offer, and 3) a reasonable fear that the offer will leave the target with unreasonably high levels of debt. ii. Proportional response: second, directors and mgmt must show the defensive measures used were reasonable in relation to the threat posed. 1. Cant be preclusive or coercive: to meet the proportionality requirement, a defensive measure cannot be preclusive or coercive. Preclusive actions are ones that effect foreclosing virtually all takeovers ( e.g. poison pill that would dissuade anyone). A coercive action is one which crams down on the targets S/Hs a mgmt sponsored alternative. iii. Reasonable investigation: third, targets board must act upon reasonable investigation when responding to the takeover attempt. b. Independent directors: court approval of anti-takeover devices are much more likely if the board approving the measure has a majority composed of independent directors (i.e. those who are not fulltime employees are who are not closely affiliated with mgmt). c. Consequences if requirements are not met: if one or more of the three requirements are not met, the court will refuse to give the takeover device the protection of the business judgment rule. It will be treated
G.
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like any other type of self-dealing, putting management to the burden of showing the transaction was entirely fair to the targets S/Hs. Decision to sell the company (the Level Playing Field rule): once targets mgmt decides that it is willing to sell the company, then courts give enhanced scrutiny to the steps the targets board and managers take. Most importantly, mgmt and the board must make every effort to obtain the highest price for the S/Hs. Therefore, targets insiders must create a level playing field such that all would-be bidders are treated equally. a. Revlon v. MacAndrews & Forbes (target sought by Raider and White Knight. Targets board favors White Knight. Targets board gives White Knight a crown jewels option to buy two key Target subsidiaries for a much-below-market price. Held: targets board violated obligation to get the best price, and it was not entitled to favor one bidder over another, such as by the use of a lockup to prematurely end the auction). b. Management Interested: if the targets mgmt is one of the competing bidders, the targets board must be especially careful not to favor mgmt (cant give them better access to information). Normally, the targets independent directors should form a special committee to conduct negotiations on the targets behalf. Sale of control: similarly, enhanced scrutiny will not be given to transactions in which the board sells control of the company to a single individual or group. Board may just say no: if the targets board has not previously decided to put the company up for sale or dramatically restructure it, then the board basically has a right to reject unwanted takeover offers, even all-cash high priced offers that the board thinks most S/Hs would welcome. Board can just say no at least in DE. a. Illustrations: targets board may, as a general rule, refuse to redeem a poison pill, refuse to recommend a merger or put a proposed merger to shareholder vote or otherwise refuse to cooperate. Paramount Communic v. Time. Court response to anti-takeover devices: a. Greenmail: most courts seem to allow greenmail. b. Exclusionary repurchase: if the target repurchases some of its shares at a price higher than the bidder is offering, it may refuse to buy back any of the bidders shares as part of the arrangement. Unocal v. Mesa. c. Poison pill plans: most poison pill plans have been upheld. Only where the poison pill has the effect of foreclosing virtually all hostile takeovers is it likely to be struck down. Moran v. Household Intl. d. Lockups: lockups are the anti-takeover device most likely to be invalid. This is especially true of crown jewel options. Revlon v. MacAndrews & Forbes. If a crown jewel option is used to end an auction prematurely rather than create one, it will probably be struck down. e. Stock option: an option to the acquirer to buy stock in the target will likely be struck down if it is for so many shares, or for so low a price, or on such burdensome terms, that its mere existence has a materially chilling effect on whether other bidders will emerge. DIVIDENDS & SHARE REPURCHASES
H.
I. J.
K.
1.12
1.12.1 DIVIDENDS PROTECTION OF CREDITORS A. Terminology: a. Dividend: a dividend is a cash payment made by the corporation to its common S/Hs pro rata. It is usually paid out of the current earnings of the corporation and represents a partial distribution of profits. b. Stated capital: stated capital is the S/Hs permanent investment in the corporation. i. Par stock: if the stock has par value stated capital is equal to the number of shares outstanding times the par value of each share. ii. No par: if the stock is no par stock, stated capital is an arbitrary amount that the board assigns to the stated capital account. c. Earned surplus: is equal to the profits earned by the corporation during its existence minus any dividends ever paid out. Retained earnings is a more modern synonym. d. Capital surplus: is everything in the corporations capital account other than stated capital. B. Dividends generally: dividends are generally authorized by the BoD within certain limits. Most states only allow dividends to by paid if: 1) payment will not impair the corporations stated capital, and 2) payment will not render the corporation insolvent.
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C. Capital tests: a. Earned surplus statutes: most states have earned surplus restrictions saying dividends can only be paid
out of profits the corporation has accumulated since its inception.
b. Impairment of Capital statutes: less strict than earned surplus statutes, these allow dividends to be paid
from unearned surplus as long as they do not impair the capital of the corporation.
D. Insolvency test: even if a dividend payment would not violate the applicable capital test, in nearly all states
payment of a dividend is prohibited if it would leave the corporation insolvent. This typically means that it is unable to pay its debts as they become due. A minority of states define insolvency based on bankruptcy saying it is when market value of assets is less than liabilities. a. MBCA: imposes only an insolvency test, not a capital test. Liability of directors: if the directors approve a dividend at a time when the statute prohibits it, they may be personally liable: a. Bad faith: if the directors know the dividend is forbidden, they are personally liable. b. Negligence: if they act in good faith but are negligent in failing to notice the dividend is forbidden, they are liable in most states. c. Creditor suit: usually, the suit to recover improperly-paid dividends must be brought by the corporation (sometimes through a S/H derivative suit or by a trustee in bankruptcy), but some states allow them to be brought by a creditor against the directors. d. MBCA: corporation may hold liable any director who negligently approves an improper dividend. Liability of S/Hs: a shareholder who receives an improper dividend may also be liable. a. C/L: at C/L, S/H will be liable if he knew when he received it that it was improper. b. Statute: some statutes make the S/H liable to return the improper dividend.
E.
F.
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1.2.2 DISSOLUTION & DISSOCIATION A. Basic Framework

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THE CORPORATE STRUCTURE GENERAL ALLOCATION OF POWERS

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A. Generally: public offerings of securities are extensively regulated by the 33 Act.

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1. Standard for Waste: typical definition is very restricted. A transaction is not

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