AGENCY 1) General a) R2 8 defined agency as the fiduciary relationship which necessitates i) Consent ii) Of a person acting on the behalf

of another iii) Under their control. b) R3 added that an agreement between the parties regarding the relationship is not dispositive. 2) Types of agency relationships R2 2 a) Master-servant: the servant has agreed to (a) work on behalf of the master and (b) be subject to the masters control or right to control the physical conduct of the servant. b) Independent Contractor- has agreed to work act on behalf of contractor but is not subject to their physical control over how the result is accomplished. i) Carpenter hired to buy lumber for project and build garage. c) Non-agent Contractor- Operates independently and simply enters into an arms length agreement. i) Carpenter simply hired to build a garage and simply get the job done. 3) Humble Oil & Refining v. Martin a) Car that rolled away while at gas station for servicing. b) Agreement stated no agency but C holds not dispositive c) Considers i) P (owner) had strict control over finances and pays utilities ii) P controls operating hours and supplied finances for equipment, advertising, etc. iii) S (operator) had to submit written reports and fulfill certain duties d) Master servant 4) Hoover v. Sun Oil a) Hs car caught fire at station owner by Sun, operated by B. b) The test to be applied is: whether the oi company has retained the right to control the details of the day-to-day operation of the service station; control/influence over results is insufficient. c) Factors i) K terminable by either party w notice. ii) B could sell competitor products & set own hours. iii) B not required to follow Ss advice or submit reports. iv) B assumed all financial risk, hires/fires/pays ees d) Note- like S above, B still has very little power bc if S didnt like something B was doing it could just threaten to terminate the lease & B would be in trouble. 5) Arguello v. Conoco a) Racism at their stores b) No M/S relationship because of clause in agreement stating there wasnt with no conflicting facts. c) This is basically a franchise and a franchisor has to set certain stds so thats not dispositive. 6) Duty of loyalty- Agent has a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.

a) Reading v. Regent i) Army uniform case ii) If a servant violates his duty of honesty and good faith, where the assets he controls, facilities he enjoys, or position he occupies are the real reason of his obtaining the money and play the predominant part in his obtaining the money, he is accountable to his master. iii) Purpose of the rule is not to compensate the principal its to deter others. b) GAMC v. Singer i) GM who had taken client orders himself & filled them independently. ii) Breach of good faith & loyalty bc he was bound to act in furtherance & advancement of the interests of GAMC and he acted adversely to their interests by acting to further his own.DUTY TO DISCLOSE 7) Duty of care- unless otherwise agreed a paid agent is subject to a duty to the principal to act with std care & with the skill which is std in the locality for the kind of work which he is employed to perform and, in addition, to exercise any special skill he has. a) Town & Country House & Home v. Newberry i) House cleaning services. ii) Ees may not solicit their previous ers customers who are not openly looking for their services & who they know about only bc of their previous job. NATURE OF THE CORPORATION PROMOTERS Promoters- the person who identifies the business opportunity and puts together a deal forming a corporation 1) Southern-Gulf Marine Co v. Camcraft a) Promoter signed k for a vessel, corp was eventually organized in Caymans not US. D defaulted and argued P couldnt sue bc of lack of corporate existence at time of k b) rule- A party who contracts with what he acknowledges to be and treats as a corp is not permitted to deny the existence or legal validity later to escape being sue. UNLESS Ps de facto status affects the substantial rights of the D c) NOTE- BC he signed individually he would be liable if the corp never actually formed. To get rid of his liability, once the corp was formed the board would have to adopt all pre-incorporation contracts and amend the k so he was released for his obligations via novation. 2) HyposA buys land for 125k, sets up a corp, sells P the corp for 200k then sells the land to the corp for 200k He is a promoter and therefore owes a fiduciary duty and must disgorge the 75k (unless he disclosed his interest, how much he paid, or contracts out of it). a) A buys land for 125k, sells it to P for 200k, P sets up corp. Hes no longer promoter so assuming hes not acting as an agent its an arms length transaction and theres no duty. 3) EXAM- Where promoter signs k and then something happens a) Is the corp liable? Yes if they ratified or adopted k

b) Promoter is not personally liable if he made it explicit he was signing solely on behalf of the proposed corp INCORPORATING 1) Decide where to incorporate 2) Steps to incorporate a) File articles of inck between shareholders and corp and corp & state. States fundamental features of company which can only be cahgned w approval of state and shareholders. b) Incorporator names initial board of directors in aerticles or first meeting c) Initial BOD has organizational meeting- Only if the directors werent already named in articles d) Adopt bylaws- more detailed than articles, addresses how the corp is to be run, not filed with SOS. 3) Pre incorporation activities by promoters a) Discover need for service/product b) Investigate if its feasible c) Assembly/logistics. Promoters may be hired, but they are still agents owing fiduciary duty. CAPITAL STRUCTURE Common stock- last to get paid but with more control (voting rights) Preferred stock- passive investment, more expensive, get paid first, lower risk, less control, CAN demand voting rights by contracting. Debt securities- essentially a loan, very first in line, no dividends, less risk/control. CORPORATE ENTITY & LIMITED LIABILITY 1) Individuals as shareholders (usually 1 or 2 in these cases) a. PCV is based on the following factors-- Sea-Land: i. Unity of interest and ownership such that the sep personality of the corp & individual no longer exist 1. Failure to follow Corporate formalities a. Shares not formally issued b. No shareholder meetings or official minutes c. No corp financial records 2. Commingling of personal and corp funds 3. Inadequate capitalization- especially important w involuntary creditors. Usually not dispositive (Walkovsky) esp if they do have the mandatory insurance. 4. Sharing assets between corporations ii. Adherence to the fiction of separate entities would sanction a fraud or promote injustice. b. Random

i. Tort/ contract torts involve involuntary creditors. Contracts involve voluntary creditors who had an opportunity to bargain for a personal guarantee (unless fraud). ii. Fraud/wrongdoing- NOTE- if SH straight lies to creditor about how much $ there is, and he relies on it, SH can be DIRECTLY liable. c. Respondeat Superior -- Walkovsky v. Carlton i. D was shareholder in 10 corp each owning 2 cabs, 1 hit P. ii. Rule- A person can be held liable for the acts of the corporation upon the principle of respondeat superior when he uses control of the corporation to further his own rather than the corporations business. iii. Comp to Sea-Land, W actually complied w corp formalities, had min insurance, filed articles, etc. 2) Parent/Subsidiary a. In Re Silicone Gel Breast Implants Products Liability i. PCV requires showing of substantial domination based on: 1. Common directors, officers, business depts. 2. Consolidated financial statements and tax returns 3. Parent finances sub 4. Parent cause incorp of sub 5. Sub operates w grossly inadequate capital 6. Parent pays salaries/expenses 7. Sub only receives business given to it by parent 8. Parent uses subs property as its own 9. Daily operations arent separate 10. Sub doesnt observe corp formalities ii. NOTE- Same result under agency, but to prove agency necessitates a showing that the sub existed solely for the benefit of the P and the P has total control. iii. This PCV is to access the parents assets, not the SH. 3) Limited partnerships- Frigidaire sales a. Limited partners have the same status as shareholders and they have no right to exercise control. In Frigidaire they never acted in any direct, personal capacity, only in their capacity as agents for the corp. 4) EXAMa. Is there a unity of interest and ownership? b. Will it avoid fraud or injustice c. In k cases usually w sophisticated parties- was there an assumption of risk? SHAREHOLDER DERIVATIVE ACTIONS 1) Direct v. Derivative a. Corp refusing to pay dividends would be direct, but could argue derivative as it affects stock value. Corp misrepresenting finances to induce investors to buy would also be direct. b. Two prong test i. nature of the wrong alleged ii. who would recover if P won. 2) DIRECT ACTION-- Eisenberg v. FTL

a. Weird complex reorganization that essentially deprived minority shareholders of vote. P didnt pay security as required for derivate so it was dismissed, but then C held it was direct so he was ok. b. Rule- the right to vote was a shareholder right, not a right of the company, so the interest involved is one belonging to the shareholder. 3) The requirement of DEMAND--- Grimes v. Donald -- DE a. Directors may not delegate duties which lie at the heart of the management of the corp. b. * If a demand is made and rejected the board rejecting the demand is entitled to the presumption of the BJR unless the SH can allege facts with particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption. c. Demand may be excused if you can prove futility bc i. Majority of board has financial/familial interest ii. Majority is incapable of acting independently iii. Underlying transaction is not the product of a valid exercise of the BJR. d. Making a demand precludes you from arguing futility. BUT can argue wrongful refusal. 4) Special Litigation Committees who Issue Refusal- Tests for futility a. Auerbach v. BennettNY TEST i. Basically company formed special litigation committee of 3 disinterest directors which was responsible for assessing derivate claims. Here the committee decided the claim should be rejected. ii. H- Determination of a special litigation committee forecloses further judicial inquiry into this case. HOWEVER, Business judgment rule does not foreclose inquiry into whether the committee is independent & really made up of disinterested directors. iii. Demand is futile if theres no: 1. Independence & composition of SLC, 2. sufficiency and reasonableness of investigation 3. good faith. a. If you cant show its not futile they get the BJR b. Zapata Corp v. Maldonado- DE TEST i. A board decision to cause a derivative suit to be dismissed as detrimental to the company, after demand has been made and refused, will be respected unless it was wrongful. ii. Adds to Auerbach key factors that even if all those are present the court should then apply its own independent business judgment to determine whether the motion should be granted this considers the nature of the motion, its spirit. 5) Settling the claim- Incentives a. Plose at trial- pay fees; settles- may be reimbursed if the proceeding results in substantial benefit to corp b. Directors- legal fees paid by corp if NOT liable, & theyre indemnified if they settle. ROLE AND PURPOSES

1) Traditional View- ultra vires doctrinecharity is outside the scope of the corp authority 2) Modern View- Corp may use resources for public welfare, humanitarian, educational BUT must still be to further the business and affairs of corp not individual a. DONATIONS- AP Smith Mfg. v. Barlow i. D brought action against BOD over 1500$ donation to Princeton, claiming the COI didnt authorize it so they didnt have the power to make it. ii. R- donations are ok if they tend to reasonably promote corporate objectives. b. Social Responsibility- Dodge v. Ford Motor i. Dodge owned 10% of stock and Ford later announced they werent paying special dividends bc they wanted to reduce cost of cars & expand. ii. H- BOD cant conduct affairs of corp for incidental benefit of shareholders & the primary purpose of benefitting others, therefore Ford can expand, but then they have to pay the surplus of profits which it can pay out without detriment to the business. DUTIES OF OFFICERS DUTY OF CARE BJR- For duty of Care cases always first look if the BJR can be rebutted. 1) Informed basis- material facts reasonably available (Kamin) a. Reliance rule- allowed to rely on experts if there are grounds for reliance (8.30) and BOD reasonably believed that the info merited their confidence b. Must have a basic knowledge of i. Business ii. Financial statements iii. Industry c. Responsible for al material facts that are reasonably available 2) In good faith 3) Honest belief that the action is in the best interests of the corporation Duty of Care- Courts look at whether the decision was in bad faith and most important HOW the decision was made rather than the substance. 1) If a director senses a flaw they must a. Inquire and investigate b. Object- which should manifest in board meetings & minutes (documented) c. Resign d. Seek advice of counsel e. Threaten to sue 1) Reliance on Experts -- Brehm v. Eisner- Disney case a. Reliance on an expert suffices for the informed requirement so they get BJR 2) BJR protects informed decisions-- Kamin v. AmExwasting of assets by declaring dividends

a. Courts wont interfere unless illegality, fraud, collusive, destructive motive is irrelevant, and there must be gros negligence. 3) BJR doesnt protect director w/o basic understanding of the business-- Francis v. NJ Bank- Old alcoholic mom sat by while kids mishandled money for personal use. a. She had a duty to be basically informed & continue monitoring. 4) Smith v. Van Gorkom- Board lost for being uninformed a. Board never ascertained that VG was promoting the transaction & determined the sale price b. Board made no attempt to learn intrinsic value of company c. No written documents, relied solely on oral statements d. Decision made in 2 hours with no real emergency, crisis circumstance e. ** Highlights how its the PROCESS, not the substance. i. As a result of this case a lot of states allow companies to add a provision to their AOI eliminating personal liability for directors. To rebut BJR, look for fraud, self dealing, malfeasance, nonfeasance, lack of rational basis, and gross negligence. Model Answer: 1. Did X Director breach his duty of care such that it overcomes the rebuttable presumption of the Business Judgment Rule? 2. The Board of Directors (the Board) performance is governed by the duty of care, which goes hand in hand with the business judgment rule (BJR). The BJR presumes that directors are acting within their duty of care. The burden of proof is on the P to show that the Directors breached their duty of care and thus are not protected by the BJR. The BJR can be overcome through a number of ways: (). Directors can protect themselves from personal liability by specifying in the corporate charters and by statute.

DUTY OF LOYALTY 3. Is there a Conflict of Interest? a. If Yes, BJR does NOT apply - BJR yields to the rule of undivided loyalty. b. If No, look for breach of duty of care 4. Standard (if conflict of intereststrict scrutiny): Burden shifts to the Directors and Officers to prove the transaction was a. In Good Faith b. Inherently Fair from the Corps viewpoint 5. What preventative measures could the Directors have taken? a. Full Disclosure to the disinterested party and Get Consent to proceed b. Take it to the s/h and vote on the transaction Corporate Opportunity Analysis 1) Is it a corp opportunity? Either Broz narrow standard or ALI broad standard 2) Can they take advantage of it? ALI requires full disclosure & rejection, DE suggests it.

3) DefensesRefusal to deal/futility (ERCO), financial incapacity 4) Remedy- disgorgement 5) Bayer v. Beran- Rayon company with the radio ads a. W a conflict of interest claim any evidence of unfairness or undue advantage will void the transaction. b. Showing no breach of loyalty requires showing that the act served a legitimate and useful corporate purpose. 6) Erco v. Porter- black scientist ditches company to rally for the minority bid a. Breach of duty to not divert the opportunity for his own benefit. b. Can only take corp opp if there is full disclosure and form refusal to deal. 7) Lewis v. SLE- complicated case with siblings inheriting shares in two companies a. BJR presupposes there is no conflict of interest, so where there is the burden is on the Ds to show it was legit and then theres a strict scrutiny standard. 8) CORPORATE OPPORTUNITY a. DE RULE-- Broz v. CIS, - D director in 2 cell companies, approached w opportunity for 1 of them, then sued by company that acquired the other company for diverting the opportunity. i. Whether there is a breach of the doctrine of corporate opportunity depends on whether 1. Corp is financially able to undertake it 2. Same line of business 3. Practical advantage 4. Corp has interest or reasonable expectancy ii. Here held no breach bc no obligation to not compete but should have put that in writing. iii. This has a very narrow definition of corporate opportunity. b. ALI 5.05 i. Director/senior exec cannot take advantage of a corp opportunity UNLESS 1. First offers the CO to corp 2. Makes disclosure concerning conflict of interest 3. The CO is rejected, AND the rejection is either a. Fair to corporation b. Made in advance, following disclosure, by disinterested directors/senior execs/SH ii. Definition of a corporate opportunity 1. A director or senior executive becomes aware of the opportunity a. In connection with their performance, or under circumstances where they should reasonably expect that the opportunity was being offered to the company b. While using corporate property/assets/info and they should reasonably be expected to believe the opportunity may be of interest to the corp

2. A corporate opportunity is also any opportunity that a senior exec becomes aware of and that is closely related with the business in which the company engages or may engage in the future. 9) PARENT/SUB--- Sinclair Oil v. Levienparent/sub Venezuelan oil company. a. When the situation involves a parent who has received a benefit to the exclusion and at the expense of a sub, the test is NOT the BJR, its the intrinsic fairness test which involves: i. High degree of fairness and ii. Shifts the burden of proof to the parent. b. Intrinsic fairness is used when there is evidence of self-dealing, meaning the shareholders didnt benefit--- in this case they did so BJR is applied & they pass c. Second issue of them basically stealing subs money was self-dealing so IF test applies. d. NOTE- generally SH owe no duty- here they do bc they are the dominant shareholders and control the board. INSIDER INFORMATION 1) Goodwin v. Agassiz- Scientist thought there might be copper, D thought it might be true and bought more shares from P (via stock exchange) a. No duty to disclose a theory, their faith, aspirations, and plans for the future b. Might be dif result if it was a face-to-face transaction 2) SEC v. TX Gulf Sulphur- drilling in Canada, lied in press releases, ees bought stocks a. Key is whether the information is MATERIAL, w a duty to disclose only in situations which are reasonably certain to have a sub effect on the MP b. Material means: i. Whether a reasonable man would attach importance in determining his choice of action includes all things that MIGHT affect value of stock. (Basic inc changes this to substantial likelihood that.) This requires: ii. Balancing 1. Prob event will occurindicia of interest between parties 2. Anticipated magnitude of the event- size of entities, potential premium over market value. c. Under 10b-5 statements must be issued in connection w purchase/sale which means it must be a device that reasonable investors would rely on, and in connection w that reliance, cause them to buy stock. d. Won anyway bc statements not def deceptive BUT **could be liable even though none of them traded. e. Must abstain from trading until info could reasonably have been expected to appear over the media of widest circulation. BJR governs timing. 3) BASIC V. Levinson a. What the information false and misleading? YES

b. Material? Test: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making a decision c. Reliance required- Must link the fraud to the result i. Rebuttal presumption of reliance where (public efficient market) any information that negatively or positively affect the market is presumed that the whole market relied on the false misrepresentation d. For speculative contingent info must balance the indicated probability and the anticipated magnitude (like TGS) i. Probability is worked out by looking at the INDICIA of interest between the parties, magnitude by looking at size of entities and potential premiums over market value. 4) Dirks v. SECanalyst disclosed that he was told by ees that there was fraud in company a. Tippee derives liability from tipper so tipper has to have breached their duty. b. For liability tipper must derive some sort of direct or indirect benefit c. ** Where info is revealed legitimately to lawyer, accountant, etc who is expected to keep material confidential there is liability regardless of benefit. d. If hed overheard in the elevator? No liability. e. ** extends Chiarella to outsiders who received info from breaching tipper & temporary insiders. 5) US v. OHagan- Insider of acquiring company, so no direct fiduciary relationship. a. Misappropriation theoryLiable bc he misappropriated info as an agent who had access to confidential info that was entrusted to him. b. ** Could escape liability by disclosing to the principal (acquiring co) that he planned to trade on the info bc then no deception. c. Similar to Carpenter w WSJ writer, he was liable bc he misappropriated info entrusted to him by the source (WSJ) 6) Breach. Courts also consider a. Regular pattern of sharing confidence, such that tippee reasonably should know theyre expected to maintain confidentiality b. Person agrees to maintain confidence c. Person receives info from immediate family member (rebuttable) 7) Limitations on 10b-5 a. Standing- cant sue bc you didnt buy b. Scienter- they must have intent to deceive, manipulate, defraud c. Secondary liability- no private right of action against those who aid & abet violations. 8) US v. Chestman a. A person violates 10b-5 when he misappropriates material nonpublic information in breach of a fiduciary duty of similar relationship of trust and condiedence and uses that info in a securities transaction. 9) 14e3if any person has taken substantial steps to commence, or has commenced a tender offer, it constitutes a fraudulent/deceptive/manipulative act for any person in possession of such info who knows (should) its nonpublic and knows (should) its been acquired directly/indirectly from a. Pretty much anybody inside or temp inside or related 10)SummaryBeyond direct breach, two theories for third party liability

a. Tippee i. Tippee assumes an insiders duty to the SH where the insider has breached his fiduciary duty and the tippee knows or should know there has been a breachDirks v. SEC b. Misappropriation i. Applies when a corporate outsider trades on nonpublic information in breach of a duty owed not to a trading party (so not to the company itself) but to the source of the information. 1. Full disclosure forecloses liability under this theory bc then there is no deceptive device and no 10b violation. SHORT SWING PROFITS 1) Must be a 10% owner at time of purchase AND saleReliance v. Emerson 2) Must be 10% owner PRIOR to purchaseForemost-McKesson v. Provident Securities. 3) Profit means buy low sell high. PROBLEMS OF CONTROL PROXY FIGHTSRule 14e 1) Proxy statements requirements a) Presentation of info in proxy statementRule 14a-5 i) MUST BE CLEARLY PRESENTED b) Rule14a-3 proxy statement with certain specific provisions is required in order to request proxy. 2) Proxy statement prohibitionsrule 14 a) False or misleading statements b) Omissions of material facts. 3) Reimbursement Costs a) Levin v. MGMP (directors & large SH) sued after D (5/13 board members) used MGM funds to pay for attorneys & PR firms & offices & ees of MGM to solicit proxies. i) Considers how well MGM has done w D in charge, but not dispositive bc its up to the SH. ii) Parties can be reimbursed for reasonable and proper expenses, but (1) Means cannot be illegal or unfair (2) Cannot involve personal interest and must involve a bona fide policy dispute. iii) NOTEInsurgents only get paid back if they win, incumbents get paid either way bc they have a right to defend themselves. b) Rosenfeld v. FairchildReimbursement Costs i) When directors act in good faith in a contest over POLICY (and not for personal power, individual gain, or private advantage) they have a right to be reimbursed for reasonable and proper expenses for solicitation of proxies subject to strict scrutiny AND SH can reimburse successful insurgents, also subject to strict scrutiny. 4) Excluding Proposals

5. Insignificant relation- if proposal relates to operations accounting for less than 5% of assets/net earnings and is not otherwise significantly related to business i. Lovenheim v. Iroquois--- D excluded Ps proposal relating to whether force feeding geese is inhumane, but goose sales are less than 5%. ii. The last provision is there to include things that have ethical and social significance. Also considers likelihood of prevailing and he gets to include it. 6. Company would lack the power or authority to implement the protocol 7. Ordinary business operations- This exception applies where the proposals involve business matters that are mundane in nature and do not involve any substantial policy or other considerations the statement may not be excluded if it involves a significant strategic decision as to those daily business matters-8. Relates to a nomination or an election for membership on the company's BOD or analogous governing body or a procedure for such nomination or election. 9. Conflicts directly with one of the company's own proposals to be submitted. 1. 5,6,7,8,9 can cite NYC Retirement v. Dole. 12. Duplication- proposal substantially duplicates another proposal previously submitted by another proponent that will be included in the proxy materials for the same meeting 13. Resubmission- substantially the same subject as another proposal that has previously been include in the preceding 5 calendar year if it receives certain % of votes depending on how many times it had been submitted already. 14. Specific amount of dividends B. In general, the likelihood of the proposal passing is irrelevant CLOSELY HELD CORPORATIONS ALWAYS LOOK IF THE D IS BEING SUED AS A SH OR AS A DIRECTOR. AS A DIRECTOR COULD INVOKE BJR, BUT AS SH OWE EACH OTHER FIDUCIARY DUTY. 1) What is a closely held corp? a) No more than 30 SH b) Subject to restrictions on transfer c) No public offering 2) Four types of control devices SH can enter into at the SH level where they bind one another to do something in order to ensure they each have a certain amount of control. a) Cumulative Voting- Voting for all the directors at once so if 10 shares and 10 directors could use 100 votes to vote for just one position. This is what there was in Ringling and also many states require it bc it protects minority voters. b) Vote Pooling Agreement i) 2+ SH agree to vote together on some/all matters. Some expressly state how votes will be cast, others merely commit the parties to vote together

ii) Will generally be valid today IF (1) No complaining minority interest (2) No fraud or injury to public or creditors (3) No prohibitory statutory language is violated (4) The agreement is unanimous iii) Can be enforced by: (1) Proxy- Agreement requires each signatory to give a 3rd party an irrevocable proxy to vote the shares in accordance w the agreement. (2) Specific Performance- Most courts will grant specific performance. c) Voting Trust- SH convey legal title of their shares to a voting trustee, under a voting trust agreement. They get dividends, etc. but they cant vote no matter what. i) Requirements: (1) Public DisclosureMust be filed with corporations principal office. (2) Limited to being valid for ten years (3) Must be in writing and implemented by a formal transfer of shares on record. (4) Requirements must be strictly adhered to or C may not enforce ii) Ringling v. Ringlingheld to be a pooling agreement not a voting trust bc the agreement didnt say it was a trust. Question then becomes whether D performed under the K, and she didnt so C invalidated her votes. d) Class Voting- certain classes of stock have certain voting rights, drafted into AOI or separate agreements. Agreements binding SH at director level 1) Delaware 350 -- Written agreement between SH of a close corp holding a majority of the outstanding stock entitled to vote, is not invalid, as between the parties on the ground that it so relates to the conduct of the business and affairs of the corp as to restrict or interfere with the discretion or powers of the BOD. the effect is to relieve directors and impose upon the SH who are parties to the agreement the liability for managerial acts or omissions which is imposed on directors. e) McQuade v. StonehamThe power to unite is limited to the election of directors and does not extend to contracts placing limits on the power of directors to manage the business of the corp by selecting agents at defined salariesDirectors, as parties to the agreement are not trustees of D, and their duty is to the corp not him. 3) DE 351- COI of a close corporation may provide that the business be managed by the SH instead of the board a) No meeting to elect directors b) SH are deemed to be directors for purposes of applying the provision c) SH subject to liabilities of directors. 4) Case law has developed so that these agreements are generally valid subject to the same conditions as above a) No complaining minority interest b) No fraud or injury to public or creditors c) No prohibitory statutory language is violated d) The agreement is unanimous 5) SUMMARY a) So if ABC agree to ensure all 3 are elected to BOD- Enforceable under Ringling

b) If they agree as directors to elect each other as officers- Enforceable under Dodge bc they own 100% of the shares so theres no one not party to the k who can complain. c) If only A & B agreed to elect to board? Enforceable bc pooling trusts are valid. d) If A & B agree to elect officers? Under Galler C has a right to say the agreement is not valid and is unenforceable. (though in Galler there were also no SH other than those party to the k ABUSE OF CONTROL 6) Transfer Restrictions- MBC 6.27 Must be included in AOI a) Must appear on stock certificate b) Four types i) Prior approval by SH before transfer can take place unless manifestly unreasonable ii) Must first offer the option to corp or other SH iii) Obligate corp or other person to acquire restricted shares iv) Prohibit transfer to designated people unless manifestly unreasonable 7) Classic freeze outa) How to spot one i) Remove minority SH from management positions ii) Stop paying dividends iii) Denial of salary iv) *** majority will only buy out at a very low price. b) Wilkes v. Springside Nursing-- P (1 of 4 directors/SH) tried to sell his shares to get out of business. SH meeting raising other 3s salaries and taking away Ps. i) Maj had no legit business purpose for firing him and SH have no other recourse in these situations and have usually invested a lot w an expectancy of continued returns. ii) SAME FD AS BETWEEN PARTNERSutmost good faith and loyalty--- Test is: (1) Majority must be able to show legit business purpose for action. If so (2) Minority can can try show same objective could be achieved through another course of action 8) Just because it has a negative effect on minority SH doesnt mean its a breach of FD a) Smith v. Atlantic Properties- 4 SH w equal shares. Bylaws state any decision needs 80% vote so each have a veto. P vetoes all attempts to declare dividends bc he wants to use the profits to do repairs so the IRS fines them for not declaring dividends and the majority sues him. i) P acted in a way that was reckless and ran serious and unjustified risks so he has to pay. CONTROL, DURATION, AND STATUTORY DISSOLUTION Involuntary Dissolution in Close Corporations 1) 14.30 Model Business Corp ActA C can dissolve a corp in a proceeding by SH if SH can establish i) Directors are deadlocked and business cant be conducted bc of it.

ii) SH are deadlocked & for 2 consec meetings have been unable to elect new directors to fill vacant positions iii) Directors have/are/will act in a manner than is illegal, oppressive, or fraudulent iv) Corp assets are being misapplied or wasted. (1) ONLY IF NOT PUBLICLY TRADED, if PT then can sell. b) Alaska Plastics v. Coppock i) D divorced one of the 3 majority SH/Ds of AP and got half his shares. They never told her about meetings, paid themselves bonuses, and then offered to buy her out below FMV. ii) C rejected TC finding that corp was obligated to buy her shares at FMV even though there was a breach of FD iii) Couldnt grant specific performance bc she didnt accept their offer to sell (1) If she had then she could have sued and bc there was a FD C would use strict scrutiny & shift burden to corp to prove transaction was fair. iv) Rule- Whilst the law allowed courts to liquidate corp assets where the acts of those in control are oppressive or fraudulent, they also have the authority to fashion less drastic remedies. Reluctant to order ID absent compelling reasons 2) 1800- CAInvoluntary Diss may be proper when i) Corp has abandoned business for more than a year ii) Deadlocked board iii) Deadlocked SH iv) Board is guilty of persistent and pervasive fraud, mismanagement or abuse of authority OR persistent unfairness towards SH OR its property is being misapplied or wasted. v) In a CC (35 SH or less) where liquidation is reasonably necessary for the protection of the rights or interests of the complaining SH. (1) Except in cases of CC, must be at least 33% owner to bring suit (2) THIS IS A VERY BROAD STANDARD b) Stuparich v, Harbor FurnitureSisters got agro bc board wouldnt listen to their proposal and ignored them at board meetings. Sought ID under 1800 claiming it was reasonably necessary to protect their rights. i) D was still paying them dividends and they had no right to influence Ds decisions so C applies BJR because there is no persistent discrimination. ii) Cites two other examples (1) Granted IDP had no say in operation, received no salary/dividends/revenue, forced to withdraw from corp. (2) Didnt- minority SH went into competition w majority, C considered bad faith conduct by min, no reasonable expectation of receiving dividends, & no profits to pay them anyway. iii) NOTE- If bro later cut off dividends it would depend on whether C looked at BJR or says he has to find a less harmful methodC would look at BJR if he offered to buy them out at FMV bc then its not a freeze out (1) Its not an utmost care and loyalty std bc D is being sued as a board member not a shareholder. 3) 2000Corp can always avoid involuntary dissolution by buying out minority at FMV a) Only the majority being sued can invoke 2000so in Stuparich sisters couldnt invoke 2000 to force their brother to buy them out.

OTHER CASESREASONABLE EXPECTATION 1) Meiselman v. Meiselman a. SH need not establish oppressive or fraudulent conduct by their rights and interests under the statute include reasonable expectations including that the minority SH will participate in the management of the business or be employed but these are limited to expectations embodied in understandings, express or implied. 2) Pedro v. Pedro3 brothers, fired one after he pointed out accounting issues- He sought dissolution but was awarded massive damages. a. SH in a CC have a duty to deal honestly and fairly w one another. KEY here is that he had a reasonable expectancy of lifetime employment. b. Doesnt matter that there has been no diminution in value of corp. TRANSFER OF CONTROL 1) Order of Analysis: a) Controlling s/h can sell their shares at a premium absent: i) Fraud ii) Reason to believe purchaser is going to LOOT Corp. Assets (Majority owes duty of loyalty to minority) iii) Corp. Opportunity is taken away (Perlman v. Feldman) iv) Control of the Board (unless it is a foregone conclusion that buyer will control and economic incentive for buyer to gain immediate control and as long as buyer does have control (safely 51%)) 2) Zetlin v. Hanson Holding-- P owned 2% of shares. The Majority SH sold his shares at a premium so a new company could gain control. He sued bc he wanted to be able to sell his at a premium too. a) Absent i) Looting of corp assets ii) Conversion of opportunity iii) Fraud or other acts of bad faith b) A controlling SH is free to sell that controlling interest at a premium price. 3) Perlman v. Feldman- D owned majority in Newport Steel. Steel shortage and F sold his shares to another corp who elected a new board. a) When a company can command a high price bc of a unique economic situation it is a conversion of opportunity for a majority SH to PERSONALLY benefit by selling his shares at a premium. b) To the extent that the price F got was a bonus he is accountable to minority SH personally. c) This is a breach of loyalty. 4) Essex v. Yates- P sold controlling block of shares at a premium conditioned on the buy being able to immediately elect new board members. Even as majority he wouldnt be able to elect all 8 the first yr bc of how the voting system worked. a) C says that they still should get immediate control bc otherwise why would they pay the premium?? 5) Transactions by one group of SH that enables it to derive some special benefit not shared in common by all SH should be subject to close judicial scrutiny- Alaska

MERGERS, ACQUISITIONS, & TAKEOVERS FREEZE-OUT MERGERS 1) Weinberger v. UOP- Signal becomes majority SH of UOP and wants to cash out minority. S generates internal report created by Signal officers on UOPs board indicating theyd pay 24$/share. Report was not shared by UOP board members. UOP CEO did see it & also had fairness opinion done by outside company but in very hurried manner. a) The standard is that material info has to be disclosed and the report was material. i) Info is material if a reasonable SH would consider it important in making an investment decision. b) Where directors are on both sides of the transaction they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness--Signal-UOP had common directors who did not disclose their conflict c) Fairness is both: i) FAIR DEALING UOP should have appointed an independent negotiation committee to deal with Signal at arms length---- must be able to show that each party exerted its bargaining power. Should have gotten a legit outside fairness opinion that wasnt rushed. ii) FAIR PRICE- liberalany technique of valuation acceptable in financial community is admissible. Must consider fair value taking into account all relevant factors. d) NO MORE BUSINESS PURPOSE REQUIREMENT (at least in this context) 2) BURDEN OF PROOFcan cite Signal a) Minority to bring specific allegation convincing C to use inherent fairness not BJR (by showing conflict of interest mainly) b) Majority who can pass this by showing minority voted. c) Minority to show it was unfair bc they didnt get all material info d) Majority to show they did TAKEOVERS & DEFENSIVE STRATEGIES NY Rule- 719(b) Directors, in making any decisions, can consider 1) Prospects for growth 2) Current employees 3) Retired employees 4) Customers and creditors 5) Ability of corp to contribute to communities in which it does business 1) Greenmail-

2)

3) 4) 5) 6) 7)

a) Cheff v. Mathes- D shares owned by several relatives & holding comp owned by same people. Maremount started buying up shares of D and started voicing opinions on how it should be run. He had a history of looting companies so D approached director-SH about fending him off by repurchasing stocks from M at above FMV. P filed a derivative action claiming they were just trying to keep their own positions. i) Corporate fiduciaries may not use corporate funds to perpetuate their control. OK if its for company benefit & incidentally helps maintain control (motivation matters) ii) Presumption of good faith--- overcome by showing bad faith or selfdealing. Here it may be seen as self-dealing bc the SH were also the directors iii) Burden on directors to show legit business purpose by showing Good faith Reasonable investigation iv) His history of looting was sufficient to overcome BJR. Self tender offera) Unocal v. Mesa- Mesa owned 13% and planned to buy 37% more at 54$ a share and then second tier buyers would get junk bonds. 8 of the independent directors meet & decide stock is worth 60$ so plan to do a self-tender by Uno for its own stock at 70-75. Board agrees on 72$ debt securities, but Mesa is excluded from offer. i) First- Cheff test of good faith and reasonable investigationshow SH are going to get inadequate value & Mesa has a history of greenmailing. ii) Adds proportionality balancing element- The Unocal Test Reasonable grounds for believing there was a threat to corp policies/effectiveness CONSIDERING Inadequacy of price Nature and timing of offer Questions of illegality Impact on constituents (So even though not in DE statute, C applies constituency model) Defensive measure must be reasonable in relation to threat. iii) This is both a DOC and DOL analysis The Board is arguing that its DOC so entitled to BJR (good faith & informed). Pro-takeover parties are arguing DOL, that theres a conflict of interest or self dealing iv) DE used the enhanced BJR, where you have to do a few things then you get BJR Pac-Man defense- HA tries to eat Target. T starts buying shares of HA..? Additional debt- in order to finance above defenses, this makes business less attractive White Knight- target asks another corp to take them over instead. Maybe they merge can be very risky bc WK doesnt have a lot of time to figure out whats going on Crown Jewel- hostile wants some special asset so co sells this crown jewel Lock up option- if hostile acquirers more than say 20% then WK agrees to buy crown jewel

8) Poison pill- most common and effective, every SH gets a particular right attached to every share that is activated when the board is faced with a takeover attempt. Its something like letting them buy stocks at 50% which company issues so the HA owning is diluted. Antidote is that board can redeem pill so encourages friendly takeover a) Revlon v. MacAndrew & Forbes Holdings- Pantry approached Revlon about taking it over. Revlon BOD met & decided to adopt poison pill plan (if P acquired more than 20% each SH could exchange their stock for a $65 principal in Revlon & 12% interest) and to repurchase 5 million shares w senior subordinated notes. P continued to increase bids and R sought out F as another buyer. F was privy to R financial data that P wasnt). R and F made an agreement with a crazy cancellation fee, lock up option & no-shop provisions so P sought to enjoin the agreement as not in the best interest of SH. i) REVLON TEST-When the break-up of a corp by outside buyers is inevitable, the BOD must move from defender to auctioneer and secure the highest possible price. ii) BOD owed FD to SH & company but once it became evident they were going to be bought their duty was solely to SH to get the best price. iii) Earlier strategies were reasonable & justified under Unocal, there was a legit danger & response was reasonable. iv) BUT by authorizing the agreement with F the BOD acknowledged there was going to be a takeover. v) CANNOT consider constituents once in this auction situation. 9) Paramount v. Time- T wanted to merge w Warner and they agreed on a stock for stock ration w W SH owning 62% of TW stocks but w Ts president as CEO. Ts board had 12 independent members and their main concern was maintaining control over journalistic integrity and corp environment. Last minute P makes a tender offer at 175 (FMV = 126) for T conditioned on terminating TW deal. T refuses. SH claims Revlon applies and had auctioneer duties. a) Revlon only applies when the board essentially abandons the corps continued existence, whereas here they did want to continue, spec with the same corp culture. b) Unocal does apply. BOD was thoroughly informed w legit basis so BJR applies. i) Directors are not obligated to abandon a deliberately conceived corporate plan for a short-term SH profit unless there is clearly no basis to sustain the corp strategy. 10)Paramount v. QVC- Viacom majority SH enters into merger agreement w P whereby V is stil majority SH and P merges into V in return for stocks and securities in Viacom. QVC approaches P and P says no and adopts defensive measures (no show provision, termination fee, stock option agreement- very beneficial to V). PV merger amended to up price to 80$ BUT didnt use leverage to eliminate other defensive provisions. Led to bidding war. a) Currently a fluid aggregation of unaffiliated SH own a majority of Ps voting stock. If the takeover goes through they will only have a minority share in the surviving corp. CONSIDERABLE ECONOMIC CONSEQUENCES. b) When control shifts the current P SH wont have any leverage to demand a control premium, so Revlon applies. c) Not like TW, bc there the board was staying in control. d) In considering alternatives BOD should consider entire situation including

i) Fairness & feasibility ii) Financing & its consequences iii) Illegality iv) Risk of non-consummation v) Bidders ID, Prior background, & Business plans. (most are from Uno) e) BOD DUTY IS: to be informed of all reasonably available info & decide which alternative is most likely to offer best value to SH after critical examination f) BC this case involves impairing SH rights an enhanced scrutiny test is applied: i) Judicial determination regarding adequacy of decision making process, including info decision was based on ii) Judicial examination of reasonableness in light of circumstances. g) No shop provision doesnt protect BOD bc they cant k out of fiduciary duties. 11)UNOCAL = BJR, REVLON = ENHANCED BJR 12)KEY TO WHEHTER REVLON APPLIES IS WHETHERE THERE IS A CHANGE IN CONTROL. a) SALE b) BREAKUP c) TAKEOVER THATS INEVITABLE

Must plead facts with great specificity to get demand excused. NY standard make it difficult for P to overcome SLC recommendation. P can try show SLC members were not independent or that they didnt use reasonable procedures. C will not make independent determination of whether SLC was right.