Introduction
AP Smith v. Barlow
·
BoD filed a
declaratory motion for a motion that it was intra vires to make a donation to
Princeton.
·
Corporate
gift-giving is allowed; the shareholders’ remedy is to get out by selling their
shares or to elect a new board.
Terminology
Financial statements
·
Cash flow
statement
o
The actual cash
that is flowing into and out of the bank account.
·
Balance sheet
o
All assets and
liabilities.
·
Income
statement
o
Statement of
all income in a given period.
Agency
Definition
·
Agency is a
consensual relationship between two parties created by words or conduct whereby
the agent takes on a fiduciary duty to the principal with the risk of liability
for breach of contract if the duty is breached.
Types of agency authority
Actual authority
·
Manifestations
from Principal to Agent that the Agent reasonably believes create authority
·
Variations
o
Express
§ Direct
·
Principal
directly communicates to the Agent.
§ Indirect
·
Principal
communicates to the Agent through a Third Party
o
Implied
§ Agent has the authority to do what is reasonably necessary to get
the job done when Principal did not spell out the details.
·
Agent’s
liability for breaching actual authority
o
Principal can
sue Agent for disobeying and exceeding his actual authority UNLESS Agent
overheard manifestations from Principal to 3P giving Agent more authority and
reasonably relied on them.
Apparent authority
·
Manifestations
from Principal to a Third Party that leads the Third Party to reasonably
conclude that A is P’s agent.
·
RS3 Agency
expands / liberalizes the meaning of manifestations, subsuming inherent
authority into apparent.
Inherent authority
·
The agent had
authority by virtue of his existing position of employment.
·
Only in RS2
Agency.
|
RS2
jurisdiction
|
RS3
jurisdiction
|
|
Actual
|
Actual
|
|
Apparent
|
Apparent
|
|
Inherent
|
|
Fiduciary duties of agents
·
The best
interests of the Principal are to be prioritized over the interests of the
Agent.
Contractual liability of agency
·
Hayes v. Nat’l
Serv. Industries
o
π sued for
wrongful discharge;
o
π’s atty
settled the case for $15k;
o
π refused to
pay, that her atty lacked the authority to settle;
o
∆ sought to
enforce the settlement agreement.
o
Held: An
atty’s apparent authority is considered plenary unless a limitation is
communicated to the opposing party. Settlement is reasonably within an atty’s
domain of authority. π did not inform ∆ that her atty was not authorized to
settle the case for $15k. The settlement agreement is valid.
Tort liability of agency
·
Miller v.
McDonald’s
o
π suffered a
personal injury at ∆’s franchise owned and operated by 3K Restaurants Inc.;
o
π sued ∆ for
the injury.
o
Held: ∆
may be held liable for the injury. ∆’s license agreement with 3K – even though
it expressly stated that 3K was “not an agent of ∆” – was very detailed and laid
out several requirements for 3K to follow. 3K could not deviate from the
agreement without ∆’s approval. ∆ sent field consultants to do compliance
audits of 3K’s work.
§ Actual authority
·
∆ expressly had
the “right to control” 3K’s activities through the license agreement.
§ Apparent authority
·
∆ requires a
uniformity in its franchises, creating the appearance of a unified, single
entity, that 3K is an employee-like branch of ∆. π justifiably relied on this
perception when eating at the 3K franchise.
o
“Right to
control.”
·
RS3
o
Principal
controls the manner of work.
·
Principal not
liable for supra-scope, “frolic and detours” or for intentional torts committed
by agents.
Ratification
·
RS2 § 82
o
The affirmance
by a person of a prior act which did not bind him but which was done or
professedly done on his account, whereby the act, as to some or all persons, is
given effect as if originally authorized by him.
·
RS3 § 4.01
o
The affirmance
of a prior act done by another, whereby the act is given effect as if done by
an agent acting with actual authority.
o
A person
ratifies an act by
§ manifesting assent that the act shall affect the person's legal
relations, or
§ conduct that justifies a reasonable assumption that the person so
consents.
·
E.g., using
goods purchased by Agent, even though he exceeded authority in buying them.
·
RS3 § 4.08,
estoppel
o
If a person
makes a manifestation that the person has ratified another's act and the
manifestation, as reasonably understood by a third party, induces the third
party to make a detrimental change in position, the person may be estopped to
deny the ratification.
Principal
Disclosed principal
·
3P knows fully
of the agency relationship
Partially disclosed principal
·
3P knows he is
dealing with an agent, but does not know the identity of her principal.
·
Agent is liable
until Principal is identified.
Undisclosed principal
·
3P is unaware
that he is dealing with an agent.
·
Agent
is liable until Principal is identified.
Partnership
Definition
·
A partnership
is a for-profit venture between two or more natural or legal persons – each an
agent of the entity – with pass-through taxation as well as entity-based
liability and ownership of assets.
Default rules
o
EQUAL division
of profits and management authority (regardless of contribution).
o
Ordinary
decisions require a simple majority
o
Extraordinary
decisions require unanimous agreement
§ E.g., bringing in a new partner
Examples
·
Estate of
Fenimore
o
π gave Fenimore
a $10k “loan.”
o
In return for
the money, Fenimore promised π a share of profits from his business;
o
Fenimore dies
and π seeks to assert creditor status, which is preferred over partner status
in the distribution of the estate.
o
Held: The
sharing of profits creates a partnership. π's loan was actually a purchase of
equity in the business.
·
Meinhard v.
Salmon
o
∆ was the
lessee of a building on a 20 year lease;
o
π agreed to pay
for the building’s renovations in exchange for a share of the profits during
the lease;
o
4 months prior
to termination of the lease, the building owner offered ∆ the lease for an
adjacent building and lot;
o
∆ never
informed π of the owner’s offer and accepted the lease;
o
When π found
out, he sued for an interest, that ∆ violated the fiduciary duties of
partnership by not informing π of the offer.
o
Held: The new
lease was an incident of the partnership, ∆ had a fiduciary duty
as partner to disclose the opportunity to π. (Holding was quickly overturned).
Corporations
Elements
·
Promoter
o
Acts for the corp.
in the pre-formation stage – signing contracts, dealing with investors, etc.
o
Promoter
remains liable on contracts post-formation until the contracts are novated by
the corp.
·
Certificate of
incorporation and articles of incorporation
o
Identifies the
board members, resident agent
o
Filed with the
state
·
Bylaws
o
Internal rules
to govern the shareholders
o
Filed with the
SEC for public companies.
Purpose
·
Dewitt v.
Fleming
o
∆ was the president
and majority (but functionally, sole) s/h of the corp;
o
∆ made an oral promise
of surety (SoF) to π, that he would pay π if the corp. could
not;
1.
Creditors often
ask s/h’s for a personal guarantee; π here should’ve gotten it in writing.
o
Neither the
corp. nor ∆ paid;
o
π sued ∆
personally, asking the court to pierce the corporate veil.
o
Held: ∆ is
personally liable notwithstanding the corp. veil
o
There is no one
determinative factor in veil-piercing. Hiding behind the corp. in order to
commit fraud is a good reason, but proof of actual fraud is not required.
1.
Factors to
consider
·
Failure to
observe corp. formalities
·
Not paying
dividends;
·
Insolvency of
the debtor-corp. at the time;
·
Dominant s/h
siphons funds;
·
No activity by
other officers or directors;
·
No corp.
records.
o
Here, the corp.
was an alter ego / instrumentality used by ∆. No corporate formalities were
observed, ∆ dominated the business dealings, any profit gained by the corp.
immediately flowed to ∆.
Hierarchy
·
Parent corp.
o
Controls
1.
Wholly-owned
subsidiary
2.
Majority-owned
subsidiary
3.
Corp. division
(but not a separate entity)
o
Does not
control
1.
Minority-owned
venture
2.
Plurality-owned
venture
Control
·
In re Silicone
Breast Implants
o
πs sued ∆ for
torts committed by its wholly-owned subsidiary, ∆ raised corp. veil defense.
o
Held: ∆ may be
sued notwithstanding the veil. ∆ used the WOS as an alter ego / instrumentality,
treated it like a corp. division rather than a separate entity. ∆ put its logo
on the WOS’s products, inducing πs to rely on ∆s reputation.
Enterprise liability
o
Reverse /
corollary to alter ego / mere instrumentality liability
o
Invoked when
the deep pockets / money / assets are actually in the subsidiary, not in the
parent.
o
Must show that
the entire corporate tree was a single, intermingled enterprise.
Veil piercing in Indiana
o
Must show that
the harm was actually caused by disregarding the corporate form.
Corporate rights and duties
Shareholders
·
Elect the
members who sit on the Board of Directors
Elections
·
Done at an
annual meeting with agenda (req’d corp. formality); any other meeting is a
“special meeting”
·
Notice of annual
meeting must be given to record date shareholders, which is usually the “street
name” shareholders (i.e., brokers)
·
Proxy voting,
s/h’s may sell their vote or have an agent vote on their behalf
o
Revocable
1.
Agency law
applies
o
Irrevocable
1.
Must be coupled
with an interest in the stock
·
Voting methods
o
Example
– A: 60 shares; B: 30 shares; C: 10 shares; 5 seats up for election.
o
Straight,
seat-by-seat voting
1.
A separate
election for each seat on the BoD
2.
A’s vote wins
every single election
o
Cumulative,
at-large voting
1.
Each s/h’s
shares is multiplied by the number of seats up for election; A has 300 votes, B
has 150 votes, C has 50 votes
2.
The
top vote-getters are elected
Other functions
·
Certain
fundamental changes require s/h approval
o
Amendment of
AoA, dissolution, merger, substantial sale of assets.
·
Inspections
o
Inspection of
the books is only allowed for a “proper purpose”
Board of Directors
Generally
·
Sets the big
picture mission of the corp., makes major decisions, appoints officers
·
Directors are
(generally) NOT agents
BoD liability
·
While officers
are in charge of daily affairs and managing employees, the BoD may be
responsible for setting up internal guidelines, mechanisms, and investigations
to make them aware of wrongdoing and goings-on (Caremark).
Fiduciary duties
·
Reasonable care
o
Must know what
is going on, duty to inquire and monitor
·
Duty of loyalty
·
Duty to obey
the law
Officers
·
Management of
daily affairs; hire, fire, and control employees of the corp.
Shareholder agreements
·
McQuade v.
Stoneham
o
Parties
executed a s/h agreement, that they would use their best efforts to ensure they
each continue as directors.
o
π was not
re-elected as a director and sued for breach of contract
o
Held: The
contract is void for public policy; s/h duties are to the corp. and not to each
other; if it is in the best interests of the corp. that the individual is not
re-elected as director, then he should not be re-elected. [This holding is BAD
LAW today].
·
Villar v.
Kernan
o
K: 51%; V: 49%
o
The parties
orally agreed that there would be no salaries, only dividends.
o
The parties
brought in another s/h: K: 50%; V: 48%; S: 2%
o
K and S voted
to hire K and give him a salary.
o
V sued for
breach of the oral contract.
o
Held: The state
corporate statute puts s/h employment within the SoF; the oral contract is
unenforceable.
o
[Prof assigned
this case to show that the division of power was poorly crafted, first giving K
absolute power, then giving S tiebreaker power. Parties should have contracted
for equal voting rights, a neutral tiebreaker, etc.]
·
Ringling Bros.
o Cumulative voting; together, they could control 5 seats; the two
minorities had an agreement, that they would agree on how to vote on all
matters and, if no agreement, would defer to their attorney.
|
|
Shares
|
Directors
|
Votes
|
|
π
|
315
|
x7
|
2,205
|
|
∆
|
315
|
x7
|
2,205
|
|
North
|
370
|
x7
|
2,590
|
|
Total
|
1,000
|
|
7,000
|
o
∆ disobeyed
|
|
π
|
∆ (as
directed)
|
∆ (actual)
|
North
|
|
Mrs. Ringling
|
882
|
|
|
|
|
Robert
|
882
|
|
|
|
|
Mr. Dunn
|
441
|
441
|
|
|
|
Mrs. Haley
|
|
882
|
1,103
|
|
|
Mr. Haley
|
|
882
|
1,102
|
|
|
Mr. North
|
|
|
|
863
|
|
Mr. Woods
|
|
|
|
864
|
|
Mr. Griffin
|
|
|
|
863
|
o
Result: Dunn is
not elected
o
π sues, that ∆
breached the agreement.
o
Held:
Agreements like this constraining shareholders are valid and
enforceable (c.f., McQuade, agreement constraining directors was
invalid.)
Shareholder rights and division of power
·
Kortum v.
Webasto
o
Separate
entities Magna and WAG came together in a joint venture to create WSI.
o
WAG provided
the IP, Magna managed / ran the business.
o
WAG wanted
access to WSI’s books
1.
WAG’s CEO
Kortum was a director on WSI’s BoD
2.
WAG is also a s/h
o
Magna refuses,
that it is just part of WAG’s exit strategy, that WAG wants to compete against
WSI.
o
Held:
WAG may have access to WSI’s books for valuation purposes, but may not share
the info with any of its subsidiaries that may compete against WSI.
o
Rules of access
1.
Directors
·
Liberal; access
allowed for a purpose reasonably related to the task as a director
2.
Shareholders
·
Restricted;
“proper purpose” required
Suing the corporation
·
Schlensky v.
Wrigley
o
BoD states,
inter alia, that having night games would not be good for the surrounding
neighborhood, that baseball is traditionally a daytime sport
o
Shareholders
sue BoD, that failure to have night games is damaging to the corp., that the
BoD’s duties are to the corp. and not to the neighborhood and tradition.
o
Held: π’s
complaint does not even state a minimum CoA just to overcome the BJR
presumption, which requires an allegation of fraud, illegality or conflict of
interest.
·
Joy v. North
o
Shareholders
brought a derivative suit against the BoD for making decisions in ignorance on
the word of one director.
o
Process for
DVSs
Director liability
·
Smith v. Van
Gorkom
o
CEO and
director negotiate the sale of the company, receive one-day offer from buyer
o
CEO gives oral
presentation to BoD (no documentation) without having read the sales agreement
o
BoD approves
the sale after 2 hour deliberation
o
Shareholders
sue the BoD alleging breach of fiduciary duties in failing to exercise
reasonable care in the meeting, that the sales price was too low.
o
BoD invokes BJR
o
Held: BoD was
grossly negligent in the sale, did not request an extension of the offer
deadline, did not recess the meeting to allow for individual consideration,
made a fundamental decision on low, one-sided information.
o
Dissent and
commentary: The directors were all competent and successful businesspeople who
understand the nature of negotiation, should not constrain such people when the
offer may have been the best deal they could get at the time.
Director indemnification
o
DE and IN
§ Corporate indemnification of directors held personally liable is a
default rule; the corp. must indemnify unless the AoA specifically opts out.
o
D&O
insurance
§ Does not cover bad faith actions
Nonfeasance and malfeasance of directors
·
Barnes v.
Andrews
o
∆ was a s/h of
the corp. and friends with the president
o
∆ became a
director at the president’s encouragement / request
o
There were only
two BoD meetings, and ∆ could only attend one; ∆ did not press the president
for details of business activities, breached his fiduciary duty of inquiry.
o
Held: ∆ does
not get the BJR presumption b/c the receiver is suing on nonfeasance, not
malfeasance. However, although ∆ was a poor director, his incompetence has no
causal link to the failure of the corp. and, thus, ∆ is not personally liable.
·
In re Caremark
litigation
o
The corp. was
fined due to wrongdoing of employees
o
S/h’s sued the
BoD for failure to properly supervise employees, insufficient internal
mechanisms
o
Held: The BoD
has no duty to supervise employees with internal mechanisms unless there is a
reason to suspect wrongdoing. Here, BoD was reasonably informed and not liable
for the harm to the corp. due to the employees’ wrongdoings.
·
McCall v. Scott
o
The corp. was
fined due to wrongdoing of employees
o
S/h’s sued the
BoD, that it encouraged a culture of fraud for profitmaking purposes.
o
Demand futility
§ Formal demand upon directors to sue prior to bringing a derivative
action is not required where such demand would be futile (e.g., asking the
directors to sue themselves).
|
|
Duty of care
|
|
Malfeasance
|
BJR presumption; burden shifts to π to prove fraud, illegality,
or conflict of interest
|
|
Nonfeasance
|
No BJR presumption; but π must prove causation (but for ∆’s
inaction, the harm would not have occurred)
|
Derivative suits
Demand requirement
·
Eisenberg v.
Flying Tiger
o
π owned stock
in the parent airline, the parent had a subsidiary holding company which owned
an air freight subsidiary.
o
The parent
airline merged with the air freight sub-subsidiary and π received stock in the
holding company, which gave him no control over the airline business for which
he originally purchased shares.
o
π sued in his
individual capacity, did not go through the DVS procedures; ∆s moved to
dismiss, that it was a derivative harm, bond required.
o
Held:
The alleged harm is to the π-s/h, that his ownership was diluted and destroyed;
there is no alleged harm to any of the corporations; it is a direct, not a
derivative, suit.
Excused demand
·
Marx v. Akers
o
π-shareholder
brought a DVS against the corporation, claiming that demand on the directors
was excused
o
Delaware
approach
§ Demand is futile if there is a reasonable doubt that
·
The directors
are disinterested; or
·
The challenged
transaction was an exercise of business judgment.
o
Universal
demand approach
o
New York
approach
§ Demand is futile when the complaint alleges with particularity
that:
·
A majority of
the BoD is interested or “controlled” by interested directors;
·
The BoD was not
fully informed;
·
The challenged
transaction was so egregious that, on its fact, it could not be the result of
sound business judgment.
o
Held:
Here, plaintiff failed to allege with particularity.
Special litigation committees
·
Auerbach v.
Bennett
o
π-shareholder
brought a DVS on behalf of the corp. suing certain directors after an internal
audit found evidence of corruption without making a demand on the BoD.
o
∆ set up a SLC comprised
of disinterested directors (i.e., not the directors that π wished to sue on
behalf of the corp.) to investigate π’s claims, which came to the conclusion
that pursuing the claims were not in the best interests of the corp.
o
Held: If
an SLC is independent and disinterested, then its decision whether or not to
bring a claim is entitled to the BJR presumption. Here, the SLC was comprised
of disinterested directors, who engaged outside counsel in the investigation.
Thus, the subsequent decision to forgo any litigation is deemed a matter of
business judgment, which plaintiff has not rebutted.
·
Zapata v.
Maldonado
o
When should the
opinion of a SLC be sufficient to dismiss a pending DVS brought without first
making a formal demand?
o
Held: The
burden is on the BoD to prove that the SLC came to its opinion independently
and in good faith. Then, if in the court’s judgment, the opinion represents a
sound business decision, then dismissal is appropriate.
·
Special
Litigation Committees
o
Indiana
§ Must be three or more disinterested persons; the opinion may be
relied upon by a court.
Fiduciary duties in the corporation
·
Jones v. Burke
o
∆s directors,
officers and employees of the corp., fed up with π’s misbehavior and
incompetence left to start a new venture after buy-out negotiations failed;
they took clients and employees along.
o
Held: ∆s
violated fiduciary duty of loyalty to the corp.; corporate interests must come
before personal interest.
Corporate Opportunity Doctrine
ALI test (broad)
·
A corporate
opportunity is defined broadly as anything that accrues to an insider as a
result of her position that the corporation may be interested in.
·
Before taking
advantage of a corp. opportunity, an insider must first disclose the
opportunity to the BoD and have a vote.
·
Northeast
Harbor v. Harris
o
π-corp. would
like to have the surrounding land in order to prevent development but probably
could not have bought it itself since it was grossly undercapitalized.
o
∆-president
bought the land, first with the intent to prevent development, then she makes
plans to build a row of houses.
o
π sues to
enjoin the development and get a constructive trust on the land in its favor,
that ∆’s purchase violated the COD.
o
Trial applies
Delaware’s Guth “Line-of-Business” COD test, that only opportunities
within the corporation’s line of business are corp. opportunities, that
purchasing and developing real estate is not the golf course’s business, that ∆
was allowed to make the purchase and development.
o
Held:
court adopts ALI procedural-based and broadly defined COD test. ∆ should have
disclosed and gotten a vote as a safe harbor.
Delaware Guth LoB test (narrow)
·
Broz v. CIS
o
∆ was a
director for CIS and the president and sole s/h of RFBC
§ CIS
·
Insolvent, being
purchased by 3P corp., no Midwest operations.
§ RFBC
·
Operates in
Michigan only
o
∆ in his RFBC
capacity bought an FCC license for an area adjacent to RFBC’s established turf
in Michigan without a formal disclosure to the CIS BoD.
§ But the CEO and 2 other directors said that CIS would not be
interested
o
Then, 3P corp.
officially purchased CIS after negotiations
o
3P corp. as
successor to CIS sues ∆ for plundering a corp. opportunity
o
Held: It
was not a corp. opportunity
Rule
·
An insider may
not take advantage of any business opportunity if
o
The corp. can
afford to take advantage of it;
o
It is in the
corp.’s LoB;
o
The corp. has
an interest or expectancy in the opportunity; and
o
Taking the
opportunity creates a conflict of interest b/w the insider and the corp.
Guth corollary
·
An insider may
take a corporate opportunity if
o
It comes to him
in his personal, rather than corporate, capacity;
o
It is not
essential to the corp.;
o
Corp. has no
interest or expectancy in it; and
o
He did not
wrongfully exploit the corp.’s resources in coming to the opportunity
Trust and disclosure
·
HMG/Courtland
Properties v. Gray
o
The corp. had 5
directors
o
Director Gray
negotiated for the sale of corporate property to NAF corp.
o
The sale went
to the BoD for voting
§ Director Gray had an ownership interest in NAF
§ Director Fieber knew of Gray’s interest and also had an interest
himself
o
Gray did not
disclose his interest and voted for the sale
o
Fieber
disclosed his interest, recused himself, and did not disclose Gray’s interest.
o
Held:
Both directors breached fiduciary duties to the corp., Gray for not disclosing
and Fieber for not revealing Gray’s nondisclosure. Evidence of self-dealing is
sufficient to rebut the BJR presumption; the burden then shifts to the
directors to prove that the transaction was fair.
Exceptions
·
Cookies Food v.
Lakes Warehouse
o
The majority
s/h owned other corporations
o
When he first
bought in to Cookies for BBQ sauce, sales were dismal; he purchased more shares
and became the majority s/h; he controlled the BoD and put in his people.
o
He caused
Cookies to execute agreements with his other corporations for advertising,
shipping, and other services
o
Because BBQ
sauce is seasonal, the facilities are not in use in the winter, so he developed
a taco sauce for sale and caused Cookies to give him a royalty.
o
The royalty was
higher than the royalty paid to the founder for his BBQ sauce
o
Held: ∆
did not breach his fiduciary duties to the corp.; court does not look at the
fairness of the transactions, only at the huge success of the corp. due to ∆’s
actions.
·
In re Walt
Disney Corp.
o
Disney’s BoD
hires Ovitz as CEO, lucrative employment contract with mandatory severance
provision.
o
Ovitz doesn’t
work out, leaves, receives the lucrative severance provision.
o
S/h’s bring DVS
against the BoD, that the negotiation of the employment contract was done
negligently.
o
Held:
π’s allegations do not overcome the BJR.
Protective rights for stock and shareholders’
rights
Contractual rights and classes
·
Byelick v.
Vivadelli
o
π owned 10%, ∆
owned 90%
o
Following all
corporate formalities, ∆ amended the AoA to remove π’s preemptive rights, then
caused the BoD to issue new shares to him, diluting π’s shareholding to 1%.
o
Held:
π’s direct claim alleging breach of fiduciary duties can go forward. While ∆’s
actions may have been permissible under the corporate code, there is still the
common law and fiduciary duties of fairness.
Rights
o
Preemptive
rights
§ The right to purchase out of any new issuance of stock one’s
proportion of ownership.
§ Not a default rule in MBCA, but in some states.
o
Redemption
rights
o
First in line
rights
Classes
·
Common
·
Preferred
o
Class A
§ Dividend set at a certain amount / minimum threshold
·
Participating
o
Receives
dividends when common shares do
·
Participating
preferred
o
2 bites at the
apple
·
Cumulative
o
Undeclared
dividends accumulate until distribution is made.
Deadlock
·
Hollis v. Hill
o
Parties were
equal shareholders in the corp.
o
While the BoD
was equally controlled by both sides (deadlock), ∆-president made some unilateral
business decisions for the corp., stopped paying π’s salary, etc.
o
π sues ∆ for
breach of fiduciary duties.
o
Held: ∆
does not get BJR presumption and π wins under Nevada law
o
Internal
Affairs Doctrine
§ Courts will apply the law of the state of incorporation
o
Nevada law
§ Fiduciary duties may exist between shareholders of closely held
corporations, which are sometimes more like partnerships. But partners have an
easy exit if things go sour, while shareholders are stuck with shares that do
not have a ready market that will pay a fair price.
o
Delaware law
§ No protection against minority S/H oppression
o
Dissent: Nevada
applies a lot of Delaware law.
·
Shareholder
deadlock in the close corp.
o
Indiana
§ There is a statutory right to petition the court for dissolution of
the corporation if there is deadlock
Dividends
What
·
A pro rata
distribution to shareholders out of the capital surplus of the corporation
o
Par value of
shares is usually set at $0.01, then sold at $10.00, making capital surplus
$9.99.
Why declare?
·
To show that
the company is doing well, to encourage investment in it
·
If the corp. is
dying, to beat creditors to the punch.
Why not?
·
To pour the
money into the corp. and expand
·
SBA or venture
capitalist involvement may preclude it.
Reasons for and against declaring
·
Zidell v.
Zidell
o
π was the
minority s/h, majority held by ∆s brother and his son; all 3 worked for and
received a salary from the corp.
o
π resigned
after his request for a raise was blocked by ∆s, losing the main return on his
investment and his sole source of income
o
Although
declaring dividends was not part of the corp. practice, π wanted the corp. to
declare.
o
∆s agreed to
declare a small amount, then increased their salaries
o
π sued, that
the dividends were unreasonable and made in bad faith.
o
Held: ∆s
offered sufficient evidence of the corp.’s conservative dividend policy. π
voluntarily resigned and was not forced out.
·
Sinclair Oil
o
∆ owned 97% of
subsidiary Sinven
o
π owned stock
in Sinven
o
∆ caused Sinven
to declare dividends in gross excess of earnings, effectively killing it.
o
π brings DVS,
that ∆ is unfairly using Sinven as a cash cow without regard to the long-term
interests of Sinven and its shareholders.
o
Held:
Fairness is not implicated because ∆ caused Sinven to declare dividends equally
to ALL shareholders, not just to ∆. Standard is BJR and π has not rebutted the
presumption.
Federal securities regulation
·
Dupuy v. Dupuy
o
Milton and
Clarence lived in the same apartment complex, each respectively owned 47% of
the corp., and mom owned the remaining 6%.
o
Milton got sick
and withdrew from management of the corp., so Clarence took full managerial
control.
o
Clarence
negotiated the purchase of Milton’s shares; in so doing, he lied to Milton about
the status of the corp. and certain opportunities, undervaluing Milton’s
shares.
o
Milton sued
Clarence under the SEA, invoking intrastate telephone calls between the two
apartments in the apartment complex for jurisdiction.
o
Held:
Intrastate, intra-apartment complex telephone calls are sufficient to invoke
federal SEA jdx
·
Insider trading
o
When a
corporate insider purchases shares in the corp. on inside knowledge without
disclosure of the knowledge to the seller.
Corporate endgames
·
Dissolution
o
Creditors have
prioritized status
·
Merger
o
Acquirer takes
on both assets AND liabilities
·
Sale of
substantially all of the assets
o
Acquirer takes
on only the purchased assets; but if the sale is functionally a merger where
the acquirer takes over and substantially continues the target’s business
activities, then the acquirer may be responsible for the target’s liabilities
as well.
·
Hostile
takeover
o
When an
outsider acquires working control of a corporation and installs its own
officers and directors
Limited Partnerships
Zeiger v. Wilf
·
Developers created a
corporation to buy the property from plaintiff;
·
The corporation was 50%
owned by CPA, a general partnership in which defendant was a general partner
·
The corporation was also
the sole general partner in a limited partnership;
o
Plaintiff was a limited
partner in the limited partnership
o
CPA was a limited partner
in the limited partnership
·
The corporation transferred
the property to the limited partnership immediately
·
Defendant handled much of
the negotiations
o
Was he acting:
§
in the general partner
capacity through the corporation?
§
OR in the limited partner
capacity through CPA?
o
If through the corporation,
his liability is shielded
o
If through CPA, CPA may be
deemed to have taken on the appearance of a general partner
·
Held: State safe harbor
provision provides that a limited partner shall not be treated as a general
partner solely for serving as a director, officer, or shareholder of a
corporate general partner. No personal liability. If plaintiff were not a
sophisticated party, then defendant might have been held liable in equity.
Kahn v. Icahn
·
Plaintiff limited partner
brought a DVS on behalf of the limited partnership against the corporate
general partner and its sole shareholder, CEO, and certain affiliates, claiming
they breached their fiduciary duty of loyalty to the limited partners by
usurping business opportunities of the limited partnership. However, the
limited partnership agreement permitted the general partner to compete with the
business of the limited partnership.
·
Held: The contractual
restriction of traditional fiduciary duties effectively created a safe harbor
that prevented the general partner from breaching fiduciary duties to the
limited partners by competing with the limited partnership.
In re USACafes
·
Plaintiffs-limited partners
sued the two individual shareholders of the CGP personally, alleging that they
violated fiduciary duties owed to the limited partners by selling off assets of
the limited partnership at a low price in return for kickbacks.
·
Defendants countered, that
their individual duties were to the CGP alone, and not to the LPs or the
limited partnership; but they conceded that the CGP owed fiduciary duties to
the LPs.
·
Held: The directors of a
corporate general partner of a limited partnership personally owed fiduciary
duties to the limited partners.
Limited Liability Companies
|
LLCs
|
|
|
It is a separate legal entity with passthru taxation (defined as a
partnership by IRS) that limits liability for members and member-managers, requires
a formal filing with the state,
Default rules include free transferability of ownership, fiduciary
duties amongst members and managers, managers as agents of the entity.
|
|
|
Member (i.e., owner)-managed
|
Manager-managed
|
|
Decision-making is the same as partners in a general partnership
Operating agreement will detail
·
How many votes each
member has;
·
What percentage of votes
is required for certain issues
|
Decision-making is similar to a corporation
Operating agreement will detail
·
How members elect and
remove managers;
·
What issues require
voting
|
|
|
|
Webber
·
Defendants were members of
an LLC and sent out spam faxes, which gives citizens a private right of action
in tort under federal law
·
Plaintiff sued defendants
personally
·
Defendants alleged they
were acting in their capacity as members of the LLC, that the LLC shielded them
from personal liability.
·
Held: Defendants can be
personally liable
In re Suhadolnik
·
LLCs are subject to the
same veil-piercing requirements and possibilities as are corporations.
[1]
(1) A servant is a person employed to perform services in the affairs of
another and who with respect to the physical conduct in the performance of the
services is subject to the other's control or right to control.
(2) In determining whether one acting for another is a
servant or an independent contractor, the following matters of fact, among
others, are considered:
(a) the extent of control
which, by the agreement, the master may exercise over the details of the work;
(b) whether or not the one
employed is engaged in a distinct occupation or business;
(c) the kind of occupation,
with reference to whether, in the locality, the work is usually done under the
direction of the employer or by a specialist without supervision;
(d) the skill required in the
particular occupation;
(e) whether the employer or
the workman supplies the instrumentalities, tools, and the place of work for
the person doing the work;
(f) the length of time for
which the person is employed;
(g) the method of payment,
whether by the time or by the job;
(h) whether or not the work
is a part of the regular business of the employer;
(i) whether or not the
parties believe they are creating the relation of master and servant; and
(j) whether the principal is
or is not in business.
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