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Baum Business Organizations Outline 1998



I.        Single owner- no formality requirement as not have to file with the state unless doing business as fictitious name- where there is significant risk for liability, may not be the best business form, as may want to seek limited liability form or insurance- if get too big, hire employee then lead to relationship with employee- look to law of agency as consent to represent someone else (principal) and principal agree to agent representing- agent under the control of principal

A.     Actual express authority- if principal expressly tell agent that able to do certain things

B.     Implied authority- ct invented- give authority where would be necessary/ natural incident to do thing authorized

C.     Fennell- lawyer settlement, but principal not want- apparent authority- agent talk to 3rd party and seem to 3rd party that have ability to bind principal- cases generally brought by 3rd party (one looking to get damages/ made whole)- protect reasonable expectation of 3rd party- appears that have ability to represent (need some manifestation that person agent)- No manifestation here that have ability to settle (not have to be direct communication to 3rd party)- manifestation that creates reasonable expectation

D.     African Bio-Botanical- when hold agent responsible for commitment- not disclose that t agent for corporation and merchandise sold to corporation, not agent- not personally responsible- as agent, should have disclosed status that represent principal- partial disclosure, indicating that purchase for someone but not tell who is- Not indicate that working for principal- when undisclosed principal/ partial disclosed, agent held responsible on the k- easy to find out that corporation existed but no hint/ flag that was a corporation

E.      Where 3rd party knows identity of principal involved, then agent not liable- but when undisclosed or partially disclosed principal, then agent liable

F.      English sign case- sign w/ owner name- new owner but continue to run- prevent form selling certain items, but still does buy from old supplier- supplier not paid, finds out agent not owner still but then goes and sues new owner- agent told that not have authority but supplier not know new owner- able to collect on inherent agent authority

G.     Tarnowski- juke boxes- fiduciary obligation- agent high fiduciary obligation to principal- act in best interest of principal (agent should not act in own best interest instead)- not investigate thoroughly, took bribe (violate duty of loyalty and fair dealing)- indicate severity of penalty imposed- get investment back and wrongful gains by agent

H.     Doherty- ratification of will- make various changes- error made in subsequent codacil, change beneficiary- was action (error) condoned even though told not to do- here ratification of error and appropriate action of agent

I.        Inherent agency power- primarily when have undisclosed principal, in order to hold principal liable



I. Requirements

A.     Not need any formality (written agreement) and not need to agree to have partnership

B.     CCC §16202 (1994 UPA)- purpose is to make profit (essential), need to associate as co-owners in business for profit, need to share ability to control business decisions (rt to participate in control)- General partner cannot limit liability to 3rd party by being called limited partner, abstain from management, secret partner- go into effect universally 1/1/99

C.     Martin- partner to firm when loan $, but not want to be partner- enter into certain agreements to protect investment (trust agreement)- providers of securities had certain rights- went bankrupt and creditors try to go after lenders- if partner, limitless liability to firm- were to be advised of decisions and consulted- could veto decisions- sharing of profits (not interest paid but share of profits w/ ceiling/ floor)- trustee could not initiate any action (could only veto)- could get resignation of any partner- agreement say not partner but immaterial if other factors show had rt to participate in control- sharing of profits (can have sharing of profits w/o partnership, critical element of control)- just b/c have many protections not equal to control/ partnership

D.     §16202(c)- notion of profit sharing critical- profit sharing create presumption of partnership except for listed relationships- degree to which party can insulate self w/in control/ management and not be considered co-owner- if don’t try indicate any particular relationship in control and share of profits, then will probably consider partnership- where retention of affirmative control in excess of need of claimed relationship and split profit then partnership

II.     Profit Sharing/ Fiduciary Obligation

A.     Reichert- $ for logging venture- split profits equally- lower court took into consideration of out of pocket expenses but not initial investment- took consideration of initial investment into account- look at original 1914 UPA- if only look at act would be wrong, b/c $ initially invested was capital contribution of partner- Need to see that to extent possible, need repay capital contribution of partner before calculate if any profits- n credit given for labor that put into effort (labor/ management costs not included) just look at capital contribution

B.     §16401(a)- consolidate items for 1914 UPA- each partner have capital account (1) $/ value of property that partner contribute to partnership/ share of profits that not withdraw- (2) partner’s share of losses- charged with % of losses

C.     Services are not discussed in (a)- §16401(h) not entitled to services rendered (4) for partnership- can provide for this in the partnership agreement- under 1914 UPA whether provisions mandatory/ default not clear, i.e. §15018 where explicit that default- In 1994 UPA, §16103 provide default rules if nit address by partnership agreement- explicit all provisions governed by partnership agreement, except for 10 things not able to do- can draft around default provisions

D.     §16807(b) where if deficiency in account on winding up, required to contribute $ to help pay off another account

E.      §16401(b) no agreement- profit share per capita and share of loss = % of profits

F.      All partners jointly and severally liable to creditors (3rd parties) cannot draft around

G.     Meinhard- real estate lease- partners in lease to redevelop building- successful- at end of lease, D sign new lease (renegotiated to take over larger portion) w/o partner- want combine all land and build new giant building- P was not even included in the deal and wanted part of the deal- at minimum should have been told of availability of new venture- real fault for not telling/ keep secret side agreement- if had told could have competed for new lease- partner ought to be given opportunity to participate in things related/ partner must disclose opportunity to other partners and allow to compete for opportunity- partner only for term of lease and after over then fiduciary obligation would cease

H.     Realtor hypo- buy building and renovate- continue management or sell- come to w/ proposition to invest- agree (partnership)- later find out had found another building and not tell about (set up 2nd partnership)- breach fiduciary obligation by not bringing to partnership attention- yes- §16404(b)(3) no competition before end of partnership- no- history/ business as before (alter in partnership agreement as default legislation)- can arrange internal affairs as decide §16103(a), under (b) can do just about anything but 10 enumerated exceptions- (3) not affect duty of loyalty, cannot eliminate but can change under (A) or (B), i.e. certain categories/ types of activities not breach of loyalty

I.        Hypo: equal owner of 3 person partnership- $30K in bank account- withdraw 1/3 and win double $- replace and keep winning- need to share winnings §16404(b)(1) profits belong to the partnership- if lose $ w/o knowledge of other partners- nothing that addresses if lose- could avoid share if place within partnership agreement §16103(b)(3)(B) or say of okay after

J.       Standard Oil- father not liable- w/ rare exception consent must be affirmative consent but if where creditor talk to and tell about representation and yet say nothing then have knowledge that credit on erroneous notionàmay be implied consent

K.    Loyalty as between parties- can limit if agree in partnership agreement but cannot eliminate

L.      §16308 if held out as partner even if not a partneràliability?- need an affirmative positive consent- not implied to be held liable for losses- rarest exception if repest reliance and easy to negate the misunderstanding

M.   hypo: run restaurant together and make purchases- want to deliver but no more credit so go to 3rd party and ask if could use name to get extended credit from car dealer- get car and business fail- many creditors and try to go after 3rd party for losses and try to treat as partner allow to be held out as 3rd party- not liable to other than car dealer as representation was not made to them and no reliance- Have to rely on representation §16308(a)

III.   Management and Control

A.     hypo: partnership in tennis school- how should business decisions be made- agreement, majority vote- generally subject to partnership agreement but there are statutory norms by default- §16401(f) equal rights in management and conduct of business (per capita basis)- need change in agreement if not want default rule

B.     Hypo: dress shop- §16301 each partner agent of partnership and can bind partnership- restriction/ limitation on ability to bind the partnership if not within the ordinary course of business of the partnership (unless authorized)- bind of apparent authority (need some manifestation by principal that have authority) can bind in the ordinary course of business- under §16401(j) outside of the ordinary course of business then need unanimous consent to bind the partnership (1914 act more strict need to be made within the ordinary course of business to bind parties)

C.     If minor kind of restriction on the authority of the partner to bind partnership, can get together and limit authority of partner, but partnership liable if not give notification to 3rd party that partner lack authority- problematic to restrict authority (if small limitation on authority will be considered routine/ non-special event and majority of partners can vote for/ if meaningful limitation then probably not be able to get to limit own authority and if unusual, require 100% approval by partners (unless in partnership agreement))- NOTICE- file a statement for limiting authority of partner and file in land record of county but when non-real estate not useful/ definitive (originally used for real estate transfer)

D.     Nabisco- Grocery store- believe inappropriate purchase/ told not to sell to partnership and not want to believe (not going to pay)- sent product and try to collect- equal split in ownership between grocery store owners- can limit authority of other partner to bind partnership but need majority vote but b/c equal owners no way to limit other partner, even if give notice (majority view) some cases have gone the other way- equal partnership, if want to carry on new innovation court will probably not go along with and will support the partner who wants to continue as did in past

IV.  Dissolution/ End Partnership

A.     Drafting matter in partnership

B.     Dissolution- legal happening (no manifestation required)- 1914 Act (alteration of relationship between partnersàdissolve partnership) assume that after dissolution, winding up in which business tie up loose ends before termination (when everything taken care of)- no specific provision regarding if want partnership to continue still as voluntary association and any time disruptionà end partnership- if want to continue then form new partnership to carry on the business- many cause: violating partnership agreement, death, decide to leave at-will, bankruptcy, decree dissolution (any partner could ask court to do)- need to go to court but b/c not able to objectively ascertain then have subjective evaluation- Problems: ability of any partner to cause disruption in business (partnership at will) and cause the winding up of the business and force to buy out and sell assets and give great economic leverage to partner seeking to leave

C.     1994 UPA- see partnership as entity rather than as aggregation of people that separate and apart from owners- if one party leave (dissociation- §16601 various reasons that create)- mandatory buy out under §16701 if dissociation and need to make offer for interest in partnership and if not agree on $, then court will decide fair value- §16801 what necessary for dissolution/ winding up- if want dissociate (not in breach of partnership agreement) and want to continue the partnership then have to have ½ partners dissolve (at will)- Does partner have ability to cause disassociation/ dissolution if violation of agreement if for certain time/ event occur- break agreement?- can but have to cover damages to other partners as a result b/c no longer voluntary partnership- power but not the right to dissolve/ disassociate- not true for at-fault partner that need immediate payout- under 1914 UPA if cause dissolution, have to create new partnership except if for term (w/ wrongful breach) then remain partner and then have the right to continue partnership until the end of the term and could postpone paying out to breaching party until end (w/ damages accounted for)

D.     1994 UPA- §16601 events that cause disassociation but not mean dissolution (when dissolution must have winding up §16801 (1), (2), (5)- §16701 mandatory buy out of disassociating party unless if wrongful, then delay buyout- §16801 dissolution end of partnership- cause for dissolution (1) at will partnership require affirmative action of more than ½ partners- (2) partnership for term- if dissociation by death, bankruptcy, or other listed or wrongful act, then dissolution occur automatically, unless if majority say that want to continue (have to act to keep dissolution from taking place)- (5) if go to court can decree dissolution but based on subjective evaluation, i.e. no longer practicable to work together



I. Limited Partnerships

A.     ULPA (CA revised)- 15501/ 15611- need at least one general partner and at least one limited partner- need authorization of the state and no way to create limited liability w/o filing something (do what jx requires)- have to file certificate (Old act require long/ complicated certificate §15502)- new act §15621 require 2 separate documents- (1) certificate- bare bones on public records that tell how to get in contact with; and (2) intricate details on another document- limited partnership agreement that not on public record and can have oral partnership agreement and used b/c of tax consequences- can have partnership pass through taxation or corporate taxation

B.     Hypo: autosales agency- need financing- liable to extent of financing as limited partner- sales manager leaves and induce limited partner to become employee- business dieà creditors go after GP and LP- under old act limited partner liable for obligation of business if take control of rights and powers of control §15507(a)- was in control management?- hire/ fire employees- look to see how critical to role of operation- fact specific

C.     Lose shield if involved in management/ control of business- Holzman- look at amount of control/ purse strings (limited partner/ general partner remove $ from account)- GP not allowed to make choices/ §15507 point at which LP allowed to interven in business (major decisions) §15507(b) what allowed to do (not exclusive list (c)) CA altered to add (b) and (c) b/c aware of possible problems- To protect investors make changes in CRLPA as to make more attractive to LP expand language to exception to control, i.e. advertising §15632(b)(1-13) and (c) show what not participation- To be held liable: 1) Need actual knowledge of participation and control; and 2) Need to reasonably believe that GP and not LP- expectation met but no windfall for 3rd party

D.     Corporation can serve as the GP

E.      Hypo: bakery- administrator (LP) book keeping, ordering, what recipes use- GP retail sales- under ULPA involve in management and control b/c flour retailer would expect to be able to get at LP’s assets b/c did ordering, but windfall?- CRLPA only liable to those who knew involved in management and control and had reasonable belief that GP at time of transaction

F.      Hypo: doctor who want invest in furniture store- form LP (only contribute $)- claim that not LP b/c nothing filed with Sec of State- no LP w/o filing w/ Sec of State- no certificate filedà LP not even have to manage- able to collect against but if renounce interest in corporation upon learning of mistake may be able to escape liability under §15511- Under CRLPA §15633 go to GP and tell that need file certificate when learn of mistake and if not able to get to do then file by self- under §15633(b) in order to be liable to those who deal with before filing the certificate, claimant need to reasonable believe that LP operating as GP nut difficult to show

II. Limited Liability Partnership

A.     GP w/ a twist as governed by GP law, but designed for professionals (lawyers, accountants)- DE for tortious act immune but for K liable (partnership debts)- CA absolved of tort/ K liability of partners but responsible for personal tort liability

B.     §15956 what partnership responsible for- need liability insurance if not have huge assets



I. Formation

A.     fictional entity and legal construct w/ own property and ability to engage in certain activities- need to make filing w/ Sec of State to get charter (through authority of state)- NO informal incorporation- provide limited liability and know w/ great certainty that exposure limited to amount invested and anyone can incorporate- area of state control and governed by law of state, but certain areas where federal preemption

B.     Constituent Documents:

1.      Articles of Incorporation- each state requires filing w/ state agency that tell about stock, name, fundamental information- when filed and accepted- register and copy sent to party- charter that indicate that corporation come into being- public document

2.      Bylaws- kept with records of corporation- officers- not public document and contain internal matters- easier to alter/ amend bylaws than charter (have to go through s/h)

C.     Shareholder-owner of corp and may/ may not have stock certificate- generally able to vote for directors/ board of directors who set the policy for the corporation and have ultimate management control- also can appoint elect officers of corp who execute the policy of the board of directors

D.     Financial Building Blocks- issue common stock- represent ownership of corporation (can be 100% of ownership)- Preferred stock- ownership, rights are exclusively assigned to preferred stock (i.e. 1st paid) what contractually give to preferred stock and what left over give to common stock- Bonds- IOU of borrowing $- sell separately

E.      Promoters- work on behalf of corporation that not formed yet- k signed by promoter need to be adopted by corporation for the corporation to be liable

F.      McArthur- adoption can be inferred from the acts of the adopting party, i.e. not formally adopted by Board of Directors, but show (equitable doctrine) knew that person was coming aboard to work b/c of promoter and allowed to work, promoter had control of corporation and could have made adopt hiring- Can corporation force agreement on 3rd party who threaten to end lease?- yes, made deal w/ expectation of dealing with corporation and not be allowed to argue that corporation not in existence at the time

G.     Promoter still liable under the contract even after adoption by corporation, unless there is a novation or language in the contract stating that there is no intent to hold the promoter liable if the contract is adopted by the corporation- never (except for 1 case) constructive novation

II. Defective Incorporation

A.     Hypo: sporting goods store- “A- President” plaque on door- claim against A who personally sign K- claim defective articles of incorporation and never filed- If seen as de facto corporation then will treat as if legal corporation- for de facto corporation need to show: 1) there is a law under which the purported corporation could have been incorporated; 2) there was a good faith attempt to incorporate under that law; and 3) there was a use of a corporate power in the honest belief that a corporation existed

B.     Model act and §200(c) have something similar in that there is no corporation until the documents are filed and that is when corporate life begins

C.     Cranston- Thought that was president of a corporation properly formed and dealt w/ them as such, so not hold liable- corporation by estoppel- need be complete and honest belief

D.     Timberline- de facto corporation doctrine should be dead- life of corporation begin at time which documents are accepted- corporation by estoppel person does not have the ability (to estop) to deny existence of the corporation b/c documents are not filed and had acted as if were dealing with a corporation

E.      Robertson- reject estoppel theory as life only begin at issuance of certificate- not typical type of estoppel as no misrepresentationàdetrimental reliance

III. Ultra Vires

A.     Corporation not have the power to do actàhave statute of what powers corporation has: 1. Power to make donations- not give money away but make investment in community (§207(e))- have ability to give away some of the profits; 2. Corporation being GP in partnership- §207(h)- when invest in corporation may think know what corporation going nto do but nhave the ability to expand into other areas and can do whatever to stay healthy legally and can get into areas of business that want to; 3. §207(d) can give guarantee without consideration in return, i.e. holding company controlling stock and want to borrow money, not have the earning power so get guarantee from company which have stock and ask that guarantee debt of parent corporation

B.     §202(b) require corporation to state the purpose of the corporation and if want to limit purpose/ scope of what can do need place in articles (need to be explicit limitation)

IV. Control and Management

A.     Wood products problem- who have ability to make business decision?- s/h generally can not sell property as not within power and need to live within statute (what legislature give)- Bd only one that can create valid legal act of corporation- pass resolution and then authorize so can accomplish- §300 all corporate power with Bd- what s/h can do over the objection of the board of directors to authorize sale quickly in problem?- certain areas that valid to life of corporation, modern view that board go to s/h to get approval, i.e. when involve sale of property of the corporation- §1001(a) need s/h approval also unless usual and regular course of business- 1) can try to add bd members- §212 set # of bd unless # set in articles of incorporation and to alter articles need approval of shareholders and bd §902(a); 2) # of directors in bylaws §211, if in bylaws then can alter by approval of s/h (approval of outstanding shares- §152- need vote of majority s/h entitled to vote on issue (in article required to put down # of shares entitled to issue (authorized shares able to issue and generally have more shares that able to issue than actually do))) or bd- usually issued shares = outstanding shares- (approved by shareholders- §153- majority of s/h at meeting w/ quorum (# of shares that must be present for action to be taken and is generally equal to majority of outstanding shares)- to get s/h together, hold meeting (call meeting §601 tell that meeting so that have opportunity to be heard- §601(a) minimum 10 days notice/ §601(c) generally go to officer to send notice to s/h, if not able to give notice to everyone able to get to waive §601(e)- right to notice can change in bylaws- filling of vacancy §305(a) can be filled by approval of the board; 3) removal of difficult director- historically could remove director for cause under the CL but not w/o cause until the end of the term, bd not remove fellow director- now under §303 can remove w/o cause (shareholder) and can remove entire board, under §302 bd of directors can remove fellow director for cause under certain circumstances, i.e. felony, unsound mind- court under petition of 10% shares can remove for specified cause §304

B.     Bd of directors in charge and # set out in articles (need approval of board of directors and s/h to change)/ bylaws (s/h can amendà notice (at least 10 days unless waiver of notice through written consent)- even if create new slot bd of directors have first shot at filling- can remove directors w/o cause for all directors, but if try to remove less than all directors need some qualifications- if remove director unusual action, the §305 vacancies can be filled by s/h approval- if no meeting than can conduct meeting by written consent and for director all need to sign off

C.     Under §1900 s/h can cause dissolution by a vote of 50% of the outstanding shares and can cause voluntary dissolution, but under §200 if other 50% want to continue business, then they can force the other ½ to sell shares, if not establish $, go to court to have $ established- special provision for closely held corporation (need to be elect to dissolve)

D.     Zanker problem- how create valid corporate action (what need to do to authorize)? Pass resolution that allow to sign deed/ contract §300- should be joint deliberation as collegial way of approaching decision making (extensive notice provision- best way possible so know that meeting taking place)- # that allow to participate and make decision- set # before take action (quorum)- statutory norm that can alter, quorum majority §307(a)(7) majority of authorized slots- can reduce number but need at least 1/3- can use teleconference, provided that each can hear one another- mail (14 days) or phone notice from time that drop in mail w/ stamp notice effective- can calculate when actually receive (48 hour notice) from when delivered by common carrier (§118) (mail carrier or phone lines)- effective notice or subject to alteration- if no formal notice possible, notice not given to some, can get waiver of notice before or after meeting- if unanimously consent in writing can vote w/o meeting and each sign own copy- if original quorum and have to leave, can continue to proceed to valid corporate action provided # votes would be enough of majority if full quorum was there

E.      §307(a)(7) quorum requirement- not be less than 1/3 authorized directors (can be adjusted)- can vote by phone as long as can hear- notice §307(a)(2) can be altered- 4 days by mail, otherwise phone, voice mail 48 hours notice minimum- ambiguity b/c of §118 w/ mail- deliver to common carrier sufficient- can have waiver of notice/ approval of minutes/ consent to meeting/ physical presence and not object to lack of notice- if no meeting at all, provision for unanimous written consent, sign off on adoption of resolution- ability to act when have to leave, as long as originally had quorum and sufficient voting for as bd of directors 307(a)(8)

F.      Amend bylaws if frequently have meeting where need to call quick?- reduce minimum quorum not less than 1/3- designate committee as long as 2 directors and delegate authority response in certain areas (expediency)- acts are just as effective as if full board- areas where not authorize corporate action: 1) where code specifically requires s/h approval (merger, sell off assets- fundamental decisions); 2) alter/amend bylaws; 3) set compensation for board; 4) appoint new committee; 5) dividend payment

G.     Specific statutory requirement to effect corporate action (board of directors) allow to tell if authorized to make decision- some situation where not have all the formalities and still be bound- informal action will be nound with closely held corporation- if no notice, may not be bound

V. Preemptive Rights

A.     If get to issue additional shares of stock, could buy up and place majority in minority position- preemptive rights will allow a s/h to maintain relative vote control so that control would not be changed by the issuance of more stock- offer shares in proportion to existing # of shares

B.     Hypo: own 20% of stock and want to insert clause for approval by supermajority vote (80% vote for)- can neutralize by issue more stock, such that no longer have same proportionate shares- §204(a)(2) preemptive rights have to be in the articles of incorporation- list of items that need to be in articles

C.     Hypo: lightswitches- another company wants to sell circuit breakers business- could sell more shares to raise $- target company would have negative tax effects- also could offer # of shares and exchange shares more beneficial tax benefits- not do and keep proportionate shares the same- Loophole: if corporation issuer of stock exchange for proportion that necessary for conduct of business, can be issued and not offered (health and viability mpre important than proportionate power) or to attract employee give stock option in compensation package- even after preemptive rights situation that will allow disrupt proportionate ownership

D.     Preemptive rights and publicly held corporation- generally get financing through issuing stock- if preemptive rights  not able to do- not effective for publicly held corporation and may not want to have

E.      Closely held corporation may see as locking into position and want to insure job security

F.      Katzowitz- preemptive rights- offer proportionate share to each shareholder- however offer at $ much lower than true worth (undervalue stock)- if all pick up underprice bargain shareà no damage, as all have same voting power and hurt equally by undervalued stock- if not pick up shares offered hurt by undervalue as not able to sell shares- result in dilution of s/h stock/ voting power- can still pick up share or lose amount of value, not want to invest more- coercive- what court not like b/c force into position by offering undervalue stock- do to squeze out s/h

G.     Preemptive rights are vested in the articles of incorporation and can be gotten rid of through amendment- approval by outstanding shares (unless arrange that supermajority shares required)- majority of available shares- not amend away provision for supermajority voting w/o same supermajority vote §902(e)- §204(a)(8) shareholder not director set value of shares

VI. Voting

A.     Voting methods

1.      Cumulative voting- come into play only when voting for directors and not other business matters- Generally, straight voting- one vote for each share which can use to fill each open slot- w/ cumulative voting allow put up to maximum number of votes on any director(s) allocate among various choices- easier to get minority representation on board of directors- if want to increase chance of minority getting director, increase number of directors- CA provide for cumulative voting §708 mandatory in order to exercise right that have- 708(b) need to give notice that voting cumulatively at prior meeting

2.      Possible to have board that classified into different panels that change every year (one group)- harder for minority to get director on board- §301.5 only listed corporation (publicly held) can have classified board have to vote affirmatively to do (originally can not do)- do away w/ cumulative voting, otherwise elect yearly (cumulatively)

3.      To remove director w/o cause, majority of outstanding shares not get rid of single director but whole board if simple majority- when get rid of 1 director need enough votes that if elected cumulatively would have been enough to elect §303(a)(1)/ §303(a)(3)

B.     Voting trusts and other mechanisms

1.      Trust- arrangement where trustee given property under contract agreement that bind do something w/ property- duties place on trustee to work for good of beneficiaries- can cause block voting- take shares and transfer into name of trustee- register to be holder of property (in trustee’s name)- person gives stock under contract agreement and place duty to do something- full authority to vote stock but nothing else- obligation to pay dividends out- to make easier to trade, trustee issue trust certificate which can sell/ transfer- transfer all rights but right to vote- self executing as no question that trustee can vote stock as look like owner- have chance that may not vote way want- duration of 10 years to limit harm and can renew/ extend but no one can be forced to remain beyond- vote as block, so unfair to those buying stock if not know that go against block of votes, so require that voting trust be filed with secretary of corporation and on books, so one can examine and find- do when can get loan (business) which hold until loan paid off (security for bank)/ also maybe when want acquire another business by trade stock

2.      Shareholder voting (pooling) agreement- vote as block- get together and agree to vote certain way- different ways how agree decide to vote (set out in agreement) not remove voting rights

3.      Manson- legal right to get together to gain/ maintain control of corporation through voting, as long as give consideration for contract and not violate corporate agreement/ oppress minority/ no fraud

4.      Ringling Brothers- voting trust and then terminate2 of 3 s/h then enter into agreement- agree to place 2 members on board for each of parties and agree as to 5th member (if not agree arbitrator decide (designate))- Haleys not vote according to agreement (place all votes on selves) chair claim that those who should have won (were elected) and not base on actual voting- lower court held that legal agreement and upheld agreement (elect parties that should have been elected)- new election be held and believed implied proxy (agent) to vote certain way based on agreement- DESC arbitrator could make suggestion which supposed to follow but just b/c had duty to vote certain way, only owner have ability to vote and can breach k- just eliminate vote cast by Haleys- $ damages but not get who want on board

5.      Hypo: if Loos had been given proxy solve problem and could resolve?- can terminate agency if no longer have faith in agentàyes have power to but have to pay damages (important that terminate agency)- Agency revocable, but w/ proxy problem (ex. 5 year agreement to buy stock, proxy to vote stock, begin payment-can revoke?- proxy given to bank for loan, before all payment made, can revoke?)- exception to agency law when proxy given in connection w/ interest, then irrevocable given proxy for benefit for principal (agent/ recipient), agent for proxy irrevocable, as for benefit of agent recipient- under statute can make proxy irrevocable

6.      Proxy (irrevocable)- to get voted as way supposed to in Ringling Brothers need proxy relationship- form of agency to vote stock- if had given proxy not positive that get vote way want if not irrevocable (otherwise could revoke- damages but not vote stock)- usually agent at pleasure of principal, have power to revoke except: 1) when purchase over time; 2) loan $ and take proxy as collateral- a proxy is irrevocable if coupled with an interest (property/ personal services given in exchange)- CA have provision to make proxy irrevocable §705(e) label proxy as irrevocable and write into why given- put vote power in someone other than owner- §706(a) not follow Ringling Brothers analysis- no longer need be close corporation to get protection of corporation of statute, now any CA corporation not need transfer share (proxy) to have 3rd party vote- irrevocable under CA law under §705(e) catchall provision

7.      Ramos- To enforce voting agreement have buyout provision if not vote as agree to vote (election to sell stock)- mandatory once violate

8.      Supermajority- norm greater than straight majority vote- create requirement for supermajority in great number of circumstances- added protection for minority s/h- harder to get action though (inability to get to move- deadlock)- use at director level and can have any supermajority for quorum/ vote- need to be in articles §307(a)(7) & (8)- same with shareholder, only restriction in close corporation s/h quorum (only need majority) §602

9.      Class Share- different classes of stock- place in articles-need majority of particular class- can be set up §152 for each class independently- §301(a) can involve director specific voting by class- designate particular class elect specific director- §400 can have non-voting shares but have at least one class w/ voting rights

10.  Transfer restriction- extremely important in closely held corporations- typical pattern get together and invest, become livelihood- want know what type of control have over other owners regarding selling stock, run business as want- not want deal with another who may not agree w/- have thrust on as co-owner

11.  CA can have reasonable restriction §204(a)- DE consent restrictions depend on reasonableness- need be in position be unreasonable- consent provisions on restrictions- what reasonable: 1) 1st option/ right of 1st refusal- amount set by person that want to buy- offer to corporation or s/h of corporation first option if want sell stock now have ability to buy at fixed price at option; 2) buy back- when certain event occur, corporation have right to buy shares from s/h (i.e. only own stock when employee); 3) buy/sell- obligation to offer to sell and corporation obligation to buy stock (in most situations problem is valuing the securities as no trading market); 4) if just 2 s/h buy/sell agreement when one want to leave go to other party and tell that sell stock for certain $ or if not agree to buy, then force to sell to offeror at same price

12.  McQuade- NY Giants (baseball)- agreement signed promising elected as officer (best effort to make sure that officer) and also set salary as officer (also vest effort all as director)- not vote as director and terminate from officer position- against public policy b/c s/h limited in controlling director (elect officer and set salary)- director supposed to be independent in making decisions (fiduciary duty to act in best interest of corporation)

13.  Galler- Agreement to care for widow- not follow in many jx- agree vote stock in certain way as director (when one party die, spouse could name new director to take place) provide continuing income- mandatory dividend payment  (qualified to protect creditors) as if cushion there have to pay dividend- if statutory close corporation then s/h could encroach into director power- valid and not against public policy- generally protection in place for minority s/h- no minority here to protect feel free to enforce as all parties agreed/ no complaining minority/ and protect creditors and minorities- tying hands of board of directors but would enforce

VII. Close Corporations

A.     Statutory Close Corporation- statutorily defined structure

B.     Closely held corporation- relatively few s/h

C.     Close corporation- Need to indicate maximum number of shareholders but no more than 35- need to identify in filings that close corporation and must include corp., inc., limited in name §202(a)- want some clarity- §300(b) w/ close corporation then s/h can enter into agreement in which completely distort internal government norms- all shareholders must agree to have statutory norms changed- §186 definition of s/h agreements (100% approval)- can voluntarily terminate close corporation- statute 2/3 of each class must vote for termination but may lower to majority- To move to be close corporation need 100% consent- lose status as close corporation §158(e) if exceed maximum number of s/h- if attempt to make voluntary inter vivos transfer that bring above maximum number of s/h will void transfers §418(d)- §421 by taking stock waive right to transfer if make invalid number of s/h- if lose close corporation status, then s/h agreement terminates/ is void unless have severability provision that would void those that would make violate law §300(b)

D.     If new s/h for new stock and refuses to agree to the s/h agreement then agreement terminates under §300(b)

E.      Have a s/h voting agreement and then transfer shares to another afterwards, then still bound by the agreement?- not entirely clear and generally will depend if take with notice or there has been an offset in the price b/c of voting agreement

F.      CA- if on certificate or know that there is an agreement then are bound by the agreement under §300(b)- legend or know about restriction (i.e. filed on corporate record)

G.     2 elements for dissolution- 1. Standing; 2. Need one of special grounds for dissolution that the court can turn to in order to ground decision under §1800(b)(1-6)- any s/h has standing to come into court and ask for dissolution (close corporation), if not close corporation then need at least 33% of shareholders to agree to dissolution under §1800(a)(2)

H.     Piercing the corporate veil- under special circumstances the court can/will disregard the corporate status and affix liability on corporate owners- will look at various elements- alter ego rationale- under appropriate circumstances if owner disregard corporate status themselves, act as if corporation not exist, then give rise that corporation alter ego of individual- §300(e) close corporation and s/h agree, then not have s/h meeting (not allowed to use against to say no corporation)

I.        Can completely alter internal governance (close corporation) take over function of directors, tell shareholders that liable like directors §300(d)

VIII. Oppression of minority shareholders

A.     closely held corporation- 1) small # s/h; 2) no ready market for stock (hard to find buyer); 3) majority s/h and managers are the same (owner participate in the running of the business)- generally will be about 20-30 s/h but can be hundreds- no way to get investment out of corporation- inherent tension in closely held corporation b/c chance of majority to overpower minority and minority have veto power b/c of threat of dissolution, engage in extortion to force- bad when “freeze out” corporate action taken by majority to make minority ownership less beneficial in hopes that able to buy out at depressed values- Board of Directors have discretion in paying out dividends- court not want to get involved and hard do anything about freeze out- may try pay self high salary/ dividend or sell off assets to majority at undervalue price or high rent payment to building own by one of majority s/h

B.     Donahue- want same treatment in terms of buyout payment by corporation- rarely followed (exception)- basic law of whether board of directors has right to buy off stock selectively (DE) in situation where reasonable ground to believe that dangerous to corporate policy- board can pick and choose whose stock want to buy- Here aberration as have to offer buyback from all s/h and not be selective- where repurchase shares give cash out to s/h in exchange for stock- less outstanding stock- like $ distribution- minority s/h want equal opportunity to be bought out- closely held corporation like partnership and saw fiduciary duty between s/h- not statutory close corporation- need equal access- no valid business decision here

C.     Nixon- unusual arrangement- w/ 2 classes of stock (vote/ non-vote (majority))- all voting stock for employees- non-voting stock for family primarily (represent majority of capital in enterprise)- P not like that provide only for employee voting stock, ESOP, key man insurance for voting stock- book value (accounting concept- way record transaction of corporation (financials) place in book on costs (will show depreciation)- may not correspond to actual fair value)- Not like ESOP and have s/h and shares with no liquidity- ESOP make other shares liquidable as could buy B stock or take cash equivalent- B stock no real value until dissolution (liquidation value)- not like key man insurance, that corporation get $ from insurance, put in place in conjunction w/ ESOP- conversion of A stock (sell back voting stock and give B stock in exchange and use insurance proceeds to buy B stock)- not have to treat all s/h equally (NY) valid business decision (attract/ maintain executives)- done for benefit of corporation and just so happen that s/h were voting class members

D.     Way out for minority s/h is through corporate dissolution- assets have to be distributed- Voluntary dissolution- (CA liberal as need 50% of outstanding shares)- if all s/h decide want to dissolve, problem when j/x say that not need 100%- Involuntary dissolution- court ordered

E.      NY Music Publishing case- equal split- one s/h die and shares go to wife and children- not get along w/ sister- ask for dissolution- as long as financially sound not give dissolution in equity- need some financial adversity

F.      §1800 what need for dissolution (standing)- only specified grounds for dissolution- enumerated- if internal dissention, may get dissolution §1800(b)(3)- economic adversity by itself not enough, need equal # of directors that equally divide and not elect board- deadlocked

G.     Kemp & Beatley- s/h that paid bonus by profit- no longer employee and not get paid- no dividend- get nothing- standing- if close corporation no problem in CA as each s/h have standing- not want someone w/ too little interest to be able to dissolve so need certain % to request- exclude the shares of the actors of (b)(4) under (a)(iii)- grounds: (b)(5) any corporation with 35 or less s/h show liquid necessity for rights or interests of s/h

H.     Minority position how get investment back?- under old act all have to say is that dissolve and require liquidation to be paid out in cash, under new act dissociation of partnership and can continue but forced sale (paid out in cash)- close corporation dissolve corporation but need grounds for dissolution

I.        Provide for possibility of mandatory buyout under §2000 corporation can buy shares, if not then s/h can buy shares or if not, then court can step in and force buy out- if deadlocked with directors under §1802 can get temporary director to break

J.       Fiduciary duty of majority s/h to minority s/h

K.    Steel Mill case- steel mill in IN- Barge ore from N. MI- run product by rail through Chicago- buy stock of barge company (majority) and want buy out minority- not able to buy out, so want to dissolve and liquidate assets- only get liquidation value of beat up barges (minority)- minority not want as not get much $- have to wait until try to dissolve- did everything correctly to dissolve- try again as breach of fiduciary obligation- liquidation w/ no purpose other than to get rid of minority- breach of fiduciary duty and have to pay difference in value- take away from minority through controlled transaction

L.      Zahn- class A and B stock- unusual stock A (common stock) redeemable and conversion option- corporation have option to repurchase/ redeem stock at fixed $- know what get when purchase (part of provision) had right to convert to B stock (able to vote), class A stock twice value of B stock (redeem $)- public traded stock (preferred) that have both features- for meaningful conversion after redemption call for stock, need give time to decide whether to take $ or convert- buy up class A and B stock, convert to B stock- after but out, liquidate (first call shares w/o telling that plan to liquidate)- nothing wrong w/ redeem stock, but no proper disclosure regarding increase value of tobacco price or that plan to liquidate- get minority interest at too low $ and not allow to take advantage (breach of fiduciary duty) by majority s/h

M.   Jones- Not followed by many jx- too heavy burden- Majority s/h of corporation form holding company and sell stock- minority not allowed to be part of holding company- created market for holding company stock and expanded value of stock- so no market for  minority shares b/c too expensive- majority have sweeping duty of fairness to minority s/h and not need action detrimental to the corporation and not have to go through corporate action to breach duty- by making public holding company stock and not allow minority s/h to be part and no offer to buy minority shares at fair $, breach of fiduciary duty

IX. Piercing the Corporate Veil

A.     Court will disregard corporateness and even though legally formed will hold owners liable

B.     In majority of cases if form corporation properly end up w/ limited liability for owners- except when: 1) alter ego- generally need unity of interest of ownership- when owners themselves act as if there were no corporation (generally only a few s/h), i.e. ignore corporate formalities, comingling of assets (take $ from corporate assets to pay private debts or mix w/ personal assets); 2) instumentality- dummy/ puppet of owner- owner cause corporation to act in fashion that not in best interest of corporation; 3) inadequate capitalization- not able to fund corporation to survive judgement/ expand- generally look at when corporation formed- almost never sole reason for piercing- hard to define

C.     Contract Based Cases

1.      Sea Land Services- shipping debt for peppers not paid- went after corporation and owner (owned numerous related corporations)- reverse piercing of related corporations to be able to collect- 2 prong test: 1) unity of interest of ownership, act as of corporation not exist; 2) if recognizing corporation would sanction fraud or promote injustice- sound like alter ego analysis- mingling of corporate funds not enough, need something moreà allow be corporation would sanction fraud or promote injustice- some wrong beyond just inability to collect debt- musty have equitable grounds for piercing

2.      Hypo: housewares- English Co. buy US Co. and become wholly owned subsidiary- try prevent paying high tariffs by reducing $ charged by subsidiary to parent company- substantially all sales to parent companyàbankruptcy of US company and creditors want at parent company by piercing the corporate veil- usually can properly insulate subsidiary, unless act against own best interest through parent corporation control- get benefit of outside health and well being of subsidiary (mere instumentality) but fraud involved?

3.      Bartle- kept identity separate from parent and no one misled- held out subsidiary separately- set up way supposed to- decide not to pierce- dissent- not like how subsidiary not allowed to make a profit- construe fraud as operate not to make a profit and creditor not know that go against natural tendency (most jx. would follow dissent)

D.     Tort Based Cases

1.      Walkovszky- taxi case- # of taxi corporations involved- all corporations 100% owned by D- each company had minimum insurance and 2 old cabs and license to drive cab (not able to transfer)- as soon as make profit make dividend that go to D, no assets in place- try pierce veil to get at D’s assets and sister corporations’ assets- not carry on in individual capacity but no comingle of corporate assets and permissible structure- conduct business in individual capacity- Keating dissent- believe that corporation undercapitalize and construct fraud as set up corporation so as devoid of assets- deliberately segment so not able to get at assets- push risk of cost on general public and against public policy?

2.      Baatz- Dram shop liability for family bar- No indication that set up as fraud to avoid liability

3.      Few cases where corporation overstep to avoid liability- TX case- build roads and have to blow up part of mountain w/ community underneath- form separate corporation to build road- great damage- allow pierce veil as not what corporate form is designed to protect (undercapitalized)

E.      Statute based

1.      Lansford-Coaldale- CERCLA- lead clean-up and who responsible for cost- sister corporation or foreign owner responsible? Arms length transaction when purchasing corporations and no actual control over operations of polluter (not use mere authority to control standard)

2.      Farm ownership/ duplex apartment- put into corporation and continue to run- want get benefit (old age) and claim that employee of corporation- disregard corporation as only use to run business and not pierce veil

3.      Construction company form corporation- employees were family members- business slow and lay off- try to get unemployment- pierce veil and not entitled to benefit

4.      Disparate results- purpose/ policy behind looked at- when statute involved

F.      Equitable Subordination

1.      Deep Rock- put s/h behind creditors in collecting when no assets- use when not able to pierce- bankruptcy court can take particular claim and subordinate others (ct. of equity)- use to try to get claim paid off- can take place in many factual situation if can convince court that equitable

2.      Hypo: expand corporation- extend credit to corporation- mechanic owed $ after corporation go bankrupt- corporation owned by another corporation who make huge loan to- insufficient funds to pay off liabilities- try to push back loan by big corporation so can get paid off before and $ available to collect- where corporation set up w/ little capital and loan large amount of $ and then bankruptcy, probably be able to get equitable subordination of loan

X. Director’s Duties

A.     Fiduciary Duty of Care

1.      Francis- Reinsurance Corp- sons cause bankruptcy- mother be sued as director of corporation- should have kept eye on sons and be aware of running of business and activities- never looked at a financial statement- obligation to look at financial statements- not attend meetings nor read financials- not understand business at all- DIRECTOR NEED TO UNDERSTAND BUSINESS- what NJ court require at a minimum

2.      CA- §309 general language- standard: ordinary prudent person in like position in the circumstances- define standard of due care- not say have to be what business person would use- need common sense/ practical wisdom/ informed judgement- low standard- standard not one of asset preservation (recognized risk taking)- take into account level of expertise- acknowledge training/ knowledge/ expertise- difference in circumstances (big corporation vs. small)

3.      Hypo: director of 3M w/ sales of $15 Billion and profits of $720 Million- worldwide operation and wide variety of products- are sued and lose- then each member of board be sued b/c of previous suit- allow to cause loss- should be liable?- if know or should have known (notice that inquiry ought to have been made into activity)

4.      Allis-Chalmers-  not completely good law still- unless put on knowledge no liability- no duty to ferret out espionage/ wrongdoing- limited by Caremark- kickbacks given- in addition to flag put on notice, essential that board of directors see that program is in place to collect information and gather information that brought to attention of senior officers and board of directors- comply w/ duty of care (compliance officer)- attorneys in terms of compliance (how fulfill) policy w/ regards to antitrust- sit down and tell what rules and sign off that not do bad things- get message out to employees- duty to investigate once know-

5.      Standard of care is very low for commercial/ industrial corporation- almost unheard of for personal liability of board member for negligence- usually need some self-dealing

6.      If false information given which rely upon in making decision, is board protected?- §309(b) director may rely on reports from those in the business- ability to rely on opinion qualified as long as act in good faith after reasonable inquiry when have reason to suspect- Duty to investigate (reasonable inquiry) §309(a) and (b)

7.      Business Judgement Rule- judicially created rules- American Law Institute definition pretty good- Director in capacity as director protected from personal liability if make poor choice- to encourage to take some risk, provide protection- court not good vehicle for making business decision and generally defer to judgement of business people on substantive matters- s/h expect some risk to be taken- not mean that under all situations protected- 1) decision at minimum need be focused/ deliberate decision; 2) no benefit if question regarding duty of loyalty, no good faith; 3) honestly believe in best interest of corporation and s/h; 4) disinterested party; 5) some rational basis for making decision- if illegal act do no protection?- Fed Ex. Double parking hypo

8.      Smith v. Van Gorkom- prior to case in order to be personally liable for negligence next to impossible- P (class action- s/h of Transunion)- not happy at price when sold- leveraged buyout- need borrow large amount and use to buy out s/h and try to get $ from director- needed to sell b/c make too much money and have excess tax credits- explore options (leveraged buyout suggested)- info put together whether feasible and at what $ willing to pay- rather have other than management buyout and talk to friend setting $ for shares- Buyer require certain things within agreement and court would like to see in establishing $ for shares (fair market price)- offer to number of different companies (go through investment banker) to get fairness opinion- need informed decision making process to not be negligent in duty and need if want protection of business judgement rule- approved after orally presented and no documents- approved amended agreement also w/o seeing any documentsàpersonal liability for gross negligence if no reasonable inquiry made into value of stock (i.e. investment banker opinion regarding fairness)- apply in areas where sell business/ tender offer defense (not cover)- higher standard of duty of care

9.      Statute to avoid some personal liability to protect directors- §204(a)(10) for  damage protection in derivative suit (limited), not eliminate/ limit liability for enumerated except illegal/ knowing breach of law, not make decision in best interest, improper personal benefit- §204(a)(11) indemnification by corporation (or §317 less expensive) when want expand area of indemnification not limit/ eliminate duty

B.     Fiduciary Duty of Loyalty

1.      Hypo: s/h, director, and officer- able to sell piece of property to own corporation- historically yes to prevent fraud by the board (not do justice to both theories)- now can be voidable- able to make profit on transaction- yes, so long as not unfair (i.e. reasonable amount and not purchase property b/c know that company interested in it)- if sell at higher $, not able to keep profit (if know of company interest and purchase) corporation can get benefit of buyer’s transaction- Ratification to insure that not voidable- vary by jx- s/h or board approve then not voidable- need be disclosure of financial interest of director

2.      Hypo: Bio Research Company- director and have other interest in another research company- corporation need new piece of equipment that other company have and want to purchase- propose that get experts to satisfy self that equipment that want and if want then authorize (director not participate in meeting) purchase- know about defect that not meet needs- Director b/c of peculiar position not able to deal w/ own corporation at arm’s length and have to give all relevant material facts in regards to the transaction

3.      CA §310(a)- If in transaction where director want to sell to corporation in which on board of directors (no matter who owns just sit on board) or when want to sell to corporation in which is shareholder, what need do so not voidable?- 1) full disclosure and in good faith vote- s/h ratify (not counting interested part’s shares) or 2) after full disclosure, go to board of directors and not count interested party’s vote- need be just and reasonable transaction (additional requirement if go through board of directors) BOP on person asserting that fair and reasonable that deal valid- prevent structural bias as other directors may not want to say no to fellow director-

4.      Not know what fair and reasonable until litigation and if not approve not mean that transaction fail as can go to court to see if fair and reasonable

5.      §310(b) when on board of directors of two corporations (common directorship) then full disclosure to s/h or to board and if do then need to ratify- no requirement that need determine if just and reasonable- if no financial interest then lower standard

C.     Corporate Opportunity Doctrine

1.      If director and corporation for which director has opportunity presented to it and usurp for own opportunity- then breach of duty of loyalty- equity important in determination of breach by usurpation of corporate opportunity- not know how weight arguments

2.      Hypo: director of corporation producing stainless steel housewares (non-electrical) also VP of manufacturing- salesman of stainless steel company (supplier corporation) come to office and tell of another corporation producing stainless steel for hospital and business for sale- director able to buy stainless steel business or have to offer opportunity first- job present w/ opportunity- offer made to in capacity as officer- area of natural expansion- ability of corporation to buy- not have to be in direct competition for have to turn over opportunity and not depend on product/ service- look at business of corporation and see if likely to expand in area of opportunity (reasonable to expect to expand)- similar manufacturing technology?- areas where helpful- profitable expertise- if court believe would have been fair to give opportunity to corporation enough- not feel constrained to fit in line of business opportunity and also might look at how opportunity came about

3.      Broz- cell phone license and outside director- offer to Broz in individual capacity- if change to in corporate capacity when receive offer- kind of business matter?- financials here mattered (the ability to purchase, as company not able to purchase)- peculiar circumstance- court gave great weight to argument (financial inability) most courts not listen to argument b/c would be too convenient (motivate director to act in wrong way- prevent from seeking loans?)- some will hear argument but only after show reasonable effort to get financing for corporation

XI. Proxies

A.     Solicitation regulation- federal law- governed by Securities and Exchange Act of 1934 to try to bring integrity into the market (place confidence in market- not believe be cheated)- apply to publicly held corporation, $5 Million assets, 500 s/h, traded shares on stock exchange, sell shares to public- govern by proxy and SEA- prior to act wild abuses as no federal regulation on need to give information (just solicit proxy)

B.     Disclosure- proxy statement required to give certain information- every publicly held corporation required to file annual report (10K, extreme detail)- also every quarter need file report (10Q)- 8K file when something unusual happen (file w/in 10-15 days)- part of activities/ holding more apparent

C.     Proxy disclosure statement problem best for s/h- what item most important requirement with particular vote- financials required in annual report (need precede proxy statement)

D.     Information important as s/h not likely to show up and vote shares- allow to vote w/o go to annual meeting- no major decisions made w/o quorum of s/h so go out and obtain proxies

E.      Anti-fraud 14a-9 recur in other areas of securities regulation- notion different from common law fraud- make/ omit material statement (mislead)

F.      Hypo: merger- proxy statement to computer company- omit to mention that pay bribes in foreign country (other company) to get business- to get relief, how important do bribes need to be to give claim under 14a-9 at what point fraud not telling about bribes of other company?

G.     Mills- if s/h might be interested, then material- USSC say too broad- need be substantial likelihood that reasonable s/h would consider important in deciding how to vote- hard advise client what is material omission- director conflict of interest in charge of corporation/ control- proxy that believe merger good, but not indicate that control of other board- need connection between material omission and damage to s/h (need show that vote differently had know?- s/h need show materiality and that proxy necessary to accomplish purpose (necessary link to required vote)

H.     Virginia bankshares- already control 85% shares but decide to solicit proxies anyway- material misrepresentation in proxy statement but no COA under proxy rules as not necessary link

I.        Hypo: at meeting of board, know that company not environmentally friendly (chemical company) try to acquire small company that have process that emit dangerous substance into atmosphere (trying to make more environmentally friendly but require more $) company want to suppress environmentally friendly process and use cheaper method- how try stop doing? S/h proposal regulation 14a-8, need be s/h of $2000 stock or 10% of stock and hold for 1 year (try prevent manipulation by s/h proposal)- propose committee that veto production of harmful chemical- if see as managerial function may omit statement under 14a-8(i)(7) illegal under state law to try to veto board- if business decision not be brought to s/h, left to management, then could exclude from statement- send to SEC to see if meet exclusion requirements (if business decision but in broad sense has social policy implications not able to exclude- under current reading- b/c policy implication allow)- if proposal not to buy, then in direct opposition to company proposal and can exclude under 14a-8(i)(9)- proxy statement not neutral document but use to sway to give company vote (company point of view)- not have counterproposal in management proxy- under 14a-8(i)(8) not allow s/h to put board of director slate in counter to management slate (not able to nominate own through proxy mechanism)- If not able to get message in proxy, under 14a-7(a) can get names and addresses of s/h (try resist) not want to do, then corporation can mail materials itself at s/h expense (corporation option)

J.       Inclusion in management proxy not effective unless management agree that good idea- do to broadcast view and try to influence management

K.    Proxy fights- try to get proxy so can gain control of corporation- scope of solicitation- cases make reference to reasonable expenses in proxy fight but not clear what reasonable- once proxy fight over and if can win then can get reimbursement from corporation for take over attempt (reimburse for expenses in throw out old director)- believe better for corporation than old management therefore advantage to corporation and ought to pay for it- no case where insurgent lost and reimbursed

L.      Roosevelt- able to exclude s/h proposals under certain conditions/ if want to contact s/h send list or offer to send to s/h at s/h expense

XII. Insider Trading

A.     Diamond- computer rental- sell stock based on inside information of loss by corporation before information became public- state CL (no fed legislation at time)- want collect by s/h of profits- no damage to corporation, but not want insiders to get advantage- turn to 10b-5 (CA §25402)- antifraud provision in regards to sales to public- begin use of 10b-5 to protect s/h- apply to ANY corporation w/ dealings in securities- must have jx means (interstate commerce), (i.e. use of telephone, mail)- ANY purchase or sale of securities involves 10b-5

B.     Texas Gulf Sulfur- copper mine- officer learn of rich ore strike- no admission of finding- corporation try purchase real estate around find- and able to purchase- b/c of activity drove up price of stock- officer buying shares w/o disclosure- press release that nothing going on- then 2nd press release that disclose discovery of find- buy shares before announcement over ticker- materiality under 10b-5 not need provable facts, information that investor want to know- if do own work then able to trade on (investigation, put together facts on own)- need to wait until public has ability to digest/ understand information

C.     If tippee as receiver of information, trade on information, under 10b-5 both tippor and tippee both liable (case law)

D.     “In connection with purchase or sale of securities” P need be actually injured (not potentially) by purchase or sale- Basic Inc. v. Levinson- D not need be buyer or seller

E.      Private COA under 10b-5, implied, securities area fraud can also be omission of material facts (not just misleading statements)

F.      State of Mind of party alleged to have violated 10b-5- negligent mistatement vs. one consciously and deliberately made- if negligent should  not equal 10b-5 vs. scienter- reckless disregard ought to be enough- 1995 Act by Congress to give protection for executives for forward looking statements- “safe harbor”- make forward looking projection and state why- limited protection for forward looking statement (protects from 10b-5 liability if not true)- 1) Identify that forward looking statement (estimate, guess, etc.) or 2) no actual knowledge that statement false- no protection in initial public offering, selling participation in a partnership, tender offer, membership in LLC

G.     Reliance- look backwards for help- similar to COA for fraud- reliance on material false statement (important)- reliance read into- different kinds of purchase/ sale- over exchange (anonymously) or face to face- material misstatement vs. omission- 1) face to face and material omission (reliance required); 2 face to face and omission (show that fact material for reliance); 3) exchange and omission (show that fact material for reliance); 4) exchange and affirmative misstatement (fraud on market as market set $ (should be bale to rely on market integrity)) rebuttable presumption of reliance- to rebut need to show a break between alleged misrepresentation and $sold/ paid or decision to trade at fair market price

H.     Causation- connection between information that investor would be interested in and $ paid/ sold- Disney & oil reserve & hotel hypo- change in price of stock not caused by information that had- for 10b-5 need show both; 1) transaction causation- what cause to take place; 2) loss causation- what affect $

I.        Duty- Chiarella- duty to disclose or abstain only if have duty- deduce party and buy target’s stock- printing company- need duty to disclose information to sellers- no connection- no fiduciary obligation so no 10b-5 violation (OUTSIDER)

J.       Dirks- fraud insurance policies- tippee disclose fraud- focus on tippor/ tippee relationship- tippor/ tippee usually be liable for use of inside information, but here look to see if breach of fiduciary duty by tippor and only when tippor breach, then 10b-5 violation- here not breach b/c not make $, doing favor for s/h (tippor no financial gain/ indirect gain) If some gain then probably be breach

K.    Theories under 10b-5

1.      Classical theory- TX Gulf Sulfur- equal information on both sides of transaction- level playing field- no advantage- informational equality- not accepted by court- possession of information by itself is not enough- need be breach of fiduciary dutyà disclose/ abstain from trade in market- tippor/ tippee laibility (Dirks)- strong support for analyst to put information together (beneficial for market- reject idea that not use b/c inequality of information- develop confidential information should benefit)

2.      Misappropriation Theory- breach of fiduciary duty not to other party in transaction but to employer- implies stealing/ breach of duty in acquiring information- outsider having market information and use may be improper- O’Hagan- for 10b-5 violation tippor breach fiduciary duty in telling tippee for violation of 10b-5 (Dirks)- where individual get information that know that confidential then even no breach of fiduciary obligation in giving information, not want act on for 10b-5 violation- “temporary insider”- treat as if insider

L.      §16(b) SEA

1.      No insider trading- make unattractive to try trading

2.      Only large publicly held corporations involved- not any transaction of equity securities

3.      Apply to officers, directors, own more than 10% equity securities (limited scope)

4.      16(a) defines insiders (statutory) and mandate that when get position notify and file w/ SEX and indicate holdings in equity securities

5.      any time buy/ sell these securities inform SEC- 16(a) reports that need to be made

6.      16(b) statutory insiders cannot retain profit on traded securities of own corporation if buy and sell w/in 6 months- any one can bring suit on behalf of corporation to make give up profits

7.      hypo: officer of corporation and buy stock in corporation- learn about good thing and believe increase price of securities- less than 6 months before- sell stock and get profits- if officer when bought/ sold security not make difference if no longer when bought/ sold- beneficial owner

8.      Reliance Electric- own more than 10% and want to sell less than 6 months after- not keep profit on that sell when above 10%, but get keep profit on that which sold when below 10%- when sold not meet definition

9.      Foremost-McKesson- need be more than 10% owner at time that buy, before under §16(b) and at time of sale

10.  Smolowe- squeeze greatest amount of profit out of transaction that occur- not match stocks- calculate profit by look at highest price sell and subtract lowest price at which buy

11.  Kern County- if cash then easy transaction- what if stock swap (tender offer)- w/ sale involve consideration that move back and forth- if merger get stock of surviving corporation and sale occur?- D want certain number of shares (KC try to stop, telling s/h not to offer) successful- then extend and say that buy more (now more than 10% s/h) and when try buy additional shares KC try stop- KC look for another corporation in which could merge (Tenneco)- KC disappear and get Tenneco stock- D not want proceed until after 6 month period- enter auction agreement and sell shares back (Tenneco option to buy back Tenneco shares)- T agree and transaction consummated- KC try to get profit from shares- no 16(b) violation-as exchange not sale- allow some flexibility in 16(b)- pragmatic approachà look to voluntariness in choosing timing, inside information that have (had no information from KC regarding merger), no concern for speculative abuse b/c no inside information to which could act- here NO sale- no 16(b) violation- Option to purchase stock- buy back shares- for $ and pay something for option- wait until after 6 months to exercise option- try claim that option in form but sale in fact (grant is not exercise of option constituting a sale) low sale price/ giving of proxy- some factors that will look at under all the facts to determine if sale


Limited Liability Company (LLC)


A.     Combine partnership and corporation elements- can have pass through single taxation like partnership

B.     LLC cannot be used by professionals- attorneys and accountants (use LLP)

C.     Need to go through some formalities

1.      Articles of Organization- filed with Secretary of State- need not include any financials in the articles of organization- are public records but need not spell out financial structure within

2.      Operating Agreement- all parties must agree to- not public document/ record

D.     Members similar to shareholders- the owners of the enterprise

E.      Managers similar to director- run the business- set policy/ management/ control- manager need not be member and can be outside party

F.      Rights: economic interest- right of the individual to share in the profit or gain of the LLC- member’s interest is the totality (collection) of rights that the member hasàsuch as economic right, right to vote, right to participate in management

G.     Ultimate decisions of the LLC are made by the managers- §1700(w) can be person elected by the members or if none selected then all of the members- Flexible in management structure- run by manager(s)- if not designate manager then all members are managers like partnership- manager need not be board members and members need not be managers

H.     Who can bind the LLC?- §17157- All members are able to bind the LLC if in the usual course of business (no manager selected)- if there is a manager selected then members are non-agents and only manager(s) can bind- similar to corporation in that if have member that have no authority to bind the LLC, then have to notify the 3rd party that have no authority to avoid liability

I.        Voting- Managers chosen by majority of the members in interest- can have voting any way that want (cumulative, straight, per capita)- not need cause to remove manager, just need majority vote

J.       §17101(b) Piercing the LLC veil- normally no personal liability for members, but here corporate form will be ignored and result in personal liability- look at factors for piercing regular corporate veil, but if base on fact that have no members meetings and include within articles of organization or written operating agreement then cannot use for piercing purposes

K.    Members not liable for LLC actionsàK or tort, but members responsible for their own tortious conduct and officer/ manager not liable b/c of their position

L.      Fiduciary Obligations- §17153- similar to those of partner- not eliminate duty of loyalty but can define certain areas where participation in certain activities that would normally look like breach of duty of loyalty, is not breach- able to modify and ability to modify look to partnership codes §16103(b)(3)

M.   Provisions are designed to be helpful- 3 levels of how can change management structure: 1) changes that are able to do w/o restrictions; 2) changes that can alter management structure, i.e. duties, and the changes must be in a written operating agreement or the articles of organization; 3) certain things not able to change at all b/c so fundamental

N.    Who want and why?

1.      Liability reasons- No one now want be GP and subject self to limitless liability b/c w/ LLC each and every member has limited liability and can participate in management and control w/o fear of limitless liability

2.      Tax reasons- Can have Chapter S corporation- Chapter s Corporation when meet certain requirements and allow to tax as if was a partnership- restriction/ requirements of S Corporationàmaximum of 35 shareholders/ shareholders not be a corporation, partnership, non-resident alien- and only one class of stock (common stock)- very limited situations where able to use- LLC can be Chapter S Corporation and good for joint ventures between corporations and also might use for real estate ventures