Business Associations Outline

I. Introduction to Business Entities.........................................................1

A. Agency......................................................................................1
B. Limits to Limited Liability........................................................3
II. Non-Corporate Entities............................................................................5
A. Partnerships.............................................................................5
B. Limited Liability Entities........................................................10
III.The Corporation...............................................................................................14
A. Corporate Formation.............................................................14
B. Board Election.......................................................................17
C. Corporate Securities and Distributions.................................19
D. Corporate Governance: Board of Directors..........................22
E. Corporate Governance: Shareholders...................................24
F. Litigation................................................................................31
G. Corporations and Fiduciary Duties.......................................34
H. Controlling Shareholders.......................................................41
I. Regulation of Securities Transactions...................................46
J. Close Corporations................................................................48
 I. Introduction to Business Entities
A. Agency
1) Formation
a. 3rd Restatement of Agency
b. §1.01: Agency Defined
i. Fiduciary Relationship
ii. A person (the principal) manifests assent to another (the agent)
1. That the agent shall act on behalf of the principal and
2. That the agent shall be subject to the principal’s control, and the agent manifests assent or
otherwise consents to do so.
c. §1.04: Terminology
i. Person (principal or agent) need not be a person/individual. Person includes individuals, organizations,
entities, governmental units, governmental agencies, etc. R. 3d §1.04(5)
1. Person’s manifestation of assent to the agent needs to be objectively determined. Best to say it
through written or spoken words or action; very rare that inaction will work.
2. Agent’s manifestation of consent must be objectively determined. Can agree in words/do as
asked to do  any manifestation of assent to act on behalf of the principal and subject to
principal’s control will do
ii. Disclosed:
1. Third party has notice that the agent is acting for a principal and has notice of the principal's
identity
2. §6.01: Agent for Disclosed Principal
a. Principal and Third party are parties to the K, but not agent unless Agent and Third-
party consent
iii. Undisclosed
1. Third party has no notice the agent is acting for a principal
2. §6.02: Agent for Unidentified Principal
a. Principal and Third party are parties to the K, AND agent UNLESS agent and third-
party consent otherwise
iv. Unidentified
1. Third Party has notice the agent is acting for a principal, but no notice of identity of principal
2. § 6.03: Agent for Unidentified Principal
a. Everyone is a party to the contract
2) Contracts
a. §§2.01 and 3.01: Actual Authority
i. §2.01: Actual
1. Agent reasonably believes, in accordance with principal's manifestations to the agent, that the
principal wishes the agent so to act
a. Must have manifestation
b. Can be implied from words or conduct (Gary Jenson Farms v. Vargill: weird
business structure, guy was doing everything on behalf of the company. Very clear it
was not a credtior-creditee relationship but more than that)
ii. §3.01: Creation
1. Manifestation to an agent, as reasonably understood by the agent, expresses principal’s assent
that the agent take action on principal’s behalf
iii. Two types of actual authority §2.01
1. Express- power that the principal has described in specific language
2. Implied- the power to do what is necessary, usual, and proper to accomplish the agent’s
express responsibilities to the principal (inherent part of the job)
b. §§2.03 and 3.03: Apparent Authority
i. §2.03: Apparent

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 1. 3rd Party reasonably believes the actor has authority to act on behalf of the principal and that
the belief is traceable to the principal’s manifestation
ii. §3.03: Creation
1. Manifestation that another has authority to bind the person
2. Third party reasonably believes the actor to be authorized
3. Belief is traceable to manifestation

c. §4.01: Ratification (Summit Properties v. New Tech: Opened up the new location and the guy went to the
opening and was like "sick" and then was like lol, I did not approve that! Weird! But it was confirmed that this
manifested assent/ratification)
i. Affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting
with actual authority
ii. Ratifies an act by:
1. Manifesting assent
2. Conduct justifies reasonable assumption of consent
3. Does not occur unless:
a. Act is ratifiable
b. Person has capacity to ratify
c. Ratification is timely
d. Ratification encompasses the act in its entirety
iii. §4.02: Effect
1. Retroactively creates effects of actual authority
2. Not effective:
a. In favor of a person who causes it by misrepresentation
b. Favor of agent against a principal when the principal ratifies to avoid a loss
d. §8.14: Indemnification
i. Principal has a duty to indemnify an agent
1. In accordance with K; and
2. Unless otherwise agreed
a. When agent makes payment
i. Within scope of actual authority
ii. Beneficial to principal
b. Agent suffers a loss that should be borne by principal

PARTIES TO CONTRACTS IN AGENCY CONTEXT

Status of Authority of Principal Party Agent Party to Third Party R.3d §
Principal Agent to K? K? Party to K?
Disclosed Actual or Yes No, unless A Yes 6.01
apparent and T consent
Unidentified Actual or Yes Yes, unless A Yes 6.02
apparent and T consent
Undisclosed Actual Yes Yes Yes 6.03

Undisclosed Apparent N/A N/A N/A

3) Torts
a. Important consideration
i. EMPLOYER-EMPLOYEE relationship
b. §2.04: Respondeat Superior
i. Employer subject to liability for torts committed by employees while acting within scope of their
employment
1. Within scope is the key, 7.07
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 c. §7.01: Liability to Third Party
i. Agent subject to liability to a 3rd party harmed by their tortious conduct
1. ALWAYS
d. §7.07: Employee Acting within Scope of Employment
i. Employee’s act not within scope of employment when:
1. It occurs within an independent course of conduct
2. Not intended by the employee to serve any purpose of the employer
B. Limits to Limited Liability
1) Piercing the Corporate Veil
a) MBCA §6.22(b)
b) General Rule: Shareholders are not liable for the debts and obligations of the corporation
c) Exceptions:
a. Shareholder gives personal guarantee
b. Articles impose liability
c. Improperly formed corporations
d. Court pierces the corporate veil

2) Key Considerations of Piercing Corporate Veil – Two elements

o Unity of interest b/t the shareholder and the corporation
 Corporate formalities are disregarded
 Shareholder dominates finances, business practices, etc.
 Enterprise theory may also apply
 Non-shareholders are not insulated
o Will piercing advance the interests of equity?
 Corporation was used to commit a fraud or injustice
 Undercapitalization is a consideration
o Test to pierce the corporate veil and impose liability on the other parties (torts):
 1 – Complete domination of finances, policy and business practice in respect to the transaction being
litigated. Union b/t corporate entity and D/corporate entity had no separate mind or existence of its
own.
 2 – Such control must have been used by the D shareholder to commit fraud or wrong
 3 – Aforesaid control and breach of duty must proximately cause the injury
 OVERALL: Whenever anyone uses control of the corporation to further his own rather than
corporation’s business + to commit fraud/wrong
3) Tort Creditors
a. R(3d) Agency §7.01 Test:
i. ∆ used business in an individual capacity
ii. To defraud
b. Walkvosky
i. Facts:
1. Car crash
2. Habit of paying out all of its earnings quickly
3. Insurance and compliance with law
a. Insurance is set at the appropriate level
c. Radasewski v. Telecom Corp.
i. Facts:
1. Injured by a truck driver
2. Owned by a parent company
a. Π looking to parent for actions of the subsidiary
3. Financial responsibility and Under capitalization
a. Under attempt to defraud element
b. Asking whether the subsidiary is properly capitalized
c. Insurance can counter because it is financially responsible according to statute

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 4. Court may pierce if: Shareholder controls corporation & shareholder uses control to
advance his own business and not the firm’s business.
4) Contracts
d. Test:
i. Is there a unity of interest and ownership/complete dominance as to transaction?
ii. Would an equitable result occur if the acts are treated as those of the business alone?
e. Kinney Shoe
i. Lease agreement between 2 places, but 1 was a shell with no assets
ii. Arg against π
1. Should have done your homework!
2. 3rd prong: reasonable inquiry to do your due diligence
a. Assumed the risk
b. Court did not want to extend this prong beyond financial institutional lenders
5) Parent-Subsidiary
f. Gardemal—Torts
i. Westin hotel drowning case
ii. How to show control element
1. Alter Ego
a. Mere tool or conduit
b. Undercapitalization
c. No separate mind
2. Single Enterprise Doctrine
a. Not operating as separate entities but integrate their resources to achieve a common
business purpose
3. REALLY just showing use in an individual capacity, no regard to corporate form
g. OTR v. Blimpee—Contracts
i. When subsidiary used as a mere agent or instrumentality
h. Prevent independent corp. from being used to deflect liability

II. Non-Corporate Entities

A. Partnerships
1) Where Partnership Law Comes From
a. Product of common law
i. Revised Uniform Partnership Act (RUPA)
ii. Uniform Partnership Act (UPA)
6) Basic Legal Attributes of a Partnership
b. Entity for some purposes, aggregate of others
c. 2 or more people
d. Default Form of Business
i. Forms without doing anything unique with the state
7) Formation
e. RUPA §202
i. If two or more persons associate
ii. If they associate as co-owners of a business
iii. If that business is for profit
iv. Then a partnership is formed
v. As Co-Owners
1. Encompasses shared management/control and sharing of profits, not mere revenue
vi. Business for profit
1. Subjective intent does not matter
2. Mere passive ownership of property is not a business
vii. Martin v. Peyton:
1. Facts:

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 a. Partnership borrowed a lot from Peyton
b. Partnership turned over to Peyton speculative securities and also agreed to other
matters
c. Court determining if this gave rise to a general partnership, decided it was not closer
to a creditor-creditee relationship
2. Results from K, express or implied
a. Proven through circumstantial evidence
3. Share of the profits is not dispositive, but can be determinative
a. Employees can be in the share of the profits
8) Starting a Partnership
f. No filing with the state required
g. Default business entity
h. BUT SEE, RUPA §105: Partnership Agreement. Partners can agree on everything otherwise
9) Operation
i. Liability
i. Debts and Obligations
1. RUPA §306(a): Debts and Obligations
a. All partners are jointly and severally liable
b. Can sue either individual or multiple partners for full satisfaction of debt
2. RUPA §307(d)(1): Exhaustion
a. Claimant must exhaust efforts to get the partnership to satisfy claim
i. Partnership first, then partners
ii. Loss or Injury Cause by Partner
1. RUPA §305(a): Loss/Injury
a. Partnership is liable for loss/injury caused by a partner who acted either:
i. Within ordinary course of business; or
ii. With actual or apparent authority of the partnership
iii. RUPA §401(b): Contribution
1. Joint and several does not mean partner has to foot the whole bill
2. Share in losses
iv. RUPA §401(c): Indemnification
1. Partnership obligated to reimburse partner for
a. Payments made
b. Liabilities incurred
2. Covered:
a. Ordinary course of business
b. Preserve business of partnership
c. Preserve property
j. Capital Accounts- running total of what you’ve been contributed, what you’ve taken out, and what’s been
added to or subtracted in the course of the life of the partnership
i. RUPA §401(a): Contributions
1. Partner gets account credited with:
a. amount of money contributed and amount equal to the fair market value of any
property contributed
b. RUPA §401(b): Share of profits
ii. RUPA §401(a): Distributions
1. Capital account reduced by any distributions made to the partner
a. Money or Property
b. RUPA §401(b) Share of losses
iii. RUPA §401(h): Services Performed
1. No right to renumerations for services
a. Exceptions:
i. Partnership agreement §105(a)
ii. Reasonable compensation for services in winding up
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 iv. RUPA §401(b): Allocation of Partnership Profits and Losses
1. Unless otherwise agreed to, each partner is entitled to equal share of partnership profits and
losses
k. Property
i. RUPA §501: Rights in Property Contributed by a Partner
1. Partner does not retain any ownership interest in the property
2. Cannot co-own partnership Property
ii. RUPA §203: Partnership Property
1. Transferring the property, now solely belongs to partnership
l. Management Issues
i. Management Rights
1. RUPA §401(h):
a. Each partner has equal rights in management and conduct of partnership’s business
ii. Voting Rules
1. RUPA §401(f)
a. Equal voting, regardless if profit share is different
2. Majority vote required for:
a. §401(j): decisions in ordinary course of business §401(k)
3. Unanimous vote required:
a. §402(b)(3): Add partner
b. §401(j): Amend partnership agreement
c. §401(j): Decisions not in ordinary course of business
4. §103(a): partners can agree otherwise on matters affection relations BETWEEN
THEMSELVES
a. Cannot if affects third parties
m. Fiduciary Duties
i. RUPA §404
1. Owed by partners to each other and the partnership
2. (b): Duty of Loyalty
a. Prohibits
i. Using partnership property for personal gain
ii. Taking business opportunities belonging to partnership
iii. Engaging in conflict of interest transactions
iv. Competing with partnership BEFORE dissolution
3. Meinhard v Salmon: Duty of Loyalty
a. Facts:
i. ∆ and π worked together in a joint venture to manage a building
ii. Shared profits and losses, general partnership
iii. Third party approach ∆ about leasing a tract of land, by virtue of partnership
got the opportunity
iv. ∆ didn’t mention to π
b. ∆ breached duty of loyalty
c. ∆ appeared as the sole owner, but had to inform about new business opportunity
i. Took a corporate opportunity
ii. Owed a duty of loyalty because partners
4. (c): Duty of Care
a. Duty not to act with gross negligence or reckless conduct, intentional misconduct, or
a knowing violation of law
5. Good faith and faith dealing
ii. RUPA § 409(b)
1. Duty of Loyalty Prohibitions
a. Using partnership property for personal gain
b. Taking business opportunities belonging to the partnership
c. Engaging in conflict of interest transactions
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 d. Competing with the partnership
e. Remedy=disgorgement (RUPA 409(b)(1))
iii. RUPA §103(b)
1. May not eliminate duty of loyalty, but can identify non-violative activities if not manifestly
unreasonable
2. Can reduce duty of care if not unreasonable
3. Cannot eliminate good faith and fair dealing, but can prescribe standards as long as not
manifestly unreasonable
n. Agency
i. Matters in Ordinary Course of Business
1. RUPA §301(1)
a. General Rule: Partner has authority to bind
i. Except if:
1. Partner has no authority AND;
2. Third party had knowledge or notice that he lacked actual authority
ii. Matters Outside Ordinary Course of Business
1. RUPA §301(2)
a. If (and only if) partner has actual authority, then partner binds
iii. Actual = always good
iv. Apparent = sometimes good if matter is in ordinary course and third party had no notice that partner
lacked actual authority
10) New Partners
o. Who decides new partners?
i. §105(a): Partnership agreement
ii. §402(b)(3): Default rule takes vote of all the parties
p. Responsibilities of new partners
i. Liable only for debts incurred after unless required to do so
11) Partners Making Money
q. Salary
r. Profit
s. RUPA §§502, 503(a): Transferring Partnership Interest
i. Partner may not transfer interest in the partnership, like right to vote or manage
ii. BUT, can transfer interest in profits, losses and right to receive distributions
12) End Game for Partnership
t. Disassociation: Partner Leaves the Firm
i. Causes of Disassociation
ii. An event that occurs in a moment in time
1. RUPA §601
a. Partner voluntarily withdraws
b. Event specified in partnership agreement
c. Partner expelled per partnership agreement
d. Pertain expelled by unanimous agreement
e. Judicial Decrees
f. Bankruptcy, etc., of partner
g. Partner death or incapacity
iii. Impact of Disassociation- Was the disassociation wrongful? Does the disassociation trigger a
dissolution of the partnership?
1. Wrongful Disassociation
a. RUPA §602(b)
i. Breach of an express provision in the partnership agreement; OR
ii. If fixed-term partnership:
1. Partner withdraws UNLESS following the disassociation with
another partner that results in the right to dissolve the partnership
2. Other options in §
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 2. Impact of Wrongful Disassociation
a. Effect on Wrongful Partner
i. RUPA §602(c): Liability
1. Partner is liable to the partnership and other partners for:
a. Damages caused by disassociation; AND
b. Any other obligation of the partner to the partnership or
other partners
ii. RUPA §803(a): Inability to Participate in Winding Up
1. Partner MAY NOT participate in the winding up of the partnership,
if it dissolves
2. Still gets fair share, but no say in the actions
b. Effect on Remaining Partners
i. RUPA §801(1): If the disassociation was willful, then the partnership will
dissolve.
1. BUT RUPA §803:
a. At any time after dissolution and before winding up of the
business is complete, ALL OF THE REMAINING
PARTNERS may waive right to have partnership wound up
and partnership terminated
3. Willful Disassociation
a. RUPA §601(a):
i. Partner has power to disassociate at any time by express will—IF not
wrongful, it is willful
ii. Always has power, but may not have right to disassociated
4. Effect of Willful Disassociation
a. RUPA §801(1): Automatic Dissolution of Partnership
i. BUT RUPA §803:
1. At any time after dissolution and before winding up of the business
is complete, ALL OF THE REMAINING PARTNERS may waive
right to have partnership wound up and partnership terminated
5. Effect on Voting Rights
a. RUPA §603(b)(1)
i. Rights to participate in the management of the partnership terminates
6. Effect on Partner’s Apparent Authority
a. RUPA §702(a)
b. RUPA §804:
i. For two years, provided partnership does not dissolve or wind up, is bound
by an act of the disassociated partner IF at the time of entering the contract
the third party:
1. Reasonably believed disassociated partner was still a partner
2. Did not have actual or constructive knowledge/notice of partner’s
disassociation
ii. Disassociated partner has apparent authority for two years
7. Statement of Disassociation
a. RUPA §704
i. Gives constructive notice to third partners
ii. Takes effect 90 days after filing
1. But immediately for real estate transfers
8. Effect on Liability
a. Contracts
i. RUPA §703(a):
1. Partner remains liable for EXISTING obligations to partnership
ii. RUPA §703(b):

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 1. If statement of disassociation is not on file, Remains liable for
transactions entered into within 2 years
a. If statement of disassociation, liable for 90 days
b. Torts
i. RUPA §703(a) – (b):
1. Partner not liable for torts after disassociation
u. Dissolution
i. Causes of Dissolution
1. RUPA §801:
a. Partner’s voluntary withdrawal as partner (wrongful or not wrongful)
b. Event specified in partnership agreement
c. Event making conduct of business illegal
d. Other judicial decrees
e. Other possibilities of a fixed term partnership
ii. Effects on Partners’ Duties
1. RUPA §404(b): Duty of Loyalty
a. Partner may compete with the partnership
b. Otherwise duties stay the same
2. (c): Duty of Care
a. Remains in effect
v. Winding Up- business is not actively conducted and the firm liquidates its assets, discharges all obligations,
and settles all accounts/make final distributions to the partners (even wrongful dissociating partner still gets his
or her share)
i. RUPA §802: Winding Up Phase
1. After dissolution and during wind up phase, partnership will:
a. Sell its assets
b. Allocate any gains and losses
c. Adjust capital accounts accordingly
2. Culminates when partnership makes:
a. Payments to creditors
b. Payments to partners
3. RUPA §802: Termination
a. Partnership terminates when winding up of its business is completed

C. Limited Liability Entities

1) LLPs
w. All the rules of general partnerships in the RUPA apply to LLPs
i. EXCEPT: RUPA §306(a)
1. Obligation of partnership incurred while LLP, solely obligation of partnership
2. Partner NOT personally liable
ii. Formation requires filing with the state
13) LPs
a. Governing Law = Uniform Limited Partnership Act
i. See also RULPA
b. Creation
i. ULPA §201(a)
1. Certificate of limited partnership, when properly filed, legally forms a limited partnership
ii. ULPA §105: Partnership Agreement
c. Management Structure
i. ULPA §102(11): General and Limited Partners
1. Need at least one partner from two categories:
a. 1 or more general partner
b. 1 or more limited partner
2. ULPA §406(a):
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 a. General Partners have equal rights to participate in management
i. Majority of general partners
ii. Unanimous for particular actions, fundamental changes i.e. amending
partnership agreement
b. Limited Partners have no rights to participate in management
d. Liability
i. Limited Partners:
1. ULPA §303(a):
a. Limited partners are not liable for firm debts and obligations
i. Even if the limited partner participates in the management and control of the
limited partnership
ii. Limited to just the initial investment in the firm
ii. General Partners
1. ULPA §404(a):
a. General partners are jointly and severally liable for firm debts and obligations
e. Fiduciary Duty
i. Limited Partners
1. ULPA §305(a)
a. Limited partners owe no duty, but GP owe fiduciary duties to firm and other partners
b. Obligation of good faith and fair dealing applies
ii. General Partner
1. ULPA §409(b): Duty of Loyalty
2. ULPA §409(c): Duty of Care
3. ULPA§409(d): Good Faith and Fair Dealing
a. Gerber v. Enterprise Product Holdings, LLC
i. Facts:
1. Limited partners brought class action challenging sale of a portion
of partnership and subsequent merger into a wholly owned
subsidiary of purchaser
2. Argued breach of good faith and fair dealing
ii. Implied covenant looks to the past and asks what the parties would have
agreed to themselves had they considered the issue in their original
bargaining positions at the time of contracting
1. Temporal focus
iii. Fair dealing: commitment to the deal in terms and purpose
iv. Good faith: faithfulness to scope, purpose and terms
1. Refrain from frustrating parties benefit of their bargain
2. Fill gaps of K, express provisions supersede
v. Can contract around/reduce duties. As a general rule, can’t eliminate duty of
care and loyalty but can establish some boundaries to them. In DE, can
eliminate these duties. But can NEVER eliminate the obligation of good
faith and fair dealing
b. Dieckman v. Regency General Partner LP
i. Facts:
1. Π is a limited partner. General partner proposed a merger.
2. Disagreement between the two
3. General partner moved to dismiss, saying no express obligation not
to mislead investors or to unfairly manipulate the conflicts
committee
ii. Takeaway:
1. Some terms are easily implied because they are so obvious that
there was no need to include them
2. Did not need to say, “don’t fraud me”
f. Agency
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 i. Limited Partners
1. ULPA §302
a. Limited Partners do not have authority to bind the partnership
ii. General Partners
1. Matters in the Ordinary Course of Business
a. ULPA 402(a)
i. Only a general partner has apparent authority in the partnership
ii. Except if:
1. Lacked apparent authority; and
2. Third party had knowledge or received notice or had constructive
notice that the partner lacked actual authority
2. Matters Not in the Ordinary Couse of Business
a. ULPA §402(b)
i. Only a general partner can bind the partnership
ii. All the partners must authorize the act
g. Contributions and Distributions
i. Distributions
1. ULPA §503
a. Shared among the partners based on the value of their contributions to the
partnership, as stated in the required records
i. General partnership: contribution = money or property only
ii. Limited partnership: contribution = money, services, performed, promissory
notes, other agreements to contribute, and k’s for services to be performed.
Any benefit. Reflects investment in the firm.
ii. Contributions
1. ULPA §501:
a. Includes:
i. Property
ii. Services  different than GP
iii. Other benefits or agreements
h. Transferability
i. ULPA §§701, 103
1. No restrictions on partner’s ability to transfer his or her rights to distributions
2. Restrictions imposed on partner’s ability to transfer any other interest in the firm
14) LLLPs
i. Governing law:
i. ULPA
j. Creation:
i. ULPA §102(9)
1. File certificate, and indicate limited liability
k. ULPA § 404(c):
i. No partner liability for partnership debts & obligations
ii. General partner is also protected by limited liability
l. Not that needed if smartly organized business
m. Other forms altogether can achieve LLLPs goals
i. I.e. an entity is the general partner not an individual
15) LLCs
n. Governing law
i. Wide variation among the states
ii. Revised Uniform Limited Liability Company Act (RULLCA)
o. Formation
i. RULLCA §201(a)
1. Formed by filing a certificate of organization
ii. RULLCA §102(a):
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 1. One or more persons
2. Separate entity—power to sue and be sued
3. Filed the certificate of organization
iii. RULLCA §104:
1. Firm is a separate entity
a. Power to sue, be sued, own property, etc.
2. Operating agreement—addresses details agreed to by the members
3. Potential tax benefits
p. Contracting
i. High degree of contracting! Allowed to create a lot
1. Incredibly flexible
ii. Frazier v. MLS:
1. Facts:
a. MLS owned all teams and all property and rights belonging to the league
i. Centralized management
b. Certain investors had a share in:
i. Control over teams
ii. Revenues generate by teams
iii. Selection of players for teams
c. Other investors were strictly passive investors
2. LLC form permitted the participants to use a single entity to achieve this
a. Not for an LLC, multiple legal entities would be needed to achieve the same desired
result
q. Management
i. RULLCA §407(b): Member-Managed Firm (default)
1. Each member has an equal right to participate in management (same as general partnership
model)
a. Difference decided by majority of members
b. Outside ordinary course, only with consent of all members
c. Amendment only by consent of all
ii. RULLCA §407(c): Manager-Managed Firm (optional)
1. Each manager has an equal right to participate in management
a. Consent of all members required for foundational changes like amending agreement,
selling property, merging, etc.
r. Fiduciary Duty
i. RULLCA §409(a): Member-Managed
1. Each member owes duties of loyalty and care to the firm and each other
ii. RULLCA §409(g): Manager-Managed
1. Each manager owes duties of loyalty and care to the firm and each other
iii. Rules permit members to exercise good amount of latitude in establishing boundaries/standards for
these duties
iv. RULLCA 409(d): Good Faith and Fair Dealing
1. Always applies; cannot be limited
v. McConnel v. Hunt:
1. Facts:
a. LLC organized to get an NHL team
b. ∆ walked away from deal
c. Π formed their owned LLC to complete the deal and sued to show allowed to
compete with original LLC
i. Included a provision allowing to compete
2. Demonstrates that you can eliminate some aspects of duty of loyalty
3. Takeaway: You can eliminate some aspects of the fiduciary duty of loyalty in LLC operating
agreement. Statute says you can eliminate some aspects of duty of loyalty, as long as not

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 unreasonable. If you are going to eliminate some aspects of duty, be careful about the words
you choose.
s. Liability
i. RULLCA §304(a)
1. No liability for firm debts or obligations solely by virtue of acting as a member or manager
ii. Cortez v. NACCO:
1. Facts:
a. Worker hurt by forklift at lumber mill
b. Swanson sets general policies and priorities, then delegates
2. Members or managers who participate in control of the business of an LLC will not, as a
result of these actions be vicariously liable for LLC’s debts obligations or liabilities
a. BUT, responsible to extent would be actionable against them in individual capacity
t. Contributions
i. RULLCA §402
1. Tangible or intangible property
2. Money, services, and promissory notes
3. Property
4. Past services and contracts for future services
5. Any benefit to the company
u. Distribution
i. Wide variations among statutes
ii. RULLCA §404
1. Equal shares among members
2. In proportion to investment in the firm in most states
3. Members can adopt any method they choose
v. Transferability
i. RULLCA §102(21)
ii. RULLCA §502
1. No restriction on a member’s ability to transfer distributions
2. Members cannot transfer any other duties, rights, or obligations that come with being a
member
w. Agency
i. RULLCA §301: Member Power to bind
1. Member is not an agent of a limited liability company solely by reason of being a member
2. Actual authority: none
3. Apparent authority: agency rules apply
ii. RULLCA §407: Manager Power to bind
1. Matters in ordinary course, difference may decided by majority
2. Matters not in ordinary course, unanimous
3. Managers have actual authority in manager-managed company
a. Also have any apparent decided by agency rules
x. Dissolution
i. RULLCA §701: Events Causing Dissolution
1. Event in operation agreement
2. Consent of all members
3. Application by a member
ii. Haley v. Talcott
1. Facts:
a. Haley (P) and Talcott (D), two fifty-fifty owners of an LLC (the Redfin Grill), had a
falling out. Haley (P) wanted to dissolve the company as allowed by Delaware law,
but Talcott (D) wanted to buy him out and continue to operate the Redfin Grill, per
their LLC agreement.
2. When it is no longer reasonably practicable for an LLC to continue to operate in conformity
with the LLC agreement, the members are entitled to a judicial dissolution.
14
 a. Exit mechanism would fail to relieve obligations, so cannot enforce

III. The Corporation

A. Corporate Formation
1) Creation/Formation
a. File Articles of Incorporation
i. MBCA §2.01, §2.02
1. One or more persons, deliver articles of incorporation to secretary of state for filing
a. Name of firm
b. Number of authorized shares
c. Name and address of registered agent
d. Name and address of each incorporator
ii. Separate entity
1. Power to sue, be sued, own property, make K’s, etc.
b. Reserve a Name
i. MBCA §4.01(a)(1)
c. Select a state
d. Draft Bylaws
i. MBCA §2.06(a), (b)
1. Address administrative details that apply to the firm
2. Cannot conflict with articles of incorporation
e. Hold Organization Meeting
i. Meeting will be conducted by incorporators if not already selected initial directors
1. Initial directors if selected can also conduct this meeting
ii. Following items are addressed:
1. Election of additional/initial directors
2. Appoint officers
3. Matters relating to meetings and voting
4. Other
16) Acceptable Contributions for issuance of stock
f. MBCA §6.21
i. Tangible or intangible property or benefit for the corporation
ii. Money
iii. Promissory notes
iv. Past and future services
v. Other securities of the company
17) Distributions
g. MBCA §6.01(a)
i. In proportion to investment in firm, as measured by # of stocks owned
ii. Shares of stock within a class have equal rights to distributions
iii. Different classes of stock may have different rights to distributions
18) Liability of Shareholder
h. MBCA §6.22
i. No liability to shareholder for debts and obligations
ii. BUT SEE, piercing corporate veil
19) Pre-Incorporation Liability
i. MBCA §2.04
i. Only persons acting for or on behalf of the firm
1. Must know firm not incorporated at time
2. Joint and several liability
20) Management of the Firm
j. Participants
i. Shareholders

15
 1. Owners of firm
2. Elect directors
3. Paid dividends as determined by directors
4. Receive assets on liquidation
5. Stock must be authorized before being issued
ii. Directors
1. Elected by shareholders
2. Exercise all power and authority of corporation
3. Appoint the officers of the firm
4. Can be inside (employee) or outside (non-employee)
5. Delegate day-to-day management duties to officers
iii. Officers
1. Appointed by directors
2. Day-to-day
3. Minimum need:
a. President
b. Treasurer
c. Secretary
4. Authority:
a. President can bind corporation in all matters that are in the scope of their authority
b. Scope of authority of the subordinate officers depends on position in question
c. Officer’s authority can arise out of articles of incorporation, bylaws, or resolution
passed by board of directors
k. Management Roles and Process
i. MBCA §8.01(b)
1. Board of directors exercise all corporate powers and manage and direct the corporation
ii. MBCA §8.40(b)
1. Officers are appointed by the board of Directors in accordance with the bylaws
iii. MBCA §8.03
1. Shareholders elect the directors at annual shareholders’ meetings
2. Shareholders do not manage!
a. MBCA §7.21(a)
i. Each share is entitled to one vote
l. Management Structure
i. Shareholders
1. Owners of the firm
2. Elect the directors
3. Paid dividends (share of profits) as determined by the directors
4. Receive assets on liquidation of the firm
ii. Directors
1. Elected by shareholders
2. Oversee the enterprise
3. Appoint officers
4. Can be employees or non-employees
iii. Officers
1. Appointed by directors
2. Responsible for day-to-day management of firm
3. At minimum firm has Pres, Treasurer, Secretary
21) Fiduciary Duties
m. Directors
i. MBCA §§8.30(a), (b)
1. Duty of loyalty- act in “best interests of the corporation”
2. Duty of care- exercise “care that a person in a like position” would
3. Obligation of good faith and fair dealing
16
 4. Duty to be informed in connection with decision-making function and discharge duties with
due care
n. Officers
i. MBCA §8.42(a)
1. Duty of loyalty
a. Best interests of corporation
2. Duty of care
3. Obligation of good faith and fair dealing
o. Controlling Shareholders
22) Ethical Considerations in Incorporation Process
a. Model Rules of Professional Conduct
iii. Rule 1.4: Communication
1. Lawyer must
a. Keep client reasonably informed of matters requiring client’s informed consent
b. Consult with the client about any relevant limitation on the lawyer’s conduct
i. If you’re representing someone, advocate on their behalf to the exclusion of
others
ii. Representing another client with adverse interests, limitation to adequately
serve new client
iv. Rule 1.6: Confidentiality of Information
1. General Rule:
a. Shall not reveal information relating to the representation of a client
b. UNLESS:
i. Client gives informed consent
ii. Disclosure permitted under Rule 1.6(b)
1. Prevent bodily harm, death, illegality
v. Rule 1.7(a)(b): Conflict of Interest
1. A lawyer cannot represent a client with a concurrent conflict of interest when
a. One client’s interests are directly adverse to those of another, or
b. There is a significant risk that a representation will be materially limited by the
lawyer’s responsibilities to another client
2. Exception:
a. Lawyer may represent clients with a concurrent conflict of interest only if
i. Competent and diligent representation of each client is possible
ii. Not illegal
iii. Not on both sides of the V
iv. Informed consent
1. Duty to disclose/informed consent collides with Rule 1.6
a. Issue when presented an opportunity to help a group
organize an entity and perceive where conflicts arise
i. Must make clear who you represent and how you
will proceed
2. Can tell clients representing business alone and none of them
personally
vi. Rule 1.13: Organization as Client
1. If a lawyer represents an organization, must explain identity of client when the organization’s
interests are adverse to those of the constituents with whom the lawyer is dealing
2. Lawyer is also representing constituents of the organization, must be in compliance with Rule
1.7 conflicts of interest
3. Make it clear to parties that the client is the entity, and info is not protected by
attorney/client privilege
vii. Jesse by Reinecke v. Danforth
1. Facts:

17
 a. Danforth (D) and Ullrich (D) were part of a group that had retained Flygt, an attorney
with the DeWitt law firm, to prepare incorporation documents and serve as corporate
counsel.
b. Three years later, Jesse (P) sued Danforth (D) and Ullrich (D) for medical
malpractice, retaining Farnsworth, also an attorney with the DeWitt law firm.
c. Danforth (D) and Ullrich (D) moved to disqualify the DeWitt law firm because of a
conflict of interest based on Flygt’s prior representation of the corporation.
2. Rule:
a. If:
i. A person retains a lawyer for the purpose of organizing a business entity
ii. The lawyer’s involvement with that person is directly related to the
incorporation, and
iii. The entity is eventually incorporated
b. Then:
i. The entity rule applies retroactively such that the lawyer’s pre-incorporation
involvement with the person is deemed to be representation of the entity, not
the person.
3. Persons who retain the lawyer but provided information to the lawyer not directly related to
the purpose of organizing an entity, then it is the person, not the corporation which holds the
privilege for that communication
4. If unclear who the attorney is representing, business or individuals, court will look to
reasonable expectations about who the client was

D. Board Election
1) Shareholder Voting
a. MBCA §7.21(a): Each Share = one vote for any candidate to the board
b. MBCA §7.28(a): Directors are elected by a plurality of votes cast
c. Default: Straight Voting
i. MBCA §7.21(a)
1. Each share is entitled to one vote for each open director position voted on at a shareholder’s
meeting
ii. As a result, majority owners generally elect all directors
d. Cumulative Voting
i. MBCA §7.28(b)
1. No right to cumulative votes unless articles of incorporation says so
ii. MBCA §7.28(c)
1. Shareholders can cumulate their votes and cast all of them for one candidate
a. Multiple their votes by number of open seats
b. Assures a more representative breakdown of directors to shareholder
e. Develop Classes of Shares that Affect Voting
i. Generally, all shares have the same rights, MBCA §6.01(a)
ii. Articles may authorize one or more classes of shares that have limited voting rights MBCA §6.01(c)
(1)
iii. However, the rights can vary only to the extent expressly set forth in the articles of incorporation.
MBCA §6.01(e), see MBCA §2.02(b)(3)
f. Voting Trusts
i. MBCA §7.30(a)
1. Shareholders transfer stock to trustee
2. Trustee exercises voting rights in the stock
3. Shareholder retains all other rights in the stock
4. Corporation must be notified of the trust
5. Terms regarding duration may be set forth in the voting trust
g. Voting Agreements
i. MBCA §7.31(a), (b)
18
 1. Shareholders may agree to vote a specific way by signing an agreement beforehand
2. Enforced by specific performance
h. Voting Proxy
i. MBCA §7.22(d)
1. Proxy is revocable UNLESS:
a. Appointment form states it is irrevocable; AND
b. Appointment is coupled with an interest
i. Pledgee
ii. Buyer of the shares
iii. Creditor
iv. Employee
v. Party to voting agreement, under §7.31
23) Shareholder Action to Limit Board
i. MBCA §8.01(b)- General Rule: BOD possesses all powers
j. MBCA §7.32
i. (a): Shareholder agreement may restrict discretion of the board of directors
ii. (b): All shareholders must approve
iii. (b): Terms must appear in:
1. Articles; OR
2. Bylaws; AND
3. Approved by all shareholders; OR
4. Written agreement that is signed by all shareholders
iv. (c): Notice of the restriction must appear on any stock certificate
k. Manner in which shareholders may restrict board
i. Eliminate board
ii. Restrict the discretion or powers of board
iii. Govern authorization or making of distribution, whether or not in proportion to ownership of shares
iv. Establishes who shall be directors or officers
v. Establishes the terms of office
E. Corporate Securities and Distributions
1) Corporate Securities
p. Types:
i. Equity
1. Common
2. Preferred (first to receive dividends)
ii. Debt (liabilities of a corporation)
1. Bond
2. Note
3. Debenture
q. Equity
i. Rights and Powers of the Shareholder
1. MBCA §6.01(c)(1) – (3)
a. Voting—one vote per share
b. Liquidation
c. Dividends when Declared
2. Subject to change:
a. Articles of incorporation can distinguish among share classes
b. Preferred Stock:
i. First to receive dividends
ii. Receive payments on liquidation before holders of common stock
ii. Dividend Rights
1. Generally:
a. Dividends only paid when declared by Board
2. Variation:
19
 a. Cumulative: Dividends accumulate each year they are not paid
b. Noncumulative: Unpaid dividends do not accumulate
c. Participating: Shares with a preference share in any distribution made on common
shares
d. Nonparticipating: Shares with a preference do not share in any distribution made on
common shares
iii. Liquidation
1. Generally:
a. All shareholders share in the assets on liquidation on a pro rate basis
2. Variations:
a. Preferred shareholders could have liquidation preference over the common
shareholders
b. Articles otherwise specify
r. Debt
i. Rights and Powers
1. As specified in the instrument
2. Entitled only to periodic payments of interest
3. Entitled to a return of the principal at a fixed point in time
4. No right to vote
s. Equity versus Debt

Feature Equity Debt

Control Over Management Power to elect board No power to elect board
Return on investment Entitled to share in any firm profits Receive interest on the investment
when board declares dividend
Return of Capital Initial investment not guaranteed, last Guaranteed return. Paid before equity
in line for liquidation
Risk High risk, high reward Low risk, fixed return
Payment Flexibility Very flexible. Dividends at board Rigid payments
discretion (Generally)
Tax impacts Firm’s tax bill will NOT be reduced Firm’s tax bill will be reduced
when it pays a dividend
Leverage More equity reduces leverage: lower More debt increases leverage: higher
profit potential and lower risk of loss profit potential and higher risk of loss

24) Corporate Stock

t. Authorizing and Issuing Stock
i. Process
1. Authorization
2. Qualify under Securities Laws
a. Federal
b. State
3. Receipt of Consideration
a. Quantity
b. Quality
4. Issuance of Shares
u. Key Terms
i. Authorized stock = shares the board has the power to issue
ii. Issued stock = shares actually transferred to shareholders
iii. Outstanding stock = issued shares that the firm has not reacquired from shareholders
iv. Treasury stock = issued stock that the firm has reacquired from shareholders
v. Shares must be authorized by articles of incorporation – MBCA §6.03(a)
vi. Consideration must be permitted by statute – MBCA §6.21(b)
vii. Consideration must be adequate – MBCA §6.21(c)
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 viii. Stages of Stock
1. Authorized: Shares board has the power to issue
2. Issued: transferred to shareholders
3. Outstanding: issued stock not reacquired by firm
4. Treasury: issued stock reacquired by firm
ix. Limitations on Stock Issuance
1. MBCA §§ 6.03(a), 6.21(b) and (c)
a. Articles of incorporation must allow or call for the authorization of shares—some
article may cap the number of issued shares
b. Consideration must be permitted by statute
c. Consideration must be adequate
i. MBCA §6.21(b)
1. Board determines when consideration is adequate
a. Cash
b. Promissory notes
c. Services already performed
d. Services to be performed
e. Other securities
i. VERY BROAD
2. MBCA §6.21(d)
a. Shares are nonassessable and fully paid once the consideration is received
b. Limits the liability of the shareholder
25) Distributions
v. Types of Distributions
i. MBCA §1.40
1. Cash
2. Property
3. Purchase of Stock
4. Redemption of Stock
5. Borrowing by Corp. FBO shareholder
6. Otherwise
ii. Not Distributions
1. Stock in the Corporation
2. Stock Split
w. Limitation on Distribution
i. Each share of stock is entitled to the same distribution, Except if the articles of incorporation vary the
class of stocks (cumulative, participating, etc.)
ii. General Concerns
1. Protect creditors (lenders and trade creditors) AND preferred shareholders against
unrestricted distributions
iii. Tests to Determine Whether Distributions MAY Be Made
1. MBCA §6.40(a)
a. Directors may authorize and the corporation may make distributions subject to
i. Restrictions by the Articles of Incorporation; AND
ii. MBCA §6.40(c)(1)
1. Equity Insolvency Test
a. No distribution may be made if:
i. the corporation would not be able to pay its debts
as they become due in the usual course of business
OR
ii. (leaves wiggle room with business judgment rule)
iii. (c)(2)
1. Balance Sheet Test
a. No distributions may be made if:
21
 i. Total assets would be less than total liabilities
PLUS amount needed to satisfy potential rights
upon dissolution of preferred shareholders with
rights superior to those receiving distribution
ii. Corporation does not even need to maintain the
minimum amount of capital (business judgment
rule)
iv. Standard of Review: Business Judgment Rule
1. Klang v. Smith’s
a. Facts:
i. Smith’s agrees to enter into a merger and buyback 50% of its outstanding
shares
ii. Hires investment firm that determines corporation’s finances are OK to do
so
iii. Board continues and the corporation displays negative net value
b. Court Held, no breach of good faith
c. Rule
i. Court is going to defer to board’s measurement of surplus, absent evidence
of bad faith or failure to evaluate the assets on the basis of acceptable data it
reasonably believed reflected current value
ii. HIGH deference, Board just must act in good faith.
2. Kamin v. American Express
a. Facts:
i. American express authorized dividends of another company’s shares
ii. Kamin alleged dividends were a WASTE that could have saved 8M in taxes
if sold on the market
b. Court held, not illegal distribution. Acted in good faith
c. Rule
i. Will not interfere with a decision made by directors of a business unless
there is a claim of fraud, bad faith, or self-dealing
ii. Takeaway: Good faith tough nut to crack. If P can’t get past good faith,
Board wins.
x. Unlawful Distributions
i. Effects on Directors
1. MBCA §8.32(a)
a. Director is personally liable to the corporation if:
i. Voted for distribution; and
ii. Distribution violated §6.40(a); and
iii. Director violated MBCA §8.30 (good faith, best interests, reasonable care
b. Liable for the amount in excess of the amount that would have been in compliance
with §
ii. Effects on Shareholders
1. MBCA §8.32(b)(2)
a. If:
i. Shareholder knew dividend was unlawful
b. Then:
i. Shareholder must return unlawful portion of the distribution to the culpable
board members
iii. Inquiry for Failure to Distribute
1. Gottfried v. Gottfried
a. Facts:
i. Minority shareholders claimed animosity between directors
ii. Majority’s attempt to coerce minority shareholders to sell their stock
iii. Majority’s interest in avoiding taxes on distributions
22
 iv. Excessive salary payment to board
b. No bad faith, evidence shows only motives were the directors best business judgment
c. Rule
i. Essential test of bad faith is whether the policy of the directors is
dictated by their personal interests rather than the corporate welfare
ii. Must Prove:
1. Willful abuse of discretion;
2. Bad Faith; OR
3. Neglect of Duty
2. Dodge v. Ford Motor Co. EXCEPTION NOT THE STANDARD
a. Facts:
i. Ford was KILLING it
ii. Randomly stopped giving dividends and all profits would be re-invested in
company
iii. Shareholders wanted dividends again
iv. ALSO, early case
b. Found bad faith
c. Rule
i. Company cannot take actions that harm shareholders and are motivated
solely by humanitarian concerns rather than business
d. VERY RARE SITUATION
3. Summary
a. If shareholder claims that BOD acted in bad faith when it failed to declare a
dividend, court will apply legal standard outlined in Gottfried v. Gottfried:
i. Was the dividend policy dictated by the board member’s personal interests
of the corporation’s welfare?
b. If shareholder sues BOD for not paying dividend, shareholder must establish either
willful abuse of discretion, bad faith, or neglect of duty to justify intervention by
court – Dodge v. Ford
F. Corporate Governance: Board of Directors
1) Corporate Governance
1. Corporate Structure
a. Director Powers - Aside from any limits imposed by shareholder agreements & a corporation’s articles of
incorporation, what is the scope of the power and authority that the corporation’s BOD exercises?
i. Exercise all corporate powers and authority – MBCA §8.01(b)
ii. Appoint officers of the corporation – MBCA §8.40(b)
iii. Delegate day-to-day management duties to the officers – MBCA §8.41
b. Who selects the individuals who sit on BOD?
i. Shareholders who own voting shares elect the directors – MBCA §8.03(c); §7.28(a)
c. Officers:
i. General rule = positions specified in bylaws or designated by BOD – MBCA §8.40
ii. Typical positions:
1. CEO/President
2. CFO/Treasurer
3. Secretary
iii. Same individual may occupy multiple positions – MBCA §8.40(d)
26) Sources of law:
a. State law: internal affairs doctrine
b. Federal law: public corporations.
c. Articles of Incorporation
d. Bylaws
27) Meeting Requirement
e. Baldwin v. Canfield: Directors are given power as a board
i. Agency only as a board
23
 f. Protects Shareholders from unconsidered board action
g. General Rule:
i. Directors must vote in person at a Directors’ Meeting
ii. Cannot vote by proxy
h. Common Law Exceptions:
i. Unanimous approval by all directors
ii. Emergency matters
iii. Unanimous shareholder approval
iv. Majority director/shareholder approval
i. Statutory Exceptions:
i. MBCA §8.20(b): Through means where everyone can simultaneously hear each other
1. Director is present if he participated through the use of any means of communication which
all directors participating may simultaneously hear each during the meeting
ii. MBCA §8.21(a): Unanimous Written Consent
1. Each director signs a written consent
2. Consent describes action taken
3. Must be delivered to the corporation
28) Notice Requirement
j. Notice Details
i. Regular Board Meetings
1. MBCA §8.22(a)
a. No notice required
b. BUT articles or bylaws my state otherwise
ii. Special Board Meetings
1. MBCA §8.22(b)
a. At least 2 days’ notice required
b. Articles or bylaws may state otherwise
c. Must state (a) Date, (b) Time, (c) Place
d. Purpose not needed in notice
iii. Board action without adequate notice is invalid
k. Curing Inadequate notice
i. Each Director Must Waive the Inadequate Notice
1. MBCA §8.23(a): Written Waiver
a. Waive must be:
i. In writing
ii. Signed by director entitled to notice; AND
iii. Delivered to corporation
b. Can be before or after the date and time stated in notice
2. MBCA §8.23(b): Director participates without objection
a. Attendance or participation at the meeting waives notice requirement
b. Unless Director:
i. Objects to the holding of the meeting at the beginning of the meeting; AND
ii. Does not vote after objecting or assent to action taken
29) Quorums
l. Quorum must exist for board action to be valid
m. Quorum Rules
i. MBCA §§8.24(a) – (b)
1. If number is specified: majority of that number
2. If number is unspecified: majority of directors set according to the articles of incorporation or
bylaws
3. Bare minimum that bylaws can allow
a. 1/3 of directors
n. If Quorum is met, Voting Rules:
i. MBCA §8.24(c)
24
 1. Directors must vote on any action board wants to take
2. vote must receive a majority of directors present at meeting to pass
30) Roles and Committees
o. Directors:
i. Elected by shareholders
ii. Oversee enterprise
iii. Appoint officers of firm
iv. Key Concepts
1. Inside/outside director
2. Independent director
3. Disinterested director
p. Independent Directors:
i. Required by NYSE and NASDAQ
ii. Must occupy all seats on:
1. Audit Committee: responsible for appointment, compensation, and oversight of the
corporation’s public accounting firm
a. Must have at least 3 members who are independent directors
b. Must be financially literate
c. One member must have accounting or related financial management expertise
2. Compensation Committee: oversees form and amount of senior executive’s compensation
3. Nominating Committee: responsible for nominating board candidates
G. Corporate Governance: Shareholders
1) Structure:
q. Shareholders Own the Corporation; Directors manage the corporation through the officers they appoint
r. Can only realistically have a say in:
i. Directors
ii. Major structural changes, mergers/other transactions
iii. Amend Articles of Incorporation
31) Special Shareholder Meetings
s. Who has the Power to Call a Special Meeting?
i. MBCA §7.02(a)
1. Board of Directors
2. Persons specified in Articles or bylaws
3. Shareholders representing 10% of shares
a. If they sign, date and deliver written demand for meeting including purpose(s)
b. Articles may fix lower % or higher (but no higher than 25%)
c. Written demand may be revoked
t. Notice Requirements
i. MBCA §7.05
1. Must be given 10 to 60 days before meeting
2. Must state purpose
3. Applies to annual and special
4. Special Meeting Record Date
a. MBCA §7.07(d) – (e): Record Date is day before first notice is sent
1. Right to notice depends on record date
2. Right to vote depends on record date
3. Unless specified otherwise, record date for notice and voting are the
same. BUT record date for voting can be later if set by corp.
ii. Keep in mind:
1. Record Owner versus actual owner
u. Quorum Requirements
i. MBCA §7.25(a)
1. General Rule:
a. Majority of shares entitled to vote
25
 2. Exception:
a. Articles or bylaws may increase the level
v. Shareholder Voting:
i. MBCA §7.25: Minimum Voting Thresholds
1. General Rule:
a. Majority of shares entitled to vote
2. Exceptions:
a. Articles may list alternative scheme
i. Plurality
ii. Supermajority
iii. Absolute Majority
3. Proxies Allowed
4. Means of voting:
a. Participate by conference call
b. Attend meeting
c. Written consent
d. Proxy
ii. Proxy Voting
1. MBCA §7.22
a. Shareholder may vote in person or by proxy
b. Appoint a proxy by signing an appointment or by an electronic transmission
c. Purposes:
i. If shareholder cannot attend a meeting; AND
ii. Wants to vote at meeting
iii. THEN they can appoint a proxy to vote on behalf
iii. Action without Meeting
1. Voting by Unanimous Consent (written)
2. MBCA §7.04(a)
a. General Rule:
i. All shares eligible to vote must affirmative consent in writing
b. Exception:
i. Articles may permit written consent by no less than the minimum number of
shares required to pass a measure
c. Consent requirements:
i. In writing
ii. All must consent
iii. Must bear shareholder’s signature, date and a description of action taken
iv. Must be delivered and filed with firm’s records or meeting minutes
iv. Annual Shareholder Meeting
1. MBCA §8.03(c)
a. Annual meeting is generally where directors are elected
i. Plurality of votes cast at the meeting, unless otherwise in articles (§7.28(a))
v. Electing a Director
1. Minimum Voting Thresholds
a. MBCA §7.28(a)
i. Plurality is sufficient (ONLY for a director not other matters)
ii. BUT MBCA §10.22(a)
1. Bylaw may require a director to serve no more than 90 days if the
director receives more votes against than in favor
vi. Shareholder Removal of a Director
1. MBCA §§8.08(a), (d)
a. Shareholders can remove director(s) with or without cause
i. Unless limited by articles
b. Shareholder must call special meeting
26
 c. Notice and quorum requirements must be satisfied
2. May also be removed by unanimous written consent (§7.04)
3. What counts as for Cause
a. Campbell v. Loews
i. Yes: planned scheme of harassment, disclosing trade secrets, embezzlement
ii. No: Lack of cooperation
iii. No: Plan to take over control
4. Vacancy on the Board
a. MBCA §8.10(a)(2)
i. May be filled by:
1. Shareholders; OR
2. Board of Directors
vii. Shareholder Inspection Rights
1. Shareholder Activism
a. MBCA 16.02(a), (c)(1)
i. Shareholders has a right to inspect corporate records
ii. Certain conditions and restrictions apply:
1. Good Faith
2. Proper purpose:
a. Information relating to shares or dividends
b. Information relating to mismanagement
c. Information relating to litigation
d. Shareholder mailing list
e. Fishing expeditions do not count
b. Barriers to Collective Action
i. Rational apathy
ii. Free riding
c. Institutional Investors
i. Own large blocks of stock
ii. Interests may not overlap

viii. Proxy Solicitation

1. 1934 Act §14(a)
a. Covers any solicitation of a proxy
b. Communication must be reasonably calculated to result in procurement, withholding,
or revocation of a proxy
c. Proxy materials must be filed with SEC
d. Civil liability for material misstatements and omissions
2. 1934 Act §14(a) Exceptions:
a. Person does not seek a proxy; AND
b. Person does not furnish a form of proxy
c. Exceptions to the exception:
i. Issuer
ii. Agent or financer of the issuer
iii. Large shareholders seeking control of the issuer
iv. Person opposing a merger
3. Is it solicitation?
a. Must be reasonably calculated to result in procurement, withholding, or revocation of
a proxy
b. Studebaker and Smallwood
i. Same basic facts went two different ways
1. Studebaker:
a. Soliciting authorization was subject to proxy rules even if
the request was not part of a planned proxy solicitation
27
 2. Smallwood
a. Advertisement not solicitation because served a public
interest independent of the decision
c. Long Island Lighting Company
i. Facts:
1. In a local political campaign, candidate Matthews urged public
ownership of the Long Island Lighting Co. (LILCO) (P).
2. After acquiring shares in LILCO (P), Matthews called for a special
shareholders’ meeting to consider his proposal. A public interest
group favorable to Matthews’s proposal thereafter published a
newspaper advertisement accusing LILCO (P) of mismanagement
and other misconduct and urged support for public ownership.
3. LILCO (P) sued, claiming the advertisement was an unfiled proxy
solicitation and was false and misleading.
4. The district court concluded that the advertisement was not a proxy
solicitation because it was published in a general publication and
could only indirectly affect the proxy contest.
ii. Held: The federal proxy regulations apply to all direct and indirect
communications respecting proxies.
1. Just looking to see if reasonably calculated, regardless of form of
communication

32) Shareholder Proposals

w. Key Themes:
i. State law establishes a shareholder’s right to vote on Certain matters
ii. SEC Rules set out a procedure for asserting that right
1. SEC positions have shifted over the years
iii. What is at stake:
1. Access to the company’s proxy materials
x. State Law Foundations
i. MBCA Relevant Provisions
1. §8.01(b)
a. Powers of Board
2. §7.02(a)(2)
a. Special Shareholder Meetings
3. §10.20
a. Bylaw amendments
4. §2.06(b)
a. Bylaw requirements
ii. Auer
1. Facts/Shareholder proposals:
a. Endorsement and reinstatement of former president
b. Bylaw allowing shareholders to fill Board vacancies
c. Vote to remove directors for cause
d. Bylaw reducing quorum for Board meetings
2. Court found no reason why not entitled to vote on all of these proposals
a. Inherent power to remove directors, amend bylaws
y. Federal Law
i. Shareholder Proposal Rule
1. SEC Rule 14a-8
a. Steps:
i. Shareholder asks BoD to include proposal in proxy material
ii. Certain minimum ownership and other requirements apply
iii. BoD asks SEC staff to take no action if it excludes the shareholder proposal

28
 b. Eligibility and Submission Procedure
i. Must continuously have held at least 1% or 2000 worth of company and
continue to hold shares and present at the meeting
ii. May not submit more than 1 proposal
c. Interpretive Process
i. No Action Letters
1. Shareholder sends letter to the company for the proposal
a. If company declines, must end a letter to SEC saying it
declined the proposal and why
i. SEC then makes ruling
ii. ADR that puts SEC as arbiter
d. Grounds for BoD exclusion of proposal
i. Improper under state law
ii. Relevance
1. If proposal relates to operations which account for less than 5% of
the company’s total assets and is not otherwise significantly related
to company’s business
a. Exclude de minimis economic debates
b. Loveheim
i. Foie Gras barely mattered, but was relied on
ethical and social significance
iii. Management functions
1. Ordinary Business versus Public Policy
2. Ordinary Business versus Public Policy
a. Medical Committee
i. Amend articles to bar sale of napalm to buyer who could not assure it would
not be used on human beings
b. Release No. 12,999
i. Proposals involving substantial policy considerations may not be excluded
ii. Exception to ordinary business operations rule
c. Cracker Barrel
i. Nondiscrimination against employees
1. Before: Ordinary business operation
2. After: Substantial social policy question
d. Trinity Wall Street
i. Required board to weigh risk of selling certain firearms
ii. Look to subject matter of proposal
iii. Does it relative to ordinary business operations?
1. Then look to
a. Does proposal raise a significant policy issue?
b. If so, does it transcend ordinary business operations
iv. Here no, because retail company deciding what they retail
e. Staff Legal Bulletin No. 14E
i. Not all proposals that require company to weigh risks can be excluded
ii. Depends on whether the underlying subject matter transcends day to day
business matters
3. Directors and Bylaw Changes
a. SEC Rule 14a-8(i)(8)
i. BoD can exclude shareholder nominated candidate for BoD in proxy
materials
b. AFSME
i. BoD cannot exclude bylaw change to the procedure for including
shareholder nominated candidates in proxy materials
33) Mergers
29
 z. Major Questions:
i. Does a Shareholder have a Right to Vote?
ii. Does a Shareholder have a Right to an Appraisal of her Shares?
aa. Types of business combination:
34) Statutory merger
bb. P (purchaser/acquirer/survivor) gives shares to T (target) shareholders; T merges into P
cc. Before: P shareholders  P. T shareholders  T. P gives P shares to T shareholders. T becomes
P.
dd. After: P & T shareholders  P
ee. Value of shares you want P to issue T shareholders will want to be equivalent in value to T shares
you’re giving up. If T share is worth $1 and P share is worth $0.50, will want 2 P shares for every
T share you’re giving up. Economics will dictate how many shares in P have to be issued to T
shareholders.
35) Triangular Merger
ff. P forms S; P gives shares to T shareholders, T merges into S
gg. Before: P shareholders  P  S (subsidiary). T shareholders  T. P gives P shares to T
shareholders, T merges into S.
hh. After: P & T shareholders  P  S. S is wholly-owned subsidiary of P.
ii. Instead of having one unified company consisting of old acquirer and its target, we have kept
business operations separate
i. More closely-tailored management
ii. Long-term severability  will be easier to sell down the road should we have to
iii. Protect P’s assets from T’s liability exposure
jj. This is a popular structure
36) Share Exchange
kk. T shareholders swap T shares for P shares; P owns T afterwards
ll. Before: P shareholders  P. T shareholders  T. T shareholders give T shares to P. P gives P
shares to T shareholders.
mm. After: P and T shareholders  P  T
i. T remains. T shareholders are giving their T shares to P. P now owns all of the shares to
T but T still exists/ is now a subsidiary of P. When a corporation owns all of the shares of
another, the other corporation becomes the subsidiary.
ii. Nothing stopping P from giving cash to T shareholders in exchange for T shares instead
of giving P shares. Why would P prefer to give shares?
1. Might not have the ability give out that much cash/issue of liquidity.

Shareholder Voting Rights in Corporate Combinations

MBCA Approach
Form of Corporate
Parent Corporation Target Corporation MBCA Section
Combination
Shareholders Shareholders
Yes, if share dilution will 11.04(b), (h)
Statutory Merger Yes
occur 6.21(f)(1)
Yes, if share dilution will 11.04(b), (h)
Triangular Merger Yes
occur 6.21(f)(1)
Yes, if share dilution will 11.04(b), (h)
Share Exchange Yes
occur 6.21(f)(1)
Yes, if no significant
Yes, if share dilution will 6.21(f)(1)
Asset Sale (not on exam)* continuing business activity
occur 12.02(a)
will remain

Shareholder Appraisal Rights in Corporate Combinations

Form of Corporate MBCA Approach MBCA Section
Combination (if shares are not publicly traded)
30
 Parent Corporation Target Corporation
Shareholders Shareholders
Statutory Merger No Yes* 13.02(a)(1)
Triangular Merger No Yes* 13.02(a)(1)
Share Exchange No Yes* 13.02(a)(2)
Asset Sale No Yes* 13.02(a)(3)

*No Appraisal Rights If Target Company is Publicly Traded*

nn. Issuing Stock in Corporation to Accomplish Merger
i. BOD cannot unilaterally issue stock in the corporation to accomplish a merger/combination if the test
in 6.21 is met.
ii. MBCA §6.21(f)(1)
1. If the conditions below are met, shares cannot be issued unless
2. Shareholders meet (after adequate notice)
3. Majority of eligible shares are present (quorum)
4. Shareholders vote to approve transaction
5. Dilution
a. If
i. Shares are being issued for consideration other than cash or cash
equivalents; AND
ii. Voting power of shares issues are more than 20% of shares that were
outstanding immediately before the transaction
37) Voting on mergers
oo. BOD cannot unilaterally issue stock in the corporation to accomplish a merger/combination if the test
described in MBCA §6.21(f) is met
pp. Voting Rights in General – MBCA §6.21(f): If the conditions described in §6.21(f)(1) are met, shares cannot
be issued unless:
i. The shareholders meet (after adequate notice)
ii. A majority of eligible shares are present (quorum)
iii. Shareholders vote to approve the transaction
qq. What conditions trigger §6.21(f)/MBCA General Approach for Voting:
i. Shareholders of the surviving corporation vote on mergers only if:
1. (a) the corporation does not receive cash for issuing additional stock, and
2. (b) the newly issued stock represents over 20% of the voting power of all currently
outstanding shares
rr. Shareholders of the target corporation must vote in all transactions – MBCA §11.04(b)
38) Voting on Asset Sales – MBCA §12.02
ss. If the transaction leaves the corporation without a significant business activity,
i. then the shareholders of the target corporation must vote to approve it.
tt. A significant continuing business activity equals NO LESS THAN:
i. 25% of either pre-sale assets, AND
ii. 25% of either
1. Revenues from continuing operations, or
2. Profits from continuing operations
39) Appraisal Rights
uu. If you’re a shareholder of the target and you don’t like the terms of the deal. If you vote no, you have appraisal
rights  let’s give question to judge and let judge figure out if what P is offering you is a fair price
vv. P Corp. Shareholders do not have appraisal rights in MBCA approach for corporate combinations
ww.If shares are not publicly traded, T Corp. shareholders have appraisal rights for all corporate combinations
xx. Appraisal rights only exist for the target shareholders
yy.
zz. Selling Assets to Accomplish Merger
i. MBCA §12.02(a)

31
 1. If the sale leaves the corporation without a significant continuing business activity, then
shareholders MUST VOTE
2. Significant Continuing Business Activity Test:
a. Corporation retains a SCBA if:
i. 25% of total assets at the end of recent fiscal year are retained; AND
ii. 25% of income or revenues
40) Voting to Amend Articles of Incorporation
aaa. Voting that Affects Everyone
i. General Rule: MBCA §§7.21(a), 10.03(b)
1. Shareholders owning voting stock can vote
ii. Exception: MBCA §10.04(a)
1. Nonvoting stock can vote on matters affecting them
bbb. Voting that Affects Special Group
i. Special Rule: MBCA §10.03(e)
1. If an issue affects a class of shares, the measure requires majority approval of
a. All shares represented at the meeting; AND
b. All the affected class of shares represented at the meeting
ccc. Voting Issues Affecting Multiple Groups
i. MBCA §10.03(e)
1. Count each group separately
ii. BUT, MBCA §10.04(c)
1. Count each group together in cases where the measure affects them in a substantially similar
way
H. Litigation
1) Purposes
ddd. Hold BoD accountable
eee. Collective action problems
fff. Key role of Plaintiff’s attorneys
ggg. Rules account for peculiar dynamics
41) Differences between Direct or Derivative
hhh. ALI Principals of Corporate Governance, §7.01
i. Injured Party
1. Direct: someone who suffered a legal injury independent of other shareholders
2. Derivative: on behalf of the corporation itself to redress an injury suffered by the corporation
or enforce a duty owed to corporation
1. In a derivative lawsuit  injured party = corporation. Typical claim = corporation has been
injured by a director who has failed to observe their fiduciary duties to the firm. Directors’
duties run to the firm. When directors fail to live up to those duties, it is the firm that is
injured
ii. BoD Power over Litigation
iii. Payment of Attorney Fees
iv. Recipient of Remedy/Recovery
v. Examples: Tooley
1. BOD breached duty of care  derivative
2. Directors breached duty of loyalty  derivative
3. BOD didn’t disclose all material facts to shareholders before seeking their approval  direct
4. BOD’s failure to pay dividend  direct
5. Dilution of voting rights  direct
6. Oppression of minority shareholders  direct
iii. Requirements:
i. Adequacy
1. Fuqua
a. Facts:

32
 i. Both plaintiffs didn’t really know what was happening, mostly led by their
attorneys
b. Plaintiff shareholder is not disqualified where:
i. Competent advisors and attorney represent shareholder; AND
ii. Disabling conflicts are absent (conflict of interest)
ii. Standing
1. MBCA §7.41: Derivative
a. Shareholder initiating the suit must:
i. Own shares when the wrongful act occurred
ii. Own shares when the suit is filed
iii. Own shares throughout litigation, AND
iv. Fairly and adequately represent interests of the corporation (represented by a
qualified attorney)
b. Fuqua
2. FRCP Rule 23: Direct Actions
a. Shareholder initiating the suit must fairly and adequately represent interests of the
class
jjj. Procedure
i. Inspection of Books and Records
1. MBCA §16.02(c)
a. Shareholder must:
i. Act in good faith
ii. Have a proper purpose
iii. Describe records desired with reasonable particularity
b. Records must be directly connected with shareholder’s proper purpose
2. Einhorn
a. Proper purpose:
i. Reasonably related to one’s interest as a shareholder
b. If proper purpose exists:
i. Access not limited to items dated after shares acquired
ii. Items not prepared by the company but in its possession count
3. Seinfeld
a. Shareholder must present evidence that establishes a credible basis to infer a
legitimate to infer a legitimate concern about misconduct in deny access to records
4. Saito v. McKesson
a. A stockholder has the right to make a written demand to inspect corporate books and
records for a purpose reasonably related to such person’s interest as a stockholder.
i. Limited to the scope necessary for the purpose
ii. Not an HBO shareholder so did not need information pre-merger when HBO
was independent of McKesson
ii. Make a demand
1. MBCA §7.42(1):
a. Shareholder must first ask board to assert claim
iii. Termination when Demand is Excused
1. Best Interests of the Corporation:
a. Auerbach: Apply BJR
b. Zapata: Court applies its own business judgment
iv. MBCA §7.44(a): Board Proceeding
1. Court must dismiss the derivative proceeding if one of the groups has determined in good
faith after conducting a reasonable inquiry that the maintenance of the derivative proceeding
is not in the best interests of the corporation
2. (b)(1):
a. Majority vote of qualified directors present at a meeting where there is a quorum
3. (b)(2): Special Litigation Committee
33
 a. SLC had at least 2 qualified directors
b. Qualified directors appointed SLC members
c. SLC determined that it was not in best interests of the corporation to pursue the claim
d. Decision made in good faith after a reasonable inquiry
4. MBCA §1.43(a)(2): Qualified Director
a. Disinterested: No material interest in the outcome
i. MBCA §1.43(b)(2): Material Interest
1. Any actual or potential benefit or detriment
2. That can reasonably be expected to impair objectivity of director
3. If devolves to corporation, does not count
b. Independent: No Material relationship with an interested director
i. MBCA §1.43(b)(1): Material Relationship
1. Relationship: familial, financial, professional, employment
2. Reasonably expected to impair the objectivity of director
c. MBCA §1.43(c): Factors that will not prevent a director from being a qualified
director
i. Nomination or election to SLC by directors who are not qualified directors
ii. Nomination or election to SLC by persons who have a material relationship
with the director
iii. Serving on another Board with a director who is not a qualified director
iv. Status as a named defendant
v. MBCA §7.44(d): Burden Shifting
1. If directors who rejected litigation are NOT independent/qualified directors
a. MUST SHOW decision was made in good faith after a reasonable inquiry
vi. Dual Representation
1. Never- D.N.J., N.D. Ca., N.D. Ill., 7th Cir.
2. Sometimes: 3d Cir., M.D. Pa.
3. MRPC 1.13: Depends on Nature of Claim
4. ALI §131: Ok if unanimous BoD rejects case
kkk. Litigation Pathway
i. Shareholder seeks documents
ii. Shareholder makes demand
iii. BoD forms SLC
iv. SLC rejects case/90 days pass
v. Shareholder files suit
vi. BOD moves to dismiss
vii. Shareholder seeks discovery
viii. Shareholder Challenges
lll. Remedies
i. Settlement
1. MBCA §7.45
a. Require court approval
b. Require notice to shareholders if court determines that it will substantially affect their
interest
2. Any settlement must be fair (is recover adequate compared to potential recovery at trial?)
a. Inclined to approve settlement offers
3. Disparity in Money flow
4. P’s Expenses- Court may order the corporation to pay the P’s expenses incurred in the
proceeding if it finds that the proceeding has resulted in a substantial benefit to the
corporation – MBCA §7.46(1)
I. Corporations and Fiduciary Duties
1) Duty of Care
mmm. 3 Categories:
ii. Decision Making
34
 iii. Oversight
iv. Informed Decisions
nnn. MBCA §8.30(b)
i. Director must discharge the duty to be informed with the care that a person in a like position would
reasonably believe appropriate under similar circumstances
ii. Duty applies to director’s decision-making function and the oversight function
iii. Objective standard of conduct
iv. MBCA §8.31(2)(ii)(B): Standard of Liability
1. Liable if the conduct was a result of a decision as to which the director was not informed to
an extent the director reasonably believed appropriate in the circumstances
ooo. MBCA §8.31(a)(2) and (b)(1) (USE FOR ALL DUTY PROBLEMS)
i. Duty
ii. Breach
iii. Causation (proximate)
iv. Damages (monetary harm to corporation)
ppp. Reliance on Others
i. MBCA §8.30(d), (f)
1. Director can rely on others who the director reasonably believes to be:
a. Employees: reliable and competent in the functions performed
b. Attorneys and accountants: expertise within their professional field or
c. Committee of the Board: merits confidence
2. The focus is on the MANNER/PROCESS in which the director performs his duties, not
whether her decisions are correct. Did you do the common-sense thing that someone in your
position would be expected to do before making a decision? Not evaluated by outcome of the
decisions themselves
3. The BOD is generally evaluated as a unit so that the deficiencies of one director are offset by
the work performed by others
4. Tort concepts of negligence do not apply
qqq. Scope of the Rule
i. BUSINESS JUDGEMENT RULE
1. General Rule: Courts do NOT second guess the decisions made by corporate directors. BJR
encapsulates the court’s deference to board’s decisions.
ii. Presumptions
1. Director acted on an informed basis
2. Director acted in good faith
3. Director acted in the best interests of the company
a. See Aronson v. Lewis
b. See also Comments to MBCA §8.30(b)
4. Directors must discharge their duties with the care that a person in a like position would
reasonably believe appropriate under similar circumstances – MBCA §8.30(b)
5. Winchester – REASONABLE is the key word to invoke
a.
iii. Outer Limits of BJR
1. Wrigley
a. Deferred to judgment that day games only were fine
b. Demonstrates intense deference to business judgment
c. Does not matter if wrong, just judgment
iv. BJR will not apply when:
1. Fraud
2. Illegal conduct
3. Waste
a. Substantive standard
b. Legal standard of waste (Grobow v. Perot):

35
 i. What the corporation has received is so inadequate in value that no
reasonable person would deem it worth that with the corporation paid, i.e.,
the decision had NO RATIONAL BASIS, no rationality, no win
ii. General rule: If directors acted in good faith, then even wasteful decisions
can be protected by the business judgment rule (Shlensky v. Wrigley; Kamin
v. American Express – see page 43)
rrr. Breaches
i. MBCA §8.31(a)(2)
1. Director did not act in good faith
2. Director did not reasonably believe a decision to be in the best interests of the firm
3. Director breached duty to make informed decisions
4. Director was not independent or disinterested
5. Director failed to provide adequate oversight
ii. Failure to Supervise Ongoing Business Activities (Oversight)
1. Failure to supervise ongoing business activities: Francis
a. Facts:
i. Shareholders, wife and sons
ii. Sons did whatever they wanted, comingled funds, etc.
b. Held: Breach of Duty of Oversight, RARE INSTANCE
c. Rule, Duty of Oversight includes:
i. Rudimentary understanding of the business
ii. Read financial statements
iii. Monitoring corporate affairs and policies
iv. Attending board meetings regularly
v. Making inquiries into questionable matters
d. Note distinction b/t Wrigley directors consciously choosing not to do something &
Francis who made no attempt to do anything
iii. Implement Monitoring Functions (Failure to catch criminal activity)
1. Graham
a. Board has a duty to install a system of monitoring to ferret out wrongdoing ONLY if
there was reason to suspect employees were not complying with applicable law and
regulations
2. In re Caremark
a. Facts:
i. Firm pays 250 million in a plea to settle a criminal case
ii. Shareholder sues to recover money from BoD, failed to actively monitor
management
b. Held: No Breach
c. Rule:
i. BoD must exercise a good faith judgment that the firm’s information and
reporting system exists and is adequate to provide the BoD with timely
information about the firm’s compliance with the law
ii. Needs a sustained and systematic failure to exercise oversight to establish a
lack of good faith
iv. Duty to be Informed
1. Smith v. Van Gorkum
a. Facts:
i. Van Gorkum agreed to buyout a third party for 55 a share
ii. No evidence of how 55 was fair
iii. Senior management disagreed
1. Board agreed with Gorkom 2 hours after meeting without any
review of agreement
b. Held: Uninformed

36
 i. Legal standard: Gross negligence  looks like the failure to undertake an
inquiry into the company’s intrinsic value/relying on current trading
price/collective expertise is insufficient
ii. No reasonably inquiry into fair value
iii. Feasible price ≠ fair value
iv. Market price reflects a minority discount
v. Expertise of BoD is no substitute for knowing fair price
vi. Reliance on advice from attorney does not replace need to know fair price
c. Dissent: Board is more than qualified to make this decision
sss. Causation:
i. Π must show:
1. Company would have avoided loss if director had performed his duties
2. Burden on π to show director’s breach of duty was proximate cause for loss
a. See Barnes
ttt. Presumption for Defendant
i. Courts do NOT second guess the decision made by corporate directors
ii. Step 1: Presume (Aronson v. Lewis)
1. Director acted on an informed basis
2. Director acted in good faith
3. Director acted in the best interest of the company
iii. Step 2: π must show
1. Fraud
2. Illegal Conduct; or
3. Waste of corporate assets
a. No rational basis
b. See Wrigley (this didn’t even amount to waste)
iv. Step 3: Burden Shift Back to ∆, ∆ must show:
1. Transaction was fair
a. Fairness encompasses fair dealing and fair price
i. Fair dealing refers to the process of making the decision
1. Pressure
ii. Fair price refers to a range of values that independent parties might agree to
in an arm’s length transaction
uuu. Director Protections from Financial Liability
i. Exculpation
1. MBCA §2.02(b)(4)
a. Protects a director from financial liability for certain wrongful acts
b. May be contained in articles of incorporation or bylaws
c. Does not protect against
i. Receipt of an improper financial benefit
ii. Intentional infliction of harm
iii. Unlawful distributions
iv. Intentional violation of criminal law
d. Exculpatory clauses (can be added into articles to offer forgiveness in advance)
i. Legal protection that could have been made available to cover the conduct in
Francis, Caremark, and Smith because that conduct didn’t fall into any of the
categories of §2.02(b)(4)
ii. Procedural safe harbors
iii. Indemnification
1. Reimbursement for reasonable expenses incurred by director
2. MBCA §8.52
a. Mandatory is director prevails in a suit against him
3. MBCA §8.51
a. Permissible when:
37
 i. Director acted in good faith;
1. Reasonably believed conduct was in best interest, and not opposed
to best interests of the corporation; and
2. If criminal, no reasonable conduct to believe conduct was unlawful
ii. Conduct which makes broader indemnification permissible
b. Does not protect against:
i. Receipt of a financial benefit to which the director was not entitled
ii. Intentional infliction of harm
iii. Unlawful distributions
iv. Intentional violation of criminal law
iv. Advances by Corporation
1. MBCA §8.53
a. Are permitted
b. BOD or Shareholders must authorize
c. Director must agree to pay amounts that are not entitled to mandatory
indemnification

v. Insurance
1. MBCA §8.57
a. Available to cover liabilities in excess of those covered by exculpation and
indemnification
b. Corporation pays premium
c. Standard practice for the corporation to buy insurance for a director
d. Does not cover
i. Dishonest, fraudulent, or criminal acts
ii. Claims alleging conduct by directors or officers detrimental to the
corporation for their own personal gain or profit
iii. Claims involving ERISA, libel and slander, bodily harm or property
damages, and pollution
iv. Claims against a director or officer brought directly by the corporation
42) Duty of Loyalty
vvv. Conflict of Interest
i. Two Step Process:
1. Is there a conflict of interest between a director and corporation?
2. Should the transaction be allowed despite the presence of the conflict?
ii. MBCA §8.60: Situations Creating a DCIT (Directors Conflicting Interest Transaction)
1. Director is a party to the transaction
2. Director has a material financial interest in the transaction
3. Director is related to a person who is a party to the transaction
4. Director is related to a person who has a material financial interest in the transaction
a. Material Financial Interest
i. Financial interest in a transaction that would reasonably be expected to
impair the objectivity of the director’s judgment
b. Related Person
i. Spouse
ii. Child, parent, grandchild, etc.
iii. Entity controlled by director
iv. Other in statute (Transaction between corp and a director, director is on
board of both corps)
iii. Key Considerations:
1. Corporation can engage in a transaction with an interested director
2. Interested director does not breach any fiduciary merely because a conflict exists
a. BJR does not apply when the board approves a transaction in which a director has an
interest
38
 i. Violates assumption director’s judgment must be independent
3. Remedy when a conflict exists- Void the transaction
www. Methods Around A Conflict of Interest
i. MBCA Subpart F
ii. MBCA §8.61(b): Transaction involving an interested director will survive a legal challenge from a
shareholder by:
1. Directors or a Board Committee Compliance with MBCA §8.62
2. Shareholders Compliance with MBCA §8.63
3. Action was fair to the corporation
iii. Director Action
1. MBCA §8.62(a)(1)
a. Majority (at least 2) of qualified directors must approve the transaction
b. Qualified directors must receive a required disclosure before voting
c. Qualified directors must deliberate outside the presence of any other director
d. Qualified directors must vote outside the presence of any other director
i. MBCA §1.43(a)(4): Qualified Director
1. Not
a. A director with a conflicting interest; OR
b. A director who has a material relationship with a director
with a conflicting interest
i. MBCA §1.43(b)(1): Familial, financial,
professional, employment or other relationship,
that would reasonably be expected to impair the
objectivity of the director’s judgment when
participating in the action be taken
2. MBCA §8.61(b)(1)
a. If these conditions are met, any challenge on the grounds of a conflicted director fails
iv. Committee Action
1. MBCA §8.62(a)(2)
a. Majority of at least 2 qualified directors must approve the transaction
b. Qualified directors must receive a required disclosure or modified disclosure
c. Each committee member must be a qualified director
d. Only qualified directors can appoint the members
i. MBCA §8.60: Required Disclosure
1. Disclosure of:
a. Existence and nature of director’s conflicting interest; AND
b. Facts that director knows that he would reasonably believe
to be material in deciding whether to proceed with
transaction
2. MBCA §8.61(b)(1)
a. If these conditions are met, any challenge on the grounds of a conflicted director fails
v. Shareholder Action
1. MBCA §8.63(a)
a. Majority of qualified shares must approve the transaction
b. Qualified shares must receive a notice describing the transaction before voting
c. Qualified shares must receive a required disclosure before voting
d. Director with the conflicting interest must identify the number of shares that are not
qualified shares
e. Director with the conflicting interest must identify the persons who do not own
qualified shares
i. MBCA §8.63(c): Qualified Shares
1. All shares entitled to vote with respect to transaction except:

39
 a. Shares the officers know or have been notified are held by
(1) a director who has a conflicted interest; OR (2) a related
person of the director
ii. MBCA §8.60: Required Disclosure
1. Disclosure of:
a. Existence and nature of director’s conflicting interest; AND
b. Facts that director knows that he would reasonably believe
to be material in deciding whether to proceed with
transaction
2. MBCA §8.61(b)(1)
a. If these conditions are met, any challenge on the grounds of a conflicted director fails
vi. Transaction’s Fairness to the Corporation
1. MBCA §8.61(3)
a. Conflicting interest action cannot be challenged if the transaction is shown to be fair
to the corporation even if there are directors with conflicting interests
b. Fairness = Beneficial to the Corporation §8.60
2. Procedural Fairness
a. Director’s dealings with the corporation must be fair
i. A majority of “qualified directors” approved the transaction– MBCA §8.62
ii. The qualified directors received a “required disclosure” before voting –
MBCA §8.62
1. Qualified directors must be disinterested and have no material
relationship w/ an interested director (independence)
iii. Compliance insulates the transaction from judicial scrutiny
3. Substantive fairness
a. Price and terms must be comparable to an arm’s length transaction
vii. In re Walk Disney Company
1. Facts:
a. Shareholder challenged independence of two board members who voted on an
employment agreement
i. President of G-Town received over a million from the person
ii. Bowers principal of person’s kids
b. Both directors independent!
i. Likely MBCA outcome
viii. Oracle
1. Facts:
a. Board appointed two new directors to SLC
b. One was a former student of a ∆
i. Deciding whether or not to donate to alma matter
2. Not independent
a. Shows what could be a conflicting interest
xxx. Corporate Opportunity Doctrine
i. Director cannot exploit a business opportunity that belongs to the corporation
1. Part of duty of loyalty
2. No exculpation or indemnification available
ii. Procedures to Comply if Corporate Opportunity is Presented
1. MBCA §8.70
a. Director takes advantage of business opportunity, director must:
i. Bring it to attention of the corporation AND EITHER:
1. Directors act in compliance with MBCA §8.62; OR
2. Shareholders act in compliance with MBCA §8.63, OR
3. Duty to offer has been limited or eliminated in articles
ii. MBCA §1.43(a)(4): Qualified Director
1. Not
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 a. A director with a conflicting interest; OR
b. A director who has a material relationship with a director
with a conflicting interest
i. MBCA §1.43(b)(1): Familial, financial,
professional, employment or other relationship,
that would reasonably be expected to impair the
objectivity of the director’s judgment when
participating in the action be taken
2. If the individual complied with section §8.70(a), then a shareholder cannot attack director for
having exploited a business opportunity that belong to the corporation
iii. Tests to Determine Whether an Opportunity is a Corporate Opportunity
1. In General:
a. Firm can financially undertake
b. Within firm’s line of business
c. Advantageous to firm
d. Firm has an interest or reasonable expectancy
i. See Guth
2. Interest or Expectancy Test
a. An opportunity which the firm would expect to receive even if it has no contractual
right to it
b. An opportunity which, in the ordinary course, the corporation would expect to
receive
3. Line of Business
a. Firm has fundamental knowledge and practical experience in the area
b. The opportunity is adaptable to the existing business
c. The opportunity is consonant with the firm’s needs and aspirations for expansion
4. Fairness (Very Vague)
a. Court looks to a number of factors to determine the overall fairness of the situation
between director and corporation—unpredictable results
b. Essentially asks what is fair and equitable; did director satisfy their duties to the
firm?
5. Burg v. Horn
a. Facts:
i. Corporation formed to buy and sell real estate. Horns purchased real estate
and did not offer to corporation first
b. Look to relationship between director and corporation
i. Fact sensitive to determine whether there is a duty to offer all opportunities
or not
6. Farber
a. Facts:
i. Directors of Servan Land (D) purchased land adjacent to property owned by
Servan (D), and Farber (P) claimed the purchase was a taking of a corporate
opportunity.
b. Director may not, in opposition to the corporation, acquire a business opportunity
that would fit into the corporation
i. Does not need to be of the utmost importance
yyy. Defenses
i. Offered and rejected by firm MBCA §8.70
ii. Corporation lacked financial capacity to take advantage
zzz. Remedies
i. Usually profits realized by the director on theory of unjust enrichment
ii. Profits realized by the Director
43) Good Faith
aaaa. MBCA §8.31(a)(2)(i)
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 i. Director who does not act in good faith when discharging his/her responsibilities is potentially
personally liable to the corporation and the shareholders
ii. MBCA §8.51
1. Corporation cannot indemnify a director who did not act in good faith
bbbb. Types of Bad Faith (Walt Disney)
i. Intent to do harm (bad faith)
1. Subjective bad faith
ii. Intentional dereliction of a known duty (bad faith)
1. Conscious disregard
iii. Grossly negligent conduct (DOC)
1. Fiduciary duty taken solely by reason of gross negligence without malevolent intent
2. Only one that can be indemnified and exculpated under MBCA §8.51
3. See McPadden
cccc. Examples
i. Stone
1. Facts:
a. Company paid 50 million in fines and penalties because employees did not file SARs
b. Board previously instituted a monitoring system to ensure that SARs were filed
2. Held: No conscious disregard because no sustained and systematic failure to exercise
oversight by BoD
ii. ATR-Kim
1. Facts:
a. Board chair and 90% owner transferred key assets to firms owned by families
b. Two directors knew and ignored this
2. Held: jointly liable with board chair
iii. McPadden
1. Facts:
a. Board sold a business unit to a management team for 3 million
b. 2 years earlier, competitor offered 25 million
c. 2 year later, buyer sold unit for 25 million
2. Held: Grossly negligent
a. Reckless indifference- protected by exculpation
J. Controlling Shareholders
1) Controlling Shareholder Duties
a. Forms and Sources of Control
i. Voting
1. More than 50% stock can just vote all the directors
ii. Incumbency
1. Can usually have power to nominate candidates for election
iii. De facto/Practical
1. Owns less than 50% but can ostensibly mobilize enough votes to elect a majority
b. Cash Out Mergers
i. Background Rules
1. Merger is a business decision that is generally protected by BJR
2. MBCA §11.04(a) – (b)
a. Board and shareholders must approve a merger
3. MBCA §7.25(c)
a. Votes in favor must outnumber those opposed
ii. Process
1. Parent owns less than 100% of sub stock
2. Parent forms wholly owned Newco
3. Parent transfers sub stock to Newco in exchange for all Newco stock
4. Newco cashes out minority owners of Sub
5. Dissenting Owners get appraisal rights
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 iii. Objective
1. Eliminate duties to minority owners
2. Allow for efficient self-dealing transactions
3. Eliminate securities reporting obligations
4. Use cash in Sub to service debt assumed to finance acquisition
iv. Standard of Review
1. Controlling shareholders have burden to show entire fairness of the transaction
a. Sterling
v. Defendants may shift the burden to plaintiff if:
1. Show that transaction was approved by a well-functioning committee of independent
directors; or
a. Kahn v. Lynch (Lynch I)
i. Facts:
1. ∆ acquired a third of a company
2. Part of the agreement created a supermajority approval of any
merger
3. ∆ also added representation on board
4. The company wanted to buy a new company, but ∆ said no, buy our
subsidiary
5. ∆ then decided to buy the company outright
6. It was a take it or leave it offer because the need for the
supermajority
7. Offered a pretty low price
ii. Shareholder owes a fiduciary duty if it owns a minority interest or, in effect,
exercises control over the business affairs of the corporation
iii. ∆ was a controlling shareholder, so owed a duty of fairness in price and
dealing
iv. Could not find suitors and were threatened with an unfriendly tender offer
v. Powerless to refuse, no bargaining power
2. Approved by an informed vote of a majority of minority shareholders
a. Weinberger
i. Facts:
1. Signal owned >505 of UOP
2. Proposed cash-out merger at 20-21 when UOP was trading at 14.50
3. Up to 24 would be a good investment
a. Never disclosed to BoD or shareholders
4. Most minority owners approved
ii. No Fair Dealing or Fair Price
1. Timing of the deal, how deal initiated, structured, etc.
iii. Minority s/h in a cash-out merger are entitled to damages based on their
shares' fair value if the merger’s approval was obtained on less than full
disclosure and its terms were unfair
1. But See Rosenblatt: Narrowed to appointed directors on UOP’s
board who thus stood on both sides of transaction
iv. Rule: Transaction must be entirely fair (fair price and fair dealing)
1. Controlling shareholder has burden of proof
v. Exception: If transaction is approved by a majority of the minority owners
(fully informed)
1. Plaintiff must show the transaction is unfair
vi. Remedy: Appraisal rights for dissenting shareholders
3. If BOTH, BJR applies:
a. Kahn v. M&F (M&F)
i. Facts:
1. Appeal of final judgment
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 2. Merger needed a special committee of independent directors AND
majority of qualified s/h
ii. Rationale:
1. Undermining influence is no longer present
2. Adequately protected
3. Consistent with law
4. Focus on PRICE
iii. BJR will be applied if:
1. Approval of both special committee and majority of minority
stockholders
2. Committee is:
a. Independent
b. Can select own advisors and can say no
c. Meets duty of care in fair price
3. Minority is:
4. Informed
5. Not coerced
44) Transaction within Corporate Groups
a. If:
i. Parent controls subsidiary; AND
ii. Parent engages in self-dealing with subsidiary
b. Then:
i. Parent must show actions are intrinsically fair to the minority owners
c. Self-dealing:
i. Parent company uses its power to enter into a transaction with the subsidiary and the parent company
receives a benefit from a subsidiary to the subsidiary's detriment
ii. Sinclair Oil Corp v. Levien
1. Facts:
a. Claimed:
i. Excessive dividends
ii. Business opportunities denied
iii. Breach of K
2. Court held: Not unfair for 2/3 because dividends here were excessive, they were not at the
detriment of the subsidiary/minority s/h's. They all get the dividends
45) Sale of Controlling Interest
l. First question, is there sufficient control
i. If no control, no duty
ii. If control, possibly duty
m. Then ask if there are actions giving rise to a duty of care
n. Harris
i. Facts:
1. Harris (P) was a minority shareholder of Atlas Energy Corporation, in which a group
including Carter (D) owned a 52% interest.
2. The Carter group (D) entered into a Stock Purchase Agreement with Mascolo (D), whereby
the Carter group (D) agreed to exchange its Atlas stock for Mascolo’s (D) shares in
Insuranshares of America (ISA) and contemplated a later merger of the two companies.
3. In the Stock Purchase Agreement, Mascolo (D) represented that ISA entirely owned two
insurance subsidiaries, which statement the plaintiffs claim was false.
4. Although Atlas’s chief financial officer questioned the accuracy of the financial statement,
the Carter group (D) did not pursue them.
5. Finally, the Purchase Agreement called for the resignation of the Carter group (D) directors,
with the assurance that directors designated by Mascolo (D) would be appointed.
6. The Carter group (D) moved to dismiss the complaint for failure to state a claim for which
relief can be granted, claiming that it owed no duty to the plaintiff.
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 ii. Held: Duty of Care breached, gave rise to inquiry
1. Pretty egregious facts
iii. Rule
1. If
a. circumstances alert a reasonably prudent person to a risk that his buyer is dishonest
or untruthful in a material way
2. Then
a. The seller of corporate control has a duty to make reasonable inquiry so that others
who will be affected should not be injured by wrongful conduct
4) Contests for Control
a. Hostile takeover:
i. Resisted by the target corporation’s board of directors
b. Defensive tactics
i. Tender Offers
1. Public offer to buy a minimum number of shares directly from a corporation’s shareholders at
a fixed price, usually at a substantial premium over the market price, in attempt to take
control of the corporation
ii. Poison Pills
1. Allows shareholders to buy additional shares at a discount if one shareholder acquires a
certain percentage of the corporation’s stock
a. Goal is to make stock less attractive to would be-acquirers
b. Can buy more shares from corporation at a discount, or buy acquirer’s shares at a
discount
iii. Staggered Boards
1. Staggers the election to delay a new majority from obtaining control of the board
iv. Proxy Contests
1. Stockholders choose between competing slates of directors
a. Subject to SEC Rules
c. Federal Regulation
i. Tender Offers SEC Rule §14
1. Makes a tender offer for more than 5% of public corporation’s stock, must file the offer with
the sec and publish information
2. Must remain open for at least 20 days
3. May be withdrawn any time before offer expires
4. New offer extends duration of offer and withdrawal period by 10 days
5. Bidder raises price, must pay higher price to all tendering shareholders
6. Unlawful to make untrue statements or omit material facts
a. Cannot mislead
ii. Proxy Contests
1. Same as proxy solicitation
2. Two additional rules
a. Requires target company to provide bidder with estimates of the number of its
shareholders and estimates of the cost of mailing proxy materials
b. All participants in the election contest must disclose their bios and securities holdings
in target company
d. State Regulation
i. Examples:
1. Control share laws
2. Business combination laws
3. Poison pill laws
4. Constituency statutes
e. Judicial Review of Takeover Defenses
i. When a board responds to a hostile takeover bid with defensive actions, but does not seek control
1. Unocal
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 a. Facts:
i. Mesa Petroleum Co. (P) made an offer to purchase stock in Unocal Corp.
(D) that would have made it the majority shareholder in Unocal (D).
ii. According to the terms of the offer, the shareholders who sold their Unocal
(D) stock would receive $54 per share until Mesa (P) acquired the thirty-
seven percent majority share it sought; beyond that, sellers would receive
highly speculative Mesa (P) securities instead of cash.
iii. To counteract Mesa’s (P) takeover bid, Unocal’s (P) directors announced
that if Mesa (P) obtained fifty-one percent of its shares, Unocal (P) would
purchase the remaining forty-nine percent for an exchange of debt securities,
which are securities reflected as debt on the books of the corporation, with
an aggregate face value of $72 per share.
iv. The offer would not extend, however, to the fifty-one percent of stock held
by Mesa (P).
v. Mesa (P) filed suit, alleging that the Unocal (D) directors violated their
fiduciary duty by excluding Mesa (P) from the exchange deal.
b. Held this was subject to a “modified” BJR, and was reasonable actions by ∆ given
the circumstances
c. Directors must show:
i. Reasonable grounds to believe that a danger to corporate policy and
effectiveness existed; AND
ii. Defensive measure adopted was proportionate to the threat posed
ii. Corporation for sale
1. Revlon
a. Facts:
i. The bidder on a corporation’s stock brought an action to enjoin certain
defensive actions taken by the target corporation and others.
ii. Essentially formed an auction between two parties and ended up foreclosing
the auction and going with a probably less lucrative offer
b. Once the sale appears inevitable, the board must work to maximize the company’s
value to ensure the highest possible price. 
i. Focus on the short-term versus long-term
ii. A sale = when it became apparent to all that the breakup of the company was
inevitable
c. Can use a poison pill and other takeover defenses to oppose a bid that it reasonably
concludes is inadequate, but cannot employ a takeover defense directed at protecting
interests of a non-shareholder constituency unless that defense ALSO provides some
significant financial benefit to shareholders
2. Time
a. Facts:
i. Time Inc. (D), which had recently expanded into pay television
programming and acquired a cable television franchise, began exploring
further expansion into the entertainment industry.
ii. Time’s (D) board deemed Warner the premier candidate and discussed the
venture’s structure. Time (D) preferred an all-cash acquisition, but Warner
wanted a stock-for-stock exchange and Time (D) eventually agreed.
iii. Before the final vote, Paramount (P) offered to purchase all of Time’s (D)
shares for $175 per share, provided Time (D) broke off negotiations with
Warner, Paramount obtained certain cable franchises, and the parties
obtained a judicial determination that the transaction would not violate the
Delaware Anti-Takeover Statute. Time’s (D) board discussed the offer but
declined to negotiate with Paramount (P).
iv. Time (D) rejected it, believing that Paramount’s (P) culture was not a good
fit.
46
 v. Paramount (P) filed suit, arguing that the Time-Warner agreement was an
effective sale of Time (D), requiring its board to maximize short-term
shareholder value.
b. The non-sale aspects of this transaction are important. Unlike the unavoidable result
in Revlon, where the company would have been broken up and sold in parts, the
evidence establishes that throughout its negotiations with Warner, Time’s (D) board
took special care to ensure that after any merger, Time would retain its reputation
and the integrity of its journalistic publications. The result here echoes many of the
considerations addressed in Cheff v. Mathes, 199 A.2d 548 (Del. 1964), in which the
board was concerned that if the outsider was successful, the business as it was known
in the market would cease to exist.
c. If a board is pursuing a merger for strategic reasons beyond merely the sale or
acquisition of another company’s assets, it may decline to entertain a competing bid
that may yield a higher short-term gain for its shareholders in favor of a merger that
ensures greater long-range gains.
K. Regulation of Securities Transactions
1) SEA § 10
dddd. Outlaws any sale or purchase of a security on a national securities exchange through the use of any:
i. Manipulative or deceptive OR
ii. Device or contrivance
iii. that contravenes SEC rules.
eeee. Manipulative or Deceptive Devices
i. SEA RULE 10b5-1
1. Buying or selling securities
2. on the basis of
3. material nonpublic information
4. in breach of a duty of trust or confidence
5. owed to the issuer, its shareholders, or the source of the information.
ii. On the Basis Of:
1. The person making the trade must be “aware of the material nonpublic information” when he
made the purchase or sale.
iii. Duty of Trust or Confidence – SEA RULE 10b5—2
1. Insiders:
a. Have a duty to disclose or refrain from trading may apply when there is a fiduciary
relationship of trust and confidence
i. Practically, cannot disclose to the buyer in a public market
1. Only real option is the insider cannot trade
2. Outside with a business relationship:
a. Person agrees to keep information confidential.
b. Person sharing the information can reasonably expect the recipient to keep it
confidential based on their past practices.
3. Outsiders with NO business relationship:
a. A presumption of confidentiality applies in certain enumerated family relationships
i. Spouse
ii. Parent
iii. Child
iv. Sibling
46) Application of SEA Rule 10b5
ffff. Outlaws the use of any instrument of interstate commerce or stock exchange to either:
i. employ any device, scheme or artifice to defraud,
ii. make any untrue statement of material fact OR
iii. to omit to state a material fact, OR
iv. engage in any act, practice, or course of business which operates as a fraud or deceit
gggg. In connection with the purchase or sale of any security.
47
 47) Insiders:
hhhh. Have a duty to disclose or refrain from trading may apply when there is a fiduciary relationship of
trust and confidence
iiii. Cady, Roberts
i. Facts:
1. Gintel of Cady, Roberts knew of a dividend cut before the NYSE, protected his clients against
it before the news broke.
2. Gintel learned of dividend cut through a director of the company – Curtiss-Wright.
ii. HOLDING: INSIDER TRADING
iii. Rule: A broker who receives nonpublic information from an insider has a duty to disclose or duty to
avoid trading.
iv. Rationale:
1. Insiders have access to information intended solely for corporate purposes.
2. It is unfair to allow insiders to profit from the information when they know it is not available
to anyone else.
jjjj. Chiarella
i. Facts:
1. Chiarella worked for a financial printer.
2. He bought stock in the target of a takeover bid after handling the print job for the bidding
company.
3. He identified the target even though its name was redacted in early drafts of the
announcement.
4. He was convicted at trial; affirmed on appeal.
ii. HOLDING: Chiarella (employee of firm hired by the bidder) had no duty to the persons who sold the
stock from him (owners of target stock)
iii. Rule: Only a person in a position of trust and confidence with the counterparty has a duty to disclose
before trading on nonpublic information with that party.
iv. Misappropriation was not actionable yet when this case was decided
48) Outsiders—Misappropriation
kkkk. Sale or purchase of a security on a national exchange
llll. Based on undisclosed use of material nonpublic information for personal gain
mmmm. In breach of a duty of loyalty and confidentiality owed to the source of the information.
nnnn. O’Hagan
i. Facts:
1. O’Hagan was a partner in a law firm that advised Grand Met in an acquisition of Pillsbury.
2. O’Hagan bought shares and options in Pillsbury after learning that Grand Met intended to
acquire it.
3. O’Hagan sold the Pillsbury stock and options for a $4.3 million gain after Grand Met
announced the tender offer.
4. O’Hagan was convicted of violating rule 10b-5; reversed on appeal.
ii. HOLDING: INSIDER TRADING – Conviction Reinstated
iii. Rule: The misappropriation occurs when the accused breaches a duty of trust and confidence owed to
the source of the information.

49) Tippers and tippees

oooo. A tippee is liable only if the insider tipper has breached a fiduciary duty and the tippee knows so.
pppp. An insider tipper has breached a duty only if the insider tipper will benefit from the disclosure.
qqqq. Dirks
i. Facts:
1. Seacrist was a former officer of EFA.
2. Dirks was a broker dealer.
3. Seacrist told Dirks that EFA overstated the value of its assets. Dirks confirmed that EFA
overstated its assets.
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 4. Dirks shares his findings with clients.
5. The clients sold shares in EFA based on the information.
ii. HOLDING: NO INSIDER TRADING
iii. Rule:
1. A tippee is liable only if the insider has breached his duty and the tippee knows so.
2. Insiders owe a fiduciary duty not to disclose company information to others.
3. An insider breaches his fiduciary duty only when he will personally benefit from the
disclosure (e.g., pecuniary gain or reputational benefit that will lead to future earnings).
rrrr. Salmon
i. Facts:
1. Salmon married to sister of Michael and Maher Kara
2. Maher started job as investment banker, discussed with Michael
3. Michael began trading on the information and feeding it to others
ii. Court:
1. Insider tipper violated duty owed
2. Was there a pecuniary duty?
iii. Application:
1. Maher got a benefit by disclosing information to Michael and allowing him to trade on it
2. Equivalent of a cash gift
50) Remedies
ssss. If Government Sues
i. Injunctions
ii. Disgorgement of profits derived by traders
iii. Treble damages (3x the profits made, or losses avoided).
tttt. If Private Party Sues:
i. Disgorgement of profits made, or losses avoided by the offending traders
51) SEA Liability
uuuu. Section 16:
i. Imposes liability on insiders for trading in the stock when there is no actual proof that they were
trading on the basis of material nonpublic information.
vvvv. Section 10(b):
i. Liability is not possible unless there is proof that the trades were based on the use of material
nonpublic information.
wwww. Section 16 Requirements:
i. Officers, directors, and over 10% shareholders
ii. Of Reporting companies (publicly traded)
iii. Who make a purchase and sale, or sale and purchase of an equity security?
iv. Within a 6-month window
xxxx. Section 16 Penalty
i. Disgorgement of profits
L. Close Corporations
1) Characteristics of a closely held corporation
b. Distinguishing Factors:
i. Integrated ownership and management
ii. Relatively few owners
iii. No active market for shares
1. See Donahue v. Rodd Electrotype Co, Smith
c. No REAL definition
52) Risks and Considerations
a. Self-dealing/extracting earnings from firm
b. Oppression of minority
53) Shareholder Action to Limit Board
o. MBCA §8.01(b)- General Rule: BOD possesses all powers
p. MBCA §7.32
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 i. (a): Shareholder agreement may restrict discretion of the board of directors
ii. (b): All shareholders must approve
iii. (b): Terms must appear in:
1. Articles; OR
2. Bylaws; AND
3. Approved by all shareholders; OR
4. Written agreement that is signed by all shareholders
iv. (c): Notice of the restriction must appear on any stock certificate
q. Manner in which shareholders may restrict board
i. Eliminate board
ii. Restrict the discretion or powers of board
iii. Govern authorization or making of distribution, whether or not in proportion to ownership of shares
iv. Establishes who shall be directors or officers
v. Establishes the terms of office
54) Shareholder Voting (Voting for BOD)
r. MBCA §7.21(a): Each Share = one vote per share for any candidate to the board.
s. MBCA §7.28(a): Directors are elected by a plurality of votes cast
t. Default: Straight Voting
i. MBCA §7.21(a)
1. Each share is entitled to one vote for each open director position voted on at a shareholder’s
meeting
ii. As a result, majority owners generally elect all directors
u. Cumulative Voting
i. MBCA §7.28(b)
1. No right to cumulative votes unless articles of incorporation says so. See MBCA §2.02(b)(3)
ii. MBCA §7.28(c)
1. Shareholders can cumulate their votes and cast all of them for one candidate
a. Multiple their votes by number of open seats
b. Assures a more representative breakdown of directors to shareholder
v. Develop Classes of Shares that Affect Voting
i. Generally, all shares have the same rights, MBCA §6.01(a)
ii. Articles may authorize one or more classes of shares that have limited voting rights MBCA §6.01(c)
(1)
iii. However, the rights can vary only to the extent expressly set forth in the articles of incorporation.
MBCA §6.01(e)
w. Voting Trusts
i. MBCA §7.30(a)
1. Shareholders transfer stock to trustee
2. Trustee exercises voting rights in the stock
3. Shareholder retains all other rights in the stock
4. Corporation must be notified of the trust
5. Terms regarding duration may be set forth in the voting trust
x. Voting Agreements
i. MBCA §7.31(a), (b)
1. Shareholders may agree by K to vote a specific way by signing an agreement beforehand
2. Enforced by specific performance
y. Voting Proxy
i. MBCA §7.22(d)
1. Proxy Must:
a. Appointment form states it is irrevocable; AND
b. Appointment is coupled with an interest
i. Pledgee
ii. Buyer of the shares
iii. Creditor
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 iv. Employee
v. Party to voting agreement, under §7.31
55) Limitations on Share Transfers
d. MBCA §6.27
i. (a): permits restrictions on transferability of shares
ii. (b): requires any restrictions to appear in the stock certificates or in information statements furnished
to owners in cases where shares are not evidenced by certificates
iii. Restriction is unenforceable against anyone who is not aware of it
e. Concerns and considerations
i. Integrated ownership and management
1. Shareholders are more involved in the activities of the firm
ii. Relatively few owners
1. Shareholders want control over who their business partners are
iii. No active market for shares
1. Departing shareholder wants fair price for shares
f. Restrictions available
i. MBCA §6.27(d)(1):
1. Seller must offer shares to corporation and other shareholders
2. Right of First Refusal: Shareholder cannot accept an offer to sell unless other shareholders
have a chance to buy on same terms
3. First Option Provision: Shareholder cannot accept an offer to sell unless other shareholders
have a chance to buy at a predetermined price
ii. MBCA §6.27(d)(2):
1. Corporation and/or other shareholders have a duty to buy shares from seller
2. Sale Option: Remaining shareholders or firm must make an offer to buy seller’s shares
3. Buy-Sell Agreements: corporation and/or remaining shareholders have a duty to buy the
stock of a shareholder upon a triggering event
iii. MBCA §6.27(d)(3):
1. Corporation and/or other shareholders must approve transfer/sale of shares
2. Consent Restriction: shareholders must approve buyer first
iv. MBCA §6.27(d)(4):
1. Seller cannot transfer shares to certain persons
g. How to Value Stock:
i. Book value: does not reflect fair market value
ii. Capitalized earnings: requires a precise way to define earnings
iii. Right of first refusal
iv. Appraisals: cost money
v. Mutual agreements: need to be updated constantly and parties typically have little to no incentive to
do so
56) Oppression of Minority Owners
h. Types of Disputes
i. Deadlock: No measure has sufficient votes to pass
ii. Squeeze-out: Majority shareholders take steps that prevent the minority shareholders from receiving
any benefits of the firm, like salary or dividends
1. Freezeout
a. Shareholders take positive steps to deny minority shareholders any benefits from
ownership interest so that minority is forced to sell to majority at reduced price
iii. Mechanisms to avoid disputes
1. Odd number of board seats
2. Arbitration
3. Mediation
4. Dissolution
i. Breach of Fiduciary Duty
i. Two Initial Questions:
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 1. How close is the relationship between shareholders in a closely held corporation
conceptualized?
a. Like partners in a partnership: high duties
b. Like a conventional corporation: Low Duties
2. If a jurisdiction imposes high fiduciary duties, what factors will determine whether the duty
was breached?
ii. Deadlock:
1. Donahue
a. Facts:
i. ∆ served as president and GM, held 80% of shares
ii. ∆ gave shares to sons, sons caused the corporation to buy 45 of Harry’s
shares for 800 per share
iii. Donahue asked for same, board rejected offer
iv. Donahue claimed breach of fiduciary duty
b. Held breach of duty
c. Rule: Close Corporation can equal heightened Duty of Care and Loyalty
i. Shareholders in a closely held corporation are like partners in a partnership
ii. May not act out of avarice, expediency or self interest in derogation of duty
to the corp. and fellow owners
2. Smith
a. Facts:
i. Wolfson and 3 others owned 25% of corporation.
ii. 80% needed for corporate action
iii. Shareholders deadlocked 3 to 1 in vote to pay dividends
iv. IRS penalized corp. for not paying dividends
v. Majority wants reimbursement from Wolfson, his removal and an order to
pay dividends
b. Held minority s/h who can veto corporate action is a de facto controlling s/h who
owes duty of utmost good faith and loyalty
i. Conduct was unreasonable, ruled against Wolfson
c. Rule:
i. Controlling s/h must act with utmost good faith and loyalty, reasonableness
is the standard
3. cf. Nixon
a. Facts:
i. Class A employee s/h could liquate investment via ESOP
ii. Class B nonemployee s/h had no comparable option
iii. Trial court concluded lack of parity was not unfair b/c arrangement
advanced legitimate corporate objective
b. Held no breach
c. Corporation did not certify as a close corp.:
i. No special protections
ii. Minority owners should have negotiated protections in advance
iii. State law prescribes all special rules that apply to close corporations
1. Cannot supplement rules
iii. Oppression:
1. Whether the action constituted oppression
a. Tests:
i. Perspective of majority: whether conduct advanced a legitimate business
purpose
ii. Wilkes
1. Facts:
a. Wilkes and 3 others each owned 25% of corp.

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 b. Each s/h sat on the board, worked and received
compensation for services
c. Removed Wilkes as director after he asserted appraisal
rights following a dispute between the s/h
2. Breach of duty
3. Rule:
a. Majority owners must show legitimate business purpose
b. Minority owner can prevail if there is an alternative course
of conduct that is less oppressive to him
c. Court must weigh any legitimate business purpose against
the practicalities of a less harmful alternative
iii. Perspective of minority: whether interests were harmed
iv. Kemp
1. Facts:
a. Corp. historically distributed profits via dividends or
bonuses according to share holdings
b. Corp. stopped doing so after two key officers owning 20%
shares left employment
c. Plaintiffs asked court to dissolve company
2. Held:
a. Oppression occurs when the majority defeats reasonable
expectations of the minority owner viewed from POV of
the minority owner
v. Dissolution is the remedy for oppression
vi. Defendants may buy out minority as an alternative
b. Close Corporation Breach of Fiduciary Duties Summary
i. Donahue: Shareholders in close corporations may not act out of avarice,
expediency or self-interest in derogation of duty to the corp. and fellow
owners
ii. Wilkes: Majority must have a legitimate business purpose that cannot be
pursued by an alternative that is less oppressive to the minority
iii. Smith: An individual shareholder who exercises veto power is treated as
controlling shareholder. Minority owners can act in oppressive ways too.
iv. Nixon: Shareholders have no special duties or protections not described in
statutes
iv. Remedies for Voting Disputes
1. Dissolution of the corporation
a. MBCA §14.30(a)(2)(ii)
i. Court may dissolve the corporation if:
1. Controlling directors have acted, are acting or will act in an illegal,
oppressive, or fraudulent manner; OR
2. Deadlock; OR
3. Corporate assets being misapplied or wasted
ii. Not available to:
1. MBCA §14.30(b)(ii)
a. Publicly traded corporations; OR
b. Corporations with at least 300 shareholders and a market
value of at least 20 million
2. Other remedies
a. Court ordered buy-out
b. Payment of salary (See Wilkes)
c. Court ordered dividends (See Smith)
d. Reinstatement to former position?
e. Other possibilities (See Donahue)
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