corporations • miller • fall 1999/spring 2000
I.	Firm as Organization of Business
Fowler v. Pennsylvania Tire  consignment v. sale w/r/t availability of assets to satisfy claims of creditors, notice of consignment based on course of dealing
•	indicia of buy/sell arrangement: financing (payment of interest as service charge on inventory), provisions for taxes, insurance payment; no segregation of merchandise accounts; not all financial reports filed
•	UCC § 2-326:  consigned goods subject to claims of buyer’s creditors while in the buyer’s possession

II.	Agents and Employees
•	appearance not as relevant in tort scenarios as in contract (where there is choice)
A.	Exercise of Control
Master/Servant v. Independent Contractors
R2 Agency § 2 Master & Servant.  S has agreed (a) to work on behalf of the M, and (b) to be subject to M's control or right to control the “physical conduct” of S (manner of performance).
•	respondeat superior:  M (employer) is liable for the torts of S (employees).
R2 Agency § 1  Agency. fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.
•	§ 1, comment (b): continuous subjection to the will of the principal which distinguishes the agent from other fiduciaries and the agency agreement from other agreements.

1.	Control over Agent's Day-to-Day Operations  Liability
Humble Oil (oil company liable for gas station owner and attendant's negligence despite express repudiation in K; M-S where contract gave oil company control over operation of station, shares operational expenses, furnishes station equipment, location and advertising, gives station owner little business discretion except for employment decisions (hiring, firing, payment)
Billops v. Magness Construction hotel franchisor could be held liable for extortion by banquet manager at hotel, ruining party, due to franchisor's control through manual with explicit directions regarding parties, despite fact that intentional tort harder to control than negligence of agents
2.	No Control over Agent's Day-to-Day Operations  No Liability
Hoover v. Sun Oil (oil company not liable for accident at gas station when no control over day-to-day operations)
accident occurred in course of service governed by agency relationship but while Sun owned station and equipment, advertising display, and sent its representatives to inspect and offer advice, oil company did not have control over day-to-day operations, operator set its own hours of operation, and either party could terminate agreement at any time
Murphy v. Holiday Inns (no liability for accident when no control over day-to-day activities of franchisee)
•	franchise K does not insulate the contracting parties from an agency relationship.  If a franchise K so regulates the activities of the franchisee as to vest the franchisor with control within the definition of agency, the agency relationship arises even though the parties expressly deny it.
B.	Control and Liability of Creditors
Cargill C becomes principal, liable for claims against D, when assumes de facto control over day-to-day operations 
•	course of dealing:  debtor’s inability to enter into mortgages, to purchase stock or to pay dividends without creditor’s approval; creditor’s right of entry onto debtor’s premises to carry on periodic checks and audits; financing of all debtor’s purchases of grain and operating expenses; creditor’s power to discontinue the financing of debtor’s operations.
R2 Agency § 14 O:  mere veto power over business acts of D by preventing purchases or sales above specified amounts does not make C a principal;  C becomes a principal when assumes de facto control over D, directs what contracts may or may not be made, whatever the terms of the formal contract may be.
C.	Scope of Authority
actual v. apparent (holding out by  company or act/speak as if having authority and company does nothing to stop such behavior)
R2 § 8 Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons
1.	implied - agent acted/recognized by principal in such a manner so that agent has authority (actual or apparent), though no explicit manifestation of consent by principal
2.	inherent - authority of office/position, normally carries certain responsibilities

Lind v. Schenley Industries company held to immediate supervisor's promise of commission to employee who had no reason to doubt manager's apparent authority to make such representation, despite practical implications and lack of actual reliance 
Three-Seventy Leasing v. Ampex computer manufacturer for computer leasing agent's acceptance of offer due to apparent authority; agent has apparent authority sufficient to bind the principal when:
•	reasonably prudent person would believe agent to have authority
•	absent knowledge on the part of third parties to the contrary
•	usual and proper to the conduct of the business 
D.	
Inherent Agency Power
Watteau v. Fenwick  brewery liable for debts of pub manager, exceeding actual authority, though third parties dealt only with pub manager with no reliance upon brewery; undisclosed principal liable for agent's actions if
(a)	within scope of agency and 
(b)	usual in course of business
•	to limit liability of principal for actions of which principal has no knowledge
•	higher risk assumed by third parties when activities outside normal scope
Kidd v. Thomas Edison  principal held liable to artist for lack of payment despite agent's lack of authorization, because such authority would normally be in scope of entertainment agency
•	would defeat purpose of delegated authority if still necessary to have constant recourse by third persons to the principal as a result of denying agent any latitude beyond exact instructions
Nogales Service Center v. ARCO inherent agency power found in job description/title by which principal held out agent
R2 Agency § 8A: Inherent agency derived solely from the agency relation for the protection of persons harmed by or dealing with a servant or other agent.  comment b:
(a)	The other type of inherent power subjects the principal to contractual liability or to the loss of his property when an agent has acted improperly in entering contracts or making conveyances.
(b)	There are three types of situations in which this power exists:
(i)	general agent does something similar to what he is authorized to do, but in violation of orders. In this case the principal may become liable as a party to the transaction,  even though he is undisclosed.
(ii)	agent acts purely for his own purposes in entering into a transaction which would be authorized if he were actuated by a proper motive.
(iii)	agent is authorized to dispose of goods and departs from the authorized method of disposal.
R2 Agency § 161: A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.
comment b: Rule applies regardless of whether there is apparent authority. Thus, the principal may be liable upon a contract made by a general agent of a kind usually made by such agents, although he had been forbidden to make it and although there had been no manifestation of authority 
to the person dealing with the agent.
E.	Fiduciary Obligation of Agent to Principal
General Automotive Manufacturing v. Singer  failure to disclose opportunities and retention of profits from side orders held to constitute violation of fiduciary duty of an employee to employer to exercise utmost good faith and loyalty to not act adversely to the interests of the employer by serving or acquiring any private interest of her own; to act for the furtherance and advancement of the interest of the employer; employee liable for the amount of the profits he earned in his side line business.
Bancroft-Whitney v. Glen  corporate officer/director liable for breach of fiduciary duty in negotiating with principal's competitor while still employed by principal and taking principal's top managers upon leaving principal; mere fact that officer makes preparations to compete before he resigns office is not sufficient to constitute a breach of duty; nature of preparations is significant
R2 Agency § 393, comm. e: agent can make arrangements to compete with his principal even before the termination of the agency, but that he cannot use confidential information peculiar to employer’s business and acquired therein.
Town & Country House & Home v. Newberry (breach of fiduciary duty in taking customer list where customers are not openly engaged in business in advertised locations or whose availability as patrons cannot readily be ascertained as trade secret due to pre-screening, large number of cold calls involved in assembling list; other competitive means available
Corroon & Black-Rutters & Roberts v. Hosch no breach of fiduciary duty in insurance agent's taking names and addresses of own customers with expiration lists; unlike home-cleaning business, easier to gain customers
Rst, 4 Torts, § 757, comment b: factors to consider in determining whether trade secret:
•	the extent to which the information is known outside of his business
•	the extent to which it is known by employees and others involved in his business
•	the extent of measures taken by him to guard the secrecy of the information
•	the value of the information to him and to his competitors
•	the amount of effort or money expended by him in developing the information
•	the ease or difficulty with which the information could be properly acquired or duplicated by others.
•	Route-nonroute distinction less protection when no particular enduring relationship developed between a customer and agent
III.	
PARTNERSHIPS
partners are both principals and agents
Uniform Partnership Act definition of partnership: association (sustained interaction; common purpose) of two or more persons (humans, firms) to carry on as co-owners a business for profit

A.	Partners v. Employees
Fenwick v. Unemployment Compensation Commission not partnership because lacking co-ownership
elements to be considered: intent of parties; right to share in profits; obligation to share in losses; ownership and control of property; community of power in administration; language of agreement; conduct towards 3d parties; rights upon dissolution
•	social policy to prevent such easy formation of partnerships to evade legal consequences of employee designation 
Frank v. Pickens & Son  terms of partnership agreement (e.g., share of book value rather than total assets upon termination of partnership) generally trump standard rules of partnership, unless other social policies involved as in Fenwick
B.	Partners v. Lenders
Martin v. Peyton no partnership in provisions of agreement intended to safeguard interests of the creditor, though had veto power, inspected books, consulted on important decisions, just as much control as necessary to protect security interest but could not initiate any transaction as a partner could nor bind the firm by any action of their own
Kaufman-Brown Potato v. Long creditors became partners with farmers under agreement by which they were repaid upon harvest and split any additional profits; mere agreement to share profits and losses does not make a partnership but both the sharing of profits and losses are usual in partnership agreements and practices.
C.	Partnership by Estoppel
Young v. Jones  no partnership by estoppel between Bahamas office and U.S.-based audit firm holding self out as international firm elements of estoppel claim: (1) holding out; (2) reliance upon partnership and advice, and (3) 3d parties give credit
UPA § 7(1) persons who are not partners as to each other are not partners as to third persons.
UPA § 16(1)  person who represents self as partner to 3P liable to 3P who has given credit to partnership
D.	Fiduciary Obligations of Partners
Meinhard v. Salmon managing partner breached fiduciary duty by failing to disclose new lease opportunity to financing partner and taking lease for himself
•	Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty.  Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
•	remedy creates deadlock or suppression
Revised Uniform Partnership Act § 404 
(a)	only fiduciary duties a partner owes to the partnership and the other partners are duty of loyalty and duty of care . . . .
(b)	A partner's duty of loyalty to the partnership and the other partners is limited to the following:
(1)	to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
(2)	to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
(3)	to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership
(c)	A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
(d)	. . . obligation of good faith and fair dealing
(e)	not violate a duty or obligation . . . merely because the partner's conduct furthers the partner's own interest 
Meehan v. Shaughnessy breach of fiduciary duty in lying 3 times by declining that partner would leave, sending one-sided letters to clients that did not make clear that clients could have stayed with firm, secrecy concerning which clients he intended to take until had obtained authorization from majority of clients; through substance and method of communications with clients, obtained an unfair advantage over former partners in breach of their fiduciary duties; fact-intensive inquiry)
UPA § 20: obligation to render on demand true and full information of all things affecting the partnership to any partner.
Bassan v. Investment Exchange (GP sold property to LP at or below market price but still at profit to GP; agreement authorized reasonable profit with consent of LPs, not implied from prior course of dealing and consent to prior profits)
•	remedy - establish common fund; no damages because no showing of damage since property sold at market value

E.	Rights of Partners in Management
National Biscuit v. Stroud  each P liable for debts of other P within scope of partnership, even if not authorized; non-consenting partner could dissolve partnership with notice to third parties to avoid liability
•	UPA § 9  Every partner is an agent of the partnership for the purpose of its business, and the act of every partner including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no authority.
Day v. Sidley & Austin no breach of fiduciary duty in Executive Committee's failure to reveal information regarding changes in the internal structure of the firm and decision to eliminate chairmanship, which did not produce any profit for the offending partners nor any financial loss for the partnership as a whole. 
F.	
Dissolution of Partnership
1.	Reason /Breach
Owen v. Cohen profitable partnership dissolved because one partner impossible to work with; dissolution an equitable remedy when there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders proper conduct of the partnership business.
UPA § 32 whenever: partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business with him.
Collins v. Lewis  court refuses to dissolve partnership at request of C because managing partner L competent to manage though C interfering; C seeks to dissolve because as financing partner in superior position for accounting, could use L's debt to make credit bid for partnership; legal right to dissolution rests in equity, as does the right to relief from the provisions of any legal contract.
Prentiss v. Sheffel  court orders judicial sale of assets of partnership in which 2 partners squeeze out minority P, dissolution of at-will partnership practical considering purpose is long-term financing of shopping center
•	term of partnership may be inferred from purpose (as in term of lease), specified in agreement, or at-will
•	minority partner objects to majority partners' use of paper dollars in judicial sale, but still bid less than other bidders so not necessarily advantaged though other bidders may have come forward if majority Ps excluded; minority partner had same right to bid as majority partners
Page v. Page Partner who is creditor as well seeks to dissolve profitable partnership to make credit bid; P made loan rather than capital contribution so as not to disturb management/division of interests; P'ship not for term of loans because would convert any P'ship with debt into indefinite duration and swallow up concept of P'ship at will
Monin v. Monin  after milk hauling partnership dissolved, former partner who did not win milk routes proceeds to compete with partner who won partnership and effectively deprive partnership of value; continuing fiduciary duty beyond dissolution to winding up
•	also violation of partnership sale agreement which included covenant not to compete and clause providing that sale null and void if dairy business did not approve milk hauling contract 

2.	Damages 
Pav-Saver v. Vasso as a result of wrongful termination of permanent-term partnership by partner owning patents and trademarks, breaching partner gets value of interest in partnership less damages and release from liability, but not value of goodwill which includes most of value of intellectual property assets; non-breaching partner allowed to continue business with use of valuable IP
Uniform Partnership Act § 38 damages for breach of the agreement against P who wrongfully caused dissolution
•	non-breaching Partners may continue business during the agreed term for the partnership and retain partnership property, so long as they pay breaching Partner value of his interest in the partnership at the dissolution, less any damages and in like manner indemnify  him against all present or future partnership liabilities
•	breaching Partner has right to receive value of his interest in the partnership, not including value of goodwill, less any damages caused by dissolution, and to be released from all existing liabilities of the partnership
Lawlis v. Kightlinger & Gray no breach of fiduciary duty in expulsion of alcoholic law partner from partnership, despite lack of hearing, notice, and right to defense, because partnership agreement provided for no cause expulsion so long as not wrongful withholding of money or property legally due expelled partner at time of expulsion
Jewel v. Boxer in the absence of partnership agreement providing otherwise, the UPA requires that attorney’s fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their prior partnership interest, regardless of which former partner provides legal services in the case after the dissolution.
•	two paradigms for allocation of ongoing sources of income:
(1)	quantum meruit: source (how case came to partnership) plus split element based on pre/post-dissolution labor
(2)	prior partnership interest
Meehan v. Shaughnessy law firm's partnership agreement deals with allocation of post-dissolution work by providing that partners get capital contributions plus share of accounts receivable at time of dissolution and partners can remove cases whether brought to firm through own efforts or not, with all pre-dissolution fees/costs back to partnership and post-dissolution fees to partner with "fair charge" back to partnership; former partners no longer have a continuing fiduciary obligation to wind-up for the benefit of each other the business they shared in their former partnership
•	remedy for improperly removed cases is sharing rule where departing attorneys share income of those cases with former partners but do not get benefit of cases left behind
G.	
Limited Partnerships
Limited Partner not liable for debts and torts of partnership beyond extent of investment in partnership, while General Partner has unlimited liability and management responsibility
Holzman v. DeEscamilla LPs liable as GP to creditors, regardless of creditors' knowledge of their role, because acted substantially the same as a general partner in management (GP had no power alone though both LPs could withdraw money; controlled crop-planting selection; required GP to resign and chose successor)
•	set up as Corporation of which LPs are shareholders and Board of Directors, hire GP as employee
•	make GP a Corporation to avoid personal liability so that only assets of corporation are available to shareholders

Frigidaire Sales v. Union Properties (Wash. 1977) LPs do not incur general liability simply because they are officers, directors or shareholders of corporate GP and thereby exercise day-to-day management and control of limited partnership
•	when shareholders of a corporation who are also officers and directors conscientiously keep affairs of corporation separate from personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation's separate identity should be respected
•	limited partnership statutes permit parties to form LP with a corporation as the sole GP, therefore concern about minimal capitalization, standing by itself, does not justify a finding that the limited partners incur general liability for their control of the corporate general partner
•	If a corporate general partner is inadequately capitalized, the rights of a creditor are adequately protected under the “piercing the corporate veil” doctrine of corporation law

RULPA §303(a)  LP is not liable for the obligations of a limited partnership unless he or she is also GP or, in addition to the exercise of his or her rights and powers as LP, he or she participates in control of business, and then only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner's conduct, that LP is GP 
RULPA § 303(b):  LP does not participate in control solely by consulting with and advising a general partner with respect to the business of the limited partnership.

IV.	CORPORATION
A.	Promoters
Southern-Gulf Marine v. Camcraft  corporation by estoppel - prevent opportunism in escaping valid obligations with de facto corporations where process failed/delayed for some reason  unless substantial rights are affected by character of organization.  If a party have no other objection to oppose to the enforcement of the K than that the obligee is incompetent to sue, for reasons anterior to his K, not permitted to escape liability.  
B.	Limited Liability - Piercing the Corporate Veil
ex post capital rules - after the fact, when assets not sufficient to cover liabilities
(1)	piercing the corporate veil - grossly undercapitalized corporation without regard for formalities, some element of unfairness; extremely rare
(2)	transfers in contemplation - recaptured through bankruptcy process to recapitalize corporation with assets transferred inappropriately within one year of insolvency
(3)	equitable subordination - company buys stock from creditor and gives loan in return to convert equity claims  into debt reconverted back to stock after insolvency to recapitalize
ex ante capital rules - require corporation to maintain assets sufficient to prevent or deter insolvency and meet claims of creditors
(1)	European (civil law) system - minimum amount of capital required
(2)	par value system - company stated with certain amount of paid-in capital for which par value stock issued; but par value might not be sufficient or be excessive in the future; largely vestigial
(3)	financial service/banking capital regulation - reservation of capital percentage of assets; requires bureaucracy for monitoring and enforcement
(4)	bankruptcy per se - allocates loss according to order of priority without attempting to keep any capital on hand

Walkovszky v. Carlton (court refuses to pierce corporate veil of individual taxi corporation to larger enterprise of 10 such corporations owned by same individual D because no fraud by corporation in complying with law by holding only minimum liability insurance; if insurance coverage inadequate, remedy lies with legislature establishing minimums, not court)
•	piercing corporate veil because corporation is undercapitalized would destroy concept of limited liability
•	whenever an individual shareholder uses control of the corporation to further his own rather than the corporation’s business, the individual will be liable for the corporation’s acts
Sea-Land Services v. Pepper Source two element test for removing limited liability:
(a)	shared control/unity of interest and ownership, based on 4 factors:
(1)	failure to maintain adequate corporate records
(2)	commingling of funds or assets
(3)	undercapitalization
Kinney Shoe v. Polan (4th Cir. 1991)
corporate veil pierced when grossly inadequate capitalization combined with disregard of corporate formalities; owner of corporation bought no stock, made no capital contribution, kept no minutes and elected no officers for corporation
(4)	one corporation treating the assets of another corporation as its own
(b)	separate corporate existence would sanction a fraud or promote injustice beyond creditor's inability to collect
Kinney Shoe v. Polan (4th Cir. 1991)third prong in determining whether corporate veil should be pierced (permissive, not mandatory, because equitable remedy): when it would be reasonable for party such as bank or lending institution entering into a contract with the corporation to conduct an investigation of credit prior to entering into contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose and to have assumed the risk of gross undercapitalization
Perpetual Real Estate Services v. Michaelson Properties (4th Cir. 1992) something more than proof that some person may dominate or control corporation, or treat it as a mere instrumentality or agency, is required to pierce corporate veil; P must also establish that corporation was a device or sham used to disguise wrongs, obscure fraud or conceal crime
•	courts extremely reluctant to lift veil in contract case, unlike torts case, where party voluntarily and knowingly entered into agreement with corporate entity and is expected to suffer consequences of limited liability associated with corporate form
•	courts require proof of some misrepresentation to the creditor in contract cases, otherwise courts will not rewrite contracts which parties themselves could have negotiated regarding limited liability and allocation of risk
In re Silicone Gel Breast Implants Products Liability (N.D.Ala. 1995)  ordinarily the fact-intensive nature of issue of veil-piercing will require that it be resolved only through trial; totality of circumstances must be evaluated in determining whether a subsidiary may be found to be the alter ego or mere instrumentality of the parent corporation; factors showing substantial domination:
•	parent and subsidiary have common directors or officers 
•	parent pays salaries and other expenses of subsidiary	•	parent and subsidiary have common business departments	
•	parent and subsidiary file consolidated financial statements and tax returns	•	daily operations of two corporations not kept separate 
•	parent finances subsidiary	
•	parent caused incorporation of subsidiary 
•	parent uses subsidiary's property as its own 
•	subsidiary does not observe basic corporation formalities, such as separate books/records and holding shareholder and board meetings	•	subsidiary operates with grossly inadequate capital 
•	subsidiary receives no business except that given by parent	
•	courts do not require showing of fraud, injustice or inequity in tort case where limitations on corporate liability were fortuitous and non-consensual
•	parent may also become directly liable by virtue of its participation in activities of subsidiary (such as placing parent's name on packaging of product manufactured by subsidiary and issuing press releases regarding safety of product) under Rest. 2d Torts § 324A One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm resulting from his failure to exercise reasonable care to perform his undertakings, if:
(a)	his failure to exercise reasonable care increases the risk of harm,
(b)	or, he has undertaken to perform a duty owed by the other to the third person,
(c)	or, the harm is suffered because of a reliance of the other or the third person upon the undertaking.

C.	Shareholder Derivative Actions
violate fundamental rule of corporation of "shareholders sharehold; managers manage" because gives shareholders right to represent corporation for purposes of lawsuit, in effect act as management
Filters in Derivative Actions to ensure in best interests of Corporation
1.	Security for Costs
Cohen v. Beneficial Industrial Loan  requirement that P shareholder posts bond to pay for D's attorney fees if suit fails as security for costs; effect is to discourage shareholder derivative actions; creates a new liability so substantive not merely procedural, applies in diversity actions)
Eisenberg v. Flying Tiger Line (security for costs requirement applies only to derivative actions, not direct actions; complaint that reorganization deprived stockholder of right to vote on operating company affairs is individual not brought on behalf of corporation) matter of pleading: derivative action only if brought in the right of a corporation to procure judgment in its favor; direct if allege personal harm (beyond mere loss of value of shares) and not ask for recovery in favor of corporation, may take the form of a representative class action
	2.	Demand on Directors
(a)	shareholder must first go to Directors and demand that Directors sue corporation (generally required but almost universally ignored)
•	if demand refused, courts review Directors' refusal under business judgment rule, very generous to management
Kamen v. Kemper Financial Services (reversed adoption of rule of universal demand because would increase power of directors to control corporate litigation)
(b)	demand excused if futile
Spiegel v. Buntrock (if make demand waive argument that Board of Directors is disinterested so falls under business judgment rule)
Heineman v. Datapoint (high threshold for excuse of demand: futile where reasonable doubt exists that Board has ability to exercise its managerial power in relation to decision to prosecute, that
(1)	Directors are disinterested and independent, and
(2)	challenged transaction was otherwise product of valid exercise of business judgment
(a)	particularized facts (hard to show in pleading prior to discovery)
•	allegation of controlling stock ownership or interlocking directorships do not raise, per se, a reasonable doubt as to the board’s independence; party must advance particularized factual allegations from which the court can reasonably infer that the board members who approved the transaction are acting at the direction of the alleged dominating individual or entity
•	must be some nexus between domination and resulting personal benefit to controlling party
(b)	standard for review is abuse of discretion, so chancery court almost never overturned
3.	Special Litigation Committee
Auerbach v. Bennett (NY case, not law in DE; SLC hires outside counsel, concludes that action not in best interest of corporation so business judgment rule applies and shareholder loses) 
court's review of SLC decision limited to: 
(1)	methodology/procedures of data collection for report
proof that the investigation has been so restricted in scope, so shallow in execution, or otherwise so halfhearted as to constitute a pretext or sham, would raise questions of good faith or conceivably fraud not shielded by business judgment rule
(2)	disinterested independence and good faith of SLC, not tainted by same bias as Directors
to disqualify entire board would render corporation powerless to make any effective business judgment w/r/t prosecution of derivation action
Zapata v. Maldonado (DE case)
even if demand excused, Board of Directors not completely ousted from control of lawsuit or returned to same power as before, now has power to appoint SLC of disinterested directors to investigate lawsuit ad make recommendation to court; refusal of demand upheld unless wrongful; 
court's standard of review of SLC recommendation:
(1)	SLC good faith and good procedures (support in record, methodologies)
(2)	court's own business judgment (additional step from NY rule)
Alford v. Shaw modified Zapata rule, requiring judicial scrutiny of merits of SLC recommendation
•	signal a shift from pro-SLC to pro-shareholder; less deference to SLC decisions whose institutional symbiosis with corporation necessarily affects its ability to render decision fairly considering P's interests
D.	
The Role and Purposes of Corporations
Smith v. Barlow corporate contribution to university; not intra vires because not made indiscriminately or to a pet charity of corporate directors in furtherance of personal rather than corporate ends; made in reasonable belief that it would aid public welfare and advance interests both as a private corporation and as part of community 
Dodge v. Ford Motor (MI 1919) minority shareholders compelled declaration of special dividend; court has power to compel declaration of dividend if refusal amounts to fraud or breach of good faith
Ford's defense is expansion plan, but price drop intended to benefit humanity rather than shareholders, also makes competition by minority shareholders Dodge more difficult
incidental humanitarian expenditure or plan to benefit mankind at expanse of corporation
Shlensky v. Wrigley dominant figure imposing own will on directors; court does not interfere with Wrigley's refusal to follow example of other baseball teams and install lights for night games; Wrigley alleges concern for neighborhood, might reduce attendance and property value

IV.	The Duties of Officers, Directors and Insiders

1.	Duty of Care
•	implied term of proper care, reasonable diligence in managing corporation's affairs
•	standard of liability is gross negligence (mere negligence never enough to violate BJR); courts may develop general business judgment but can never recapitulate specific situation in which business decision was made, reluctant to exercise hindsight bias

A.	2 Means of Violation
(1)	willful blindness - ignorance is breach; directors who willingly allow others to make major decisions without supervision
Graham v. Allis-Chalmers  Directors not liable for employees' violation of antitrust laws because structure of corporation, a large company with number of divisions, heavily decentralized management in which authority delegated down to lowest level, prevented directors from knowledge of activities (but, decision encouraged decentralization)
•	absent inquiry notice, no duty upon Directors to investigate and ferret out wrongdoing which they have no reason to suspect may exist
Francis v. United Jersey Bank (N.J. 1981) elderly and alcoholic widow of corporation's founder held personally liable for corporation's insolvency due to her breach of duty of care as Director for failing to notice and put an end to sons' siphoning from client accounts; receipt of financial statements gave rise to duty to inquire
•	Directors not responsible for day-to-day involvement or audit but general monitoring of corporate affairs and policies
Smith v. Van Gorkom (Del.Sup.Ct. 1985) Directors not entitled to BJR because they had not adequately informed themselves about or considered proposed takeover bid with strict 3-day deadline for approval because materials were delivered too late for study either before or after meeting, and no opinion of investment bank re reasonableness of price was presented; Directors approved offer without asking questions and without extended discussion; basic test of duty of care is gross negligence
(2)	no-win situation - director chooses greater risk at lower rate of return
Joy v. North Bank, dominated by single Director, continues making loans to failing developer in no win situation, higher risk at lower rate of return; BJR relieves Director of liability; prevent hindsight bias; ignorance not a defense unless active concealment by dominant Director 
Kamin v. American Express Directors chose to distribute shares of devalued stock as dividend rather than sell at loss, which would have offset capital gains and saved millions in taxes, so as not to reduce net income and hurt reputation by admitting bad investment; business judgment rule so no liability unless fraud, oppression, arbitrary action, or breach of trust

B.	Shareholder Ratification
In re Wheelabrator (Del.Ch. 1995) sh ratification cures failure of board to reach informed business judgment
•	fully informed board: statement in proxy that board had "carefully considered" merger not materially misleading, though board meeting lasted only 3 hours, because board meeting included presentations by investment bankers and outside counsel, proxy statement described in detail factors that board considered; directors already had substantial working knowledge of merger object

2.	Duty of Loyalty 
rigorous scrutiny, not BJR, applies when transaction involves self-dealing
A.	Directors and Managers
Bayer v. Beran rigorous scrutiny, not BJR, applies when transaction involves self-dealing; burden on Directors to prove good faith of transaction and fairness to corporation; individual consent rather than formal meeting/resolution usually allowed due to practical difficulties in convening board in timely manner, though group dynamics affect decisions and directors unlikely to reverse momentum for steps already taken by management
Lewis v. S.L. & E. (2d Cir. 1980)transaction voidable between corporation and entity in which directors are interested:
(1)	unless approved by disinterested directors upon full disclosure/knowledge (though ignores dynamics of personal relations among directors so that even non-conflicting directors may have some interest in transaction), or
(2)	proved by interested party to be fair and reasonable to corporation at time approved by directors
B.	Corporate Opportunities 
Energy Resources Corp. v. Porter breach of fiduciary duty in failure to disclose DoE grant opportunity to firm
(1)	Did opportunity knock?
•	circumstances in which opportunity came to individual (due to own reputation or position at company)
•	setting (while individual at work or at social event)
•	nature of contact (professional relationship or social acquaintance or family connection)
(2)	If opportunity knocked, would firm have invited it in?
•	line of business
•	financial position of company (current earnings, opportunities; contacts, ability to raise additional funds)
C.	Dominant Shareholders
Sinclair Oil Corp. v. Levien (Del. 1971) tranactions between dominant shareholder/parent company and subsidiary
•	intrinsic fairness standard for decisions involving self-dealing to detriment of minority shareholders
•	business judgment rule (upheld unless gross or palpable overreaching) for business decisions such as payment of dividends in excess of earnings (because minority shareholders also received dividends) and channeling of business opportunities to other subsidiaries (because no showing that opportunity ever came to subsidiary)
Zahn v. Transamerica (3d Cir. 1947) majority shareholder causes directors to call one class of stock without disclosing appreciation in value so minority shareholders would not convert to other class
transactions involving different classes of stock held to principle of fairness to minority shareholders--directors required to treat fairly each class of stock and may not take actions which are designed to enhance the value of one class at expense of another
D.	Ratification by shareholders or majority of disinterested directors 
In re Wheelabrator (Del.Ch. 1995) sh/board ratification shifts burden of proof 
(i)	transaction between corporation and controlling shareholder (parent-subsidiary merger) - upon approval by majority of minority shareholders, standard of review remains entire fairness, but burden shifts to P
(ii)	interested transactions between corporation and director (or entity in which director is also director or has financial interest)
	DE Corporation Act § 144:  approval in good faith upon disclosure of material facts by majority of disinterested directors or shareholders, or is fair as to corporation when approved by board of directors or shareholders, shifts burden of proof to party challenging transaction to show that no person of sound business judgment would deem fair; standard remains business judgment rule
E.	Federal Law
Santa Fe Industries v. Green
•	federal law does not override state corporate law except where federal law expressly requires certain responsibilities of shareholders w/r/t shareholders
•	Rule 10b-5 does not apply to breach of fiduciary duty where transaction not manipulative or deceptive within meaning of statute; no omission or misstatement in notice of short-form merger permitted under DE law
•	once full and fair disclosure has occurred, fairness of transaction not concern of statute
F.	Inside Information
disclose or abstain from trading/recommending rule functions as implied warranty
Goodwin v. Agassiz (Mass. 1933) no liability of insider who purchased shares knowing likely would be more valuable based on geologist's theory, though seller would not have sold if had known of theory, because mere theory
•	directors have no duty to inform shareholders of aspirations, faith and plans for future
•	impersonal transactions v. personal transactions
•	impersonal on stock exchange--insider not required to seek out other ultimate party and disclose all material information when identity not known or readily ascertainable
•	personal transactions between insider and stockholder subject to close scrutiny
Elements of Rule 10b-5 Action:
a.	standing - SEC enforcement or implied private right of action
b.	insider
(1)	corporate officer or director, employee
(2)	tippee - purpose of communication based on context
Chiarella  employee of printer not liable for trading based on information in tender offer documents because not an insider of corporation whose shares he traded; duty to disclose/abstain arises from relationship of trust between shareholders and employees; thief not tippee, though may be liable to employer for misappropriation
Dirks v. SEC (S.Ct. 1983) securities analyst passes on inside information about major fraud in corporation received from former officer and advises clients to sell stock; tippee assumes fiduciary duty to shareholders of corporation only when tippee knows of insider's breach
•	breach of duty only when insider will personally benefit, directly or indirectly, from disclosure, such as through pecuniary or reputational gain; gift of personal information may involve reciprocal expectation of return
•	no duty to disclose for market analyst because in nature of information that cannot be made available to general public but only to analyst's clients; better rule if market analysts permitted to disclose only general buy/sell recommendations or predictions, rather than specific information
Carpenter v. United States (S.Ct. 1986) newspaper columnist shared advance information as to timing and contents of WSJ column and shared profits from trades with tippees; liable under Rule 10b-5 and mail fraud statute due to breach of duty to newspaper employer
United States v. O'Hagan (S.Ct. 1997) misappropriation theory, breach of duty to source of information, may be basis of criminal liability under Rule 10b-5; designed to prevent abuses by outsiders who have access to inside information but owe no duty to corporation or shareholders 
•	Rule 14e-3  does not require specific proof of breach of fiduciary duty, though fair assumption that trading on the basis of inside information about tender offer involves breach of duty to bidder or target company
Rule 14e-3 fraudulent, deceptive or manipulative act for any person in possession of nonpublic material information relating to tender offer acquired directly or indirectly from offering person, target issuer; any officer, director, partner or employee of any other person acting on behalf of the offering person or such issuer, to purchase or sell or cause to be purchased or sold any of such securities . . . unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed 
United States v. Chestman  (2d Cir. 1991) fiduciary duty or similar relationship of trust and confidence does not arise simply from marriage or entrusting confidential information, therefore no liability of broker tippee who traded on inside information received from nephew-in-law of  corporation's president  under Rule 10b-5, though liable under Rule 14e-3 for trading on material nonpublic information relating to tender offer
•	explicit promise not to share or act upon inside information may give rise to fiduciary duty
•	why not hold broker liable for breach of duty to client--fraud on the source?

c.	security	no liability in case of bank check, CD, insurance policy
Reves v. Ernst & Young (S.Ct. 1990) demand notes issued by farmer's cooperative with undetermined maturity falls within definition of security under § 3(a)(10) (which excludes notes with maturity not exceeding 9 months); liquidity of investment does not eliminate associated risk 
factors in deciding whether transaction involves security:
(1)	motivations prompting reasonable seller/buyer to enter into transaction (security when seller's purpose is to raise money for general use of business enterprise or finance substantial investments rather than temporary cash-flow or other commercial or consumer purpose; security when buyer's purpose to generate profit
(2)	plan of distribution for instrument, common trading for speculation for investment
(3)	reasonable expectations of investing public
(4)	existence of another regulatory scheme reduces risk of instrument, rendering securities acts unnecessary
d.	in connection with purchase or sale
Blue Chip Stamps no cause of action if did not buy shares because misled by pessimistic prospectus 
loophole: investor who would have sold/bought but for inside information; just as fraudulent but difficult to prove subjective intent, potentially limitless class of plaintiffs (though applies even when current shareholders do not sell); failure to buy/sell does not utilize market so not regulated by statute
Deutschman v. Beneficial Corp. (3d Cir. 1988) purchaser of option contracts has standing to bring cause of action under Rule 10b-5 for affirmative misrepresentations; options deemed securities because market price for options directly responsive to changes in market price of underlying stock and information affecting that price
•	Chiarella and Dirks rules limiting affirmative duty to disclose or refrain from trading to outsiders and nonfiduciaries in some special relationship of trust of confidence toward plaintiff not applicable to cases involving affirmative misrepresentations which affected market price of securities
e.	misleading disclosure 
Deutschman v. Beneficial Corp. (3d Cir. 1988) Chiarella and Dirks rules limiting affirmative duty to disclose or refrain from trading to outsiders and nonfiduciaries in some special relationship of trust of confidence toward plaintiff not applicable to cases involving affirmative misrepresentations which affected market price of securities
SEC v. Texas Gulf Sulphur (2d Cir. 1968) impression made on reasonable, not sophisticated, investor, in the exercise of due care
when is trading permitted?
(a)	medium of disclosure - broadest medium generally available to investing public (e.g., Bloomberg, AOL)
(b)	timing - reasonable waiting period so that market can absorb/react to information
•	time of day/week
•	whether market responded
(c)	type of information - ease of translation into market action (e.g., news of a revolution more difficult)
f.	materiality 
balance costs and benefits of disclosure; if threshold too low, burden investing public with too much information
Basic Inc. v. Levinson (S.Ct. 1988) substantial likelihood that disclosure of omitted fact would have been viewed by reasonable investor as having significantly altered total mix of information made available
•	where event is contingent or speculative in nature (such as preliminary merger negotiations), reasonable investor might not have considered significant; probability/magnitude approach based on size of two corporate entities and potential premiums over market value, as well as indicia of interest in transaction at highest corporate levels based on board resolutions, instructions to investment bankers and actual negotiations between principals
SEC v. Texas Gulf Sulphur (2d Cir. 1968) whether reasonable investor would attach importance; any fact which in reasonable and objective contemplation might affect value of securities
•	no justification for insider activity that disclosure prevented by legitimate corporate purpose of purchasing surrounding land
•	materiality depends upon both indicated probability that event will occur and anticipated magnitude of event in light of totality of company activity
•	insider behavior gives some indication of whether information material; timing of purchases by individuals who ad never before purchased compels inference of materiality
Jordan v. Duff and Phelps (7th Cir. 1988) special facts doctrine (background rule of state law) that close corporations buying their own stock, like knowledgeable insiders of closely held firms buying from outsiders, have fiduciary duty under Rule 10b-5 to disclose material facts including new events such as merger that substantially affect value of stock
•	parties may contract around special facts doctrine but in the case of employment at will, company did not obtain express or implied agreement releasing it from duty to disclose, and course of dealing suggests regard for value of shares in employees' decision to leave
g.	scienter
Ernst & Ernst v. Hochfelder person making false statement must be shown to have made it with intent to deceive, manipulate, or defraud
h.	reliance
Basic Inc. v. Levinson (S.Ct. 1988) presumption of reliance of individual plaintiffs upon public material misrepresentation because most publicly available information is reflected in market price
•	market acts as unpaid agent of investor, informing as to value of stock given all information available to it
how to rebut:
(1)	misstatements did not affect market price
•	price change relative to nature of disclosure
•	price change of market as a whole and other stocks in sector
•	trading volume
•	historical movement of stock with/against market
•	other information/disclosures from company that may cancel out misstatement
(2)	market was not efficient
•	NYSE efficient because heavily traded, followed by analysts
•	thinner markets, OTC, might be less efficient so market price would not necessarily reflect all publicly available information
(3)	P did not actually rely on market price or disclosure
•	knowledge of untruth of statement
•	other reasons for trading

Pommer v. Medtest (7th Cir. 1992)
•	no presumption of reliance in personal transaction, no fraud on the market but sale between individuals
•	generic warnings or boilerplate that shares may become worthless do not enlighten investors as to specific risks or prevent reliance on false oral statements 
•	ex ante perspective of securities laws: just as a statement true when made does not become fraudulent because things unexpectedly go wrong, so a statement materially false when made does not become acceptable because it happens to come true
i.	damages
Pommer v. Medtest (7th Cir. 1992) damages under Rule 10b-5 are actual damages under loss causation principle, difference between price of stock and its value on the date of transaction if full truth were known, not full rescissionary damages which imply that stock did become worthless

G.	Short-Swing Profits
§ 16(b) of 1934 Act officers, directors and 10% shareholders must pay to the corporation any profits they make, within a six-month period, from buying and selling firm's stock; for the purpose of preventing unfair use of information 
•	officers and directions subject to § 16(b) if occupy position either at time or purchase or time of sale
•	equity securities, including convertible debt
•	damages calculated using lowest priced purchases and highest priced sales, to maximize amount company can recover
Reliance Electric v. Emerson Electric (S.Ct. 1972)
•	beneficial owner must be such both at the time of purchase and sale, or the sale and purchased involved
•	bright-line rule underinclusive when read literally to allow parties to plan activities to avoid liability:  statutory insider might sell enough shares to bring holdings below 10% and within six months of purchase sell additional shares free from liability 
•	at some point separate transactions may be deemed the same--within same day? hour?
Kern Co. v. Occidental Petroleum (S.Ct. 1973) S.Ct. refuses to apply §16(b) to behavior that falls within but does not meet Congress's purpose; execution of option to purchase not exercisable within 6-month period, and exchange of shares in tender offer, not deemed sale under 16(b)
courts look to whether  transaction involves speculative abuse
involuntary exchange of shares by tender offeror threatening hostile takeover and displacement of management, vigorously and immediately opposed by current management, not in position of insider
H.	
Disclosure and Fairness
Doran v. Petroleum (5th Cir. 1977) in absence of finding that offerees had been provided with information about issuer or given effective access to such information as would have been disclosed in registration statement, sale of limited partnership interest not private offering exempted by § 4(2) from registration requirements of 1933 Act 
•	exempt transactions are those as to which there is no practical need for protection of the Act
factors in determining whether private offering:
(1)	number of offerees and relationship to each other and the issuer 
•	sophistication of investor is not substitute for access to information that registration would disclose; must be sufficient basis of accurate information upon which sophisticated investor may exercise skills
(2)	number of units offered
(3)	size of the offering
(4)	manner of the offering
I.	Indemnification and Fairness
form of compensation to officers and directors against litigation risk (attorneys' fees, expenses) and liability risk (damages, penalty if found liable); individual retains separate counsel when potential liability exceeds corporate insurance policy limits
•	insurance company controls risk through:
(i)	deductibles (insured covers first traunch of risk)
(ii)	exclusions
(iii)	premiums to reflect risk probability of insured
(iv)	policy ceilings/limits (insured covers last traunch of risk)
(v)	copayments
(vi)	monitoring operations (provide advice and counsel to reduce risk)
•	if indemnification instead of insurance, company controls risk by exclusions and monitoring operations
•	problems of indemnification:  self-dealing involved; company may not be able to perceive or rate risk; only attorney benefits because corporation reimburses officer/director for damages paid to corporation

DE General Corporation Law § 145
(1)	in civil action, not derivative, or criminal action, corporation may indemnify officer/director, employee or agent against expenses, judgments and amounts paid in settlement if:
(a)	in good faith
(b)	in manner reasonably believed to be in or not opposed to best interests of corporation
(c)	had no reasonable cause to believe conduct was unlawful
(2)	in civil derivative action, corporation may indemnify officer/director, employee or agent only against expenses if
(a)	in good faith
(b)	in manner reasonably believed to be in or not opposed to best interests of corporation
except no indemnification if person adjudged liable unless and to the extent that the Chancery Court determines that person is fairly and reasonably entitled to expenses
•	to the extent person successful on the merits, corporation shall indemnify against expenses
•	determination that person entitled to indemnification made by majority of non-interested directors, written opinion of independent legal counsel, or stockholders
•	corporation permitted to pay expenses in advance of final disposition upon receipt of undertaking to repay amount if ultimately determined that not entitled to indemnification
•	corporation has power to purchase and maintain insurance on behalf of nay person irrespective of whether corporation would have power to indemnify under statute
Citadel Holding v. Roven (Del. 1992)
indemnification agreement provided additional protection beyond that available under DE corporate law by requiring corporation to advance costs and expenses before final disposition
any action not limited to claims against which director may be indemnified but extends to federal claims based on actions taken as director reasonably related to business of corporation (even if company later determines that director not entitled to indemnification)

V.	
Problems of Control
solicitation includes any communication with shareholders relating to potential subject of shareholder meeting
•	letter to shareholders influencing proxy outcome
•	Studebaker v. Gittlin (2d Cir. 1966)  preliminary requests that other shareholders join in demanding shareholder list constitutes solicitation under § 14, even though purpose of such solicitation was to get list with which to make actual proxy solicitation
A.	Proxy Fights
insurgent tries to oust incumbent management by soliciting proxy cards and electing its own representatives on the board;  how to gain control over company:
(i)	tender offer to buy shares from current shareholders (often hostile takeover attempt)  
•	if lose tender offer, still make money upon resale of shares to winning bidder
•	capture value added through ownership of shares
(ii)	proxy solicitation to elect new directors  
•	cheaper than tender offer, but must share value added as director with current shareholders
•	if lost bore entire cost of proxy solicitation
1.	Strategic Use of Proxies
Levin v. MGM (S.D.N.Y. 1967) not wrongful or unfair for incumbent management to commit corporation to pay for services of specially retained attorneys, public relations firm and proxy soliciting organizations and to have used offices and employees of corporation in proxy solicitation and the good-will and business contacts of corporation to secure support for present management 
•	right of independent shareholder to be fully informed is of supreme importance, though also important that court not act to unduly influence shareholder's decision as to which faction should receive proxy
•	amounts paid not excessive
2.	Reimbursement of Costs
Rosenfeld v. Fairchild Engine & Airplane (N.Y. 1955) when directors act in good faith in a contest over policy, as opposed to purely personal power contest, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies which directors believe, in good faith, to be in best interests of corporation, subject to court scrutiny
•	successful insurgents may also be reimbursed for the reasonable expenses incurred in good faith, subject to court scrutiny
•	where moneys spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in best interests of stockholders and corporation, or where fairness and reasonableness of amounts are successfully challenged, courts will disallow
3.	Private Actions for Proxy-Rule Violations
§ 14(a) of 1934 Act prohibits solicitation of proxies in violation of SEC rules. Rule 14a-9 prohibits solicitation of proxies by means of materially false and misleading statements.
Virginia Bankshares v. Sandberg (S.Ct. 1991) no causation when minority shareholder votes not determinative of outcome
•	misstatement of psychological fact of speaker's belief alone, without objective evidence that statement also expressly or impliedly asserted something false or misleading about subject matter, not subject to § 14(a) 
•	mixed statement of opinion and fact may be materially misleading even when stated in conclusory terms when misleading about subject matter; reasons for directors' recommendations or statements of belief are matters of corporate record subject to documentation, to be supported or attacked by evidence of historical fact, so no undue risk of open-ended liability or uncontrollable litigation
Stahl v. Gibraltar Financial (9th Cir. 1992)
•	reliance not necessary element under § 14(a)--plaintiff who did not rely on misrepresentations may bring suit before or after vote is taken; should not penalize shareholders who discovered true facts
4.	Shareholder Proposals
Rule 14a-8 requires corporation, upon notification by shareholder of intention to present proposal for action at forthcoming shareholder meeting,  to include proposal on proxy statement, with certain exceptions:
•	corporation has burden to show that proposal falls within exception
14a-8(c)(1) not proper subject for action by share holders under state law
14a-8(c)(2) would require violation of law if implemented
14a-8(c)(4) relates to redress of personal grievance or to further personal interest not shared with other shareholders at large
14a-8(c)(5) insignificant relationship to business of firm (<5% of total assets) 
14a-8(c)(6) deals with matter beyond corporation's power to effectuate 
14a-8(c)(7) deals with ordinary business operations (proposal violates fundamental rule Shareholders Sharehold; Managers Manage); mundane matters of day-to-day business involving no substantial economic and policy considerations
Amalgamated Clothing and Textile Workers Union v. Wal-Mart (S.D.N.Y. 1933) SEC No-Action Letter to individual company is not expression of interpretation to which court must defer, not ruling or decision; employment-related proposals based on social policy considerations generally deemed to involve conduct of day-to-day business; even if substantial policy, request for information regarding individual actions involves day-to-day business
Austin v. ConEd of NY (S.D.N.Y. 1992) shareholder proposal relating to employee pension rights and retirement after period of service not required to be included on proxy statement because related to ordinary business operations; availability of alternative forum, collective bargaining, indicates that issue not so extraordinary that shareholder meeting is only forum
NYC Employee's Retirement System v. Dole Food (2d Cir. 1992) corporation must include in its proxy statement shareholder proposal to establish committee for purpose of evaluating impact of national health care reform proposals on the company, though relates to employee benefits, because not beyond firm's power to effectuate, not related to ordinary business operations, and not insignificant piece of firm's business
5.	Shareholder Inspection Rights
books and records of firm; shareholder list (necessary to communicate directly with shareholders)
Crane v. Anaconda (N.Y. 1976) NY BCL § 1315 requires foreign corporation doing business in state to furnish shareholder list upon request of NY resident who for six months has been shareholder of record or holds or acts for those who hold 5% of any class of shares, if for purpose in interest of business of corporation (similar provision for NY corporations § 624)
•	solicitation of tender offer of general interest to shareholders of corporation, so shareholder entitled to have access to shareholder list unless inimical to purposes of corporation or its shareholders
•	whenever corporation faces situation having potential substantial effect on its wellbeing or value, shareholders are necessarily affected and business of corporation is involved
State Ex Rel. Pillsbury v. Honeywell (Minn. 1971) shareholder who purchased stock of corporation for sole purpose of asserting ownership privileges in effort to halt corporation's production of bombs not entitled to inspect corporate records because did not have proper purpose related to economic interest as shareholder
•	proper purpose is investment interest in long term well-being of corporation or enhancement of value of shares
Sadler v. NCR (2d Cir. 1991) NY law requiring out-of-state corporation doing business in NY to provide resident shareholders with list of shareholders and to compile and produce list of beneficial owners of shares who do not object to disclosure of names, when law of state of incorporation would not allow shareholders to obtain such lists, valid and not violative of Commerce Clause
statute is to be liberally construed to facilitate communication among shareholders on issues respecting corporate affairs, so firm required to compile NOBO list though one not currently in existence; DE construes its statute narrowly because compilation of NOBO list can take up to 10 days to compile and plays no role in proxy contest
B.	Shareholder Voting Control
Stroh v. Blackhawk Holding (Ill. 1971) difficulties of transition from small corporation controlled by promoters to public corporation: inherent conflict of interest when managers control corporation, inconsistent with concept that capital investment determines control when separate economic rights from voting rights
•	under Illinois corporate law, parties to a corporate entity may create whatever restrictions and limitations they may want with regard to corporate stock in the articles of incorporation limited only by proviso that articles may not limit or deny voting power of any share
•	economic rights to earnings and rights to assets may be removed and eliminated from other attributes of share of stock so long as voting rights are not limited or denied
•	proprietary rights conferred by ownership may consist of one or more of rights to participate (i) in the control of the corporation, (ii) in its surplus or profits, or (iii) in distribution of its assets
•	great deal of flexibility in structuring share attributes as long as full disclosure, may be bad deal but no fraud

C.	
Control in Closely Held Corporations  deadlock and oppression
Ringling Bros. v. Ringling (Del. 1947) vote pooling agreement valid, distinguished from voting trust, not against public policy, because parties only consult about how to vote stock and to vote together, not what to vote, therefore does not separate voting power from share ownership; provision for submission to arbitrator intended only as deadlock-breaking measure, not transfer of ownership of shares 
•	under state law, voting trust, by which legal ownership of shares is transferred to trustee who can vote under terms of trust instrument, can exist only for ten years, while voting agreement, by which parties retain legal ownership of stock but are contractually bound to vote together, has no duration limit
•	proper remedy not to declare election invalid but not count votes cast in violation of agreement, with result of deadlock in same number of directors elected by remaining two shareholders, closing out third shareholder who is in worse position than if had complied with voting agreement 
McQuade v. Stoneham (NY 1934) agreement between majority shareholder and two minority shareholders that one minority shareholder would be retained as treasurer of corporation at specified salary held invalid because precludes board of directors from changing officers, salaries or policies at risk of incurring liability except by consent of contracting parties
directors may not by agreements entered into as shareholders abrogate their independent judgment
power of shareholders to unite is limited to election of directors and is not extended to contracts whereby limitations are placed on power of directors to manage business of corporation by selection of agents at defined salaries; violates fundamental principle of Shareholders Sharehold, Directors Direct
•	punctilio of Meinhard v. Salmon exists only in relation to corporation and its shareholders, not to individual director; mere morals of marketplace govern contracts
•	not all shareholders were party to agreement, therefore would be injured if directors failed to exercise honest and unfettered judgment
•	§ 620 of NY BCL overruled McQuade principle in limited circumstances if arrangement is disclosed in articles of incorporation and is approved by all of shareholders
Clark v. Dodge (NY 1936)
•	agreement between two sole shareholders of corporation to retain one as general manager at specified salary upheld because no risk of harm to minority shareholders or public
•	damage suffered or threatened is a logical and practical test for validity of shareholder agreements; if enforcement of contract damages nobody, not even the public, then no reason to hold it illegal even though impinges slightly upon broad statutory provision that business of a  corporation shall be managed by directors
•	distinguished from McQuade:  no attempt to sterilize board of directors or render powerless, only agreement as to manager's position and salary; agreed to by all shareholders

Galler v. Galler (Ill. 1964)
distinction between publicly held and closely held corporations, from which shareholders cannot escape merely by selling shares; modern view of nearly complete acceptance of shareholder agreements concerning management of corporation so long as:
(1)	no complaining minority interest appears
(2)	no fraud or apparent injury to the public or creditors is present, and
(3)	no clearly prohibitory statutory language is violated 

Ramos v. Estrada (Cal. 1992)  general corporate law also open to shareholder pooling agreements so long as not totally sterilize board and serve valid purpose (avoid oppression) and agreed to by all shareholders (but even if not, only tells shareholder to vote together without what to vote or how to manage)
agreement to vote shares in manner voted by majority of shareholders did not constitute proxy but is substantially similar to pooling agreement authorized under California Corporations Code § 706 for close corporations (agreement between two or more shareholders of close corporation may provide that shares held by them shall be voted as provided by agreement or a parties may agree or as determined in accordance with a procedure agreed upon by them), applies also to non-close corporations so long as not otherwise illegal
Zion v. Kurtz (NY 1980) court upheld under both Del. and NY law complex financing arrangement in which creditor obtained minority interest in closely held corporation and commitment from dominant shareholder that corporation would not enter into transactions without consent of creditor, despite "technical" defects in failure to expressly elect close corporation status and to refer to agreement limiting discretion of directors in articles of incorporation
D.	Abuse of Control
Wilkes v. Springside Nursing Home (Mass. 1976) breach of fiduciary duty when three majority shareholders of close corporation did not show legitimate business purpose for severing fourth shareholder/director from payroll and refusing to reelect him as officer or director because no showing of misconduct or neglect of duties but design to pressure shareholder into selling shares to corporation at price below value, in disregard of longstanding policy that each shareholder would be director of corporation and employment with corporation would go hand in hand with stock ownership; damages in amount that would have been received if he had remained officer and director
•	shareholders of close corporation owe each other same fiduciary duty of utmost good faith and loyalty in operation of enterprise that partners owe to one another
•	close corporations afford opportunity to majority shareholders to oppress, disadvantage or freeze out minority stockholders
•	when asserted business purpose for action is advanced by majority, it is open to minority shareholders to demonstrate that same legitimate objective could have been achieved through alternative course of action less harmful to minority's interest

Ingle v. Glamore Motor Sales (NY 1989) provision in shareholders agreement for option to repurchase all shares of stock from stockholder in event that stockholder ceases to be an employee of corporation for any reason, where there was no employment contract, held not to violate fiduciary duty of close corporation to shareholders when fair share price paid 
•	duty owed by corporation to minority shareholder as a shareholder distinct from any duty it might owe her as employee
•	divestiture of status as shareholder by operation of repurchase provision was contractually agreed to consequence flowing directly from firing
•	no duty of loyalty and god faith akin to that between partners precluding termination except for cause, arises among those operating business in the corporate form who have only the rights duties and obligations of stockholder and not those of partners
Sugarman v. Sugarman (1st Cir. 1986) majority shareholder's offer to buy stock from minority shareholders at inadequate price constituted breach of fiduciary duty to minority shareholders of close corporation as part of plan to freeze minority shareholders out of financial benefits to which they were entitled
•	elements of cause of action by minority shareholder denied of fair share of benefits of close corporations:
(1)	not sufficient to show majority shareholders have taken excessive compensation (because must be brought as derivative action) unless attempted freeze-out of minority shareholders by draining off corporations earnings in form of exorbitant salaries and bonuses
(2)	not sufficient to allege that majority shareholder has offered to buy stock of minority shareholder at inadequate price unless majority shareholders breach duty to exercise complete candor with minority shareholders when negotiating stock transactions and fail to disclose all material facts surrounding proposed transaction
Smith v. Atlantic Properties  (Mass. 1981) breach of fiduciary duty of utmost good faith and loyalty to shareholders of close corporation in director's unreasonable refusal to vote for declaration of dividends, attributed to tax avoidance purpose and dislike for other shareholders rather than any legitimate repair and improvement program, incurred substantial penalty taxes and legal expense
•	reversal of roles of majority and minority shareholders due to provision in articles of incorporation requiring vote of 80% of outstanding shares for election, appointment or resolution, effectively granting veto to any one of four original shareholders
Jordan v. Duff and Phelps (7th Cir. 1988) stock repurchase agreement that corporation would purchase at book value all shares held by employee upon termination of employment for any reason valid and enforceable on its face, because close corporations do not want outsiders holding stock, provide incentives to prospective employees and disincentives for employees to leave
•	special facts doctrine (background rule of state law) that close corporations buying their own stock, like knowledgeable insiders of closely held firms buying from outsiders, have fiduciary duty under Rule 10b-5 to disclose material facts including new events such as merger that substantially affect value of stock
•	parties may contract around special facts doctrine but in the case of employment at will, company did not obtain express or implied agreement releasing it from duty to disclose, and course of dealing suggests regard for value of shares in employees' decision to leave
•	employment at will still a contractual relation requiring company not to behave opportunistically to discharge employee 

VI.	
Mergers, Acquisitions and Takeovers
A.	Statutory Merger
two companies form third separate company or one company takes on identity of the other
•	board approval by both boards
•	shareholder approval
•	may be by supermajority (depending on corporate charter)
•	interested shareholders may be excluded from voting
B.	De Facto Merger
sale of substantially all assets to other company in exchange for cash which is then liquidated in form of dividends to shareholders 
•	issue of what happens to liabilities of selling firm
•	requires approval of shareholders of acquiring firm
Farris v. Glen Alden Corporation (Pa. 1958) court treats asset acquisition transaction as de facto merger with appraisal rights for shareholders based on realities and consequences of transaction not only provisions of agreement under which selling corporation sold assets for shares of acquiring corporation and then dissolved and distributed shares to dissenting shareholders
•	shareholder approval of asset acquisition agreement invalid due to failure of corporate officers to inform shareholders that true intent and purpose of agreement was merger and their right to dissent and claim fair value for shares 
•	PA legislature later revised corporate law to abolish doctrine of de facto merger
Hariton v. Arco Electronics (Del. 1963) merger may be accomplished as sale of assets with mandatory dissolution and distribution without appraisal rights of statutory merger under DE corporate law
Rauch v. RCA (2d Cir. 1998) de facto non-merger theory rejected by court; agreement took form of merger but in substance was sale of assets followed by redemption (upon which sh's entitled to much higher price in Cert. of Inc.); corporation had every right under DE merger statute to convert stock to cash to accomplish merger - to treat such as redemption would be to nullify conversion provisions of statute

C.	Freeze-Out Mergers
parent takes over subsidiary through forced sale by minority shareholders
•	no vote by minority
•	forced sale
•	minority has appraisal rights
•	may be general fiduciary duty of fair treatment to minority shareholders during course of freeze-out
how to get majority share ownership:
(1)	buy in market
(2)	stock tender offer - acquiring company offers own stock in exchange for acquired company's stock; no financing required because just issuing own stock
(3)	cash tender offer - acquiring company offers shareholders of acquired company cash in return for stock 
Weinberger v. UOP (Del. 1983)
short-form cash-out merger transaction between parent and partially owned subsidiary failed to meet standard of entire fairness: 
(1)	fair dealing - when transaction was timed, how it was initiated, structured, negotiated, disclosed to minority shareholders/directors and how approvals of director and stockholders of subsidiary corporation were obtained
•	lack of disclosure of feasibility report that higher price than offered was still good investment for acquiring company; lack of price negotiation; cursory preparation of investment bankers' fairness opinion and communication in social context; huge time pressure in 4 day timeframe
(2)	fair price - economic and financial considerations including all relevant factors such as assets, market value, earning, future prospects and any other elements that affect intrinsic or inherent value of company's stock
•	result could have been different if independent negotiating committee of outside directors had conducted transaction and parties had exerted bargaining power against other at arms length
Coggins v. New England Patriots Football Club (Mass. 1986) majority shareholder in freeze-out merger has burden of proving
(1)	merger was for legitimate business purpose
•	because duty of a corporate director is to further legitimate goals of corporation, and freeze-out merger results in the elimination of public ownership in corporation, the corporate directors who benefit from transfer of ownership must demonstrate how legitimate goals of corporation are furthered
•	director violates fiduciary duty when uses the corporation for his or his family's personal benefit in a manner detrimental to the corporation
(2)	then considering totality of circumstances, merger was fair to the minority
•	normally appropriate remedy for impermissible freeze-out merger is rescission, but when passage of time makes pre-merger position of parties impossible to restore, damages based on present value are appropriate
Rabkin v. Philip A. Hunt Chemical Corporation (Del. 1985)
appraisal remedy may not be adequate in cases beyond mere inadequacy of price, particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved
•	inequitable conduct in failing to effect cash-out merger during one-year period of commitment to $25/share price will not be protected merely because no legal obligation to carry it out
•	lack of genuine bargaining, when price at low end of fairness range, looks like overreaching
Cheff v. Mathes (DE 1964) greenmail - strategy of inside directors to use corporation's assets to buy out dissident directors directly at a premium price to eliminate threat to corporate policy
burden of proof on directors to justify transaction on basis of reasonable belief in danger to corporate policy, good faith and reasonable investigation
•	corporation's power to purchase and sell shares of its own stock analogous to power to use proxy funds to inform stockholders of management's views on policy questions in election to board of directors, but not selfish desire to perpetuate themselves in office
•	if board has acted solely or primarily out of desire to preserve own positions, the use of corporate funds is improper
•	control premium - substantial block of stock will sell at higher price than individual shares trading in open market
•	existence of non-corporate alternative (personal funds) to buy out control block to maintain control irrelevant to issue of improper purpose
•	50% tax on gains from greenmail - sale of stock held for less than 2 years and sold to corporation pursuant to offer not made on same terms to all shareholders
Unocal v. Mesa Petroleum (DE 1985) board's decision to selectively offer fair value to shareholders excluding raider shareholder making two-tiered front loaded tender offer with junk bonds, reasonable and consistent with directors' duty to ensure that minority shs receive equal value for their shares
•	to be protected by business judgment rule, a defensive tactic must be reasonable in relation to threat posed to corporation(inadequacy of price offered; nature and timing of offer; illegality, impact on non-shareholders such as creditors, customers, employees, and community generally), risk of non-consummation, and quality of securities offered in exchange; enhanced judicial scrutiny over and above the traditional business judgment rule standard

Revlon v. MacAndrews & Forbes Holdings (DE 1985) when board of directors concludes that sale of business is inevitable, its role shifts from participant in contest to a more neutral stance ensuring that shareholders get best possible price for shares, directors no longer may exercise business judgment to prefer one bidder over another but must allow market forces to operate freely; decision to use a lock up to defeat a higher bidder and favor a lower bidder not protected by business judgment rule
•	concern for various corporate constituencies is proper when addressing takeover threat limited by requirement that there be some rationally related benefit accruing to stockholders; concern for non-stockholder interest is inappropriate when action among active bidders is in progress and the object no longer is to protect or maintain corporate enterprise but to sell to highest bidder
Paramount v. Time (DE 1989)
•	two circumstances when Revlon duties to maximize immediate shareholder value: (1) when corporation initiates active bidding process seeing to sell itself or to effect a business reorganization involving a clear break-up of the company, and (2) in response to a bidder's offer, a target abandons its long-term strategy and seeks alternative transaction involving breakup of the company
•	if board's reaction to hostile tender offer is only defensive response and not abandonment of corporation's continued existence, Unocal duties attach
Paramount v. QVC (DE 1989)
enhanced scrutiny to determine whether defensive measures were coercive or preclusive
where self-interest is present and affects a majority of directors approving transaction, court will apply even more exacting scrutiny to determine whether transaction is entirely fair to stockholders
•	when corporation undertakes a transaction which will cause a change in corporate control or a break-up of corporate entity, duty to seek best value
•	in seeking best value, having informed themselves of all information reasonably available, directors not limited in methods by which to fulfill obligation, such as conducting auction, canvassing market, etc.; not limited to considering only amount of case involved, not required to ignore its view of future value of a strategic alliance
•	enhanced scrutiny mandated by:
•	threatened diminution of current stockholders' voting power
•	fact that asset belonging to public stockholders (a control premium) is being sold and may never to available again
•	traditional concern of DE courts for actions which impair or impeded stockholder voting rights
•	key features of enhanced scrutiny: 
(a)	judicial determination regarding adequacy of decision making process employed by directors,  including information on which director based their decision
•	directors have burden of proving that (a) diligent and vigilant in examining critically the competing offers; (b) act in good faith; (c) obtain, and act with due care on, all material information reasonably available, including information necessary to compare competing offers  and alternative courses of action to determine which would provide best value; and (d) to negotiate actively and in good faith with both competing bidders
(b)	judicial  examination of the reasonableness of directors' action in light of circumstances then existing
•	judicial scrutiny limited to whether decision was within range of reasonableness, not perfect