Corporations Outline

I.	The Corporate Entity
                  Corp                 Gen. Partnership                 Limited Liability Corp.
Creation:                State                     Partners                                    State
Entity:                     Yes                         ?                                             Yes
Continuity:              Yes                        No                                           No
Personal Liability:  No                      Yes (unlimited)                          No
Tax Character:    Tax payer              Pass through                             Pass through

-	Sole propietarship: No legal entity, have to register name
-	Conventional Wisdom: Organizing small business Limited liability corp
(1)	Advantage of limited liability
(2)	Avoid disadvantage of double taxation
-	Corp pays tax on revenue
-	Shareholders pay tax on dividends
-	For average start-up, these considerations are irrelevant

1.	Formation § 101-104, 106; § 401-403
a.	Procedure
(1)	Certificate of Incorporation must be signed by incorporator(s) 
[Must be 18+ in NY § 401]
(2)	Filed with Secretary of State
(3)	Recorded by the Recorder of Deeds
(4)	All taxes and filings must be paid
(5)	Secretary of State must stamp certificate filed and return same incorporator
(6)	Duplicate copy recorded with Recorded of Deeds
(7)	“To conduct or promote any lawful business or purposes” NY 402(a)(2)
 
b.	Contents
(1)	Name of corporation 
(i)	Must include one of the following: association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate, or limited
(ii)	Name “shall be such as to distinguish it…from the names of other corporations”.  No duplication of names

(2)	Address of corp and registered agent within the state

(3)	Purpose Clause: Usually general, can be specific to prohibit corp from entering certain types of business
(i)	NY 402(a)(2): If use general purpose clause, must also specify that corp is not formed to carry out any activity requiring state approval 
(ii)	Ultra vires: Corp acting outside stated powers (§ 124 ; § 203)
-	Classically, transactions outside sphere were unenforceable against corp because beyond corp’s powers and unenforceable by corp on the ground of lack of mutuality
-	2 questions
 Acting beyond purposes, engaged in business activity not permitted under its certificate
 Whether corp exercised a power not specified in is certificate
-	Recurring problems : 3rd party debt; power of corp to be a general partner
-	Present-day statutes explicitly empower corp to make guarantees, even without provision to that effect in certificate and explicitly empower corps to become partners
-	Corp powers could be implied or explicit
-	Ultra vires not a defense to tort or criminal liability
-	Doctrine confined to executory contracts, but still limited
-	If both parties had fully performed, ultra vires could not undo transaction
-	If neither had performed, it was a defense to both corp and 3rd party
-	Difficult case when 1 party performed and nonperformer sought to use as defense
-	Majority view: Nonperformer, having received benefit was estopped from using ultra vires as a defense
-	General purpose clauses got rid of this problem

(4)	Capitalization NY 402(a)(4)-(5)
(i)	Certificate must set forth classes and number of shares that corp is authorized to issue, par or no par value stock
(ii)	If more than 1 class and/or preferred class- set forth the designation, powers, preferences and rights, qualifications, limitations, and restrictions for each class
(iii)	For preferred, include statement of authority to be vested in board to establish, designate series, and fix variations in relative rights, preferences and limitations
(iv)	If corp does not have authority to issue capital stock, must be stated in certificate (DE 102)
(5)	Duration of corp, if other than perpetual

(6)	Discretionary items that may be included:
(i)	Provisions setting forth elimination or limitation of liability for directors or shareholders for damages for any breach of duty within certain restrictions (e.g., bad faith)
(ii)	Larger voting proportions needed for actions than that called for by DE GCL (DE 102(b)(4))
(iii)	Provision levying personal liability on shareholders.  Otherwise, no liability 102(b)(6); 402(b)

(7)	Preemptive rights: Rights that are sometimes given to shareholders that permit them to maintain % of ownership in corp by enabling them to buy a portion of any newly issued shares
 DE 102(b)(3)- Shareholders do not have preemptive rights unless expressly granted in charter
 NY- Shareholders possess preemptive rights unless expressly denied in charter

(8)	Agent of Process NY 402(a)(7)

c.	Execution, Acknowledgement, Filing, Effective Date DE 103
(1)	Certificate signed by incorporators if filing occurs prior to election of initial Board of Directors 103(a)(1)
(2)	Signature constitutes affirmation/acknowledgement of signor 103(b)(2)
(3)	Certificate is deemed filed when: 103(c)(3)
(i)	Instrument is delivered
(ii)	Taxes and fees are rendered
(4)	If there is an error, certificate of correction may be filed 103(f)

d.	Required First Actions of Corporation:
(1)	Directors are elected
(2)	Bylaws are adopted, including:
(i)	Date for annual meeting
(ii)	Provisions for the number of officers and directors
(iii)	Provisions for notice of annual meeting and how such notice is to be given
(iv)	Powers of officers and directors
(v)	Provisions for establishment of bank account

Note on Initial Directors
-	Board of directors elected by shareholders BUT no shareholders until stock is issued and issuing stock is function of board
-	Mechanism for naming for naming directors before stock or issuing stock before directors
-	2 statutory patterns for solving problem:
(1)	Incorporators have power of shareholders until stock is issued and powers of directors until directors are elected (NY 404(a); 615(c))
-	incorporators will adopt-by-laws, fix number of directors, elect directors to serve to serve until first annual meeting of shareholders

(2)	Incorporators have powers of shareholders and directors unless initial directors are named in certificate of incorporation (DE 107; 108)

e.	Corporate Existence
(1)	De jure: Perfect/Substantial compliance with statutory requirements for formation
(2)	De facto: Imperfect or non-substantial statutory compliance, but sufficient steps have been taken towards formation so as to treat entity as a corp with respect to 3rd parties
(i)	Incorporation statute
(ii)	Good faith effort to comply with statutes
(iii)	Some good faith, significant use of corporate entity
-	Consequence of not qualifying as a de facto corp is personal liability of directors or shareholders

Timberline Equipment Co. v. Davenport (Ore. 1973)
-	 signs contract on behalf of Aero-Fabb Corp. in Jan
-	Certificate of incorporation is not issued until June 
-	Oregon statute: All persons who assume to act as a corporation without the authority of certificate of incorporation… shall be jointly and severally liable for all debts and liabilities incurred…”
-	 alleged de facto corporation defense
-	 H:  is personally liable under contract
-	Persons who assume to act… does not include those whose connection with organization is only as an investor
-	 went beyond passive investing- participated in policy and operating decisions, visited site, met with employees, assumed to act for organization
-	Therefore, liable under statute

-  Today, can start corp immediately
Model Act: Intention to abolish de facto corporation doctrine
- no influence on NY or DE
- states which have adopted are split on whether it abolished the doctrine

(3)	By Estoppel: When party has dealt with enterprise as though it were a validly formed corp so that it would be unjust to permit party to allege thereafter that
corp was defectively formed.
-	Depends on who is bringing suit
-	Estoppel cases may arise under 3 different theories:
 An association, or its owners, having claimed corporate status in an earlier transaction with a 3rd party, later denies status is a suit brought by 3rd party.
True estoppel

  in suit by would be corporation may seek to raise defense that  is not a corp, and therefore cannot sue in corp name.  Courts tend to find this nonmeritorious.

 3rd party who has dealt with business as a corp seeks to impose personal liability on would-be shareholders who raise estoppel defense.  Should claimant, having dealt with business as if it were a corp, be prevented from treating it as anything else? (Cranson v. I.B.M. (1964) YES)
-	comparable to de facto theory but cannot be used against tort claimant or someone who was a stranger to business before claim
-	would be shareholders would not need estoppel if could establish de facto corp so presumably, therefore, less in way of “corporateness” must be shown to establish a corporation by estoppel than to establish de facto
-	Timberline leaves open the question of the impact of statutes on estoppel theory

Quo Warranto: Traditional method for corporate status, proceeding brought by state
-  de facto only defense against collateral attack, by private actors
-  de jure  good defense

(4)	NY RULE: Conway v. Sampson: Approach as agency issue
-	Agency rule of Implied Warranty of Authority
-	If  acted on behalf of X corp, with actual or apparent authority, bind X to 
-	If  doesn’t have authority or corp doesn’t exist, breached warranty of authority
-	BUT who is liable?  breached but someone hired him, they breached also
-	Suits against whole chain of authority:  1 2 3

f.	Basic Modes of Corporate Finance
(1)	Common Stock: Equity interest, residual ownership, claim to what is left after all senior elements (debt and preferred stock) have been satisfied

(2)	Debt: Fixed claim against corporation for principal and interest
(i)	Bonds, Debentures, and Notes: Long-term promissory notes issued pursuant to and governed by longer contracts
-	Bonds and debentures are long-term obligations issued under indentures
 Bonds: Secured obligations
 Debentures: Unsecured obligations
-	Notes: Before, not under indentures, now can be; unsecured, intermediate term (10 years or less)
-	Promise by borrower to pay specified amount on specified date, together with interest at specified times, on terms spelled in governing indenture or note agreement
 
(ii)	Indentures: Contract entered into between borrowing corporation and a trustee
-	Contract with trustee, rather than directly with holders of the bonds so as to permit bonds to be sold in small denominations to large numbers of scattered investors
 
(3)	Preferred Stock: Hybridization of the ownership element of common stock and the senior nature of debt

g.	Dealing With Foreign Corporations
     McDermott, Inc. v. Lewis (Del. 1987)
 -   McDermott (DE) is a public company that owns 100% of subsidiary, McDermott      
      International (Panama)
-    Change in U.S. tax laws and McDermott (DE) becomes liable for revenues of foreign  
      corp that have not yet been repatriated
-    Swap places: McDermott International becomes parent and McDermott becomes     
      subsidiary
-    International buys majority share in McDermott
-    International amends charter: Instead of 1000 authorized shares, 20, 000, 000
-    Offers McDermott shareholders a swap of 1000 McDermott shares for shares in
      International
-    International owns 92% of McDermott, 8% for public
-    Practical Consequence: Board of International gets to decide how shares of
      International are voted because they own McDermott
-    If both U.S. companies, couldn’t do because you can own stock but can’t vote it
-    Panamanian law allows
-   Conflicts Rule: Internal Affairs Doctrine: State of incorporation governs internal
     affairs, look to law of state of incorporation of corporation whose stock is  being voted
-   Here, Panama it is allowed
-   Indication that there may be a constitutional dimension to choice of law

- Some states trying to regulate internal affairs of corporation
- “Pseudo-foreign”: Substantial operations in state but are incorporated in another
    jurisdiction
- CA subjects foreign corps to CA corporate law if more than 50% of corporation’s property, sales, payroll and outstanding shares are in state

CTS v. Dynamics: Court seems to be saying that internal affairs doctrine has constitutional implications
-  A number of states, including NY (§ 1319; § 1320) try to apply state corp law to
    foreign corps
-  Is this constitutional?

2.	The Entity Idea
-	A corporation may exist as a legal entity separate and distinct from its shareholders
-	Has duties, responsibilities, and rights
-	Can sue or be sued
-	Can own property
-	Power to create corporations is function of state law
-	Ellis v. Michael (1800): Neither managers nor investors of the corporation had any personal liability for debt of corporation
-	Wood v. Drummer (1820): Investors’ investment is permanent and cannot be withdrawn until all creditors are paid off (With an operating business this only happens when company is liquidated)
-	Interests are freely transferrable
-	Piercing the corporate veil: If corporate entity is used to evade obligations courts will prevent the abuse by disregarding the corporate entity and looking directly to individuals
-	Veil is pierced in instances of:
 Fraud: Use of corp to evade creditors, specifically formed to evade duty
 Undercapitalization: Corp formed so as to avoid liability likely to be incurred
   in operation
 Intermingling/Disregard of Corporate Formalities: Failure to observe statutory 
   requirements; shareholders acting as individuals; co-mingling of personal and corp 
   funds…
       (Absent fraud doesn’t seem to work but undercapitalization AND disregarding
         formalities Pierce the veil)

United Paperworks International Union v. Penntech Papers, Inc. (1977)
-	U.S. District court in Maine
-	Penntech Papers creates wholly owned subsidiary, TP, which acquires all outstanding capital stock of Kennebec, which owns the paper mill
-	Penntech cut a deal with K’s creditors-guaranteed 25% of debt after they write down debt
-	The secured creditors could get from assets but they agree to write down because they are not confident they will be able to recover from assets
-	K also negotiates new collective bargaining contract with union before acquisition
-	Penntech and TP want to negotiate before acquisition because they could still walk away, after union in stronger position because they could not walk away
-	Penntech makes agreement with union condition of buying stock, but contract is between K and union
-	TP purchases and shuts down in a year
-	Union seeks arbitration over various benefits
-	To succeed, must convince court to disregard separate corporate entities K, P, TP, to view all as one so that the people with the money, P, will be subject to the contract
-	H: Must prove “moral culpability on part of the parent” to establish liability for the contract of subsidiary
-	Need fraud or misrepresentation to disregard corporate entities
-	“Instrumentality Rule”: Subsidiary will be deemed alter ego of parent, and a mere instrument, if elements of 3 part test are met
(1)	Control, complete domination, not just majority stock control, of subsidiary, control over finances AND policies with respect to transaction at issue
(2)	Fraud: Control must be used to commit fraud, wrong, or violation of statutory/legal duty
(3)	Proximate Cause: The control and breach of duty must proximately cause injury or loss 
-	H: P had complete control over K, bargaining agreement drafted at request, corporate officers intertwined BUT no proof of fraud or misrepresentation that induced union into contract no piercing of corporate veil

Riddle v. Leuschner (1959)
-	Riddle is creditor of corporation, seeks to hold individual officers and directors of 2 companies liable as alter egos of the corporation
-	Companies-officers and directors all family members, owned majority of stock in each other’s companies
-	 made personal transactions with company (loans to and from with no approval by directors or shareholders)
-	Intertwined-same offices, bookkeeper…
-	Trial court: Corps in name only, used for personal finances
-	s transferred assets from insolvent corp to solvent corp in order to avoid liability from creditors
-	2 part test for disregarding the corporate entity:
(1)	There exists such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist AND
(2)	If acts are treated as those of corporation alone, inequitable result will follow
-	 H: Test satisfied, corp is alter ego of 2 s (son and mom, even though she only held one share) personally liable
-	The absence of corporate formalities is significant in disregarding corp entity
-	Slain: Only basis for disregarding

Walkovsky v. Carlton (NY 1966)
-	Enterprise Entity Theory and undercapitalization
-	 injured by taxi
-	 is an individual that owns stock in 10 corporations, each of which owns 2 taxis
-	Each company has no assets except for 2 cabs and is insured for minimum amount
-	Designed to limit the liabilities
-	Would be forced to have higher liability insurance if 1 big corp
-	 sues to (1) Hold  personally liable and (2) to have 10 cab companies treated as single entity, enabling collective assets to be reached and disregarding their separate corp existence (Enterprise Entity Theory)
-	Court rejects both theories
-	The corporate form may not be disregarded merely because the assets of the corp together with the mandatory insurance of the vehicle are insufficient to assure recovery 
-	More than undercapitalization needed, need fraud BUT
-	Undercapitalization does not really affect this case, wouldn’t likely have enough capital to cover compensation, so adequacy of capitalization is not relevant
-	No evidence of fraudulently running companies as separate entities (no unauthorized shuttling of funds….)
-	Not fraudulent to have minimum insurance, this is an issue for the legislature and not the courts to decide
-	To hold  personally liable would have to show  siphoned corporate funds in fraud of creditor no evidence of this

-	We don’t treat tort s the same as contract s
-	Why should limited liability apply to tort s?

-	Berli’s Concept of Enterprise Liability: Business is liable
-	Business is all separate corporate entities
-	This is widely applied in bankruptcy- where group of related corps all in bankruptcy, look around and find out if it is a unitary business
-	If so, administer as single estate
-	Assumes equality is equity BUT not where inequality is bargained for
-	Choose to deal with 15th and not other 14, now everything is together
-	NY is most reluctant to pierce corporate veil 

Sea-Land Services v. Pepper Source (7th Cir. 1993)
-	 carries freight for 
-	 never pays freight bill, has no funds
-	 owned by Marchese, who also owns 5 other entities
-	 sues Marchese and 5 entities, to hold liable for  and to satisfy any judgement with assets of other 5
-	H: Trial court properly pierced corporate veil
-	Local law requires that it be shown that not piercing would sanction a fraud or promote injustice
-	Here, injustice would be promoted because Marchese used corporate entities as playthings to avoid responsibilities to creditors
-	Withdrew salary from one leaving it insolvent to satisfy liabilities; took shareholder loans to pay personal expenses, leaving insolvent; didn’t pay taxes on this personal income 
-	Chart (p. 198-199) shows that undercapitalization is close to being a guarantee of success for 
-	Not cited frequently by courts, but words like “alter ego” and “instrumentality” are conclusory, used when courts have already decided to pierce, not real-life factors

3.	The Stockholder As A Creditor
-	Among creditors subordination of debt is usually contractual
(1)	Secured creditors-Use collateral to satisfy obligation (if not fully satisified become general creditors)
(2)	Preferred Creditors and Claims
 Claims owed to government (taxes)
 Cost of administering estate
 Wages 
(3)	General Creditors (May contract amongst themselves, senior and subordinated debt- Subordination Agreements)
(4)	Shareholders: Preferred before common

Calligar Excerpt
-	2 basic types of subordination agreements
(1)	Inchoate: Subordination does not become operative until voluntary or involuntary distribution of assets is made to creditors
-	Specific event which triggers subordination specified in agreement
-	Until financial distress occurs, subordinated debt may be amortized, redeemed or refunded by debtor through other means
-	With public companies, only inchoate subordination is possible
-	If complete, could only be paid after banks, which means after bankruptcy
(2)	Complete: No payment of principal or interest on the subordinated debt may be made so long as the specifically identified senior debt remains unpaid
-	Subordination is immediately effective
-	More security to senior debt
-	Principal stays in until senior debt is paid, but interest depends on deal
-	If business is being liquidated: Implied assignment of the distributions otherwise payable to jr. debt goes to senior debt until completely paid off
-	Dual nature of subordinated debt
 provides security, in non-legal sense, for senior creditor
 broadens the borrowing base of the corporate issuer (because financial community regards subordinated debt as quasi-equity broadened equity base broadened borrowing capacity)
-	“Double Dividends”: Dividends paid directly on senior debt and dividends paid on subordinated debt until he is made whole
-	Subordinated debentures can be convertible to common stock: 
-	If company is making money, common stock is valuable and price is locked in, use debenture to buy stock at a bargain (Creditor shareholder)
-	If things don’t go well, remain a creditor
-	Good reasons for corporation to issue subordinated debt rather than true equity issue, like preferred stock:
 Interest paid on subordinated debt is tax deductible
 Interest rate on subordinated debt is lower than dividend rate on preferred stock
 Subordinated debt provides leverage- i.e., an opportunity for greater capital appreciation of the interest of existing shareholders
-	Subordination is the usual remedy for situations in which the business is undercapitalized but kept alive by loans of shareholders
-	Don’t need to prove misconduct by shareholders
-	Subordination of shareholder claims is also typical where management has mismanaged
-	Most subordination is not a remedy, it’s contractual
-	With bank, 2 options:
(1)	Subordinate corporation’s debt to the bank
(2)	Surrender debt to corporation as contribution to capital
-	Bank prefers (1) because if business goes under, bank gets double distribution (double dividendsimplied assignment) but with (2) if business goes under, all creditors share equally in additional capital
      	In re Mader’s Store for Men, Inc. (Wis. 1977)
-	Store decides to sell its assets to another corp
-	Bulk Sale: Sale by business of all its assets outside ordinary course of business (now governed by Art. 6 of U.C.C.- Have to notify all creditors; if you fail to do this, creditors can get equitable liens and follow assets into hands of transferees)
-	State insolvency proceeding: State cannot impair obligation of contract, cannot discharge your debts, bankruptcy court can, state can administer debts
-	Gant Shirt Makers bring injunction, alleging Mader’s owes $ and will only allow sale to go through if its attorney is appointed Receiver of Proceeds of the Sale
-	Receiver wants to subordinate claims of officers of Mader’s-treat as contribution to capital
-	Absolute Priority Rule: Creditors paid before shareholders
-	Trial court: Claims of officers of Mader’s were not loans, rather contributions to capital, and therefore subordinated to claims for general creditors
-	Some commentators have pointed out that an advance is a capital contribution and should result in disallowance of claim rather than subordination, since no claim in insolvency can be based on proprietary interest
-	No practical difference in this case
-	Trial court subordinated using  Brady 3-part test:
(1)	At time the advances were made the corporation needed money urgently
(2)	Needed funds could not be obtained from banks or other commercial lending institutions
(3)	Notes given by corporation were demand notes carrying a moderate rate of interest
-	(If there is public interest in business surviving, does this serve public policy?)
-	Consequence of Brady Rule: Moderate rate doesn’t look like a loan, so we increase interest rate to make it look like a loan, this increases the claim on the bankrupt estate
-	Larger demand on corporation = Better chance at collecting during insolvency
-	Wisconsin Supreme Court disapproves of this Brady Rule
-	Alternate Rule To Justify Subordination:
(1)	These are denominated loans made to corporation by one or more stockholders in a position of control within the corporation
(2)	Circumstances must be such as to indicate that the advance was not intended to be repaid in the ordinary course of the corporation’s business, but rather was expected to remain outstanding as a permanent part of the corporation’s financial structure
-	(here, there was a pattern of shareholder lending and corp paying back)
(3)	The paid-in stated capital of the corporation must have been unreasonable small in view of the nature and size of the business in which the corporation was engaged
-	BUT how do you tell what is unreasonably small? Unreasonably small when?
-	Court says look to capital adequacy at time corporation is organized
-	But at the time of the loans, there was another business going on that obviously had greater capital demand
-	Receiver had burden of proof about amount of capital needed didn’t meet burden
-	H: (1) is met but (2) and (3) are not loan, not contributed capital
-	Money was expected to be repaid and the amount was not unreasonably small claim should not be subordinated

LIQUIDATION:
(1)	Secured creditors paid to extent of collateral
(2)	Preferred claims and creditors 
 Government (Taxes)
 Wages
 Cost of administering estate
(3)	Unsecured creditors (If secured’s collateral is insufficient to satisfy obligation he is owed, secured creditors become unsecured for balance UNLESS non-recourse loan: Bars lender from action against other assets of borrowed if security value of specified collateral for loans falls short)
- Pay subordinate amongst themselves
(4)	Preferred shareholders in accordance with rights and preferences
(5)	Shareholders

II.	Governance of the Corporation
1.	The Directors’ Role § 141;  § 701, 703, 704, 707, 708
-	Business affairs are managed by or under the direction of the Board of Directors
a.	Number of Directors
(1)	DE: § 141(b)- One or more directors; number may be fixed by by-laws or certificate of incorporation 
-	Directors need not be shareholders unless required by certificate
-	Statute silent on power of board to change number
(2)	NY: § 702(a)- 1 or more, number of directors may change by:
(i)	Amendment of by-laws
(ii)	Shareholder action
(iii)	Board action under the specific provisions of a bylaw adopted by shareholders, but any such action requires vote of a majority of the entire board.  Entire board is defined as total number of directors which corp would have if there were no vacancies

b.	Qualifications of Directors
(1)	DE §141(b)- Only requirements specified in certificate of incorporation or in by-laws
(2)	NY § 701- Must be 18 yrs and whatever other qualifications required by certificate of incorporation and by-laws

c.	Election of Directors
-	In the absence of a controlling provision in the certificate of incorporation, all directors are elected annually by a majority of present voting shares in the presence of a quorum
-	Quorum:
(1)	DE § 141(b): A majority of the total numbers of directors shall constitute a quorum unless certificate of incorporation or by-laws provide otherwise, but in no case less than 1/3 of total unless board of directors is only 1, 1=quorum
(2)	NY § 707: Quorum is majority of entire board (no vacancies), unless by-laws or certificate provide differently, but in no case less than 1/3 (§ 708)
-	Can’t break quorum by leaving after meeting starts
-	Elected by shareholders
-	Director holds office until successor is elected
-	2 types of election structures:
 Classified Board: Different classes of stock elect different, specified 
    numbers of directors
(1)	DE §141(d)
(2)	NY § 704 (classes of directors and staggered boards)
 Staggered Board/ Classified Board: Elections staggered so only a portion of
                                the board is elected each year
-	useful as anti-takeover device, would need a few years to control the board
(1)	DE § 141(d)- Directors may be divided into 1, 2, or 3 classes
(2)	NY § 704- Directors may be divided into 2, 3, or 4 classes, as equal in number as possible

d.	Meetings/Notice
 Regular meetings: Time and date specified in by-laws or certificate so no 
   need for notice or general notice is sufficient
 Special Meetings: Can be called as allowed in charter documents, require
   notice to all directors
-	Must have “Statement of purpose”- limitation so that if someone misses not sandbagged by hidden votes at meeting
-	No DE statute relating to time and notice of directors’ meeting

e.	By-laws: Adopted by initial directors
-	After sale of stock, shareholders have power to amend, adopt, or repeal

f.	Function of Directors
-	Board manages the corporation, and officers, run the business § 141(a); § 701
-	Appoint officers (Shareholders not involved)
-	Board acts as agent to the outside world
-	Individually, a director (unless also an officer) is not an agent of the corp
-	Board must act collectively through validly convened meeting to bind the corp
-	Exceptions:
 Action will be allowed without board meeting if all directors consent in writing, authorizing action. § 141(i); § 708(b)
 Participation via phone constitutes presence at meeting
   § 141(i); § 708(c) (in NY must be authorized by by-laws)
 Ratification by vote of shareholders sometimes effective to validate otherwise voidable acts of directors
-	Fiduciary duty- In a circumstance such that the law deprives you of preferring your own interests
-	Duty of Care Owed: Basic standard “due care”: Held to ordinary duty of due care that a reasonably prudent person would exercise in similar circumstances
-	Business Judgement Rule: Courts will not second guess wisdom of directors’ and officers’ business judgements and will not impose liability for even stupid decisions so long as:
(1)	No conflict of interest,
(2)	Gathered a reasonable amount of information before deciding AND
(3)	Did not act wholly irrationally
-	Courts really look at process of decision, little scrutiny to substantive decision
-	Duties of directors include:
 General monitoring of corporate affairs and policies
 Attend board meetings regularly
 Maintain familiarity with financial status of corporation by regular review
   of financial statements 
    may give rise to duty to inquire further into matters revealed in statement
-	Directors can rely on subordinates but must investigate if event causes suspicion
-	Good Faith Defense: Not liable if one relies on books/records in good faith
-	Lack of knowledge is no defense (Francis v. United Jersey Bank)
-	Reasons to limit directors’ liability:
 Need risk-taking directors for innovation and business success
 Courts poor judges of business reality (Joy v. North)
 Directors are poor cost-avoiders and cost-spreaders
-	Successful claims against directors:
 Total failure to act as director (Francis v. United Jersey Bank)
 “No win” Transactions
 Disguised “Self-Dealing” Cases 

Continental Securities Co. v. Belmont (NY 1912)
-	 is stockholder who is upset because board issued stock without consideration
-	Shareholder is not a party to the transaction but can sue derivatively
-	Derivative suits are an equity invention of the 19th century
-	Shareholders can maintain an action for the benefit of the corporation
-	Recovery, if any, goes to corporation
-	Corp always joined as  (won’t be )- Interests are implicated, necessary party
-	If not joined, res judicata problem, if  loses, corp could sue, another shareholder could sue
-	Contemporaneous Ownership Rule: To maintain derivative suit have to be contemporaneous owner
-	Court refers to directors as trustees, not really accurate because they do not have title to property as real trustee does, 
-	This is crude and inaccurate way of saying directors have a fiduciary duty to corporation and can’t act in their own interest
-	(In U.S. fiduciary duty runs through corp to shareholders.  Different than U.K.)
-	Have to act in corp’s interest, law limits usual right to prefer your own interests
-	Court also says board of directors is agent of the corp
-	Not agent of shareholders, not subject to their instruction
-	Shareholders have no authority to act in “ordinary business” of corp
-	Power is limited to:
 approving extraordinary transactions
 other permissive authority granted by statute
 power to ratify certain actions of the board which would otherwise be voidable
 shareholder resolutions 
   Precatory Resolution: Way to tell board what shareholders are feeling 
-	Can make recommendations
-	Can vote out directors-indirect control and authority
-	Serious impropriety sue
-	Court forbids suit here because  did not go to board and the case was not one which on its face made application to the board useless 

Francis v. United Jersey Bank (N.J. 1981)
-	Mrs. Pritchard is director of reinsurance broker, goes bankrupt, trustees in bankruptcy sue for violating her duty of care as director
-	2 officers, her sons, have misappropriated a lot of money
-	Board meetings almost never held, she never attended, knew nothing of corporation’s affairs, did not read financial statements didn’t pay attention to her duties
-	H: Duty breached liable for losses caused by misappropriation
-	Even though she was old and sickly
-	Court not persuaded that standard of care is low for someone with her characteristics could have gotten outside help
-	If you can’t do the job, don’t take it
-	Directors are not required to conducted detailed inspection of day to day activities but must at least be familiar with fundamentals of business
-	Had she paid attention, would have noticed loans, put her on notice of sons’ stealing
-	If she had asked them to stop, might have
-	Negligence only result in liability if it is a proximate cause of the loss
-	H: Mrs. Pritchard’s negligence was a proximate cause of the losses
-	BUT she would have been outvoted anyway, 1 of 3 directors (other 2 are the sons), how is there causation?
-	Court says that she did not object at all, her objection could have had some effect and deterred sons
-	They could not have continued in face of serious opposition (possible lawsuit)
-	NJ law is applied, even though incorporated in NY
-	Internal Affairs Doctrine says look to state of incorp but Court found more of a nexus with NJ
Joy v. North (2nd Cir. 1982)
-	Double derivative suit:  is shareholder of bank’s parent company, shareholder of a shareholder of corporation
-	Bank continues to advance unsecured credit to real estate developer for dealing going down the drain
-	Crosses 10% of bank’s capital loan limit- Bank examiners get involved
-	Someone offers to buy, falls through, bank stuck with mortgage
-	Suit for mismanagement
-	s can’t defend on merits, want to make suit disappear
-	Special Litigation Committee: Formed of directors not implicated  most of these suits get settled
-	Burks v. Lasker: S.Ct: Whether decision of a committee of the board of directors is binding is a question of state law (here, CT, doesn’t have law on issue) 
-	Decision whether to bring a lawsuit on corporation’s behalf is decided by a Special Litigation Committee and is subject to the Business Judgement Rule
-	Different rule applied if there is a conflict of interest (no actual conflict here)
-	If it is a demand-required suit, and committee says no, shareholder stuck
-	Demand-not-required case here
-	H: Business Judgement Rule should not play major role where committee recommends termination of lawsuit in a demand-not-required case
-	Reality is committee created to evaluate merits of litigation are appointed by s
-	Same conflict of interest if s were on committee no business judgement rule
-	Trial court used BJR so only had to decide if committee acted independently and reasonably
-	Committee recommended suit be discontinued for outside s and settled for inside s
-	2 Models For Dealing With Special Litigation Committees
 NY Model Auerbach v. Bennett: Limits judicial scrutiny to good faith,
                                                           thoroughness, and independence
-	If committee is thorough and fair, decision is dispositive (Trial ct used)
 DE Model: 2 part test
(1)	Investigate if committee acted in good faith
(2)	Court uses own judgment: Balancing probabilities and success of suit with costs (may consider impact of distraction of personnel, potential losses from publicity of trial)
-	Corp is responsible for indemnifying directors for legal expenses unless found guilty of misconduct
-	Although more publicity = higher costs, the worse the conduct more publicity, it would be more important to pursue litigation but the costs rise 
-	Cardamone Dissent: Court should not be involved in business judgements
-	How is court to quantify good will, other info 
-	BUT court is actually trying to determine settlement value of lawsuits, who else would be better for this than judges?
-	Slain: Not a big burden on trial judges and this is better rule than NY, which makes the rabbit the keeper of the cabbage patch
-	In terms of info, this is what committee should provide judge, if it does not than it is not a credible committee anyway

Kamin v. American Express Co. (N.Y.Sup.Ct. 1976)
-	Directors of corp have caused it to distribute the shares it holds in a separate company, DLJ, to shareholders as a special dividend (spin off)
-	: Should have sold shares on open market instead of distributing as dividend  substantial tax savings to shareholders
-	: There is no way to justify a decision that doesn’t save the 8 million
-	Justification: Don’t want to report the loss (if they sell DLJ shares on market for lower than what they bought at) and have reported earnings per share go down and the price of shares decrease, forego the 8 million to corp to protect price of stock 
-	Shareholders are better off this way
-	Issue: To whom do the directors owe a fiduciary duty?
-	Fiduciary duty runs to entity (U.S.: AND to shareholders; U.K.: Only to entity)
-	Management considered selling, would it matter if they did not consider?
-	H: For s.  No claim of fraud or self-dealing, and claim that some other decision would have been wiser does not state a cause of action because of the Business Judgement Rule
-	Decision may have been different if corp was “operating in the area of insolvency” because then fiduciary duties also run to creditors (DE)

EFFICIENT MARKET HYPOTHESIS
-	Supreme Court had held this as an appropriate subject of judicial notice
-	Questionable, as this would imply unarguably true or known to be true
 Weak Form: Markets have no memories, price at 1 point, no reason to be price at 
                        another point
 Semi-Strong Form: The price of a publicly traded security at any time accurately 
                                   impounds all available information relating to its value
-	whatever the price is it’s right
-	if all info is public, there are no overpriced securities, there should be no bargains either
-	there may still be bargains but it is not worth it to look because of transaction costs
-	may be true on a macro level, overall market is correctly priced based on what is happening at moment
-	can’t do better than overall market
-	but doesn’t tell you much about a particular security
-	Kamin: Widely known that DLJ stock was tanked, that would have already been taken into account in stock price, so would not have matter if corp reported loss by selling shares in market no difference in selling or giving away
-	 Only relevant difference would be tax saving
-	management did not accept EMH as true because they believed stock price would be affected by sale of DLJ stock
 Strong Form: Inside information will not help (Slain: This can’t be true)

2.	Stockholder Meetings and Role
§ 212(a)(b), 211, 213(a), 216, 222, 228
§ 602, 604(a), 605(a), 608, 609, 612(a), 613, 614
Before a derivative suit, shareholder must ordinarily make a demand on the directors to undo an improper action
a.	Types of Meetings: § 211; § 602(b)(c)
(1)	Annual Meeting: §211; § 602
(i)	Required to elect directors- By a majority except DE plurality § 216(3)
(ii)	General notice
(iii)	General business
(iv)	Meetings can be held anywhere, in or out of state
-	Failure to hold annual meeting shall not work as forfeiture or dissolve corp

(2)	Special Meeting: § 222; § 605
(i)	Require special notice
(ii)	“Statement of Purpose”-List specific business to be transacted
(iii)	If corp is subject to proxy laws, must comply with them
(iv)	If meeting is adjourned to another time, no notice of adjourned meeting necessary unless corp fixes a new record date or announcement of adjourned meeting not made at prior meeting
-	10% shareholder can request special meeting

b.	Conditions Precedent to Convening a Valid Meeting
 Record Date: Used to determine which shareholders are entitled to get notice
                         and to vote at any meeting
(i)	DE § 213(a): Record date shall not precede the date upon which the resolution fixing the record date was adopted by the board, and shall be not more than 60 days nor less than 10 days before the date of the meeting.  If no record date is set, then determining who can vote is on day proceeding the day notice of the meeting is given.
 
(ii)	NY § 604(a): Date shall be not more than sixty days nor less than 10 days before the date of such meeting.  If no record date set, on day proceeding day notice is given.

-	Applies to publicly traded shares were stock is continuously traded and shareholders change
-	If stock sold after record date, former shareholder can come and vote
-	If stock bought after record date, cannot vote unless seller gave buyer proxy to vote on shares  

      
c.	Notice
(1)	Regular meeting
(i)	DE § 222-Written notice giving place, date, hour, not more than 60 days nor less than 10 days prior to meeting, deemed given upon deposit in mail
(ii)	NY § 605- Notice may be written or electronic. Give place, date, hour, not more than 60 days nor less than 10 days before date of meeting.  3rd class mail: Not more than 60 and not less than 24 hours.  Given upon deposit of mail.  Electronically-when directed to shareholders e-mail.
(2)	Special meeting: Same as above but must also set forth purpose(s) of meeting

d.	Quorum: § 216; § 608
-	Consists of a majority of all outstanding shares entitled to vote unless provided otherwise in by-laws or certificate of incorporation, but not less than 1/3 the number of shares entitled to vote
-	Majority rule applies to class/series of stock if item being voted on so requires
-	1 vote for each share, unless certificate of incorporation provides otherwise
-	(NY 608(c): Once quorum is present can’t be broken by subsequent withdrawal)
-	Shares are considered present if owner is physically present or by proxy

e.	State Law Proxy Requirements: § 212(a); § 609
-	Every shareholder entitled to vote may authorize another person to act for them by proxy
-	Proxy rules do not apply to closely-held corporations
(i)	Written authorization needed
(ii)	Revocability- Proxies are generally revocable, unless expressly made irrevocable
(iii)	Irrevocable proxies- Proxy coupled with an interest
 
f.	Consent of Stockholders In Lieu Of Meeting: § 228; § 615

g.	Failure to Hold Meeting: § 211; § 602
-	Only real recourse is to sue for a writ of mandamus to force corp to conduct its required duty
-	If no annual meeting held, “holdover board” and actions generally valid

Matter of Auer v. Dressel (NY Appeals 1954)
-	Shareholders can seek to influence board by adopting shareholder resolutions that recommend particular action to the board
-	Board removes X as president, s, majority of class A stock, seek to put to a shareholder vote a resolution endorsing X and requesting reinstatement
-	H: s entitled to vote to pass a resolution recommending action, if only as a way to signal desires to board (warn directors in a sense)
-	Where by-laws of corp allow shareholder to call meeting on demand, President of corp cannot deny such a demand
-	s also petition for right to amend by-laws so that if 4 directors are removed, only class A shareholders will be permitted to vote to fill the resulting vacancies
-	H: s- Since they have exclusive right to elect 4 directors now sought to be removed, appropriate that they have sole right to elect any successor

Carey v. Pennsylvania Enterprises, Inc. (3d Cir. 1989)
-	 getting ready to make tender offer
-	Management decides to call shareholder meeting and suggest amendment to charter of incorporation to double amount of outstanding stock
-	Stock will become cheaper more active market price goes up harder to acquire enough stock for tender offer
-	’s opposition to management’s proposal loses by narrow margin
-	Challenges validity of vote
-	Proxy forms were sent to beneficial owners
-	: Not entitled to vote, privilege belongs to record holder (broker…)
-	H: PA statute requires record holder vote, doesn’t matter that business practice was for beneficial owners to vote invalid vote because violates statute
-	Result: Disenfranchising shareholders but court insists on following statute exactly
-	Since votes could have changed outcome vote reversed
-	If record owner does not personally vote shares, any person who attempts to do so must have formal proxy from record owner 

3.	Stockholder Voting and Other Agreements
a.	Shareholder Agreements
-	Agreement to vote stock a certain way have always been considered legitimate
-	Questions about length of agreement are disputed
-	Statutes may limit, commonly 10 years
-	Can be used in both public and closely held companies

b.	Agreements Limiting Board Discretion
-	Courts have traditionally been reluctant to enforce agreements that limit the discretion of the board because it cuts against the principle that corporation shall be managed by the board
-	There has been some statutory and judicial change
-	NY § 620(b): An agreement limiting discretion of directors as to how to manage business or transferring management duties to shareholders may be allowed BUT NOT for corps with shares traded on national securities exchange or over the counter markets- Only for close corporations § 620(c)

McQuade v. Stoneham & McGraw (NY 1934)
-	Stoneham (majority) and 2 minority shareholders agreed to use best efforts to keep each other in office as directors and officers at specified salaries
-	McQuade dropped as treasurer sues for breach of agreement
-	H: Refuses to enforce, agreement is held invalid
-	The effect of contract was to provide for governance of corporation by 3 people which prevents board from acting as board, which is a statutory requirement
-	Agreement to vote for directors is OK, but not to appoint officers and compromise discretion of board
-	The fact that McQuade is right doesn’t matter
-	NY: Leading cases limiting enforceability of agreements that restrict board’s discretion
-	Today, could do this with § 620(b)

	Galler v. Galler (Ill. 1964)
-	Leading non-NY case showing modern liberal trend
-	2 principal owners sign a shareholders’ agreement in which they agree to pay certain dividends each year, and in event of one’s death, pay pension to widow
-	1 dies, other refuses to carry out agreement
-	H: Court upheld agreement even though it limited the discretion of the board
-	3 Part Test In Order To Uphold:
(1)	No minority interest who is injured by agreement
(2)	No injury to public or to creditors
(3)	Agreement must not violate a clear statutory provision
-	Stressed importance of these agreements in closely-held corporations
-	Investor in these corps typically has a lot of capital invested and no ready market should he desire to sell
-	Therefore, more than mere investor and voice should be heard concerning corporate activity
Without an agreement enforceable by courts, which insures a modicum of control, a large minority shareholder might be at the mercy of an oppressive or unknowledgeable majority

c.	Voting Trusts: Agreement whereby legal title to shares is vested in a trustee with
                              dividends and other distributions passing to the equitable owners 
                              of the shares (beneficiaries of the trust) who hold voting trust  
                              certificates, but voting power vested in trustee who votes in 
                              accordance with the agreement.

-	Where owners of business have many decedents, some competent and some not, may give voting power to trustee, so as not to disinherit anyone
-	Result of bankruptcy reorganization
-	Result of litigation or as punishment for violating business laws 	

4.	Cumulative Voting § 214; § 618
a.	Definitions
 Straight Voting: Each share may be voted for as many candidates as there are slots 
   on the board but no share may be voted more than once for any given candidate
   (Cannot aggregate all your shares and vote for 1 director)
-	Ex: A owns 51%; B owns 49%, 3 director slots being voted on.  A can vote 51 for each director, B can vote 49 loses on all 3 no representation on board
 Cumulative Voting: Entitles shareholders to cumulate or aggregate votes 
   (shares x number of slots open) and exercise them in favor of fewer candidates
-	This increases the likelihood that minority shareholders will have some representation (works out so minority is always overrepresented)
-	Exists in NY and DE only if certificate of incorporation provides for it
Ex: I own 100 shares, 5 director slots, I can vote 500 for one director, instead of 100 for 5 

b.	Formulas
(i)	For Calculating Minimum Number of Shares Needed to Elect Given Number of Directors:
                     S      x     D
X =      _____________+ 1
             N + 1
X = Number of shares required to elect a specified number of directors
S = # of shares to be voted at meeting
D = # of directors you seek to elect
            N = Total # of directors to be elected at meeting

(ii)	For Calculating The # of Directors One Could Elect Given Ownership Of A Specified Number of Shares

D  =   (X-1) (N +1)
         ____________
                    S

c.	Staggered Elections
-	% of stock minority shareholders must hold to elect at least 1 director varies inversely with number to be elected (Easier to elect 1/10 than 1/3)
-	So with staggered elections, and only part of board being elected, number of shares need to elect a director increases
 
d.	Removal of Directors: § 141(k); § 706
-	NY: 706(a): Shareholders can remove for cause
Board can remove for cause if certificate provides EXCEPT if elected by cumulative voting or class voting
   706(b): If certificate provides, shareholders can remove without cause
-	Where there is cumulative voting director cannot be removed (with or without cause) if votes cast against removal would have been sufficient to elect him through cumulative voting in an election where all slots are being filled 
-	DE: 141(k): Any director may be removed with or without cause by shareholders BUT where there is cumulative voting no director can be removed without cause if votes cast against removal would be sufficient to elect him through cumulative voting in election where all slots are being filled
-	Otherwise, cumulative voting would be defeated (This way minority gets veto over removal of their representation

5.	Federal Regulation of Proxy Solicitations
 1933 Act: Limited statute, required registration and prospectus, full disclosure
-	prospectus becomes outdated the minute stock is sold
-	no law at state level for corporations to provide information on an ongoing basis 
 1934 Act: Creates system of continuous disclosure

Overview of Sections of Security Exchange Act of 1934
Section 12- Registration requirements for securities
	       12(a)- Must register securities traded on a national securities exchange
             12(b)- Info to put in application to SEC for registration
             12(g)- Issuers with 
(1)	$10, 000, 000 in total assets
(2)	A class of equity security held by >500 shareholders
 must register

Section 14-Proxies
             14(a)- Proxies must conform to SEC rules
             14(c)- Must file info prior to annual meeting
Rule 14a-1(f): Definition of proxy
Rule 14a-1(l): Definition of solicitation
Rule 14a-2(b)(1): Communication among persons not trying to get proxies, no longer 
                             considered solicitation (was deterring activism)
Rule 14a-3: Information to be furnished to security holders
Rule 14a-4: Requirements of proxy
Rule 14a-8: Proposals of shareholders
Rule 14a-9: False or misleading statements with respect to any material fact
Rule 14c-2: Distribution of information statement
Rule 14c-3: Annual report to be furnished to security holder

§ 12(a): Unlawful to effect any transaction in any security on a national securities exchange unless registered

§ 12(g)(1): Equity security, 500 + shareholders AND                     
                 $ 10, 000, 000 in total assets

§ 14(a): Shall be unlawful to solicit proxies for any security registered pursuant to                  
             § 12 in contravention of the rules and regulations of the SEC 
Rule 14a-8: Shareholder Proposals
                     Shareholders who:
(1)	Own at least 1% or $2,000 in present value of corporation AND
(2)	Have held shares for at least 1 year
 Submit a single proposal for inclusion in management’s proxy statement (not exceed 500 words)
      Rule 14a-9: No solicitation shall be made containing any statement which is false or
                            misleading with respect to any material fact (includes omissions)

Lovenheim v. Iroquois Brands, Ltd. (D.C. 1985)
-	 wants to prevent management of corp from excluding his shareholder proposal from the proxy statement
-	Turns on the applicability of 14(a) of 1934 Act and the shareholder proposal rule 14a-8
-	s refuse to allow information concerning ’s proposal to be included, relying on the exception to the general requirement of 14a-8
-	(Staff of SEC advised that it will recommend no enforcement action be taken in company excludes ’s proposal- No Action Letter) 
-	Exception: 14a-8(c)(5): Issue of securities may omit a proposal and any statement in support thereof if proposal relates to operations which account for less than 5% of issuer’s total assets, and less than 5% of net earnings and gross sales AND is not otherwise significantly related to issuer’s business
-	 claims that proposal cannot be omitted merely because not economically significant if proposal has ethical or social significance
-	H: Meaning of “significantly related to business” is not limited to mere economic significance, includes ethical and social significance
-	Procedural Posture: Motion for preliminary injunction but case ends up being fully litigated because preliminary injunction issue is dispositive
-	If  wins here, case over  meeting happens without proposal
-	These resolutions almost never pass
-	Why wouldn’t they just include it? Don’t even want issue raised,  will have lots of info, management will have none

III.	Issuing Securities and Paying Dividends
1.	Legal Capital and Dividends
A.	Authorized Capital Stock
DE: § 102(a)(4), 151(a)(b)(c)(d)(e)
NY: § 402(a)(4)(5)(6), 501(a)(b)
-	NY § 501(a): No class shall be issued with limited or defined dividend or liquidation rights unless 1 or more classes of stock or bonds are entitled to full voting rights
-	Seems to require that before preferred class may be issued (with limited voting or liquidation rights), common stock (with full rights) must be outstanding
-	Blank Series Preferred: Advance grant of power to set forth alternative classes
-	Corp can issue X shares of stock with all other features of stick to be determined by board
-	Authorized capital stock deals with problem of overissue (issuing more stock than permitted)
-	Authorized capital stock is a ceiling on power of corp to create shares
 PAR VALUE: Par set out in certificate, cannot sell shares for less than par value
-	Originally tied to equitable contribution doctrine: Contributions of investors should be equal
-	Par value set for stock, which people expected to pay
-	When trading market develops, it is present value, not par value, that matters
-	True Value Rule: If property is exchanged for stock, property becomes worthless (stock watering), Rule: Property must turn out to be worth at least par value OR stock is assessible: Corp can demand amount equal to par value
-	In a trading market, don’t know if shares were bought with property  par value gets reduced to almost nothing
-	Why not have no par value?
-	Par value is a representation to shareholders as to the value of the stock
-	No par value  no representation  no liability
-	No par stock never caught on because statutes forbade giving stock away, and whatever consideration received for stock constituted capital investment for purposes of par value
-	1954: Original Issue Tax: Taxed on par value, not on amount paid, important to have low par value, if no par value given hypothetical of $100 for tax purposes  
-	Stock must be:
(1)	Duly Authorized: Certificate contemplates issuance of this amount of shares and this class (look at outstanding shares and certificate)
(2)	Validly Issues: Check minutes to make sure board is authorized to sell stock
(3)	Fully Paid: All consideration received and it is at least equal to legal minimum 
DE § 156: Atypical, permits sale and issuance of partly paid stock
(4)	Non-assessible
-	2 Modern Functions of Par Value:
(1)	Par value sets a floor for consideration the corp must receive for issuance of stock
(2)	In states like NY and DE, used as a baseline in computations that permits directors to make voluntary distributions to shareholders (dividends)
-	CA got rid of par value, allows corp to give stock away and shareholders can sue if unhappy

B.	Dividends
-	No pressure to declare dividends, shareholders would rather see value accrue in stock and then sell it and get taxed at capital gains rate
-	Close Corp: If shareholders want income, salary is a more tax efficient way
-	Miller & Medigliani: Rational shareholders indifferent to dividends because if $ is reinvested in corp the value of the shares goes up equal to the amount of dividends
-	In no tax world, no difference between dividends and selling stock at higher value because of reinvestment
-	Tax World: More efficient to get $ by selling stock (capital gains rate)
-	Management is forced to invest $, after reinvesting in corp may go to other businesses where they have no expertise

DE: § 170  NIMBLE DIVIDEND PROVISION
-	Even if no surplus, can pay dividend if corp is currently profitable (dividend paid out of corporation’s net profits for the fiscal year in which the dividend is declared and/or out of net profit of preceding fiscal year
-	One of few states with this provision
-	Can impose stricter dividend regiment 

NY: § 510, 102(a)(8)(9)(12)(13)
-	Corp can impose on itself a more strict regiment on dividends than is imposed by statute
-	§ 510(a): Corp can pay dividends on outstanding shares “except when insolvent”
-	Insolvent in equity § 102(a)(8): Cannot pay debts as they become due (Compare current assets and current liabilities)
-	(Insolvent in bankruptcy: Liabilities exceed assets)
-	§ 510(b): Dividends may be declared out of surplus only
-	§ 102(a)(13): Surplus: Excess of net assets [total assets – total liabilities               § 102(a)(9)] over stated capital [sum of all par value of shares that have been issues = (par/share) (# of outstanding, issued shares] 
-	Surplus = Retained Earnings +  CCIP (Capital contributed in excess of par)
-	Board can move other assets to stated capital by resolution
-	Surplus can be increased by starting with a lower par or by lowering par by resolution of board
-	Can pay dividends out of surplus = Board can, by voluntary distribution of dividends, reduce the assets so long as the amount of reduction on the left hand of the balance sheet can be absorbed on the right hand in the accounts which make up surplus (retained earnings + CCIP)

-	Both NY and DE also provide for Wasting Assets Corporations: Corp formed to exploit a particular resource and then fold, not to carry on business
-	Directors and shareholders decide about amending certificate BUT is it creditors who are intended to be protected by restrictions on dividends (they get no say)
-	Theoretical problem, U.S. corps do not go broke from paying dividends
-	(in CA can pay dividends out of retained earnings or if assets are 125% of liabilities AND have to use GAAP)

Klang v. Smith’s Food & Drug (DE 1997)
-	Make deal to sell company by issuing shares to shareholders of company it is being merged into and making a self-tender to reduce ownership of non-family members
-	Can only buy back shares from shareholders, redemption of stock, if they can finance with surplus
-	Applying Generally Accepted Accounting Principles (GAAP) liabilities exceed assets, so can’t do this
-	Under DE law don’t have to use GAAP
-	Investment firm gets numbers that look OK
-	How meaningful are DE limitations if they are so easily avoidable
-	Slain: This is appalling precedent
-	NY RULE: Randall v. Bailey: Board can value assets for determining surplus
-	Not CA rule: require GAAP to be applied to determine whether dividends can be declared

Smith v. Atlantic Properties, Inc. (Mass. 1981)
-	Super-majority provision: Effectively gives each of 4 shareholders a veto power
-	Need 80% = >3/4  Unanimous
-	3 want to pay dividend out of surplus, 1 wants to make improvements in real estate
-	Can’t pay dividends without unanimity accumulate earnings which are subject to tax penalties (tax’s purpose is to force dividends)
-	Others want 1 removed, to be held personally liable for $ corp had to pay to IRS, and have court declare dividends
-	Accepted that there is a fiduciary duty of controlling shareholder to corp and minority shareholders
-	Here, not controlling shareholder
-	But same principles apply
-	H:  Minority shareholder has fiduciary duty to co-stockholders if has veto power
-	Problem: This veto was negotiated for and he is not being unreasonable
-	H: Has to reimburse for loss suffered because of his unreasonableness (?) and court will declare dividend if shareholder does not agree on his own
-	Why should shareholder bear result of deadlock and not corp?
-	Unusual case, court never usually forces dividends, decision to not declare subject to Business Judgement Rule

2.	Issuing Stock
A.	Subscriptions 
DE § 165, 166; NY § 503
-	Agreement between corp (or incorporators of corp that is about to be formed) and a subscriber, agrees to pay for stock that is issued
-	Subscription irrevocable (DE 3 mos.; NY 6 mos.)
-	Non-issue now that corps can be formed without waiting periods

B.	Consideration
DE: Const. Art. IX § 3
        § 152, 153
NY: § 504
-	Some states have no requirements about consideration for stocks
-	Most have constitutional provisions or statutes that deal with quantum and quality of consideration
-	Money, labor done, property received statutes
-	Often gets decided retrospectively, whether thing has proved to have value
-	Problem with intangible property

C.	Types of Stock
-	Stock is the unlimited residual claim against the corporation
-	Rights of shareholders can be divided among classes of stock
 Common Stock
 Preferred Stock
1.	Dividends
a.	Participating/Nonparticipating (Limited): Share in dividends with junior securities after preferred dividend has been paid
- What if not paid?
b.	Cumulative/Noncumulative/Cumulative If Earned: 
-	Non-cumulative preferreds are unusual, securities issued to junior claimants in bankruptcy reorganization
-	Is accrued dividend a debt? (Debt is an obligation which can be sued on)
-	Not a debt, it is not owned, only owed once board declares
-	What are legal consequences of non-payment? 
-	Board cannot pay dividends to any junior securities (Blocking position) 
    
2.	Liquidation: Can be preferred or not upon liquidation
-	Most usual liquidation preference: Par value plus accrued dividends
-	After this, may be participating or non-participating

3.	Voting
a.	Full Voting Preferreds
-	Unusual
-	Each share of preferred votes on all issues with common
-	Each share of preferred usually represents a much larger investment in corp than a share of common, preferred may have a vote which is a multiple

b.	Class Voting Rights
-	Dealing with fact that a relatively small number of preferred shares may represent a very substantial investment
-	Can vote separately and as a class

c.	Contingent Voting Rights
-	Some event triggers voting rights
-	Baron: Contingency is failure to pay dividends
-	NYSE precludes listing a preferred which does not have at least this much voting power
 		
d.	Limited Voting Rights
-	Some matter may have special significance for preferred (e.g., amending charter), so may have voting rights (typically class voting rights) in this matter

e.	Nonvoting: Even here almost every state statute confers voting rights under some circumstances on stock which has no contractual voting rights

4.	Redemption
-	(Redeemable common stock is a contradiction in terms, somebody must own residual equity)
-	Because preferred often thought of as alternative to bonds, rather than alternative to common, state statutes permit issuance of redeemable/callable preferreds

5.	Conversion
-	May be convertible into common
-	If convertible, almost surely reedemable

-	Until 1960s: Straight Preferreds
 Preferred and limited as to dividends
 Cumulative
 Preferred and limited on liquidation
 Liquidation Preference: Par Value + Accrued Dividends
 Usually have no voting rights other than contingent rights triggered by non-
   payment of dividends
 Usually redeemable (less often convertible)

Baron v. Allied Artists Pictures (DE 1975)
-	Business goes bad, fails to pay preferred dividends, contingent voting right triggered
-	Preferred in control, elects directors
-	 wants to have election declared invalid
-	 not suing to order to pay dividends because that would run into Business Judgement Rule (Smith v. Atlanta is rare case where dividends ordered)
-	 arguing there is an implied condition subsequent, right to elect board dies when there is sufficient funds to pay outstanding dividends
-	Ct: Must be showing of fraud, or gross abuse of discretion before interfering with judgement to pay dividends
-	BUT there is a fiduciary duty to pay when it would be “prudent” to do so
-	Easier standard than Business Judgement Rule
-	Directors have fiduciary duty to corp, can’t argue they have to both preferred and common because they have opposing interests
-	Most states, duty extends only to common, not preferred, even if they elected the board

Rothschild International v. Ligget Group, Inc. (DE 1983)
-	Grand Met paying $10 over market for 7% preferred and $70 over for 5.25% preferred because they needed voted of people with voting stock to approve merger
-	7% didn’t have voting rights, controlling shareholders still owed duty to minority shareholders so they have to pay some $
-	 wants $100/share that he would get in a liquidation (senior in event of liquidation)
-	Claims this tender offer is like a liquidation
-	All shareholders other than GM cashed out, same as if shares all bought and assets distributed
-	Ct: This is not a corporate liquidation, corporation still exists
-	Delaware Independent Legal Significance Doctrine: If there are multiple ways of achieving something under DE law, party gets to choose which way and other parties cannot complain that if you had done it differently I would have more rights
-	Rights of preferred treated like rights of creditors, contractual, get what you bargain for, not like rights of common which are owed a broad fiduciary duty
-	Participating preferred: No case law
-	But logic would suggest they be treated like common shareholders on the theory that fiduciary duty runs to those who own residual equity

IV.	Fundamental Changes
-	Fundamental changes are an exception to the rule that a corporation is managed by its board
-	All fundamental changes require shareholder approval
-	In some instances, shareholders who dissent from approved fundamental changes are entitled to appraisal rights

1.	Charter Amendments § 242; § 801, 803, 804, 805
-	Corporate charter constitutes a contract:
 Between corporation and the state 
 Among the shareholders
 Between shareholders and corporation
-	Although corporation derives its existence from the state, state cannot unilaterally amend corp charter
Dartmouth College v. Woodward: Corp charter is a contract which is protected against state impairment
-	State cannot amend charter without consent of corp, but parties can agree within the charter to allow either party to unilaterally alter, amend, or repeal charter
-	States can reserve power in general corporation laws (Most states do today) DE § 394; NY § 110
-	Amendments can substantially limit or alter shareholders rights but cannot introduce provisions which would not be permissible in original charter
-	DE § 242
(1)	Board resolution for charter amendment
(2)	Shareholder meeting
(3)	Approval by majority of all outstanding stock entitled to vote and majority in each class entitled to vote 242(b)(1)
242(b): Confers voting rights under certain circumstances even if certificate says it is a non-voting stock
-	Class vote more broadly extended in NY (804(a)(3)) than DE

McNulty v. W & J Sloane (NY 1946)
-	Corp eliminated dividend which had accrued but never been declared, pursuant to NY statute
-	 argues that this infringes on contract clause unconstitutional taking
-	H: Reserve power of states allows state to amend constitution
-	Dividends are not debt because they were not declared
-	Why isn’t accrued dividend treated like property?
-	Not a coherent body of law: Courts have no problem allowing amendments to wipe out accrued dividends but balk at amending right to liquidation preference and mixed on dividends

Bowman v. Armour & Co. (Ill. 1959)
-	Prior preferred 6% at $100 par value with voting rights (Illinois requires all stock be voting) redeemable at $115/ share and dividends
-	Proposed amendment would alter redemption provision so that it could be redeemed for a debenture (Income Debenture: Interest is paid only if corp has earnings but accumulates and subordinated to all other indebtedness)
-	Ct: You can alter deal but cannot change fundamental nature of it.  Cannot turn shareholders in equity into a creditor
-	Not much of a real difference, why is Armour doing this? TAX
-	Can write off debt- cutting cost of $ by 50%
-	Interest is deductible in computing corporate earnings, dividends are not

2.	Merger and Sale of Assets
Merger: A corp + B corp  A/B corp
Consolidation: A corp + B corp  C corp

3 Basic Modes of Acquisition:
(1)	Statutory merger under state law (type A)
(2)	Buy majority of stock from shareholders, wholly owned subsidiary (B)
(3)	Acquire all of corp’s assets (type C)
-	all can be tax free/ taxable under state law
-	any one may implicate federal securities law
-	all will implicate problem of pooling/ purchasing
-	Sale of Assets:
1.	Assets for cash or debt securities
2.	Assets for stock (then liquidation and distribution of stock)

 Cash-for-Assets:
 Cash-for-Stock
 Stock-for-Assets (C)
 Stock-for-Stock (B)
 Downsteam Merger: Parent sub
 Freeze Out Merger: Controlling stock owners want to get rid of tiny public faction, merger with terms that outside share owners get cash

a.	Statutory Merger § 251, 259; § 902(a), 906(a)(b)
-	Upon filing merger occurs
-	Surviving corp subsumes the entire legal position of disappearing corp(s)
-	Owns assets of corp as if had originally bought them 
-	Owes obligations as it had originally incurred them
-	Precise Protocol: NY and DE board has to pass merger and then it has to be approved by shareholders
-	14a-8 allows shareholder to put forth motions BUT cannot initiate a merger proposal
-	All shareholders entitled to notice even if not entitled to vote (§ 251(c), § 903(a))
-	Who gets to vote?
 DE: § 251(c) Contractual question: Holders of common stock and any other stock that has voting power on issue
 NY § 903 (Used to require 2/3 majority to pass merger; now simple majority)
-	only applies to corps created after 1998 and those that opted for majority regiment in certificate
-	different from DE, provides for 
(1)	possibility of a class vote 
(2)	vote by shareholders who do not have contractual voting rights if they would have had a vote in new terms in the certificate of incorporation of surviving corp had been added to disappearing corp’s certificate through amendment
-	If doing something as part of merger agreement, have vote if would have had vote on this if doing it through charter amendment
-	Traditionally, owners of shares of disappearing owners of shares of acquiring corp
-	Today, almost all states provide for a cash-out merger rather than payment instock of surviving corp

b.	Practical Merger: Asset Sale and Assumption of Liability
-	DE § 272(1) Asset sale must be initiated by board, approval identical to merger UNLESS asset sale in ordinary course of business
-	NY § 909(a)(1): Asset sale must be initiated by board, approved by shareholders, UNLESS sale of assets in the ordinary course of business difference is only people who get to vote are those with voting rights, no class vote
-	Acquiring corp does not need to have a shareholders vote
-	If acquiring needs to issue new stock to do the deal they may require shareholder vote if they have already issued all the authorized stock permitted under certificate
-	If board wants to issue authorized stock, shareholders do not need to vote
-	BUT if listed on NYSE, exchange has to approve shares to avoid delisting of existing shares
-	Under listing policy, if acquisition has the potential to increase the outstanding shares by more than 20% there must e shareholders meeting regardless of state law requirements (policy becomes a new source of law)
-	DE § 251(f) has same provision, nothing in NY state law
-	2 ways to structure transaction:
(1)	Target merges into Acquirer, Target’s shareholders receive stock in Acquirer in lieu of stock in Target
(2)	Target sells all of its assets to Acquirer in return for Acquirer stock; Target then liquidates and distributes Acquirer stock to its own shareholders
 SAME RESULT: Target’s shareholders have stock in Acquirer and Acquirer owns Target’s business
Differences:
-	Merger is easier and quicker, some asset sales can be very complex
-	Asset Sale, only assumes liabilities “on the books”
-	May trigger different appraisal rights
-	DE, and other states, do not give appraisal rights to stockholders of a corporation that sells its assets (but do give appraisal rights in statutory merger)
-	Can Target shareholders demand appraisal rights under structure (2) on theory that it is the substantial equivalent of a merger and should be treated as one?
-	De Facto Merger Theory (pooling makes of de facto doctrine more likely than purchase method)
-	Pooling: Folding financial statements of 2 corps together, book value
-	Purchase: Market value takes account of assets of Little corp at their cost to Big corp, market value, not at Little’s cost
-	Assets are higher, takes account of good-will more depreciation expense reduced net income less taxes
-	For Big, worst is a tax-free purchase, asset quantification goes up and depreciation goes up which is a tax deduction, but if no taxed, don’t get benefit and get disadvantages of higher depreciation

Farris v. Glen Alden Corp. (PA 1958)
-	In economic terms, List agreed to acquire Glen Alden
-	Transaction in unusual form, Glen Alden acquires List
(1)	Glen Alden would acquire all assets of List
(2)	Glen Alden would pay for assets by issuing large amount of its own stock to List (enough stock so List would end up owning over ¾ of Glen Alden)
(3)	Glen Alden would assume all of List’s liabilities
(4)	Glen Alden would change its name to List Alden
(5)	All directors of both companies would become directors of new List Corp
(6)	List would be dissolved, and its assets (now solely stock representing 2/3 interest in List Alden) would be distributed to original List shareholders
-	Shareholders in both companies would end up in more or less same position they would have been in had List simply bought Glen Alden in return for List shares
-	Stock-for-Assets instead of merger to avoid appraisal rights under Delaware law
-	Reverse Technique (Smaller acquires bigger) because smaller was a Pa. Corp which did not give appraisal for a purchasing corp but Pa. Law gave appraisal rights to both shareholders of a target in a statutory merger and to shareholders of corp selling assets
-	Glen Alden needed shareholder meeting to amend certificate to be able to increase number of authorized shares, needed for transaction
-	 claims this is a de facto merger and should have been notified prior to shareholder meeting, should have been told of appraisal rights
-	: You don’t have any appraisal rights so you don’t need to be warned 
-	H: Look at realities of transaction this is a merger
-	Fundamental Change Doctrine: This is fundamental change, same purpose as merger appraisal rights should be granted
-	Pa among small number of courts to accept de facto merger doctrine

Hariton v. Arco Electronics, Inc. (Del. 1963)
-	DE rejects de facto merger doctrine
(1)	Arco agreed to sell all its assets to Loral in return for some shares of Loral (Stock-for-Asset swap, C reorganization)
(2)	Arco’s shareholders then approve dissolution of company
(3)	Arco liquidated and distributed to shareholders all Loral shares it had received in return for assets
-	Same result as merger BUT Arco shareholders do not get appraisal rights
-	: Substance should prevail over form
-	Ct: Reject de facto merger doctrine
-	DE legislature had created 2 distinct statutory procedures, one for mergers and one for sale of assets, 2 procedures were of “equal dignity” and company could use either one, Independent Legal Significance Doctrine

-	Courts have begun cutting back on appraisal rights for public companies because they can get market price
-	Even Pa. Supreme Court rejected doctrine after Farris
-	Began cutting back because believed if unhappy can sell, don’t need judicial proceeding to determine value of stock, believed semi-strong form of efficient market hypothesis, so market price reflects right price
-	Slain: Doesn’t accept semi-strong form as truth
-	But the problem is that with appraisal the value of the stock is determined immediately before public announcement of deal
-	I can’t sell until I know of deal, which means everyone knows, is public info
-	Can’t sell pre-deal, by the time I can sell, the market price is affected by the deal, unaffected market price (which is what appraisal would give) never happens

3.	Small Mergers and Short Form Mergers
NY § 905
DE § 253, §251(f) (No analogue in NY)
(1)	Requirement that survivor’s certificate of incorporation not be amended: Designed to assure that merger technique cannot be used to deprive stockholders of voting rights they would enjoy if certificate was amended under § 242
(2)	20% limitation on increasing number of common shares: A merger that involves less than 20% of survivor’s shares is not such a major change as to require stockholder vote, really no more than an enlargement of business that could be achieved by any other means without triggering voting rights
-	Puts merger on a parity with acquisition of assets or shares so far as the legal requirements are concerned

-	NYSE Shareholder Approval Policy: If company listed on exchange is about to list new stock, if it will increase outstanding stock by more than 20%, a condition of listing is a shareholders meeting (whether or not required by law)
-	Must have vote, but doesn’t say if you are bound by vote

-	Short Form Merger: Certain parent-subsidiary mergers can be effected simply by vote of parent’s board, no vote of parent or subsidiary shareholders, without appraisal rights in parent’s shareholders, no vote of subsidiary board
-	NY need to notify shareholders
-	Used to be applicable for only 100% owned subsidiary, now down to 90% (§ 253, § 905)
-	Purpose of statutes is to provide parent corporation with a means of eliminating the minority shareholders’ interest in enterprise by issuing cash rather than stock to minority (Cash-out, rather than merger)
-	1 way: Parent can force minority to sell, minority cannot force parent to buy
-	Aimed at expediency, do deals quickly

4.	Appraisal and Valuation
§ 262(a)(b)(c)(d)(e)(h)(j)(k)
§ 910, 806(b)(6), 623
-	Right to opt out of a deal by demanding that corporation buy the shareholder out
-	NY extends appraisal rights quite broadly to many charter amendments
-	DE, like many states, appraisal is very narrow, statutory mergers (BUT certificate can provide for appraisal rights in other mergers, sale of assets…)
-	DE and NY no appraisal for publicly held corporations 
-	2/3 states not available at all for charter amendments 
-	Are appraisal rights exclusive?
-	NY § 623(k): Exclusive except when not
-	DE silent
-	§ 262(b)(1) Provides market out, publicly traded no appraisal
-	In most cases, can complain in equity of unfairness of transaction even if you have appraisal rights

a.	Appraisal
Bove v. Community Hotel Corp of Newport (RI 1969)
-	Community overwhelmed with accumulated unpaid preferred dividends
-	Could not wipe out dividends because under RI law need a unanimous vote
-	 Community formed Newport, sub, for purpose of downstream merger, parent  sub, which only needs 2/3 shareholder approval
-	: This is a de facto charter amendment
-	, owner of preferred stock, my rights were created by charter and this is wiping them out
-	H: RI is allowed to enact this statute because this alteration of shareholder rights are within the reserve power of the state
-	You buy into a corp subject to the reserve power of the legislature to adopt laws that change the nature of the deal
-	Corp has 2 ways of doing this, both allowed, court will not second guess method
-	Independent Significance Doctrine
-	Court: Exercise appraisal rights and force corp to buy at fair value
-	 doesn’t want appraisal, wants corp to be forced to need unanimous approval so he can hold out, opportunity for extortion
-	RI viewing appraisal as exclusive UNLESS can show transaction is unfair
-	 says it is unfair because  a group with 0% equity in the underlying venture is coming out with 8%
-	Preferred, who have 100% 91%
-	BUT this is based on assumption that corp will be liquidated, but no one is proposing liquidation AND even if liquidate assets might not match accounting quantifications
-	Moreover, common did bring something of value, class vote, can’t do deal without them
-	No fiduciary duty not to use voting as bargaining chip
-	H: Transaction not unfair

b.	Valuation
Piemonte v. New Boston Garden Corp. (Mass. 1979)
-	Freeze Out Merger: Everyone appealing from valuation
-	Need to determine fair value of shares in Boston Arena Corp. so court can enforce appraisal rights held by minority shareholders in corp who object to proposed merger
-	Delaware Block Method: Court considers 3 factors
(1)	Market price of share just before transaction is announced
(2)	Net asset value of the company
(3)	Earnings valuation
-	Court can give different weights
(1)	Market value
-	: Market should be disregarded, thinly traded, no real market
-	: Judge should reconstruct market based on comparable corps
-	Ct: Volume of trading sufficiently high to use market value
-	Accepts semi-strong form of EMH that price of publicly traded share actually impounds all info relevant to its value
-	BUT what exactly are we valuing? % of business OR shares of stock owned?
-	Law is undecided
(2)	Net Assets
-	What is liquidating value
-	Going concern value will be higher
-	Is goodwill of name considered
-	Boston Arena itself, Bruins, concessions
-	But looks at accounting quantifications
-	No real way to determine value
-	Value lies in future, costs lie in the past
(3)	Earnings Valuation
1.	Court computes average earnings of corp for some prior period
2.	Court selects multiplier, factor by which average earnings should be multiplied to produce net present value of annual earnings stream in future
-	Most subjective part
-	H: Trial judge within discretion in assigning weights, approach to valuation was essentially correct (remanded on a few points)

-	Problems with this method: Courts often end up with unrealistically low earnings valuation factor (average of earnings in past, no attempt to estimate future earnings)
-	DE revises its policy after a lot of criticism 

Singer v. Magnabox (1973): Freeze out merger is a breach of duty which can be sued on for damages UNLESS business purpose to merger
-	Business purpose doctrine functionally eviscerated but stuck around for years until Weinberger

Weinberger v. UOP, Inc. (DE 1983)
-	Minority shareholders challenge Freeze Out
-	If controlling shareholder causes a company to enter into a transaction with shareholders, transaction must meet standard of entire fairness (fair process and fair price)
-	: Since transaction required a majority of the disinterested (minority) shareholders, burden of showing unfairness should shift to 
-	Burden of proof: Includes burden on introducing evidence and persuasion
-	BUT if  didn’t disclose all info,  only has to introduce evidence and  has burden of persuasion
-	If this was a deal with an unrelated party, no matter of contest
-	But 2 board members were also part of signal (who was offering $)
-	Ct: Violation of fair dealing by withholding info and haste in which deal was done
-	Board members owe duty to both UOP and Signal shareholders
-	Inside board members should have excused themselves from merger discussions
-	No full disclosure, means no approval by majority of minority
-	So  has burden of introducing,  burden of persuasion of entire fairness
-	Ct holds appraisal should be less rigid, all methodologies in common use can be considered, including discounted cash flow
-	Liberalization of appraisal value rules  eliminates business purpose body of law
-	If only asking for value of stock appraisal

5.	Dissolution
§ 275, 278, 282
§ 1001, 1006, 1007, 1103, 1104, 1105
-	Classic view: Raymon v. Naidaw: At no level of abuse of minority shareholder would courts order dissolution while business continued to function
-	Voluntary Dissolution (§ 275, 1001): Fundamental change
-	DE: Board resolution recommending, shareholder majority vote
-	NY: Unsure whether board resolution needed before shareholder action (Slain thinks no)
-	Shareholders may be able to initiate a resolution for dissolution without approval of board
-	Could initiate proposal and piggyback on management proxy solution under 14a-8
-	Both states provide for half life of corp to wind up business, manage claims, carry on litigation
-	Many states have added oppression of shareholder as statutory ground for dissolution (NY yes, DE no)

In re Kemp & Beatley, Inc. (NY 1984)
-	§ 1104 resolved: Statute permitting shareholders to come to seek judicial decree ordering dissolution (no analogue in DE)
-	Ousting traditional equity jurisprudence
-	After s leave corp, remaining shareholders change method by which they pay out corp earnings, instead of based on stock ownership services rendered to co.
-	s left with no way to derive any economic benefit from minority holdings, petition for dissolution
-	H: NY statute permits judicial dissolution if s show they hold at least 20% of corporation’s shares and have been oppressed
-	Oppression: Self-dealing, squeeze-out moves
-	Court ordered dissolution (could be avoided if majority buys back s’ shares for what court determines is a fair price 

6.	Triangular Mergers and Share Exchanges
a.	Triangular Merger
-	A forms a wholly owned sub, AS
-	B merges into AS
-	B shareholders receive A stock in exchange for their B shares
-	Shares of AS owned by A are unaffected 
-	After transaction: AS is still wholly owned
-	Former shareholders of B have become shareholders of A
-	Triangular merger used when A wishes to keep the assets acquired from B in a separate corporation

b.	Reverse Triangular Merger
-	It is critical for corporate entity of B to stay intact, for some reason
-	AS merges into B 
-	Plan of merger provides that shares of AS, all owned by A, will be converted into shares of B
-	Shares of B outstanding before the merger will be converted into shares of A

V.	Federal Corporation Law
-	The work of the SEC: To enforce and administer the Federal Securities Laws which are intended to ensure that securities are fair and honest
-	If laws are complied with SEC cannot go beyond power and regulate bad investments

A.	Continuous Disclosure System § 13(d) of 1934 Act

B.	Antifraud Provisions
-	Broad antifraud provision, 1933 Act: § 17(a) (sell, not buying, covered) BUT nothing about private right of action
-	§ 10: Anti-fraud provision
-	§10(b): Grant of authority to SEC to create rules regulating all securities, does not forbid any conduct in itself
-	10b-5: Fraud in the purchase or sale of security
-	No short sale

C.	Enforcement- Express Actions
-	SEC has broad authority to litigate with someone who might be violating      (1933 Act: § 20; 1934 Act: § 21)
-	Can criminalize willful violations (1933 Act: § 24; 1934 Act: § 32) 
-	1934 Act has some provisions for private enforcement:
§ 9(e): Private right of action for manipulation of securities traded on exchange but so narrowly defined that no facts come within no case law
§ 18: Private right of action for persons who purchased securities under a false filing, also drawn extraordinary narrow

D.	Implied Actions
1.	Development
Kardon Case (1947): Held that § 27 created private right of action, although not intended as such
-	First private right of actions in proxy area
-	First, state courts treated proxy violations as normal elections, only remedy to vote out
-	Finally, S.Ct recognizes private enforcement as a necessary complement to enforcement by SEC under 14a-9 J.I. Case v. Borak (1969)
-	After Borak people thought S.Ct will do the same thing for 10b-5 as 14a-9
-	BUT that doesn’t really follow since a private right under 14a-9 does not displace any state law while 10b-5 is basically the tort of deceit which is recognized under state law
-	Slain believed S.Ct would be daunted by state-federal law conflict if a private right was created wrong

Mills v. Electric Auto-Light (1970)
-	Case alleging violation of proxy solicitation
-	BUT this case turned 10b-5 into an industry because even if no damages corp pays attorney’s fees
-	Parent sub  grandsub merger
-	Parent controlled grandsub board, which recommended merger to shareholders
-	(If this was a DE corp would not have needed shareholder vote because they owned 54%, only need simple majority, here need 2/3)
-	 complains that recommendation did not disclose this info
-	Regulation S-K, item 403 requires the disclosure on the proxy form of any group with more than 5% stock
-	 waited to start suit because if they had begun early enough, corp would have made minor alteration to proxy form
-	District court: Defect is material (Slain: It is trivial)
-	Harm found but need causation (tort case)
-	Not possible to determine if shareholders relied on info
-	Court looks for transaction causation (not loss causation), see if votes were necessary
-	Deceit:
(1)	Misrepresentation
(2)	Materiality
(3)	Reliance: Transaction causation
(4)	Scienter: purposeful conduct (not really needed for 14a-9)
(5)	Loss
-	District Ct: Remanded to see if there is loss causation
-	Interlocutory Appeal 7th Cir: Affirms materiality, reverses on causation
-	For causation: Can’t look at reliance, have to look at fairness of transaction
-	Unfair = Transaction causation
-	S.Ct: Causation issue only, materiality issue never before Court
-	FN 7: Shareholders will vote for any good deal (not necessarily true), cut the shareholders voice out of causation inquiry
-	Not required to prove reliance
-	If defect is material this is sufficient showing of causal relationship between violation and injury if proves that proxy solicitation itself, rather than particular defect, was essential link in accomplishment of transaction 
-	s merely have to show the merger could not have been carried out without the submission of the proxy materials to minority shareholders
-	Case awards damages and attorney fees
-	2 significant consequences:
(1)	If such trivial defect material  anything may be (Court did not rule on materiality but it is perceived this way)
(2)	If you establish a violation, regardless of any economic impact, attorney’s fees paid by corp

-	 (Meeting required in those cases because of stock exchange requirement)
-	Did Mills enhance shareholder protection?
-	YES: Low standard of materiality improves disclosure
-	NO: Such a low materiality standard,
(1)	Drafters interested in defendability, not disclosure
(2)	Encourages friviolous litigation
(3)	S.Ct tries to limit this litigation by limiting standing (rather than deal with materiality) which prevents real claims as well  

Rule 10b-5:  Failure of buyer to disclose nonpublic, material facts in connection 
                      with purchase or sale of stock via an instrumentality of interstate 
                      commerce gives rise to an action by seller for rescission or damages

2.	The Standing Requirement
Birnbaum v. Newport Steel Corp. (2nd Cir 1952)
(1)	10b-5 only deals with transactions that affected organized security markets. Private transaction 10b-5 not implicated
(2)	s had no standing because had to be purchaser or seller of security (s were complaining of being deprived of chance to sell)

Superintendent of Insurance: S.Ct in holding there was a private right of action under 10b-5, expressly disapproved of (1) of Birnbaum doctrine

Blue Chip Stamps v. Manor Drug Stores (1975)
-	s say they were injured because they did not buy stock because of pessimistic prospectus
-	9th Cir: Thinks this is narrow exception to Birnbaum, usual concerns not implicated, this is a small, identifiable class
-	S.Ct reverses
-	H: 1934 Act: No punitive damages, only actual damages, if any
-	H: No private right of action under 1933 Act § 11, 10b-5 or nothing
-	H:  in 10b-5 action must be either purchaser or seller of stock in the company to which the misrepresentation or insider trading relates
-	Rationale: Fear of vexatious litigation, no way to limit s and proof would depend on ’s uncorroborated oral testimony, buyer/seller has paper trail

-	What if there was a material proxy defect BUT corp did not need votes (have supermajority)?  All courts of appeal held same result would follow based on Mills

Virginia Bankshares, Inc. v. Sandberg (1991)
-	Answer to above question is NO 
-	H: If  is a member of a minority class whose votes were not necessary for proposed transaction to go through,  may not recover no matter how material or intentional the deception in the proxy statement was, because deception did not “cause” transaction to go through
-	Freeze-out merger: 1 corp owned 85% of corp 2, wanted to get rid of 15% public shareholders
-	Merger agreement whereby corp 2 will be merged into wholly owned subsidiary of corp 1
-	Proxy statement send to shareholders, saying directors approved of plan and price
-	Proxy statement not necessary under state law, could have sent statement of information instead, required by § 14(c)
-	But in event of subsequent litigation if majority of minority s approve, gives  procedural advantage (see Weinberger v. UOP)
-	Most minorities gave approval,  did not, alleges defect in proxy statement
-	Wins, affirmed by 4th Cir, S.Ct reverses no standing because ’s votes were not required
-	Totally misunderstood the point of securities rules
-	Voting least important part of proxy process, process is to provide shareholders with accurate information which they can use for a variety of purposes, effective utilization depends on accurate information
-	Slain believes  could have done better under 10b-5 
 
3.	Scienter
Ernst & Ernst v. Hochfelder (1976)
-	s are accounting firm that had audited brokerage firm that had been carrying on massive fraud (customers’ account own accounts)
-	Accountants missed a number of clues, yet no suggestion that they ever intended to defraud or mislead
-	H:  will be liable under 10b-5 only if he acted with scienter, intent to deceive, manipulate or defraud
-	FN 12: Definition of scienter: Conscious intent to defraud, must be intentional and material, leaves open question whether recklessness is enough
-	Post-Ernst courts have concluded making a misstatement recklessly, constitutes scienter (Roth v. Blyth; Eastman Dillon & Co.)
-	S.Ct reaches this definition because the statute, not the rule, defines the outer limits of rule “any manipulative, device, deceptive advice or contrivance”
-	FN 7: Does not get to question of whether aiding and abetting a 10b-5 violation is a violation
-	Central Bank of Denver v. First Interstate Bank of Denver: No private right of action for aiding and abetting a violation of 10b-5, so scienter discussion doesn’t matter in that case BUT still matters in an enforcement action brought by the SEC
-	(Slain: Possible scienter definition:  is not sleepwalking) 

Aaron v. SEC (1980)
-	2 reps of brokerage firm were making false statements to solicit orders for stocks of a company, manager, Aaron, does nothing
-	SEC sues to enjoin Aaron from violating § 17(a) of 1933 Act and § 10(b) and 10b-5 of 1934 Act
-	District court finds conduct purposeful
-	2nd Cir: Affirms judgement but holds negligence would be sufficient when SEC suing
-	S.Ct: Logic of Ernst requires scienter applies here
-	H: Requirement of scienter applies to injunction proceedings brought by SEC
-	But 1934 §21(d)(1) seems to expand the possibility of injunctions whether or not conduct violates 10b-5, § 21 eliminates requirement to prove all elements of violation
-	H: Congress did not intend to exempt scienter
-	No scienter no injunction against 10b-5 violations
-	1933 17(a)(1): “To employ any device scheme or artifice to defraud”
-	H: “Employ” indicates intentional conduct
-	BUT § 17(a)(2)(3): “To obtain…through misstatement”, “To engage in any business that would be fraud” NO SCIENTER REQUIRED
-	BUT 10b-5 has identical language to § 17(a)(2): Why do you need scienter for one and not the other?
-	Because 10b-5 is pursuant to §10(b), must be interpreted consistent with this, Court already held needed scienter in Ernst
-	§ 17(a) has no limitation of authority
-	Is there a private right of action under § 17(a)?
-	Did not matter before because you had 10b-5 but now different requirements
-	§ 17(a) negligence action applying to all purchases (not sales)
-	S.Ct has not resolved but every court of appeal says NO
-	Private right of action would have effect of reading § 11 and § 12 out of the 1933 Act
-	Burger Concurrence: Why are we even litigating this, who would ask for injunction in absence of scienter, if you didn’t think they were doing it on purpose and were going to do it again, why would you need injunction?
-	After this, SEC has been successful in getting injunctions for any violations without showing of intent or possibility of further violations

4.	Materiality and Duty of Disclosure
Basic, Inc. v. Levinson (1988)
-	Case involving alleged affirmative misrepresentation
-	Basic involved in merger discussions with another corp but publicly denied and denied knowing of any reason why Basic’s tock was trading heavily and setting new highs
-	Buyout of other corp finally announced and shareholders who had sold prior to announcement at less than final buyout price brought vlass action
-	Claim: Injured by having sold at artificially depressed prices in a market affected by ’s misleading statements
(1)	Materiality
-	Court rejects 3rd Cir. and 6th Cir. formulations for materiality
-	3rd Cir: Info is not material until there is an agreement-in-principles because too much info confuses shareholders, merger negotiations require confidentiality, value of bright line rule
-	6th Cir: Any statement that you that is untrue is by definition material
-	H: Adopts standard of materiality of TSC Industries v. Northway (1975) in proxy-solicitation context for 10b-5 (and presumptively for all other sections of securities act)
-	H: Standard of materiality: Omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote (would have been viewed by reasonable shareholder as significantly altering the mix of information made available)
-	Rule only forbids misstatement about material facts, need independent determination of material facts
-	FN 17: 10b-5 Does not impose obligation to speak
-	“No comment” = silence
-	BUT if we deny when not true and say “no comment” when is true, “no comment” = yes
-	FN 18: No authority to alter materiality standard depending on who brings action or whether insiders have profited recognize that trading and profit by insiders can serve as an indication of materiality (SEC v. Texas Gulf Sulphur Co.) 
(2)	Class Certification
-	If you conclude that reliance is a matter of individual proof, individual elements predominate no class, which effectively means no lawsuit because individuals won’t sue
-	s can show they were harmed by ’s misconduct even though they did not rely on anything he said or did by Fraud on the Market Theory
-	Fraud on the Market: Semi-strong form of EMH says that at any time price of stock reflects all publicly available information, when  sold they relied on current market price being fair one that reflected all known information.  ’s misstatement (or when  bought without disclosing material non-public information) made price different from what it would have been had he fulfilled obligations.  Bought/sold based on market price, received less because of ‘s wrongdoing, economic loss caused by this wrongdoing
-	Dissent: It is wrong to take judicial notice of EMH because that implies it is universally accepted as true
-	Also not true that people rely on market price as accurate, they buy when they think it is low and sell when they think it is high
-	Slain: Could have shown derivative reliance (broker, media relied on info) rather than drag in complicated economic theory
-	Court said  could rebut presumption of reliance BUT HOW?
-	Basic’s intent was not to defraud (to keep deal quiet) so how does this fit in with definition of scienter in Ernst
-	In non-disclosure cases, reliance assumed
-	Slain: Believed reliance would be subsumed by materiality if standard was sufficiently high BUT Court refuses to raises standard and keeps assuming reliance is required in 10b-5 cases, because it is based on state tort of deceit

5.	Enforcement of Fiduciary Duties
Santa Fe Industries, Inc. v. Green (1977)
-	s unhappy with price they were getting for short-form cash out merger
-	But did not want to use state-law appraisal rights, brought federal suit under 10b-5
-	[Big difference in stock price under asset appraisal and market price- look at Q ratio graph.  Consequence of inflation is people would rather own assets than paper (stock and money), hard assets take on disproportionate value and stocks are undervalued with respect to replacement cost]
-	H: Cannot be a violator of 10b-5 or 14a-9 where there is no misrepresentation and full disclosure
-	If full disclosure not actionable under securities laws
-	Before this case, it was thought that securities rules and 10b-5 was going to subsume all of corporate law
-	NO, where  violates fiduciary duties (but full disclosure) take claim to state law
-	Breach of fiduciary duty cannot by itself be a violation of 10b-5 
 Tremendous increase in state cases on fiduciary duties

E.	Regulation of Tender Offers (1934 Act)
-	Tender offers are used to oust management
-	Proxy contests to take over board never work, U.S. shareholders vote with management or sell
-	Dealing with corp where stock is selling well below assets value (if not, management would be doing a good job)
-	Ads are placed inviting people to offer their shares
-	Offers:
(1)	Offer is irrevocable for some time
(2)	Payment at small premium over market
(3)	Aiming for 50% + 1 (First come, first bought out)
-	People were jumping to sell as soon as possible so they don’t get shut out, don’t tender you are minority shareholder with management you don’t know
-	Always worked, happened so quickly management could not defend
-	 Williams Act: Amendments to 1934 Act, regulates process, no substantive regulation
-	Statute intended to be neutral as to target and bidder, protecting shareholders of target company
 § 13(d): Person acquiring 5% or more of any equity security registered under § 12 
                 has to file with SEC a 13(d)(1) within 13 days of acquisition
                 -  EARLY WARNING LINE
 § 13(d)(1): 
(1)	Who are you?
(2)	Where is $ coming from, whose financing? What’s relationship with financer?
(3)	Do you have any side deals?
(4)	What are your intentions in purchasing the stock?
-	Groups or person can constitute a person under § 13(d)(1)
-	Tends to inhibit institutional investors to cooperate with 1 another to take strong stands vis-à-vis management, which SEC has always been in favor of (SEC had amended 14(a)(2), definition of proxy solicitation, to encourage dialogue between investors)
 § 14(d): Regulates process of making offers, applies only to § 12 securities
-	Key event in tender offer is commencement 
-	§ 14(d)(2): Any kind of communication which is public and announces target, amount of securities, and price range is commencement
-	On day of commencement:
-	Tender offer statement (essentially same info as § 13(d)(1)) must be filed and hand delivered to issuer
-	Regulates timing of steps
-	§ 14(d)(4)-(6): How to disseminate info to shareholders (long-form/short-form)
-	Bidder must be provided with opportunity to make direct solicitation of shareholders, can demand on day of commencement that issuer/target provide
(1)	Up to date shareholders list OR
(2)	Undertake to mail materials to shareholders on bidder’s behalf
- Preference for this, don’t want to turn over list, want to avoid direct contact
-	Statute gives narrow withdrawal and proration rights but gives SEC authority to give broader rights, which they have
-	§ 14(d)(6): Take all stock a pro rata 
-	§ 14(d)(7): Pay increased consideration to all
-	Therefore, practical for someone to do competing tender offer at higher price
-	14d-7: Shareholder can revoke tendered shares and withdraw at any time until the offer closes
-	14d-10(a)(1): All Holders Rule: If make tender offer, must make it to all persons who hold that class of stock
-	14d-10(a)(2): Best Price Rule: Give everyone who tenders best price that you give anyone who tenders
-	§ 14(d)(8): Requires stock be taken ratably from everyone who tenders (if you get twice as much, take it at 50%)
-	No benefit to tendering early 
-	10b-13: Forbids person making tender offer to buy alongside in any other way 
 § 14(e): Anti-fraud provision, not so limited, debt securities would be covered
-	14e-1(a): Tender offer must remain open for 20 days
-	14e-3: If tender offer has commenced, it shall constitute a fraudulent, deceptive, or manipulative act within the meaning of § 14(e) for any other person who is in possession of material non-public information to purchase or sell any security of such companies
 § 14(f): Directors elected as part of tender offer, issuer shall transmit to SEC and
                shareholders who would be entitled to vote same information as would be
                required if such persons were nominated for election as directors at a
                meeting of such shareholders

Raider: Person that makes tender offer/bidder
Tender Offer Defensive Tactics:
(1)	White Knight: Competitive bidder selected by management
(2)	White Squire: Someone buys enough stock to give themselves a blocking position (If merger requires 2/3 vote, 1/3 + 1 blocks)
(3)	Crown Jewel Lock Up: Sell most valuable assets at a fraction of actual value to a friendly folks 
-	Raises serious issues of fiduciary duties to shareholders under state law
           Structural Tactics:
(4)	Classified Board of Directors: Limit number of board who can be elected at once in certificate of incorporation
-	Never works because no director will go to court to fight bidder, will resign
(5)	Poison Pill: Corp creates a class of warrants issued to existing shareholders which provide that if someone not previously approved by board buys a substantial portion of stock, warrant kicks in and shareholder can buy additional shares at discounted price bidder has to pay more to get stock

-	DE has held that techniques are legitimate provided they are used as bargaining tools to secure a better deal for shareholders, not if just used to stop deal dead
-	4 Factors To Consider:
(1)	Whether target’s board has reasonable grounds for believing that raider posed danger to corporation’s  welfare
(2)	Whether defensive measures were reasonable in relation to threat posed
(3)	Whether board acted in good faith after reasonable investigation
(4)	Whether the measure was approved by a board majority whose members were outside (as opposed to employee) directors

-	1 effect of Williams Act: Premiums went up dramatically
-	Market price will go up to tender offer price discounted for possibility that tender offer will fail
-	Shareholders sell when price gets up close to tender offer price, because would rather take small loss rather than risk uncertainty that with tender offer, may not happen and get nothing
-	Who buys? Can’t be bidder because of 10b-13
-	Risk Arbitragers: Buy and arbitrage risk, when they have lots of stock and will definitely tender corp is “in play”, inevitably will be sold, question of to whom
-	Risk arbitragers hoping for competing tender offer to drive up price
-	80s-90s: Tender offers as friendly deals, alternatives to statutory mergers
-	Because Q ratios: Stock is undervalued because of inflation so corp does not want to issue more stock and sell it at low price, would rather have bidder buy corp outright

-	Leverage Buyout: Combination of management buyout and a high degree of leverage
-	Management buyout: Acquisition for cash or non-convertible senior securities of business of public corporation by a newly organized corp in which members of former management of public corp will have a significant equity interest, pursuant to a merger or other combination
-	Leverage: Involves use of debt to increase return on equity
-	LBO: MBO that is highly leveraged, newly organized acquiring corp has high amount of debt in relation to its equity
-	Management (or group they form ) forces shareholders to make tender offers for own shares
-	All shares redeemed except for those owned by management
-	Finance by borrowing and mortgaging
-	Gives management carrot, equity if things go well, and stick, have to make things go well because need to make debt payments
-	Idea that management works best when desperate
-	Junk/High Yield Bonds: Unusually high risk of default, so carries unusually high yield
-	Theory: By diversification, investors in junk bonds can insulate selves from huge loss if one hoes under
-	Most of debt issued to finance LBO is junk bonds

SEC v. Carter Hawley Hale (1985)
-	CHH management took defensive measures against tender offer by getting a White Squire to get a blocking position
-	And went to buy their own stock, block inadequate price for tender offer and give those shareholders who wanted to sell a chance
-	SEC alleged this was a violation of § 13(e) (governs issuers purchasing their own stock) and 13e-4 (Applies tender offer rules to self-tenders)
-	No definition of tender offer in the securities laws
-	Court adopts 8 factor test of Wellman
(1)	Active and widespread solicitation of public shareholders for shares of an issuer [NO]
(2)	Solicitation made for a substantial % of issuer’s stock
[District Court: Without (1) no, S.Ct: Could be but not reversible error]
(3)	Offer to purchase made at premium over prevailing market price
[No premium, bought at market price, although this is up from pre-tender price]
(4)	Terms of offer are fixed rather than negotiable [Not]
(5)	Offer contingent on tender of a fixed number of shares [Not]
(6)	Offer only open for a limited period of time [Not]
(7)	Offeree subjected to pressure to sell stock 
[Without premium and time crunch no additional pressure]
(8)	Public announcement of a purchasing program concerning the target company precede or accompany rapid accumulation of large amount of target company’s stock  [No]
 Not a tender offer not a violation of 13e-4
-	Slain thinks (7) and (8) may be met 
-	Court doesn’t say how many need to be met 

Epstein v. MCA, Inc. (1995)
-	14d-10: Best Price Rule and All Holders Rule enacted pursuant to § 14(d)(7)
-	Major shareholder entered into a contract with bidder to exchange his stocks for stock redeemable at 106% of tender offer price
-	Contract entered into before tender offer and only becomes effective if tender offer closes
-	 alleges this is a violation of 14d-10
-	§ 14(d)(7) does not provide for a private right of action but may be implied under Borak
-	4 Part Test of Court v. Ash:
(1)	Congressional intent
(2)	Whether  is part of a class for whose special benefit the statute was enacted
(3)	Whether it would be congruent to purpose of legislation to allow cause of action (Hard to see why this would not be the case)
(4)	Whether this is an issue traditionally left to state law 
-	(2)(3)(4) met, with (4) states cannot enforce this, § 27 of 1934 Act gives federal courts exclusive jurisdiction (if no private right  no remedy available)
-	Private right of action allowed
-	Was deal part of tender offer
-	H: Wasserman transaction: Terms conditioned on terms of public tender offer, this transaction was an integral part of offer and subject to 14d-10 requirements
-	H: Wasserman transaction offered different consideration, violation of 14d-10
-	Sheinberg Payment: ’s evidence gives rise to a disputed issue of material fact and precludes SJ for 

Piper v. Chris-Craft Industries, Inc. (1977)
-	Chris-Craft made a tender offer for Piper (registered under § 12) shares
-	Piper gets a White Knight, makes competing offer
-	Transaction requires registration under 1933 Act, because registered securities and under Williams Act
-	White Knight did not disclose it was trying to sell company for $5 mill, this relates to value of BP (White Knight) violates § 14(e)
-	BP wins tender, Chris-Craft wants to sue for violation of tender offer rules
-	H: Bidders are not part of the class for whose especial benefit the Williams Act was enacted  do not have standing to bring implied private actions for violations of the Act
-	Case finally decides purpose of Williams Act: Not to benefit bidder (or target), to protect target shareholders
-	Several circuits-1 after Piper- have permitted injunctive relief
-	2nd Cir allowed nontendering stockholders to join target company as s (tendering ones don’t need 14(e) because they fall in 10b-5)
-	BUT authority that target shareholders may not sue their own corporation for chilling the offer by misrepresenting the offeror’s intentions

F.	Trading on Non-Public Information (1934 Act)
1.	§ 16(a): Identifies 3 classes of reporters
(1)	Anyone who owns 10% of class of equity security registered under § 12 (includes not only those listed on exchanges § 12(a) but also all equity securities of issuers who meet § 12(g) standards)
(2)	Any director
(3)	Any officer
-	If you come within1 of the reporting classes, must report ownership of any equity under that issuer regardless of whether issuer falls under § 12
-	File Form 3 and at end of every month must show any gross change in ownership (Buy 100, sell 100, no net change but must still be reported)
-	Since requires insiders to disclose any changes in their beneficial ownership of securities, provides a means for bringing to light possible 10b-5 violations, as well as “purchase or sale” within scope of § 16(b)
-	Reveals information which may be used in evaluating securities of issuer
-	Is itself a deterrent to misuse of inside information through publicity which attaches to reports
-	§ 16(b): Allows issuer to recover any profit of any of the classes required to report § 16(a) made from the buying and selling of any securities of the issuer within a period of 6 months
-	Need to be officer or director either at time of purchase OR sale BUT need to be 10% owner at both time of purchase AND sale
-	Statute applies automatically to anyone, even those with no inside info, because it does not make transaction illegal, only allows profits to be recovered
-	Contemporaneous litigation rule requires that  be shareholder at time of violation to bring suit, Court decided that this does not apply to § 16(b)
-	Congress was aiming at short-term trading with this statute, dissuade executives from profiting from this at expense of long-term financial health of corp
-	Penalize the unfair use of inside information by insiders
-	Eliminate temptation for insiders to manipulate corporate events so as to maximize own short-term trading profits
-	Only provision of 1934 Act that specifically regulates insider trading
-	Stirs up litigation BUT doesn’t cost anything to administer and is 100% effective

Gratz v. Claughton (2nd Cir 1951)
-	H: Take any sale as minuend and look back for 6 mos. For a purchase at less price to match against it or can take same sale and look forward to 6 mos. For any purchase at a lower price
-	 had to pay under § 16(b) even though he suffered a real net loss
-	As a practical matter, if an insider makes a sale within 6 mos. Of a purchase, or a purchase within 6 mos. of a sale, does so at great peril

2.	§ 20A, 21A, 10b-5, 14e-3
Cady, Roberts (SEC 1961)
-	Insider trading law begins
-	10b-5 does not expressly state that an insider who buys or sells based on material non-public information without making affirmative misstatements has engaged in “fraud or deceit”
-	This case, holds silent insider trading violates 10b-5 
-	SEC articulates disclose or abstain rule
-	Disclosure not required because it may jeopardize corp’s deals BUT if you do not disclose, you must abstain
-	Member of brokerage firm heard bad news about corp at meeting, got out violation

Comparison of § 16(b) and 10b-5:
       	§ 16(b)                                                     Rule 10b-5
Security:        Any equity security                                  Any security (debt?)
                      of an issuer which has 
                      securities registered under § 12

Persons:     Only those who report under § 16(a)           Anybody

Illegal:           No                                                           Yes (criminal prosecution)

 (private suit):  Corp (the issuer)                                 Purchaser or seller

	SEC v. Texas Gulf Sulphur Co. (2d Cir. 1968)
-	First major case where Court asserted that silent trading in the securities market on the basis of non-public information violated 10b-5
-	Employees of TGS, members of geological team, president, executive vice president, general counsel, and a director bought stocks and calls
-	Pessimistic press release: Did this violate 10b-5?
-	SEC sued individuals and corp, induced outsiders to sell at lower prices than they would have got if press release had not been issued
-	Court found in favor of SEC
-	But with regards to people who sold in open market and were injured by lack of info even if others had abstained, did not have to disclose so info would still be unavailable to those who sold, same injury suffered
-	Adopts “abstain or disclose” rule
-	Material information: That to which a reasonable man would attach importance in determining his choice of action in the transaction (Definition adopted by Supreme Court in Basic)
-	Friendly’s definition: Significance discounted by likelihood
-	Materiality bolstered by fact that people who knew about it thought it was so important
-	(Waterman definition: Info is material if it would be of interest to a speculator BUT what wouldn’t a speculator be interested in?)
-	Insiders have to wait until information is widely disseminated, not just made public
-	Receipt of stock options constitutes  “in connection with purchase or sale of any security”
-	TGS itself could be found to have violated 10b-5, even though didn’t buy, because it failed to use due diligence in preparing press release (today, need knowledge or recklessness, lack of due diligence is not enough)
-	Problem with scienter: Press release was not a conscious attempt to defraud
-	Does it mean intent to defraud OR intent to do what you did which ended up as a violation?
-	Who was hurt? Not sellers really, people who wrote calls at low price and the corporation

-	Extreme paucity of private suits for insider trading led Congress to amend the 1934 Act in the late 80s: § 20A and § 21A
 § 20A: Doesn’t add anything substantive to insider trading BUT it provides that
               inside traders are liable to a whole class of counter-partied who
               bought/sold in the era
 § 21A: Treble damages penalty to SEC (Intended to cover fact that it was 
               believed that punishments of § 20A were not enough) 
Why are we regulating insider trading?
-	Blackmun/Brennan: Conception of securities market as place of perfect parity of information
-	In case of silent insider trading,  will not be liable unless he was an insider, tippee (receives insider information from an insider, tipper), or misappropriator

Chiarella v. U.S. (1980)
-	Printer, figured out names of corps in connection with takeovers, used info to buy shares in targets
-	Charged with violation of 10b-5
-	2d Cir Opinion: Although he defended by saying not an insider, applied insider definition that was in a draft of a bill not yet introduced in Congress (Insider: Someone who works regularly in the market)
-	H: No violation because he had not been under any duty to disclose or abstain from trading
-	Duty applies only where there was a relationship of trust and confidence between parties to a transaction
-	 had no fiduciary duty to corp whose shares he traded in
-	To hold, would make fiduciary duty to everyone in the market
-	A parity of information rule cannot be operationalized
-	10b-5 doesn’t create affirmative duty to disclose, does not alter common law rule
-	( may have misappropriated but no instruction on this was given to jury, Burger thought he should be convicted for misappropriation)
-	Does ’s trading have possibility of hurting bidder? YES, his buying drives price up, other people will buy because of piggybacking
-	Blackmun/Marshall Dissent: Believe in perfect info

Dirks v. SEC (1983)
-	Dirks is an analyst who heard about fraud from insider, investigated, tried to get Wall Street journal to publish story, didn’t trade but told investor customers about findings so they sold stock in corp which was doing fraud
-	SEC charged Dirks with violation of 10b-5 on theory that fraud allegations were inside information that Dirks gave clients for purposes of trading
-	H: Did not violate, was a tippee, not an insider, any liability he night have for using inside information must derive from liability of tipper
-	Tippee assumes fiduciary duty to shareholders of corp not to trade on material non-public information only when insider has breached his fiduciary duty  to shareholders by disclosing information to tippee AND tippee knows or should know there has been a breach
-	Question of tipper liability
-	H: No breach for passing on information about fraud, breach only when  tipper personally will benefit, directly or indirectly from disclosure 
-	Includes monetary or if trying to make a gift of confidential info
-	H: No breach by insiders no derivative liability no violation
-	Dissent: Tipper breaches when he knowingly harms shareholders regardless of personal benefit

U.S. v. Chestman (2d Cir. 1991)
-	President of publicly traded Waldbaum supermarket tells sister that they agreed to sell corp to A & P tells daughter tells husband tells Chestman, stockbroker “I have some definite and accurate info”
-	 said he couldn’t advise husband 
-	Then made purchases of Waldbaum stock in the open market (for own account and husband’s)
-	Later that day husband told  explicitly to buy stock
-	Charged with violating both 10b-5 and special tender offer rule 14e-3
-	H: No 10b-5 violation (Need to show Husband breached fiduciary duty to source of information AND  knew of such a breach), Husband did not breach no violation
-	Mere familial relationship between source of information and tipper was not enough to impose fiduciary duty
-	If there was a pre-existing duty or demanded confidentiality before discussion of info duty BUT “Don’t tell” is not enough 
-	Misappropriation Theory: Basis for liability is that person is in possession of info breaches a fiduciary duty to someone other than issuer or issuer’s shareholders, recognized as basis for 10b-5 violation
-	Possibility that Husband breached a fiduciary duty even though he had no direct relationship with issuer or shareholders
-	Dissent: “Family members who have benefited from family’s control of corp are under a duty not to disclose corporate info that comes to them in the ordinary course of family affairs”
-	14e-3: (Added after Chiarella) Forbidden to trade based on tender offer information derived directly or indirectly from either offeror or target
-	Dispenses with requirement that info must have been obtained as a result of a breach of fiduciary duty (as with 10b-5)
-	Validity of 14e-3:  alleged SEC exceeded authority under § 14(e) because no fiduciary duty needed BUT claims that SEC is only given the authority to deal with common law fraud
-	Standard of review with this legislative rule is super deference
(1)	Is this within grant of authority?
(2)	Is this so far off so as to be arbitrary or capricious? 
-	H: Violation of 14e-3
-	Winter Opinion: Concurs with 14e-3 conviction, thinks should have been convicted under 10b-5
-	Formulation for finding fiduciary duty in family:
(1)	Gets benefit from family
(2)	In position to learn confidential information
(3)	Knows they are supposed to keep it quiet
-	Thinks this will be better for family relations, no arms length
-	Miner: Disapproves of Winter’s family rule
-	Mahoney: SEC exceeded authority, SEC has right to regulate common-law fraud but not to redefine (by eliminating fiduciary duty requirement), gives SEC power to create criminal law, not what Congress intended
-	Misappropriation: Property right in the information, trading on it is theft
-	Tension because 10b-5 is not really about theft

(4th Cir)
-	Prosecuted on misappropriation theory
-	Works for lottery, knows they are changing systems, buy stock
-	4th Cir reverses on grounds that theory is fundamentally unsound
-	Absence of  duty free

Carpenter
-	Wall Street Journal columnist trading on info that is going to be in paper
-	Not inside info BUT 2d Cir holds guilty for misappropriation from WSJ
-	S.Ct: 3:3 no precedential value

U.S. v. O’Hagan (1997)
-	 made purchases in target, worked for law firm that had represented bidder
-	H: 10b-5 liability could be based upon misappropriation of confidential data from a person other than the issuer
-	BUT if you disclose to person to whom you owe a duty no liability
-	Statutory construction of § 10(b): “Deceptive device…in connection with” purchase or sale of securities
-	Both these requirements satisfied when person misappropriates from non-issuer and then buys/sells
-	This interpretation was held to further the general policies behind anti-insider trading rules, especially policy of encouraging wide participation in securities market
-	Although info disparity is inevitable, people would hesitate to invest if trading based on misappropriated non-public info is unchecked
-	Doesn’t make sense to hold  liable if he works for firm that represents offeror and not if they represent target
-	Under Ginsburg analysis: Disclosure to firm would have been enough
-	14e-3(a): Cites to Chestman, abstain or disclose
-	Reasonably designed to prevent, and prophylactic measures allowed to encompass more than core activity
-	Response to Thomas Dissent: Grant of authority in last sentence of § 14(e) is not the same as § 10(b) but more similar to § 15(c)(4)
-	Slain: This is not a plausible position, they are totally different
-	Thomas Dissent: The range of possibilities under 10b-5 is limitless
-	Majority reads “in connection with” right out of statutory language
-	Slain: Ginsburg is right about 14e-3 BUT Thomas is right about 10b-5
-	Look at history, last sentence of 14(e) adopted after Chiarella, when they added must have contemplated forbidding something, if not this, then what?
-	Bad drafting of 14(e) but this was exactly what they were after
-	Less disturbing ambiguity because it is limited (to tender offer situation) in a way that 10b-5 is not
-	10b-5: No limits, no requirement that what you do is common law theft