BA CRAC

Question 1

Agency Tort

Answer 1

1. Is A an agent of B
2. Torts
   a. Who makes the claim
   i. Injured parties (customers, workers)
   ii. Victims of accidents

b. Claims
i. Respondeat superior
1. R: an employer is liable for torts committed
a. by its employee
b. within the scope of employment.
2. R: An employer is a principal who has control over the manner and means–in essence, the details–of an agent’s work.
3. R: Courts place special emphasis on whether such control is exercised in the specific part of the business where the tort occurred (Miller).
4. R: Restatement 220 provides more specific factors for determining employer status, such as:
a. Control
b. Distinct business
c. Custom skill
d. Tools and place
e. Length
f. Compensation
g. Intent
h. P in business?

ii. Apparent agency
1. R: one can be liable for a holding out of agency that causes a third party to rely justifiably on a purported agent’s care and skill.
2. R: A threshold issue is whether individual is an agent
3. A:
a. For: Reputation. McDonald’s Corp was potentially held liable for a customer injury caused by a locally owned restaurant because the customer may have relied on McDonald’s national reputation for food quality
iii. Franchisor-Franchisee Liability
1. R: Key is degree of control. Controlling question not general control but control over relevant “instrumentality”.
2. Possible for McDs to be vicariously liable for torts related to food quality/prep

Question 2

Agency in K

Answer 2

a. Who makes the claim
i. Wronged customers
ii. Suppliers

b. Claims
i. Express authority
1. R: A’s reasonable perceptions of P’s express authorization. Agreement or clear and express oral instructions, etc.

ii. Implied authority
1. R: A’s reasonable perceptions of P’s implied authorization. Necessary, and customary.
2. R: A threshold issue is whether Individual is an agent.
3. A:
a. For: past practice of representation, left in charge, necessity to make decisions when alone
b. Against: director knew he went too far, relationship ended

iii. Apparent authority
1. R: Focuses on the reasonable beliefs of third parties, traceable to P
2. R: A threshold issue is whether Individual is an agent.
3. A:
a. For: agent has customary powers, left in charge, repeated dealings b/w individual and T
b. Against: rushed or coerced decision, customer arrangement, appearance of independence
4. Sub: consider any contractual warranty (“we’ll make it right”)

iv. Undisclosed Principal
1. R:P is liable for rogue A’s actions if P has notice and doesn’t try to notify 3P that A is acting outside scope of A’s authority OR P is undisclosed P and A acts within normal scope of authority for someone in A’s position
2. A:
a. P can’t rely on secret limiting instructions as defense
b. Watteau - Humble transferred beerhouse to Ds but stayed as manager & Humble’s name painted on door. Agreement: Humble could buy only ales/water -> Ds still liable for additional goods Humble bought bc within industry standard
c. Doesn’t matter if 3P believes A is acting on own behalf and not P’s behalf if above elements met

v. Ratification
1. R: Company could be bound after affirmance of a prior act professed to be done on Company’s account by acceptance of results with (a) intent to ratify, and (b) full knowledge of material circumstances
2. A:
a. For: past ratifications, use of ingredient that they should know its existence
b. A: Company lacked knowledge of material facts, ratification of one customer does not equal ratification to others.

vi. Estoppel (contract)
1. R: estoppel creates a binding obligation when:
a. A third party (the customer) detrimentally relies on an unauthorized party and
b. Either: (1) the alleged principal intentionally or carelessly caused the third party’s belief or (2) the principal was on notice of the unauthorized acts and didn’t take reasonable steps to correct the misapprehension
2. A:
a. For: detrimental reliance, company had knowledge
b. Against: History, no detrimental reliance, no knowledge

Question 3

Partnership

Answer 3

1. Who makes the claim
   a. Landlord
   b. Agencies
   c. Injured customers
2. Rule: A partnership is formed by sharing profits and control. Partners are jointly and severally liable for partnership obligations. Moreover, the strongest cases for partnership also include shared losses or exposure to the downside risk of the business
3. Analysis:
   a. Shared control?
   b. Shared profits and losses?
4. Claims
   a. RUPA defaults bind partnership
   b. Partner/partnership ratification
   c. Partnership by estoppel

Question 4

Partnership by Estoppel

Answer 4

1. Rule: Representation of partnership by defendant; Reasonable and good faith reliance by plaintiff; Resulting in detrimental change of position
   a. Against: the relationship is vague

Question 5

PCV

Answer 5

1. Who makes the claim
   a. Creditors
   b. Injured customers
2. Why make the claim?
   a. Hold shareholder or owners of a corp personally liable for the debts of the corp
3. R: to pierce the corporate veil, the creditor must first show that the separate existence between the shareholder(s) and the corporation has not been respected—that is, the owner(s) were operating corporate entity in “individual capacity.”
4. Two types of transgressions must be established:
   a. (1) unity of interest/control (e.g., lack of formalities, commingling, undercapitalization) and
   b. (2) an injustice if limited liability is respected (fraud-ish conduct or unjust enrichment)
5. Note: respecting corp formalities (holding board meetings, keeping corporate/personal assets separate & adequate records) = very reliable way to avoid PCV

Question 6

Piercing the LLC veil

Answer 6

1. R: PLV requires
   a. (1) unity of control (e.g., co-mingling, lack of formalities, undercapitalization) and
   i. Lack of formalities, while usually an important factor in corporate PCV, is less important for an LLC.
   b. (2) an injustice if limited liability is respected.

Question 7

Duty of Care

Answer 7

Duty of Care
Requires board to make decisions with reasonable diligence and prudence. Cannot Delegate duty.

Hasty decision - bjr unless D shows gross negligence in becoming informed then fairness.

1. Rule: The BJR normally shields decisions, but gross negligence in becoming informed results in fairness. Fairness is procedural and substantive review.
2. Application
   a. For: directors removed? Questions?
   b. Against: reasonable delegation? Regular updates (except to conflict party)?; experts?
   c. Case: Van Gorkom:
   Good to takeover specialist
   Short meeting in little notice. No chance to review proposed merger. No analysis re price. Didn’t check market.

Directors violated DOC and are personally liable

Question 7

Duty of Loyalty

Answer 7

1. Rules:
   a. Duty to act in best interest of SH rather than person interest. Directors can’t have an undisclosed interest in the transaction that is diff from SHs

i. Ford case
b. Self-dealing transaction subject to fairness review unless ratified by a majority of independent shareholders or directors
c. Fairness includes substantive and procedural review
2. Application
a. Cleansing: Hinges on materiality of Director’s stake in Company
b. Unfair: Divergence from market custom; how active is director
c. Fair: Experts; negotiation by qualified director; positive sales until testing failure

Corp opportunity

Cleansing

Bad faith
- bjr rebutted and gets fairness review
- directors can be indemnified but not if bad faith

Question 8

Securities Law

Answer 8

1. Who makes the claim
   a. Purchasers of stock/investors

b. ’33 Act violation
i. Must register any “offer or sale” (any issuance, e.g., formation, capital raising) of “security” UNLESS exempt private offering
ii. Average underwriting cost for registration in 2014 = $20M, so a lot of time is spent making offering exempt
iii. Disclosure-based regime

c. Rule 506
i. Rule: Rule 506 requires all accredited purchasers and either no general solicitation OR extra verification steps (check account statements, etc.)

d. Section 4(2)
i. Under the Doran, the following factors are among those relevant to whether an offering is private and therefore qualifies for Section 4(2):
1. The number of offerees
2. The relationship between the offerees and the issuer
3. The sophistication of the offerees
4. The amount of disclosure provided to offerees
5. The amount offered

e. Definition of security
For something to be a security, it must either qualify as one of the (many) enumerated instruments in Section 2(1) of the 1933 Act’s definition of a security, or it must fall under one of
the catchall terms, “investment contract” being the most common used.
i. Enumerated: Stock, bonds, notes, options, etc

ii. Investment contract is a contact, transaction, or scheme whereby a person makes an investment in a common enterprise with reasonable expectation of profits to be derived primarily from the efforts of others (Robinson).

Question 9

Oversight duties

Answer 9

i. MBCA 8.31(a)(2)(iv) states that a director may be liable when facts would alert a reasonable director to the need for a timely and appropriate inquiry.
ii. Upon discovery of illegal course of action, D must: object, resign, or file suit
iii. sustained failure to devote attention (pattern of conduct) & facts that would alert reasonable director

Question 10

Improper corporate purpose as a director

Answer 10

i. Corporate Purpose Doctrine: Corporations should be operated for the financial benefit of SHs, but with courts giving wide discretion to the board in deciding what is in the SHs’ interests

Question 11

Self-dealing/conflict of interest

Answer 11

i. fairness unless ratified by disinterested directors or SHs; BJR once ratified

ii. i. Fairness review has 2 components: procedural analysis (was process involved in undertaking transaction fair?) and substantive fairness analysis (was outcome fair?)
1. Bd can be saved from liability under fairness review if bd somehow stumbles into a good result despite procedural problems

Question 12

Corporate Opportunity

Answer 12

i. Rule:
1. If an opportunity, must offer to the corp through MBCA 8.70.

2. Broz four part test: Financial capability? Line of business? Interest or expectancy? Resulting conflicts?
3. Majority of qualified directors or shareholders can decline the opportunity, if provided “material facts”
   ii. A:
4. Run through test. Did shareholders consider?

Question 13

Charitable Donations

Answer 13

i. R: In general, corporate giving is protected by the BJR unless the gift involves (1) a conflict of interest (e.g., no pet charities), (2) no nexus whatsoever to shareholder profit, or (3) a donation amount or scope of action that is way too big for the stated business purpose.

ii. i. Three grounds for rejecting corp donations
1. Conflict of interest issue: no pet charities
2. Not trying to even justify action/cannot reasonably be beneficial (anon donation doesn’t help goodwill)
3. Amount of donation or scope of action way too big for biz purpose described

Question 14

Liability of a Shareholder

Answer 14

1. Who makes the claim
   a. Creditors
   b. Smaller shareholders
2. Claims/Duties
   a. Controller shareholder
   i. SH with >50% voting control or >25% voting control & other influence over bd); possible for group of SHs to be single SH for the purposes of test (e.g., agrmt to act in concert)

b. Disproportionate benefit (transaction involves only controlling SH not all SHs) -> fairness review

c. Controlling SHs owe DOL to minority SHs to avoid certain kinds of self-dealing (Sinclair)

d. In the absence of self-dealing (a benefit for the majority that excludes the minority or works to minority’s detriment), the transaction is reviewed under BJR (Sinclair)

e. The court applies fairness review to self-dealing resulting in disproportionate benefit to controlling SH. Fairness review considers both the quality of the decision-making process and fairness of outcome (substance) of transaction.

f. PCV

Question 15

Insider Trading

Answer 15

a. R: Under classical, material nonpublic info, from insider of traded company, extends to tippees who know of breach.
i. Tipper must breach fiduciary duty to shareholders by disclosing information in exchange for personal benefit, and tippee must know/have reason to know the information is ill-gotten

b. Under misappropriation, material nonpublic info, misappropriated from insider of other source, extends to tippees. Either way, tipper personal benefit required.

c. A:
i. For: If strong hint at source of info, so tippee knows and is liable. Pecuniary benefit based on close friend/relative rationale.

Question 16

Derivative Claims

Answer 16

a. initiated by SH on corp’s behalf

b. i. Mechanism for enforcing director/officer fiduciary duty claims as corporation suffers direct harm from management failings

c. Demand requirement – 1st screen
i. To bring a derivative suit, the shareholder plaintiffs must first either make demand or request demand excusal on the basis of futility.
1. Make demand on bd to pursue claim, or
a. 1. BJR applies to bd’s decision to dismiss (extremely hard to overcome), so P will virtually never make demand.
b. 2. Indeed, it is better for the shareholder not to make demand, as that can lead to a waiver of ability to request demand excusal later on as the action implicitly acknowledges a belief that the board would have been able to make the proper decision.
ii. Request demand excusal on basis of futility: To claim demand is futile, under the Aronson standard, shareholders must allege particular facts that create a reasonable doubt that the board is capable of making a good faith decision as to whether to pursue the claim.
1. 1. Demand futility test: Under Grimes, DE courts will find demand futile (i.e., demand will be excused) if either a majority of the board (1) received personal material benefit from alleged misconduct being challenged; (2) would face substantial liability on any of the claims in the demand (aka DOC failures); or (3) is incapable of acting independently from tainted directors.
2. 2. This is a very high standard to meet à must plead assertions based on facts at hand (no discovery)
3. 3. If demand excused, SHs file lawsuit themselves even over objection of bd
iii. Demand requirement + demand futility strikes balance between
1. Preserving discretion of directors to manage corp w/o undue interference
2. Permitting SH to bring claims on corp’s behalf when evidence directors will wrongfully refuse

d. Special Litigation Committees – 2nd screen
i. After demand excused, corp has one more option to wrestle back control: form a SLC to review merits of suit and decide whether to dismiss the claim. In response, SH can challenge SLC
ii. b. Zapata 2-step test to determine if SLC rather than SH should control derivative suit
1. First, is the SLC truly independent? Factors: operational and financial independence; good faith of committee; bases supporting recommendation
a. Burden entirely on corp to prove SLC is independent
2. Second, what is court’s own business judgment on whether litigation should continue? Factors:
a. 1. Does corp have “compelling interest” in suit being dismissed? (e.g., suit meritless, bad publicity/expensive suit with small potential benefit)
b. 2. Even if yes to 1st Q: Are there matters of law and public policy that might make it important for lawsuit to continue? (e.g., revelation of corp scandal to restore confidence in corp America, lead to discovery of criminal conduct)
iii. c. Zapata test is hard to meet! SH has already been able to argue that bd can’t be trusted to decide whether to handle litigation or not under Aronson, so demand was excused. Thus, we should be skeptical of SLC as a creature of that original board.

Question 17

Revlon Duty

Answer 17

a. Act II: After PP increased offer to $56/sh, Revlon bd finds another buyer they like better and offered generous deal protection devices that effectively ended competitive bidding

b. i. Revlon duty: once “break-up” of co inevitable, Ds’ role changes from defenders of corp bastion to auctioneers charged w/ getting best price for SH (at this point, defense measures/favoritism no longer appropriate)
i. 1. Bd may consider non-SH interests if rationally related benefit to SH exists, but can’t once auction among active bidders in progress
1. Deal protection devices (i.e., lock-up, no-shop, termination fee) for noteholders = problem; no rationally related benefit

ii. 2. Duty kicked in once Pantry Pride increased its offer to $56 (became apparent to all that break-up of co inevitable)

Question 18

Unocal

Answer 18

a. Pickens, thru entity called Mesa, offers $54/sh for Unocal through tender offer. Bd rejects offer and adopts takeover defense: if Mesa reaches a certain ownership threshold, every SH other than Mesa has right to $72/sh for a certain number of shares (flip side of poison pill)

b. Court held defense appropriate: (1) legit motive bc coercive offer and price inadequacy and (2) proportional bc including Mesa in self-tender offer would help fund takeover, which would ultimately be harmful to SHs

c. Court held Pickens’s offer in Unocal involved a cash offer on the front end, with plans to cash out the other shares with junk bonds on the back end to be coercive.

d. In Unocal, the stock was trading at $38 prior to Pickens’s offer of $54, and the court accepted Unocal’s argument that the offer was grossly inadequate. Here, the premium is smaller/larger…

Question 19

Enterprise Liability

Answer 19

a. R: Enterprise liability ordinarily addresses the liability of sister entities – two entities with the same shareholder/member.

Question 20

Shareholder Agreements

Answer 20

i. SH agreements commonly cover SH voting and share transfers
ii. SH agreements cannot dictate board votes, unless unanimous
1. Shareholder agreements are generally enforceable, subject to some restrictions.
2. Shareholders may agree in advance how to vote shares but cannot bind how directors will then act, as such an agreement may be contrary to their fiduciary duties to the corporation/shareholders (McQuade).
3. Exception: ok if all SHs of corp in agreement (Clark)
4. AC: If SH wants to ensure employment as officer of corp, need two agreements: SH agreement and standard employment contract between SH and corp

Question 21

Shareholder Proposals

Answer 21

i. SEC Rule 14a-8 gives shareholders in publicly traded companies the right to include a shareholder proposal and brief supporting statement in company’s proxy statement.

ii. When can company exclude?
1. prohibits shareholder proposals that are improper under state law
a. if phrased as a mere recommendation (i.e., not binding), then it cannot be excluded under state law.

2. prohibits shareholder proposals that violate the law:
   a. Cannot be cured via framing proposal as recommendation because if executed it would violate the law.
3. prohibits shareholder proposals that are not relevant
   a. A shareholder proposal that has significant political, social, or ethical implications cannot be excluded because the importance of those implications outweighs its small quantitative impact (Lovenheim)
4. prohibits shareholder proposals that the company lacks the power or authority to implement
5. prohibits shareholder proposals that deal with management functions unless there are transcendent implications involved and the proposal does not micromanage
6. prohibits a shareholder proposal that is trying to influence a particular director election. It doesn’t prohibit something like a bylaw amendment that will change the process for elections going forward

Question 22

Shareholder Inspection Rights

Answer 22

i. a. Basic Rights: obtain copy of SH list, other books/records (financial statements, board minutes)
1. i. SH list typically lists intermediates (brokerages, who hold shares for SHs)
2. ii. Under DE law, not required to provide NOBO list (beneficial owners of shares)

ii. b. SH may inspect books/records and obtain SH list for proper purpose related to biz of corp.
1. Qualified SH may inspect SH list to ascertain ID of fellow SHs for avowed purpose of informing them directly of tender offer, as a potential acquisition/takeover is extremely important to future of corp.

iii. A proper purpose under DGCL §220 must be focused on the economic returns to investors. Purely social/political issues are not proper purpose (Honeywell).

Question 23

Choice of Entity

Answer 23

a. Tips
i. Plain English to client
ii. Avoid jargon, such as through use of examples
iii. Clear organization, such as eliminating S-corps right away and structuring discussion around the questions Executive asked
iv. Appropriate tone.

b. LLCs
i. Easy to create such a structure within an LLC through a board of managers. But LLCs lack the procedural scaffolding and default rules that make a board of directors work so well.

c. C-corps
i. A c-corporation is eligible for venture-capital financing and most suitable for an initial public offering.
ii. hierarchical management structure of a corporation is well suited to an investor who would like to be mostly passive
iii. board of directors - where it would be a part of a collaborative and formal process to decide major strategic issues without involvement in day-to-day matters.

d. S-corps
i. Entities cannot own s-corporations

Question 24

Cumulative Voting

Answer 24

a. R: Per 2115, CA voting applies to DE entities headquartered in CA. CA allows for cumulative voting.
b. R: In CA, a class vote is required. The common can block the sale.

Question 25

Indemnification

Answer 25

a. R: The Delaware indemnification statute allows advancement of reasonable expenses with a commitment to pay back if not ultimately entitled. 145(f) allows the company to pre-commit to that.
b. A corporation may indemnify a director who acts in good faith.
c. A corporation must indemnify a director who is successful on the merits or otherwise.
d. An indemnification agreement can make mandatory what would be permissive.

Question 26

M&A

Answer 26

a. Rule: The board applies Revlon (intermediate scrutiny) when a board commits to a cash-out merger. The board must take reasonable steps to maximize short-term shareholder value

Question 27

Incorporation Issues

Answer 27

a. R: Incorporation statute available; Good faith attempt to comply; Conducted business in corporate name

Question 28

Tests for Contests for Control

Answer 28

a. Smith v. Van Gorkum
i. Need to satisfy the duty of care

b. Unocal
i. Did the directors have legitimate motive for believing a danger to corporate policy and effectiveness existed? (look at the process and the threat)
ii. Was the director’s defensive response proportionate? (i.e. not preclusive or coercive)

c. Revlon (if a change in control OR break-up of corporate entity)
i. When a “sale” or “breakup” of the company becomes “inevitable,” “the directors’ role [is] changed from defenders of the corporate bastion to auctioneers charged with getting the best price for SH at a sale of the company.