Business Associations Flashcards

Question

Critique of Boards | and reforms ## Footnote A board member is considered **independent** if the only compensation they're receiving is for serving on the board. * as long as the compensation you're receiving from the corporation is only for serving on the board, you're considered to be an outside director.

Answer 1

Concerns the limited time and expertise of board members. * Many directors are busy executives with other responsibilities, and they may only meet four times a year to discuss important company matters. “Internal" directors, who are current or former executives or majority shareholders * May be biased towards management and more concerned with protecting their own interests than those of shareholders. * On the other hand, "external" directors, who are independent of the company, may lack the expertise and knowledge of the industry needed to make informed decisions. boards are often a tightly knit social network, with directors forming close friendships and social norms that can make it difficult to challenge the status quo. * Companies may be reluctant to criticize directors or remove them from the board, even when their performance is subpar. This can create a culture of complacency and a reluctance to push for meaningful change. Furthermore, while shareholders have the right to vote for board members, the real power often lies with the management team that nominates the candidates. ## Footnote Possible Reforms * Increase diversity on BOD, both in gender, race, ethnicity and professional background and experience * Tighten the definition of what a disinterested board member and increase the independence of the board of directors to ensure that all directors are truly independent and have no conflicts of interest = By requiring a certain proportion of independent directors, who have no financial or personal ties to the company, it may be possible to improve the board's oversight and reduce the risk of misconduct * Increase the accountability of the BOD = Currently, it can be difficult for shareholders to hold the board accountable for its actions, as they may be shielded by various legal protections. By requiring greater transparency and disclosure, as well as more frequent elections of directors, shareholders may be able to exercise greater control over the board and ensure that it acts in their best interests. * Give more power to shareholders, and less to boards

Answer 2

Mandatory Disclosure * The Government can require mandatory disclosure rules for corps but corporate law makes little use of it (financial statements, balance sheets, income statements etc) * only the charter will be obtainable and does not provide info that is important b/c corporations don't have to file their by-laws or anything else * Most states also do not require private corporations to file or prepare financial statements = can contract for it but disclosure could be fraudulent and are expensive Capitalization Requirements * You would have to keep a certain minimum capital in the corporation and that minimum would be use in case of creditor claims (aka to pay them) A lot of jurisdictions have this but we are getting away form this for 2 reasons * Usually these minimum requirements are too small to even pay out a single tort claim let alone the legal fees * Getting rid of it helps entrepreneurs and business = easier to start a corp ## Footnote there is a reliance on credit rating agencies. * In theory it is a good idea for a proxy for the lack of disclosure and provides some info on how a company is doing but these reports have errors * a lot of power being handed to these agencies

Answer 3

Standing * generally, creditors do not have standing to bring fiduciary claims = they are protected by contract, they are not residual claimants * BUT in Insolvency = standing = In insolvency, fiduciary duties run not only to shareholders but also CREDITORS * When a company is not healthy but it is not bankrupt (have not triggered filing but not able to meet obligations as due) Can you show that the board violated fiduciary duties that run to both shareholders and creditors? * Ex = Corp owes 12M, could settle and get 12M but can try to make more money in trial and get more money for s/h - no right answer ## Footnote they should maximize value to all shareholders

Answer 4

A fraudulent conveyance occurs when a debtor intentionally transfers assets to avoid paying creditors. Actual fraud (very difficult in practice) * Smoking gun → actual proof Constructive fraud (motive and opportunity, where the transferor leaves the debtor in a vulnerable position) * Circumstantial motive and opportunity * Transferor leaves the debtor in a vulnerable position. Things to look for: * Remaining assets are unreasonably small in relation to the business or * Transferor intended, believed, or reasonably should have believed he would incur debts beyond his ability to pay as they became due or * Transferor is insolvent after transfer ## Footnote Fraudulent Conveyance in Leveraged Buyouts * public company not doing well --> buyout s/h and take it private through debt = large amount of debt and little equity --> sell company to 3rd or IPO * The fraudulent conveyance argument arises when pre-LBO creditors (e.g., those who lent $500M before the buyout) claim that the LBO overloaded the company with debt ($4B total), making repayment impossible and increasing bankruptcy risk. * They argue this meets constructive fraud Spinoffs * You've got a client who is a creditor of an integrated company such as Philip Morris → It is a tobacco business, which is very profitable. = spinoff into two separate companies * The argument is that the division into these two companies is a fraudulent conveyance → Because my client, when they became a creditor → was extending credit to a company that was hedged aka a food and tobacco company so it was diversified Both fail -- rejected by courts = you could have protected yourself in contract and these are business moves not trying to avoid debt

Answer 5

Controlling shareholder recharacterizes its position in the capital structure to gain priority (e.g., equity to debt, junior debt to senior debt) * Courts will look for under-capitalization, withdrawal of equity at time business failing * Can only be done by controlling shareholder who has access to the books court uses its equitable powers to subordinate the debt – i.e. “push it back down the capital structure” ## Footnote If the firm was just undercapitalized, that is not the issue, BA law does not care * It is the fact that the company was insolvent, near bankruptcy and then they decided to change to debt in a shady way and just left 6k in the equity account

Answer 6

Unity of interest and ownership * Failure to follow corp. formation; Failure to maintain separate accounts “commingling”; D was using those accounts for personal expenses; under-capitalization = these are nice but not enough by itself * Where a plaintiff will win for the first prong → showing lack of process = Lack of formalities Injustice / fraud-like conduct * Some injustice beyond the creditor’ inability to recover (how much? unclear) * Shell company is being used to perpetrate some injustice * It can NOT simply be the mere fact that the creditor will not be paid if the veil is not peirced * ex: Unfair business practices; Intentional misrepresentations, deception, fraud-like conduct; Creation of a corp. simply to eliminate liability/ lacking true business operation In 0.01% of situations, maybe, if prong two is really, really bad and there would have to be something like something really horrific, like a mass tort * The court might say, look, we’re going to pierce the veil based on the extent of the injustice – very very rare

Answer 7

Ex post, pro rata liability for shareholders * Personal liability with regard to tort victims * problem = Too radical (no appetite in the law for this); Which shareholders? Ones at the time of tort? Time of complaint? Time judgment is rendered? Direct regulation * Certain industries that are particularly dangerous * Ex: airplanes, generating nuclear power, making medication Mandatory insurance * Like cars, should we force other industries to have mandatory insurance to protect tort victims? * Problems: which industries? Cost? Giving priority to involuntary (tort) creditors in bankruptcy * Simple and feasible but its a micro thing with particular cases not a macro systematic reform thing * Let the tort victims go to the top of the line in bankruptcy proceedings * Issue is usually the tort victims do not have the absolute best and sophisticated bankruptcy lawyers while the voluntary creditors are sophisticated and can afford the best bankruptcy lawyers

Answer 8

Limited: * Electing board of directors * Fundamental changes (dissolutions, change to charter; typically: mergers, sales of assets) * shareholder resolutions (14a-8 = probably the only moderately inexpensive way to get a proposal in front of shareholders = public companies) Where: **annual meeting** * If there is no annual meeting, the court will force an annual meeting after 13 months * This demonstrates the power dynamic of not wanting shareholders to call meetings because it could be disruptive. This is one of the only times a shareholder can bring up issues in DE. **Special Meeting** * Typical way to initiate action between annual meetings. * DE allows only board or person with authority in charter to call special meeting | other jxn allow controlling shareholder **Consent solicitations** * Written consent instead of meeting, but expensive, cumbersome * DE allows any action that can be taken at meeting of shareholders to be taken by written concurrence ## Footnote the what policy: * if shareholders were voting on everything every day, then things would get very disruptive (flowers in office) * But have we gone too far? and is that part of the shareholder disenfranchisement? * even special meeting is disenfranchising

Answer 9

Baseline * you need a board, even if it's one person, you need one class of shares. * The default is one share, one vote. And you have an annual election where the board is elected. Staggered voting * Delaware and some other states allow you to divide the board into different classes to stagger the board * So what you would have is one third of the directors up for election in next year → You would have another third up for election the following year. * is that this staggered board mechanism is a very, very simple and extremely powerful anti-takeover mechanism. (good against hostile takeovers) Cumulative voting = Corp hate this * The idea with cumulative voting is to allow non-controlling shareholders to strategically accumulate, bunch together their votes in order to get some representation on a board. * We are going to give you a number of votes equal to the number of shares multiplied by the number of openings candidacies. * So A you have 199 votes. There are going to be three directors. You have 597 votes. (199x3) ## Footnote Removing * Board members can be removed by shareholders or judges - that is it * not by other board members unless authorized in corp docs

Answer 10

Extremely expensive = costs of printing and postage (e.g., $2M-50M+ for public companies), expense of proxy battles deter insurgents * Shareholders receive proxy statement and proxy ballot (“proxy card”) * Shareholders return proxy card by mail, indicating how their shares should be voted RECOVERING COSTS ASSOCIATED WITH OBTAINING PROXIES IN A BATTLE FOR CONTROL * incumbents (those currently in power) can be reimbursed from a corporation’s treasury regardless of victory or loss; * however, insurgents (those mounting the proxy battles) can only be reimbursed if they win (they also get control of board) * lose and lose everything POLICY: * (1) This might not be much of a problem because the people in the business of mounting proxy battles and attempting to get their board elected may have a lot of risk tolerance and funds. * However (2) this type of rule is unfair and discourages challenges to insurgents who already have a limited number of ways to vote and make changes. ## Footnote POLICY: Some alternatives suggestions to improve proxy voting might be: * Change the doctrine: we reimburse everybody or why don't we reimburse nobody OR Why don't we reimburse people based on the percentage of votes they get? * Why don't we just move this to electronic communications? = Company can send “Notice of Internet Availability of Proxy Materials” --> Shareholders can request paper or email communications and save money and trees = optional and not widely adopted because it is an advantage to insurgents * Allow shareholders access to corporate proxy = Allowed a shareholder who has at least 3% for three years to nominate at least one director up to a maximum of 25% of the number of directors up for election * The goal was to reduce costs in proxy fights by putting both incumbent and insurgent nominees on the same ballot, avoiding separate mailings and expenses.

Answer 11

Shareholders have a right to inspect books and records “for proper purpose” Stock list: identity, ownership interest, address of each registered owner * Courts broadly grant access; typically don’t look if additional “improper purpose Books and records: more expensive to furnish, might jeopardize confidential information * Improper in context of proxy solicitation and might not be allowed * Proper as “quasi-discovery” prior to lawsuit ## Footnote Cannot solicit voting w/o proxy stmt

Answer 12

Shareholder voting is increasingly influenced by large institutional investors and asset managers, especially through passive funds that track stock indices, like the S&P 500. * These funds automatically invest in a set list of companies rather than actively picking stocks, meaning they hold large stakes but may lack incentives to closely monitor corporate governance since they don’t have a direct stake in individual companies' performance. Another issue is share lending, where investors temporarily hold shares just to vote, raising concerns about fairness and legitimacy in the process. * Holding it for a short time doesn’t necessarily mean they care about the long-term health of company Proxy advisory firms like ISS and Glass Lewis also play a major role, advising investors on how to vote. * However, this raises questions about why highly paid fund managers are outsourcing these decisions instead of actively engaging. Lastly, activist hedge funds use their voting power to push for changes in companies, often boosting stock prices in the short term. However, some worry about the long-term impact of their influence. * They tend to target specific firms and they only care about short term gains

Answer 13

“Town hall meeting” rule: * Shareholders can include certain proposals in proxy materials for other fellow shareholders and have the company bear the expenses. For a shareholder’s proposal to qualify, the Shareholders must * So if you've held stock for one year = $25,000; two years = $15,000; three years = $2000 * Submitted within 120 days before the company’s proxy statement is to be released * Must not exceed 500 words * Must not submit more than one proposal for each shareholder meeting Must NOT run afoul of subject matter restrictions, e.g.: * Relate to more than 5% of the business (assets, profits etc) * NOT relate to ordinary conduct of business (Day to day business issues) * NOT relate to an election of directors * NOT counter management proposal Proposals must relate to certain areas over which shareholders have control → AKA WILL NOT GET KICKED OUT * Corporate governance (about 75% of proposals) = We do not like the plurality voting in our director election process, let’s change it! Use majority voting! = The argument is → this is a question of corporate governance and you should let the shareholder’s vote on it! * Corporate social responsibility (about 25% of proposals) = To stop some horrible activity that a corp might be engaged in = Company doesn’t care about environment/Investing in a company with bad labor practices/discriminating against employees ## Footnote The Battle: * The public corporation will argue that this is an ordinary conduct of business thus we will kick out your proposal * The plaintiff, proxy solicitors will say “no this is either about corporate governance or corporate social responsibility so its important for shareholders to see and vote on” * Even if your proposals get through, the rational apathy problem is still real and you might never get the votes anyway

Answer 14

To succeed on a 14a-9 violation claim, shareholders need to show that there was * (1) Material misrepresentation or omission in proxy statement * (2) Made with intent to deceive (“scienter”) * (3) Upon which there is reliance * (4) Causing * (5) Injury (e.g., damages) | Implied private right of action exists ## Footnote Case * minority shareholder = vote not necessary for corp action * yes material misrep but no causation = the company did not need the minority shareholders' votes to approve the deal. * yes conflicted board but fed court will not federalize fiduciary duties

Answer 15

Shareholder voting fundamental to corporate theory * courts are given broad equitable powers to prevent management from abusing its powers * Board unilaterally changing shareholders meeting date and location was found inequitable = outlier * Argument that courts should not intervene seems to be winning Modern law: * In order to interfere with the vote, the incumbent board has to have a compelling justification Duty of Candor as a possible approach to this issue? * First, there is no state fiduciary duty to disclose aka the state fiduciary duty of candor is pretty much dead * case = You violated your duty to disclose when you essentially provide false information in filing with SEC * Chancery court dismisses → You've got a problem with disclosure, go to the SEC. | Long term policy reform? ## Footnote creating a state duty to disclose sounds good for like private companies * But tons of issues with public companies because they have to comply with federal disclosure laws Long-term policy reform is a possibility * Delaware court view = Duties of Care & Loyalty are considered sufficient for addressing management abuses. * Duty of Disclosure is primarily governed by federal securities law, not state law Duty of Candor: * Requires board members to disclose all material information needed for shareholders to evaluate management and the company. * No mandatory state law requirement for disclosure unless federal securities laws apply (e.g., tender offers, proxy voting, insider trading, antifraud). Challenges with the Duty of Candor: * Overlap with federal securities law (which already imposes disclosure obligations). Blurred lines between governance and disclosure: * Governance duties (care & loyalty) focus on decision-making. * Candor would impose a broader duty to disclose even when shareholders aren't asked to act.

Answer 16

will protect the director/defendant from personal liability for acts or omissions. * Additionally, corporations can reimburse director, officer for reasonable expenses from actual or threatened judicial proceedings or investigations (e.g., attorney’s fees, settlements) * BUT you will NOT be indemnified if you are acting in bad faith or if you knew your conduct was unlawful ## Footnote Waltuch * Waltuch wanted his legal fees reimbursed despite his criminal activity and courts reimbursed him because he was “successful on the merits” * Here is what we will do → you were successful on your civil claims and not as successful on the gov claims, so we cannot say you were successful there * SO → you get half of your fees reimbursed. The other subsections required good faith

Answer 17

If you're on a board or if you are an officer of the corporation, part of the deal is that you get a D&O insurance package * uniformity of coverage, less expensive, tax deductible * Typically cases settle to the insurance limit. ## Footnote With indemnification and D&O insurance, yes the plaintiff will get paid but the money is coming from the corporation (its not coming from the D&Os) * So essentially, it's like the shareholders are paying themselves and there's no deterrent effect to directors and officers

Answer 18

Directors and officers required to act “with the care that a reasonably prudent person would reasonably expect to exercise in a like position and under similar circumstances” * corporate officers and directors would be too risk averse under a negligence standard * Judges are not business people so it's important that they defer to business decisions Thus, we have the Business Judgment Rule (BJR) * Which states that directors and officers are insulated if they act in good faith and meet minimal proceduralist standards of attention and thus gross negligence Make sure clients follow proper process * appoint committees, have meetings, have minutes for the meetings, hire outside advisors etc

Answer 19

Am ex * lost over 20M buying stocks, decided to give dividends in the form of stocks but they could have sold the stocks instead and saved 8M * courts will not second-guess business decisions, even if they result in financial losses, as long as the board acted within proper corporate procedures Van Gorkom * Merger gone wrong --> directors never read merger agreement nor read formal review into company's value * only deliberated for 2 hours after 20 min meeting * the price of merger was higher but court did not care due to lack of formal process

Answer 20

replaces duty of care after a 102(b)7 waiver enacted * The court defined a lack of good faith as either **intentional dereliction of duty or conscious disregard** for the company’s interests. ## Footnote There are two completely contradictory theories for this * Theory 1: shareholders are highly sophisticated, they're focused on value creation, they do not want another Van Gorkom → we will gladly take the $55 per share for a company that is losing money * Theory 2 (which is directly contradictory): shareholders are going to be apathetic, they won't vote or they won't take the time to understand 102(b)(7)

Answer 21

$140 million severance payment * if you're on a board and you're hiring a president, you probably want to read the materials that are sent to you. You probably want to show up prepared. * If you are an attorney, no matter how amazing you are, if someone asked you a question worth $140 million, we would want a few hours or a few days to think about it and maybe do a little bit of research? * If you are a board member and the president is being fired, you want to be involved. So at the very least negligent → EVEN GROSSLY NEGLIGENT → **But it's not an intentional dereliction.** * It's not conscious disregard. **Nobody was trying to hurt Disney**. ## Footnote Not doing any research on a question worth $140 million, you could argue is conscious disregard. Showing up to board meetings, not having done any of the reading, you could argue is conscious disregard * THE COURT SAYS IT IS NOT ENOUGH. WOW. Post-disney * Why don't we just have another waiver like 102b7 and get out of all of this stuff? Just have the duty of loyalty

Answer 22

General Rule: * Cannot “abandon office” → ie, the board must assume some monitoring responsibilities Directors have a duty to assure that a corp. information and data gathering system exists even absent some ground giving suspicion to violation of the law * but level of detail is a question of business judgment if and only if there's a 102(b)(7) waiver * lack of good faith standard which requires an intentional dereliction and conscious disregard by the board * OR having implemented such a system, consciously fail to monitor or oversee its operations ## Footnote Francis (smaller family company) * These cases contrast in that → with Francis, where the defendant mother failed to monitor her sons’ actions, where oversight would have been more manageable = there was no oversight at all, which led to a finding of gross negligence. * The court said → even a cursory reading of the financial statements would have revealed that her sons were pillaging the company. * even though she could not change anything (out-voted 2-1) but she should have protested and resigned Allis-Chalmers (bigger company) * the court found that the process in place, even if imperfect, was sufficient given the company’s size and complexity, and thus the directors were not grossly negligent Marchand (ice-cream death) * sterility failure in the plant → listeria that contaminated the ice cream -- people died. The board of directors did not monitor this * They were grossly negligent * and even if there's a 102(b)(7) waiver, they were consciously disregarding their duties because → if you are in the food business, the number one concern should be around food safety * Why did the company have no food safety committee? * Why were there no committee processes or board level processes? * Why wasn't there a protocol to let people know of food safety issues?

Answer 23

POLICY: Federal law is more focused on corporate (and individual) criminal liability, not individual (e.g., director) civil liability. * General Anti-Fraud Provisions: § 10(b) * Foreign Corrupt Practices Act = If a corporation fails to maintain adequate books and records. * Fed Crim law = individual liability * no BJR deference in fed law = stricter because requires "reasonably effective" compliance program ## Footnote For example, a case like Francis → * where the company was commingling money, that could trigger federal statutes on accurate books and records and on internal controls

Answer 24

Fiduciaries – the directors, officers, controlling shareholders – must exercise their power to advance corporate interests * While a duty of loyalty means **loyalty to shareholders** (Ford); in reality, there are other constituencies that a board must acknowledge. BUT small exception: * **Charities, political giving** = no sorry shareholders, it is okay for corporations to give to charity or political entities because corporations exist within a social social structure * **B corp (charter expands duty of loyalty)** = These are corporations that, in their charters explicitly say it's not just about profit for shareholders, but it's also about social causes, the environment, whatever it might be * **insolvency** = creditors ## Footnote Should the duty of loyalty extend beyond shareholders? * The issue lies in the fact that there is a need to consider the interests of other stakeholders (such as employees) vs. providing excuses to insiders to take actions that preserve their personal interests Proponents for shareholder primacy * Argue that it is the primary responsibility of corporate D&Os to act in the best interest of the shareholders who OWN the corp. * They also argue that by doing what is the shareholder’s best interest that it promotes economic growth and prosperity Advocates of Stakeholder theory * Argue that the the duty of loyalty extends to stakeholders because corporations have a broader social purpose beyond simply making a profit and that by having loyalty to the stakeholders, it can actually benefit the corporation’s long term health and success

Answer 25

A self-dealing transaction is when a fiduciary is on both sides of the transaction * A director is involved in a conflicted transaction if they are a party to the transaction * have a beneficial financial interest in the transaction * and then exercises his influence to the detriment of the corporation. Baseline of DUTY OF LOYALTY = FAIRNESS * In order to ensure fairness is to have disclosures! (aka Disclosure is a prerequisite) * If you do not disclose → you will fail duty of loyalty instantly ## Footnote Must disclose material information * Information is material if a reasonable shareholder would consider it was important Hayes Oyster * stands for the proposition that regardless of whether there was anything bad going on, non-disclosure is per se unfair

Answer 26

Baseline standard is fairness → disclosure is a prerequisite → burden on the defendants to show the transaction is fair * If no disclosure = automatically unfair * If there is disclosure = then burden on the D to show transaction was fair IF you have a majority of the disinterested directors or majority of unaffiliated shareholders approve → * THEN, IF the defendant is a director or officer, THE STANDARD IS BJR → The burden is on the plaintiff to make a prima facie case. * THEN, IF the defendant is a controlling shareholder → then it is fairness but with a burden shift to the plaintiff to show that the transaction is unfair Fairness = fair dealing (process) and fair price. ## Footnote IF the defendant is both a controlling shareholder and a director/officer → then it is going to just be the burden shift * If we have disinterested approval then who the D’s are matter; if not, baseline Get a majority of the unaffiliated shareholders to approve the transaction? * Unaffiliated = shareholders who would be unaffiliated with the party who is conflicted Almost always you want to go with the directors * Delaware allows this via a committee of disinterested directors * Appoint one and if it is really high stakes give them some money and let them hire outside counsel aka independent lawyers, independent bankers etc

Answer 27

requires both fair dealing (process) and fair price. * involves the substance of the transaction as well as the process and procedure by which it was accomplished, and both must be shown to be fair Fair process * appointing an independent negotiating committee of outside directors * Disinterested = outside directors who have no financial stake or conflict in the transaction * An outside director = a board member who only gets paid for being on the board Even close friendships between directors and officers do not disqualify disinterested status under current law. Inside director = a board member who gets paid for being in a different position on top of being a board member → this can be a c-suite employee or corporate counsel ## Footnote Fair: * Independent negotiation committee bargaining at arm's length with sufficient resources. Unfair * Directors serving on board of target and acquirer - on both sides of transaction; * Conflicting valuing opinion in undisclosed reports. * Word snipping - changing word from negotiations to discussions to avoid liability by arguing that no negotiations took place = securities filings were altered to downplay the nature of the transaction Fair Price? * court will not engage into adequacy of consideration

Answer 28

disinterested approval cannot cure wasteful transaction * Waste = exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade * even if you have a wasteful transaction that could be cured by unanimous shareholder approval. | the likelihood of prevailing on a waste claim is zero ## Footnote For example, even in situations where a corporation experiences massive financial losses following a questionable transaction, like a $3 billion profit turning into a $10 billion loss, courts typically do not find waste.

Answer 29

Basically with the corporate opportunity doctrine, a fiduciary takes an opportunity and unilaterally preempts the corporation * Unlike self-dealing or conflicted transactions, there is no transaction w/ the corp * The fiduciary is basically taking an opportunity away from his corporation Is the opportunity corporate? Fairness factor test * how did fiduciary learn of opportunity * whether the fiduciary used corporate assets in exploiting the opportunity * relation to company line of business? not corp = D (fiduciary) wins If so, can the fiduciary still take it? * yes if corp is financially unable to do so * whether the board has decided not to pursue opportunity in good faith * best move would be for fidu to disclose it ## Footnote Delaware 122(17) - waiver * It's a provision that allows a corporation in its charter or in its bylaws → it's a waiver out of the corporate opportunity doctrine. * Remember 102(b)(7) is charter only so the shareholders have to vote for it * the argument is you can take opportunities without worrying about getting sued Arg = Either it is “here we go again waiving out of fiduciary duties, this is dangerous” or “we want to allow business risk and business ideas without the risk of being sued” * But now we are perilously close to the end of chapter 2 of being able to waive out of fiduciary duties in corps!!! * REMEMBER → policy → the fiduciary duty exists precisely as a gap filler to incomplete contracts. * **That's why fiduciary duties exist, they are gap fillers to incomplete contracts.**

Answer 30

Aligning of incentives for CEOs → increase of incentive-based compensation aka like stock options * As stock prices go up, CEOs get paid more Beginning in 1993, the SEC mandated increase disclosures for top 5 corporate officers * No one wants to be average → ratchets up compensation * Birth of executive compensation consultant services that would go around and advocate how much money these CEOs should make based on similar companies Tax incentives * It said if you want compensation to an employee above $1 million to be tax deductible, it effectively has to be incentive based.

Answer 31

Are executives over-compensated? * Not a problem = The world is competitive, increasingly global, and this is the price of superstar talent * Also shareholders want higher prices on stock so the incentives align Does this encourage excessive risk taking? * Well it could encourage risk taking in the illegal fraud sense, they cut corners etc to make stock prices a little higher each quarterly earnings call = If the incentives were not like this, maybe we would not have an Enron issue * But it also probably does encourage risk taking in the legal sense = Innovate, make money, stock price up, everyone happy Is the concern about the amount of compensation or the "opaque" way it is set? * arg there's excessive pay without commensurate performance = And a lot of it has to do with a faulty process that's not arm's length. * other arg = Wants it to be a informal process that essentially insulates compensation from the market ## Footnote Overall, the law has reacted like this → who cares * Shareholders aren't complaining * the law certainly does not want to get into, for example, whether $12 million is appropriate consideration for the CEO. State law has done nothing! Fed law has a couple * Note also that → every single one of these legislative reactions has been in response to a crisis, in a hastily put together statute. * Clawbacks = these statutes say if you got your compensation based on distorted numbers → So in other words, if it was because of accounting fraud which distorted stock price → you need to pay that back * Disclosure = done nothing due to s/h apathy * prohibition on loans to directors or officers = kinda worked = They used to take loans and fund lavish parties not so much anymore

Answer 32

they are exceedingly deferential to the insider receiving the compensation * BJR and if 102(b)(7) waiver, then it will be even more deferential * reform via election of board, not court Waste? * good luck – generally not a winning argument Rare success where procedural mechanisms improperly followed * provision not specific enough to support waiver ## Footnote Confluence of two factors * Courts are not going to essentially second guess the decisions of boards and they will refer to the business judgments * Courts do not want to get into the adequacy of consideration In Re Goldman Sachs * no arg worked * The strongest argument that the plaintiffs could have had is, look, this is existential, it is 2008, you are placing your own interests, your own compensation ahead of the corp’s. You are begging the gov for a bailout and you still do this insane compensation??? It's placing your own interest, your own compensation ahead of that of the corporation. → This is a loyalty violation.

Answer 33

If you're representing a single shareholder or a group of shareholders (some subset of shareholders) * it must be a direct claim * Because what you're arguing is that a subset of shareholders were somehow injured in the way that the other shareholders were not. If you are representing ALL shareholders, you run into the Tooley problem * it should be a derivative case Look at: * who is injured and who is getting the recovery ## Footnote Tooley v. DLJ * In Tooley, shareholders sued directly, arguing they were harmed by a 22-day delay in merger payments, causing a loss in the time value of money. * The court rejected this, ruling that the injury affected **all shareholders equally and thus was a harm to the corporation**, so the claim should be derivative.

Answer 34

can be compensated out of **damages** received, **common fund**, or if **“substantial benefit"** Fletcher v. AJ Industries * the court found that the plaintiffs’ lawyers were entitled to compensation because they delivered a **substantial benefit** to the corporation through their work and intellectual capital * Common fund: idea would be that in the course of legal work and the litigation, the company sets aside a pool of money and use it to pay ## Footnote Fletcher v. AJ Industries * There was no monetary remedy and there was no hourly fee. * And I think today the courts would say tough luck. * back in the 60s (more P friendly) Court said: There is no hourly, no contingency, let's find other possibilities the reality is that compensation for plaintiffs’ lawyers is much more narrow than these sources suggest. This reflects an overall concern that some courts have against plaintiffs * procedural aspects of corporate litigation or more generally, you're talking about evolution of the law and more defendant friendly reforms in civil procedure

Answer 35

Standing: plaintiff must: * Be s/h for duration of action * Have been s/h at time of alleged wrong * fairly and adequately represent the interests of s/h * **demand requirement** Demand requirement * Majority of the board is **conflicted** – The plaintiff must show that more than 50% of the board was not independent/conflicted; or * The challenged underlying transaction is not protected by the Business Judgment Rule (BJR) – A high bar that is rarely met What if the board changes between time of underlying transaction and time of complaint? * 1st prong analyzed with board present at time complaint is filed * 2nd prong analyzed from the prior board ## Footnote Universal non-demand and the confusion that has been created by Delaware * Delaware says if a plaintiff makes a demand = if prior to litigation, you go to the board and say we want to talk to you about this, we need to resolve this → then Delaware says plaintiff has conceded the first prong. * The argument is if you go talk to the board, you're basically conceding that they're not conflicted = Otherwise, why would you even talk to them? The problem = even if you have clients who hate each other or disagree, if they talk = get a settlement (through their lawyers even) * Delaware says don't try Takeaway * Do not make demand * File → wait for D to bring motion that says the case should be dismissed because you did not make demand and then argue the first prong = saying my client did not make demand because we think a majority of the board is conflicted

Answer 36

First, the court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. * how do we feel about the processes of the committee -- Who is on the committee, Did they have the proper budget, Could there be any hidden conflicts of interest * lack of direct financial conflict and/or clear disclosure of financial conflict is normally enough Second step * “The court should determine, applying its OWN independent business judgment, whether the motion should be granted” The second prong of Zapata has been essentially ignored * Oracle exception = court found that the directors could not be sufficiently independent due to the “network of social relationship” despite the SLC concluding that there was no conscious bias and that there was no way an insider could have known enough information to engage in insider trading * Joy case = cost/benefit analysis where if judge determines that probable recovery greater than cost, litigation should continue ## Footnote This is the first and only time, the last time, we will see a court instruct a judge to use their business judgment = Two schools of thought on this * 1) this is dumb and it runs counter to everything we have learned in chapter 7 about the BJR → judges are jurists they are not business people! Fuck this opinion * 2) how come it's taken 439 pages of dense reading to get to the point where Delaware court is willing to admit that a judge could actually think about and even second guess as needed, a business decision

Answer 37

If this kind of litigation deters bad behavior, then the argument is it's worth it. * Who cares if the plaintiff’s bar is making alot of money? If they are working hard, devoting a lot of time for difficult questions, and they are helping to deter bad behavior then who cares On the flip side * The argument is it's actually not deterring bad behavior because it's coming from insurance and it's coming from indemnification. * It is just one big circular scheme

Answer 38

Forum selection bylaw * internal affairs doctrine that the choice of law for questions of corporate governance is the law of the state of incorporation. * However, you can still do, per FRCP, the thing where you have a CA judge interpret Delaware law = Plaintiffs started doing this alot = forum shopping * Defense lawyers caught on to this = basically started inserting forum selection bylaws = If you have to sue us, you have to sue in the delaware courts = made legal by delaware legislature Increased scrutiny of settlements * There are strong economic incentives for both plaintiff's lawyers and defendants to settle * However, courts are increasingly scrutinizing settlements to ensure that they provide a real benefit to the shareholders and do not just provide a payout to the plaintiff's lawyers. So what is happening → is a sort of “OK lets not have a “settlement” lets have a “mootness” agreement which encompasses a fee” * So the argument is we're not settling. We're declaring the litigation moot in exchange for receiving our fees. * And the question is, are the judges essentially going to say, nice try bud → You're trying to evade judicial review of a settlement ## Footnote Problem with first bullet? * We don't like litigation → You got a problem with duty of care? Duty of loyalty? Go to an arbitrator = currently illegal * So you can imagine a world where private litigation against corps is destroyed = there could be a provision in the bylaws that says, oh, by the way, loser pays winners legal fees AKA huge chilling effect on litigation Because what is happening here is that we are doing things more by contract (bylaws) and creating a legal regime that is increasingly favorable to the defendants. * If we go too far and the argument turns to “if you don't like it and you don't like the bylaws, then why are you investing in the corporation?”

Answer 39

Private benefits of control * If you have control you can disproportionately in a non pro-rata way siphon off benefits for yourself. * pay yourself higher compensation. * Corporate expense funds for ridiculously lavish expenses * So we do not want a new controller to come in and take advantage of these to the detriment of non-controlling shareholders Controlling shareholders can sell their shares at a premium to buyers * Regular market price of shares $10; Share price with control = $20 ## Footnote The counter narrative is * We like deals, we like transactions → it is efficient * If you're a controller, you want to sell your shares, then sell your shares.

Answer 40

So if you are on the defense side and you are representing a controlling shareholder who sold their shares at a premium: * best argument → market rule (zetlin) * It is about efficient use of assets! Free market! If you want to argue the other way, there are a couple things you could argue: * One is you could argue that the sale of control results in a loss of corporate opportunity (Perlman) * The other possibility that we'll talk about is to say it's a violation of fiduciary duty (In re Digex) ## Footnote Argue fiduciary first, then corporate opportunity

Answer 41

Absent looting of corporate assets, conversion of corporate opportunity, fraud, or other acts of bad faith * the controlling shareholder is free to sell, and purchaser free to buy, that controlling interest at a premium price ## Footnote Zetlin v. Hanson Holdings → Market rule * So the plaintiff is a 2% shareholder → The defendant (controlling s/h) has 44.4%. Sold at premium * The plaintiff says, hey, my shares are worth $7 → Why should your shares be worth $15? No. Not fair. = I want to be cut into the deal. I want a part of that upside to $15. * P loses.

Answer 42

By selling, the controller is foregoing corporate opportunity that belongs to all shareholders ## Footnote I think if you're going to use this corporate opportunity doctrine, you need to find an unusual fact pattern where the sale of control effectively means that the company's business model collapses, or at least does much more poorly. * Here, we are in the middle of war, supply chain issues, Feldmann plan insures very good money to manufacturers → and once the end users get control and integrate backwards, they obviously won't use the feldmann plan which means worse finances for steel manufacturers which means less money for the remaining minority shareholders

Answer 43

Here's the issue → If you attack directly and say, hey, this is a controlling shareholder, they sold a lot of shares → I want to be cut into the deal!! * you lose to market rule Attack indirectly, attack the controller as a fiduciary!!! * Make the argument that the controlling shareholder is facilitating the transaction and in doing so is violating their fiduciary duties * because by facilitating the transaction, they're placing their own interests ahead of those of the corporation. ## Footnote In re Delphi (Del. Cb. 2012) * Controlling shareholder breaches his fiduciary duties to minority stockholders when he conditions his consent to merger transaction upon his receipt of control premium for his shares * notwithstanding provision in charter explicitly prohibiting such control premium.

Answer 44

Corp office * You could see a rational economic actor paying more money to get control in a transaction, that makes sense = **The question is, wait, why would anyone buy a small percentage of shares at a premium?** = Is there something weird going on in the background? Some quid pro quo? * two factors the courts look at is: the size of the premium and the number of shares Example * E.g., sale of 9.7% block at slight premium upheld (Carter v. Muscat (NY App. 1964)) → not suspicious * E.g., sale of 4% block at 35% premium deemed “contrary to public policy and illegal” (Brecher v. Gregg (NY 1975)) → suspicious ## Footnote Looting = We're talking about going after the seller who sold to the looter. * So the court says when transferring control, the controlling shareholder, sometimes has the duty to investigate the bona fides of the buyer (we don't know when is sometimes) * You say let's look at whether the seller did their due diligence under a reasonableness standard. * But here's the problem. The reasonableness standard does not exist in business associations law → thus it should be a tort Imposing a duty to investigate the bona fides of a buyer and take reasonable steps could discourage potential buyers from acquiring control of the corporation

Answer 45

So the whole point with the Williams Act at a very high level → **to give target shareholders time and to give them information**. What's wrong with that? I mean, who could argue with a statute that says, okay, everybody, let's relax Let's take a deep breath. * We're going to provide information and give you time to decide → And you can decide as the target shareholder whether you want to tender or not. The counter argument (same counter argument context of proxy voting rules) * is that complying with everything is incredibly expensive. * You need a whole specialized legal team, and having the Williams Act essentially discourages bids = rather not do it or go buy a private company ## Footnote Why do we even have the williams act? Why is the premium that buyers are getting, not enough → so that we need this? * The premium is always 15-20% = The argument is, well, isn't that 20% premium on stock price good enough? let target s/h choose! Counter * which is that over time, the stock of the company is going to go up past the 20% increase you are offering * Lawyers always say “It's not in the best long term interest of the shareholders.” → This is code for over the long run the stock will go even higher.

Answer 46

“Early warning system”: public disclosure by shareholders if they acquire more than 5% of voting stock * applies in any context * Disclosure in 5 business days (used to be 10) = Remember, the shorter the window, the worse it is for any potential bidder. * So what the lawyers would advise is cross the 5% threshold and for the next 5 days and buy like crazy Disclosure of offer: offeror must disclose identity, financing, future plans * In other words, if you are making a tender offer, you have to provide disclosure = Who the offeror is, what do they want to do (The target board also has to comment) * Disaster from the pov of the bidder = They don't want people to know who they are. They don't want people to know their plans. * Corporation must make similar disclosures if tendering for own shares ## Footnote Early warning system * Hated by bidders and loved by companies because it gives companies an early warning of who has a significant number of shares who might be making an offer * bidders hate publicity and public disclosure about their securities positions

Answer 47

Antifraud * 14e-3 says any person who trades on material nonpublic information in conjunction with a tender offer can be liable criminally or civilly. Substantive terms of offer: timeframe, price * Offers must be left open for at least 20 business days * Tender offer must be open to all shareholders at the same price = So no different consideration * But you can put conditions on your tender offer such as I want half of it in stock, half in cash * The only point is you cannot discriminate among shareholders. ## Footnote Substantive terms * POV of bidder = This is a disaster. * Again, because 20 business days in the context of one of these transactions is an eternity. You have to make the offer and then you're basically waiting

Answer 48

Tender Offer: * Offer to buy X number of shares for Y amount. Test * Solicitation * Purchase contingent on minimum number of shares * Fixed price Tender offer = Hey, everybody, I'm announcing publicly I want to buy X number of shares for this price. ## Footnote Case * Over the course of a couple days, buys from different institutional investors, give or take a quarter of the company about 24% = The defense quite brilliantly argues you can't sue us under section 14 or any of the rules promulgated under section 14 because this is not a tender offer. the court says → NOT TENDER OFFER * no widespread solicitation of stockholders = Aka public advertising or public solicitation * Not contingent on a minimum fixed number of shares. * not a fixed price. * you did not use a third party depository = This was just a broker calling and buying shares.

Answer 49

With the Hart-Scott-Rodino Act, it's not just running out the clock * What you're waiting for is a response from the government that says they're not going to block the deal. timing * So on a cash deal, pure cash consideration, 15 calendar days. * Anything else is 30 calendar days, during which government may request more information Hart Scott Rodino filing is going to be necessary on any deal, regardless of the deal form, tender, offer, merger, whatever it is. ## Footnote POLICY: Everything the William Acts does makes it really hard to make bids for a public company, expensive, time consuming and uncertain (need lawyer). * However, if you’re not comfortable paying lawyers millions, don't be in the business of bidding for public companies. it will be a disaster. Argument is that is discourages bids * Counterargument: don’t bid for public companies then

Answer 50

Positives (“Synergies”) * Economies of scale => Make on bulk = cheaper * Economies of scope => Restaurant business buys farms for its food instead of using 3rd party to buy food * Reduction in agency cost = Better management; the idea is we get rid of lazy, incompetent agents and we put in better management. * Tax benefits = harvest losses - tax write-offs * Diversification = you buy a target to essentially smooth out the ups and downs of your business. You are a Sunscreen company, also buy an umbrella company for the winter Negatives (“Traps”) * You could have, in these mergers and acquisitions, a minority shareholder, non-controlling shareholder, a **freeze out problem** = legal issues * These transactions are fundamentally CEOs who effectively want to build empires = willing to overbid, ego, goes to question of why bidders overpay ## Footnote Overarching issues to discuss with client include: * cost, taxes and accounting, speed, liabilities, regulatory hurdles, due diligence uncertainties, possibility of competitive bidder

Answer 51

Normally you are going to need board approval in terms of the target * depending on the size of the acquisition, you might need board approval from the board of the acquirer, but that's more a case by case. you cannot engage in an asset acquisition unless you get approval by the target board. * no hostile asset acquisition; You need the acquiescence of the target company board Strategically → Advantages and disadvantages Advantages * Buyers are able to pick and choose assets to minimize liability (buy the chemical plant that doesn't have the EPA on its ass!) * Making asset acquisition through a new subsidiary (shell company) could further reduce liability = it's going to be pretty difficult for someone to try to pierce the veil * GOOD for very risk averse client Disadvantages * Transaction costs are HIGH * Difficult to determine who has title to property and do due diligence * SLOWEST

Answer 52

Can be done through a tender offer * No votes, no approval needed because it is direct to the shareholders So with a stock acquisition, like a tender offer, then effectively the bidder bypasses the target board → This is the critical point. * You go directly to the target's shareholders and say, hey, this is what we're offering → we do not care that the board hates us! * no shareholder voting at all! Advantages * This method is fastest when purchased in cash * When you do it in cash, you do not have to register the consideration for the deal * This would still trigger the williams act, 20 days, but still way better than needing to get votes and registering securities as consideration * No votes are required Disadvantages * This method could be the most expensive in hostile takeovers since board approval is not required * Often difficult to buy ALL 100% in one step ## Footnote if you want to get full control of the company, you'd go 100% → you could also go less

Answer 53

In order to do a merger you need board approval for both target and acquirer. * The point is, if you want to do a merger, it has to be friendly. History = Essentially deregulation, liberalization. * Today, if you get 50.1% of the shareholders to agree to a deal, the deal becomes mandatory to the remaining 49.9% (in the context of mergers) * Today, any form of legal consideration constitutes valid consideration = It could be cash, it could be debt, it could be equity. Anything as long as legal Advantages * Doing a merger through a subsidiary will minimize liability by shielding a buyer’s assets from target liability and creditors = Triangular merger Disadvantages * Transaction costs might be high because of voting requirements for target shareholders and acquirer’s shareholders. = medium speed ## Footnote The merger you can conceptualize as kind of in terms of a risk mitigation versus speed somewhere in the middle. * But just as a rule of thumb, mergers are not as fast as stock acquisitions → but they're faster than asset acquisitions generally. Mergers are not effectively as protective against liability than asset acquisitions but probably better than stock acquisitions because you have to vet this through boards, which help with duty of loyalty issues

Answer 54

As a first pass: will the charter have to be amended? * If so, requires shareholder vote * This addresses charter amendments and dissolutions but what about other transactions? Professor’s rule of thumb: * Look after the transaction (ex post) to see whether shareholders in question will still have similar power (governance rights) in corporation * If yes, unlikely to be given vote ex ante * If no, likely to be given vote ex ante For stock purchases, like tender offers, there's no vote * It's yay or nay. You tender or not. So we're not worried about this. ## Footnote where the rule does not work best = share issuance * So companies under state corporate law are free to issue shares as long as they're authorized in the charter * If you go and you issue shares, you could dramatically dilute the existing shareholders, putting them in a weaker position. Under state corporate law, there's nothing that protects the shareholders. This causes the rule of thumb to break because they cannot vote on this * BUT The exchange listing requirements require shareholder approval if you're going to be issuing 20% or more of your outstanding stock.

Answer 55

**if a company is going to sell all or substantially all of its assets** → the shareholders get a vote. What does “All or Substantially All” mean? two cases Katz v. Bregman * This was a company and it sold off one of its divisions and the division was basically half of the assets. Shareholders → “wait hold on, we should get a vote!” The board says, what do you mean you should get a vote? All or substantially all? 50% is not all or substantially all. * And the Delaware court, to the surprise of many, says, oh no, no → 50% can be substantially all. We need to look at things both qualitatively and quantitatively * And even though this division was only 50% of the assets, when the company sells the division, its whole business model changes away from steel containers to plastic containers = look at qualitative factors! Hollinger inc. v. Hollinger int’l * Had to do with the breakup of the media empire – the the gist of the lawsuit was → Hollinger and Telegraph newspaper, who was give or take 50% of the business * what do you mean 50% is all are substantially all? * Nah, all or substantially all means almost 100%. THUS * If you want a more strict definition of all or substantially all → cite Hollinger and you say, look, unless it's like 80, 85, 90%, you don't get a vote. * And if you want a more liberal, more holistic conceptualization of substantially all → cite Katz and you basically say that even half can be “substantially all” based on qualitative factors | either is fine - use them depending on how you want to argue ## Footnote Run it through the rule of thumb * Means that after the transaction → The company has sold off, or would have sold off all or substantially all of its assets → That's a greatly diminished company ex post = So ex ante, we want to give the shareholders the vote. * on the other hand, let's assume you've got a multibillion dollar company and the multi-billion dollar company decides to sell four of its tractors and five of its vans and ten of its cars = Nobody would seriously say the shareholder should get a vote on that.

Answer 56

Shareholders of target always get vote Shareholders of acquirer get a vote unless acquirer much larger than target (“whale-minnow”) * The argument would be that under the rule of thumb, shareholders of the acquirer get a vote if after the transaction, the acquirer would be in a substantially different position. Under 251 → no vote if: * acquirer’s charter → not modified * Securities → not modified; AND * outstanding common stock not increased by more than 20%. ## Footnote Example * Apple or Nvidia is going around buying tech companies, and it happens every day. Apple is still Apple. * The Charter's not modified * Apple securities are still Apple securities * And no to the third element → No need for them to issue. I mean they have plenty of cash sitting around so they don't need to increase their shares for funding

Answer 57

Short-form merger statute allows shareholders with 90% of shares to cash-out remaining unilaterally without liability for breach of loyalty. * The protection that shareholders have in a short-form merger against oppression is really just an appraisal right if you get more than 50% shareholders to tender in your first tender offer, we will treat more tender offers as approved * In other words, we're going to use the tendered shares as a proxy for the shareholder saying, “hey, we agree to the transaction.” * AKA shareholder approval assumed and not needed past 51%

Answer 58

two step: * STEP 1: GET CONTROL → become a controlling shareholder, let's say 51% * STEP 2: FREEZE OUT → second step is to essentially force out the remaining shareholders * 1 → 51% = no liability Second step → Now the bidder is a controlling shareholder * first, just accept the risk of duty of loyalty litigation * ORRRRR be smarter add a third step * You go to control in step one. * You go to 90% in step two with a medium form merger * do a short-form merger in the last step = cuts out last 10% of shareholder hold outs who might be very litigious from suing because of how short form works → So fewer claimants ## Footnote So, in the first step, you go to control → you're really not going to get a lawsuit for violation of fiduciary duty. Why? * Because the defendant, the instigator of the transaction, is not a fiduciary YET!!! Still a third party * Remember: Fiduciary = director officer controlling shareholder. * At this point they are not an officer, not director, and not a controlling shareholder ⇒ Thus not fiduciary

Answer 59

Technique used to minimize liability where an acquirer sets up a shell company to protect the assets of the acquirer from creditors of the target. * Acquiror (“A”) forms subsidiary (“NewCo”) [transaction done using shell company] * NewCo merges into Target (“T”) (“reverse” triangular merger) or T merges into NewCo (“forward” triangular merger) * Merger consideration distributed directly from A to T’s shareholders If, instead, A is merged directly with T and T has substantial debts, A will be vulnerable to T’s creditors ## Footnote ISSUE: Should a transaction be treated as a merger, if the transaction achieves the same results as a merger even if it is not structured as a merger? Rule * Most jurisdictions, including DE, have not adopted the “De Facto” Merger Doctrine (Hariton v. Arco Electronics (DE Ch. 1962)). Rationales against doctrine * Emphasis on formality in corporate law * Need for predictability → DE wants formality and predictability when structuring a transaction a certain way. * Institutional limits of courts → If DE wanted to give appraisal rights to asset acquisitions it would amend DE 271. Courts should not be rewriting statutes.

Answer 60

Right for a dissenting shareholder who objected to transaction to go to corporation and say that they did not vote for the merger, and they should be cashed out for fair going-concern value of corporation * No need to show any wrongdoing (fiduciary duty violation, etc.) * Cannot waive out of appraisal remedy Why are they so rare? Going-concern value likely less than value post-merger * client who thinks this is a stupid deal → sure you could go for an appraisal BUT → Most often the best approach is → take the money and run. Get your 15-20% premium * BECAUSE the statute says that you can't take into account the value of the transaction Dissenting shareholders represent smaller class ⇒ less incentive for plaintiff lawyers * Battle of experts for what “fair going concern value” is → expensive litigation if you want to sue and to try to block it? You can't do that with appraisal * It's an ex post monetary remedy. ## Footnote Which mergers qualify for appraisal? **Market-out rule**: * shareholders in private firm (2,000 or fewer shareholders) always get appraisal rights, assuming they have a right to vote on the merger * shareholders in public firm (or private firm with more than 2,000 shareholders) do not get appraisal rights where they receive stock in surviving corporation or other shares traded on national exchange * But do get appraisal rights if they receive cash as consideration * fractional shares does not trigger appraisal remedy → So you could give them 26 shares in stock -> And you can give them the equivalent of 0.2 of a share in cash. How to calculate fair going-concern value? * Look to value immediately prior to transaction → that is where the trend is * Thus you do not get the 15-20% premium Can a P bring both appraisal action and fiduciary claim? * Recent case law says yes

Answer 61

Baseline → fairness * With a burden on the defendant (the controlling shareholder.) Now if you get director OR shareholder approval → burden shift * So far just fairness standard BUT if you get director AND shareholder approval * You get business judgment rule ## Footnote This new standard says if you're a controlling shareholder and you are freezing out the non controlling shareholders and you get **board approval by a majority of the disinterested directors**, and a **majority of the non-controlling shareholders** to approve. * Congratulations. You're going to get business judgment rule Policy? * we may be moving to a world where conflicted business transactions with controllers may, like conflicted transactions with directors, receive BJR * outside the context of Controlled mergers and Controlled Tenders * Now, the argument on the one hand is, whoa, this is being way too nice to the controllers. * The argument, on the other hand, is, well, if you're getting both director and shareholder approval, how bad could the deal be?

Answer 62

All fact patterns come down to a variation of the following scenario. * We have the normal share price graph – relatively flat. * Some hostile bidder comes offering money to the shareholders → bidder is in opposition to the target board, thus “hostile” * The bid is higher than the flat line The question is → **should the shareholders be allowed to entertain this bid?** * This has to be done through a share acquisition, notably a tender offer. * You can't do a merger or asset acquisition if you're hostile Because of defensive mechanisms * the hostile bid (the tender offer) alone is NOT going to be enough. * With advent of defensive maneuvers (e.g., poison pill), often need to couple tender offer with proxy contest Ex: Your stock is trading at $50. My client offers you 100 bucks → However, the $100 offer is contingent on my client winning the proxy contest * So the idea is, if you win the proxy contest, you'd have control of the board * If you have control of the board → The first thing you'll do is dismantle the defenses, notably the poison pills, and then you do the deal. ## Footnote Poison pill * the concept involves creating a device that multiplies the rights of shareholders (but not of the would-be acquirer) so that a person who did acquire the company would find that the increased shareholder “rights” made the takeover so expensive that it would not be feasible

Answer 63

Target board implements a poison pill, distribution rights (as dividends) to shareholders. * If triggered event occurred (e.g. a hostile bidder crossing a share threshold), everyone except bidder could buy shares at a steep discount. * This makes exercising the rights economically irrational for the bidder, effectively killing any hostile takeover. The other issue is how is this legal? * Plaintiffs argued it was an anti-takeover tactic, not a legitimate rights plan. The plaintiffs said hold on here, this mechanism discriminates against the shareholder who is the one making the bid → the court couldn't care less The defendants argue → Delaware 151 gives us the right to issue shares. Delaware 157 gives us the right to acquire securities, us being the board. * plaintiffs say hold on, hold on, hold on → These are fundraising statutes → They are not anti takeover statutes. * the court basically shrugs and says we couldn't care less. Upshot of this opinion: * Poison pills get Business Judgment Rule (BJR) protection. * No one triggers them because it’s financial suicide. * The only way around is to gain board control and repeal the pill. ## Footnote Policy? * Proponent argument: poison pill gives the target board discretion to go after a better deal for shareholders. * Counter: It lets the board (agent) act paternalistically by blocking offers before shareholders even see them. But Shareholders (the principals) could just reject bad offers—they don’t need protection from seeing them. (since with the poison pill, you don't even get the offer) The key point here is the poison pill gives tremendous power to the board * That's the bad news from a bidders point of view because they cant get their offer to shareholders.

Answer 64

Unocal v. Mesa Petroleum * Unocal = target oil company, Mesa Petro = hostile bidder, led by Pickens (an Elon musk and hostile to target board) * Pickens’ Takeover Strategy: 2-tier, front loaded tender offer (Cash first, Junk bonds second) * Unocal’s Defense Response: they pass a resolution that says that if a buyer gets control of Unocal through step 1 → then Unocal will raise debt and buy back the remaining 49% shareholders’ stock = This would leave Pickens in control of a highly indebted company obligated to pay more per share than he paid. He sues Unocal standard: When a board takes defensive measures in a takeover, apply unocal which asks if the defensive mechanism was “reasonable in relation to the threat posed.” * Was there a threat? Junk bonds * Was the response reasonable? Yes, even though the buyback plan involved massive debt and might indirectly protect board jobs, The intent was to protect shareholders from being left with junk bonds. So the board wins! ## Footnote Unitrin v. American General = refine Unocal * Ask first: is the board’s response “ Draconian”? * Effect: as long as what the board does is not totally crazy, its allowed * What this makes very clear is that Unocal combined with Unitrin, essentially takes us perilously close to the business judgment rule Unocal + Unitrin makes it very hard for plaintiffs to win: * Not as hard as Business Judgment Rule (BJR), but close. * Plaintiff must now prove that the board’s response was draconian, which is a high bar. For the plaintiff to show something is draconian. * Example: Hilton hotels was hostile bidding for ITT, a conglomerate * ITT board, without a shareholder vote, spun off 90% of the assets of it into a company called ITT DESTINATIONS. = So if Hilton won, they’d get a shell company with only 10% of the original value * Court ruled this was draconian: Hollowing out the company and sidestepping a shareholder vote = extreme and coercive.

Answer 65

The revlon board had two lethal defenses * poison pill * share repurchase plan, where they effectively loaded up the balance sheet with debt in order to have cash to repurchase shares * Normally, the story would end here → There's a poison pill, the balance sheet is a mess (aka looks unattractive to hostile bidders) Hostile bidder basically started bidding up/offering more money. * Strategy: Offer such a high price that shareholders would pressure the board to abandon its defenses and accept the bid = it worked. Then the Board responded by finding another multibillionaire to buy Revlon instead of hostile bidder * Hostile bidder sues → argues board is not acting in best interest of shareholders What the Revlon court does: REVLON STANDARD * When a board decides to put the company up for sale, it has an obligation to get the best price for the shareholders. * Duty shifts from protecting the company (unocal context) to getting the best price for shareholders * “When the sale of the company becomes inevitable, the directors' role changes from defenders of the corporate bastion to auctioneers charged with getting the best price for shareholders at the sale of the company.” ## Footnote If the Revlon board had just maintained its defenses and refused to engage, it would’ve been protected under Unocal. But once the board sought another bidder and effectively put the company up for sale, the Revlon duties kicked in — meaning the board was then required to maximize shareholder value by getting the best price.

Answer 66

Paramount 1 * Time and Warner were planning to do a merger. Paramount makes a hostile bid for time for Time just before merger vote offering up to $200/share (Time was was trading ~ $50 per share) * They want to get the shareholders to turn down the merger and as expected, the shareholder pressure mounts * Time responds by restructuring the merger into a buyout of Warner (instead of a merger) taking on a lot of debt to do so * Paramount sues arguing both a Unocal argument and a Revlon argument. Unocal * Paramount argued “offering cash” is not a threat, unlike junk bonds in Unocal → Court rejected this, saying even cash offers can be a threat. * The court introduced an extremely broad definition of threat: price, timing, impact on non-shareholder constituencies, etc. Revlon * Plaintiffs argued that Revlon duties applied because Time’s deal with Warner put the company in play (up for sale) * Court disagreed = In order for Revlon to attach, you need a breakup or abandonment of the corporate existence of the company. * So anything short of a breakup is not putting the company up for sale here. * Here, Time is not going to be broken up (it would still exist post-transaction) so Revlon duties don't attach = And this was the law until Paramount 2 ## Footnote Paramount 2 * Roles reversed (from Paramount 1): Paramount becomes the target and the hostile bidder is QVC, and the counterparty is Viacom * Viacom structured the merger deal to: Prevent Paramount from negotiating with others, Include a $600 million termination fee, Include stock options at a favorable price for Viacom — profiting if Paramount’s share price rose due to a bidding war. * QVC sues when Paramount refuse to engage, citing the no-talk clause in merger agreement So does Revlon apply? Is Paramount “up for sale” * Argument as Paramount’s legal team → no b/c there’s no breakup or threat to corporate continued existence (Citing paramount 1) * The Delaware Supreme Court says: Everyone misread Paramount 1 → It wasn’t just about breakups — it also included "change in control" * New standard: Revlon duties attach when there is a change in control (the doctrine today) * The only standard here is change in control. Breakup is a subset of change in control. If a company is going to be broken up by definition, there's a change in control. And then last but not least → Court also shifts language: Revlon focused on “price” → Paramount 1 mentioned “value” without explanation * SO The thing to conceptualize here is what the court is really talking about is risk adjusted price. Example: * Even though $101, for example, in junk bonds is a higher price than $100 in cash → The value of $100 in cash is more than $101 in junk bonds because of the inherent risk in junk bonds. * So to use a more realistic example, somebody says, hey, we offered 100 in cash → The other party says, no, well, we offered $130 in junk bonds → Which is the highest value? * If that case goes to trial → devolve into battle of the experts

Answer 67

First, is there a threat? → open-ended, multi-faceted test: * Board can look to a variety of factors such as: price, nature and timing of offer, impact on non-shareholder constituencies, risk of non-consummation of deal, quality of securities offered Second, is the response reasonable? Aka now = draconian? Very permissive toward directors * “Directors are not obliged to abandon a deliberately conceived corporate plan for short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy” ## Footnote Revlon today * Up for sale? = Change in Control * “Where a corporation undertakes a transaction which will cause: (a) change in control, or (b) break-up of the corp entity → board’s obligation is to seek the best value for shareholders” But recall: break-up implies change in control → so just change in control What must the board maximize? After Paramount II → value not price * Board has a duty to “secure the transaction offering the best value reasonably available for shareholders” * To assess value, look to factors such as: premium, structure of offer (e.g., is it front-loaded), and terms (e.g., termination fees, options)

Answer 68

After you do a REVLON argument → put a small paragraph at the end talking about Lyondell basically making the argument that we should deemphasize these intermediate standards (Revlon/Unocal) * The main difference to argue on: Revlon we had hostile parties meanwhile in Lyondell the board did nothing, just sat on their hands. The transaction was ostensibly “friendly” ALSO no bidding process Thus, the court in Lyondell went into duty of care (102b7) and duty of loyalty * If you’re thinking about Unical and avoiding Revlon → there are some things you can do → I think the more conservative approach is, the best thing to do is, do nothing → don’t talk, hold your ground → Low risk of liability, especially if you have 102b7 ## Footnote You have this chemical company, Lyondell → huge business. Len Blavatnik → billionaire expresses interest in buying it but the board does absolutely nothing for over a year → Eventually billionaire comes back. They start deal talks in summer in July where the deal was negotiated. * S/h sue under Revlon: They said by engaging in these discussions with Mr. Blavatnik, they put the company up for sale. So now Revlon kicks in and you have a job to get the highest price. They argue that the board didn’t run a real sale process, didn’t shop the company, and failed to get the best price * “Why, when Blavatnik approached you 15 months ago, did you sit around doing nothing?” The court says Lyondell has a 102b7 waiver → so unless you can show utter failure, you have nothing. SO. . . * instead of questioning whether disinterested, independent directors did everything they should have done to obtain the best sale price. (REVLON) * The inquiry should have been whether the directors utterly failed to attempt to obtain the best. (102(b)7 standard) → LOWER STANDARD

Answer 69

Rule: * If the defense is taken for the “primary purpose of thwarting the exercise of a shareholder vote,” then the board must offer a “compelling justification” (Blasius) Rationale: * The shareholder vote is the ideological underpinning upon which the legitimacy of directorial power rests → aka shareholder voting is too important * First → this takes us in many ways back to the collective action/rational apathy problem and why many people argue the vote is useless. Basically saying we need to protect the vote even if you think it is useless --> we need to keep up apprearances, because this is how we give the board so much power Compelling? a lot more shareholder plaintiff friendly than Draconian = what could be compelling? * the board wants to prepare an alternative to the transaction and therefore wants to delay the vote to present another transaction to shareholders. * It would have to be some almost extenuating circumstance that would prevent having the vote in the matter that was planned Primary purpose? * So if you are modifying the meeting date or the meeting location – If you are engaging in a transaction that requires a shareholder vote, like a merger → those would be defenses where the primary motivation is to interfere with the franchise/vote * BUT a court could disagree and say the primary motivation is not to interfere with the shareholder franchise and thus analyze it under Unocal. ## Footnote Prior to this case → Chris Kraft * where the defendants, in an attempt to try to block a proxy contest, move the meeting location and the and the meeting date. * The Delaware Supreme Court said, well because you're trying to interfere with a shareholder vote, then effectively we are not going to allow this under some general equitable power of the judiciary. Blasius = more specific doctrine → primary purpose & compelling justification

Answer 70

If you're the plaintiff, you want to lead with Blasius (Not Unocal because that standard is friendly to board ) * If you're the plaintiff and there's some kind of a tenable argument that the defense somehow interferes or has interfered with a vote → you basically start by saying primary purpose is to interfere with my client's vote → Then, say the defense doesn't have a compelling justification * THEN → you plead in the alternative → “Even if the court doesn't believe the argument that Blastia supplies, my client should still win under Unocal because the defendant's behavior was draconian.” For the defendant, it's the exact opposite → You start by saying what my client did obviously falls under Unocal and they're obviously not draconian and that's why we should win. * THEN in the alternative → If the court should assess that Blasius applies → my client has a compelling justification etc So don't worry too much about what the boundary between Blastoise and Unocal is → the best thing to do right is to argue both Similarly, even though Revlon is most likely gradually on its way out, don't worry about whether you're in Revlon land or not. * Because the plaintiff is going to argue we're in Revlon land and therefore you need to get the highest price, and you didn't → and in the alternative, if we're not in Revlon land and it falls under Unocal aka draconian. * The defendant in always is going to be the flip, which is to say Revlon doesn't apply and what my client did is not draconian under Unocal and then in the alternative, say if the court deems that Revlon would apply, then we did get the highest risk adjusted price. ## Footnote So my point is this: don't worry about some analytically clear line between Blastoise and Unocal or between Revlon and Unocal → best we can do is argue in the alternative * Hilton example = Hilton hotels launched a hostile takeover bid for ITT. In response, ITT spins off 90% of its assets to this company ITT DESTINATIONS without a shareholder vote. There's a lawsuit. Impossible question: Do you analyze this under Blasius? * Do you say, hey, when you start spinning off assets without shareholder vote, you're interfering with the vote so Blasius applies * Or do you say actually Unocal applies because the primary purpose here was not to interfere with the vote. The primary purpose was to do an asset restructuring → No right answer * What court in Hilton eventually said is:the primary purpose is not to interfere with the vote. It was to restructure the assets. Nonetheless, the defendants lose because it's draconian per last example with this fact pattern Recognize it is not clear when you're in Revlon land. * Yes, we know the doctrine is change in control but when do you have change in control? Could be easy, could be not. Also, recognize that what the primary purpose is → also unclear. So you plead in the alternative

Answer 71

Rule * “[W]hen a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies” (Corwin) So what Corwin says → * And again, we are not talking about controlled transactions here. We're talking about other mergers. * And it says, look, when a transaction not subject to the entire fairness standard, which is code for we're not talking about a controller → is approved by a fully informed and uncoerced vote of the disinterested stockholders, the BJR applies ## Footnote Wait, what? Like does that mean my client can't raise a Unocal or Revlon claim if the majority of the shareholders voted for it? That seems to be what the court is saying → Note how they're finessing this → “Unocal and Revlon were not designed with post-closing money damages claims in mind.” * What are they seem to be saying? we're back in the world of Lyondell → It's de-emphasizing the intermediate standards. if a majority of the shareholders voted for the transaction, you're not going to be able to come back and sue (in the context of not controlled transactions) * BUT you're going to be able to come back and sue for BJR. Good luck

Answer 72

Material misstatement or omission * Omission is the focus for insider trading cases In connection with the purchase or sale of a security * (standing) Made with intent to deceive (scienter) * This is presumed only in insider trading cases if person has material nonpublic information Upon which there is reliance * Transformed into “fraud on the market” doctrine Causing * loss causation Damages ## Footnote PRIVATE PARTY securities fraud * Need to show all elements SEC (government) securities fraud * Only need to show elements 1, 2, and 3 INSIDER TRADING * omission only - will explain

Answer 73

Material if “substantial likelihood reasonable investor would consider it important” * Material if affects “total mix” of information * vague = argue case by case Forward looking statements? (disclosure about things that have not happened yet) * Balance probability event will occur with magnitude of event ## Footnote Basic v. Levinson * You have this company and there were rumors of merger discussions. The company issued three denials which said these rumors were false, we are not engaged in merger discussions. These were lies. * The Court: argues that a reasonable investor would care if you are lying three times to deny a merger. The point of the materiality standard is to get rid of de minimis * Misstatements and omissions are only actionable if they're “important” ones.

Answer 74

Need to be an actual purchaser or seller of securities * key = You need at least a buy or a sale at a time when the fraud was being committed. ## Footnote Blue Chip Stamps = No holder cases and no potential purchaser cases. * In other words, the plaintiff can't say, oh, I would have bought the security had I known the truth = potential purchaser * or I would have sold the security had I known the truth = holder case. * you have to be an actual purchaser or seller.

Answer 75

First problem * Negligence does not suffice * Rule: Scienter = intent to deceive, manipulate, or defraud = You're going to have to either find a smoking gun or some other direct evidence or circumstantial evidence like motive and opportunity * Recklessness does suffice Second problem * PSLRA = Congress said that private parties, when pleading 10b-5 have to plead scienter with particularized facts that give a strong inference of scienter * PSLRA was designed to make it difficult for plaintiffs to bring securities fraud claims * In litigation → You are pre-discovery, there is only so much you can do → try to put in as much information as you can = Information from public sources, Confidential witnesses (e.g., disgruntled former employees), books and records request * Also, the government doesn't have the heightened pleading standard for Scienter Policy * The other thing is, this heightened pleading standard actually has gotten into business associations law. If a plaintiff survives a motion to dismiss, you get into discovery. * Then things start getting more painful, more expensive, and the settlement value of the case goes up. * The whole point here for D is to win a motion to dismiss so that the defendant does not have to contemplate settlement negotiations. ## Footnote Couple problems with recklessness * SCOTUS is becoming more and more defendant friendly and we are drifting more towards intent only → but still today recklessness works * The other problem is: What is recklessness? Extreme negligence? No clear answer

Answer 76

Normal reliance = face to face transaction = easy = But in securities? Two parties have never met face to face. The transaction happened online. * Thus, we have the fraud on the market presumption * The basic idea: information affects price under the efficient market hypothesis * And the idea is that regardless of whether a particular plaintiff actually can show they relied on a specific lie or omission → any defendant that is providing fraud info into the market is affecting the stock price under efficient market hypothesis → And therefore is committing fraud on the market * Feeding fraudulent information into the market distorts stock prices so we presume reliance.

Answer 77

Dura * Company misled the market about a nasal spray they were developing. The FDA did not approve it. Stock price dropped. * The plaintiff has to show that it was the fraud that caused the drop in the stock price (burden on plaintiff) * What is the big deal with this? It is incredibly difficult for any party to try to disentangle the reasons for stock price movements. = It could be because of the fraud. It could be because of a market collapse in general like from Trump’s tariffs * you're going to have a battle of the experts ## Footnote Patterns that we see: strategic timing and bundling of announcements. * So, for example, in order to confound the market → if a company wants to reveal that they've committed fraud, the best time to reveal they committed fraud is when the market's not doing well or their stock price is already falling. And then if there's a lawsuit, the argument essentially is → My client committed fraud but, you know, the stock price was already going down. So how do we know it was from the fraud * Bundling of announcements = Give good news and bad news

Answer 78

Compensatory damages → The idea is to put the plaintiff in the position the plaintiff would have been in had the securities fraud not been committed. Two problems * One is kind of the macro policy problem, which is: is that all we're trying to do? Or are we also trying to punish the defendant, are we trying to deter = Compensatory damages are not good for deterrence * The micro problem is when we think about compensatory damages, it's essentially out of pocket = So we're talking about what the transaction price was → My client bought the shares for $20 a share minus the value had the fraud not been committed * Problems? What would the price be had the fraud not been committed? How do we calculate it? Punitive damages → Deterrence? So the idea there is this is not about compensating the plaintiff → It's about deterring pathological behavior. Concern? * deterrence could overcompensate the plaintiff → Two reactions to this = So what? Why are we so worried about overcompensating people? Should we not be worried about deterring bad behavior? * Possible solution: You know what? Take whatever damages, the maximum you can for the defendant. Take whatever you need from that to compensate the plaintiff and if there's anything left over, then fundamentally, you could give that to some kind of public fund. ## Footnote Treble damages * Civil insider trading cases brought by the SEC where the damage is three times the profit. * when you see something like treble damages, what the law is basically signaling is that the behavior is under detected.

Answer 79

Mandates that directors, officers, greater than 10% shareholders (statutory insiders) must disclose when they achieve insider status, as well as subsequent trades made after * So if you have a client who is a statutory insider and if there are purchases and sales that can be matched within a six month period, any profits need to be disgorged to the corporation. SO they need to hold it for 6 months after purchasing shares of the company of which they are a statutory insider. * IF THEY FAIL THIS → Disgorge profits! (return to corporation) ## Footnote You could write to the board and have them waive this in case of an emergency and you need money → If board accepts, they will waive their right to collect your profit

Answer 80

Insider trading cases are 99% of the time brought by the government = So only elements 1, 2, 3 * Element 1: we do the analysis * Element 2: it is assumed because somebody traded * Element 3: doctrine says that anyone in possession of material nonpublic information → presumption of scienter Most difficult omission problem arises in context of insider trading * If you're addressing a fact pattern, you just go to o'hagan case * On a policy question, and you were discussing insider trading jurisprudence, talk about how the law has evolved starting from Texas Gulf Sulfur to O’hagen ## Footnote 10b5-1 plans → Affirmative defense against scienter in both securities fraud and insider trading * You pre-plan your trading as an insider so no scienter

Answer 81

Equal Access Rule * Anyone trading in possession of material non-public information must disclose or abstain from trading Basically says if you are a person and you have material nonpublic information and you trade on that, you can be liable both civilly and criminally. Most gov friendly, SEC loves this rule to this day * However, SCOTUS never accepted this theory and instead moved from fiduciary duty theory in the 80’s (Chiarella, Dirks) to Misappropriation theory in 90’s to now (O’hagen) ## Footnote Classic insider trading fact pattern → you have these defendants, they are aware of a very major copper deposit on land that their company owned. (inside information). These individuals bought stock right before the market knew of this massive copper deposit.When the market learned the truth, the stock price went up. * Made profit → because they knew that the company was sitting on this massive mineral deposit before the market did

Answer 82

And the court says you're only liable for insider trading under a fiduciary duty theory. * They are not talking about fiduciary duty theory the way we have been talking about it in business associations * Rather, the court was using fiduciary duty as a proxy for employees. So what happened after this case? * First, there are a number of individuals who are not employees who have access to confidential information. * Bankers, accountants, lawyers → these did not meet Chiarella’s test and thus 10b-5 would not attach to them and they could inside trade without 10b-5 liability * So from 1980 to 1997, unless one was an employee or tipped off by an employee (Dirks), there would not be liability. This led SCOTUS to change the rule to misappropriation theory ## Footnote So you have an acquirer and you have a target, and they're doing deals = Back then, the deals would have to go to a financial printer (they would basically print out all the contracts and make sure they are perfect) * Chiarella was an employee at the printer → at these companies, they try to hide the names of the targets and acquirers BUT → Chiarella was able to figure out who the targets where from like context and he trades on them (Remember target companies get huge spikes in these deals) SCOTUS → Overturns Chiarella’s insider trading conviction * So what they were saying was, unless you are an employee of the company in which you're insider trading (or as we see in Dirks, you’re tipped off by an employee of the firm in which you are trading), you have no liability

Answer 83

Rule: They say we're going to ask three questions. * The first question is did the tipper breach their fiduciary duty? (from Chiarella) = Now, if the answer is no, there's no breach of fiduciary duty → then analysis ends * If and only if the answer is yes, then you ask a second question → did the tipper derive a personal benefit? If no → no liability, stop the analysis * If yes → third question: Did the Tippee know or should have known of the breach? If and only if the answer to all three questions is yes → then we have liability = objective standard ## Footnote So we have an individual, Secrist, who was a disgruntled former employee of a company called Equity funding. (Secrist is the tipper). He goes to his friend named Dirks (the tippee) * And he says to Dirks, Hey, let me tell you something → There's a lot of bad stuff going on at my company, fraud, all sorts of corruption. I would highly suggest you kind of check this out. Was there a breach of fiduciary duty by the tipper? * Yes, Secrist, the former employee, was breaching fiduciary duty by providing inside information to Dirks Did Secrist derive a personal benefit from the tip? * This is the controversial part → WTF is a personal benefit? * So the court has said to this day → financial or other, pecuniary or non pecuniary personal benefit * Now in practice the closer the personal benefit is to a bribe or a financial quid pro quo, the more likely the government is going to be able to show that the test is met.

Answer 84

duty of trust and confidence * SO → Any person with a duty of trust and confidence to the source of the information violates the misappropriation theory and could be liable civilly or criminally for insider trading O’hagen just expanded Chiarella → to include outsiders * By definition an employee or an insider = duty of trust and confidence. How complicated can we make the duty of trust and confidence? * 90% of the time = easy = The investment bankers, the accounting firms, the consulting firms. At the limits * First degree family members * congressmembers have it ## Footnote Dirks still holds → So anytime you have someone with a duty of trust and confidence tipping off somebody else → dirks framework

Answer 85

Rule 14e-3: equal access rule applies in context of tender offers * Hard to defend against → Because your client's obviously a person and if the government can show they traded on insider information → done Regulation Fair Disclosure (FD): prohibits selective disclosure by issuers; for example, to preferred analysts and investors * Basically → You can’t provide inside information to a select group of investors or analysts. * ISSUES = It is extraordinarily difficult to differentiate a statement that was made in a private meeting versus in a public setting or public meeting. * somebody could say exactly the same thing with exactly the same words word for word, comma for comma, but deliver the message with different body language, with different intonation. Turns into grammar exercise for courts ## Footnote Reg FD He said this is very low priority for him but know it

Answer 86

So here's the problem. What we don't know is whether or not these private fraud actions actually deter bad behavior → there's a school of thought that essentially says, you know, this is just a nuisance. * But on private claims, at the end of the day, you know, as we discussed all along, there is indemnification clauses, there is insurance * And so does this really provide a deterrent? Or is this really just enriching plaintiffs lawyers? If they do deter bad behavior, who cares if plaintiff’s lawyers are making a lot of money? They are fulfilling a social good by policing bad behavior * Especially when enforcement can change based on the fed gov’s policies However, if these private fraud actions are not deterring bad behavior * This whole fraud chapter has been a waste of time and money and it's essentially the corporation and the shareholders paying the plaintiffs lawyers. The trend is: * These private fraud actions do not add value, and that's why they're getting constrained. ## Footnote Policy of insider trading laws = * insider signals valuable info = but overall small portion * investors will adjust ex ante = investors do not have perfect info * insider trading is compensation = fuck off it is already high * where is the harm, especially given s/h apathy = systematic fairness, integrity of the market for all investors