Cases

Question 1

Farmers v. Cargill

Answer 1

Key Rule: A creditor that exercises control over a debtor’s business can become liable as a principal for the debtor’s acts. Case Snippet: Warren ran a grain elevator and bought grain from farmers; Cargill financed and tightly supervised Warren’s operations. When Warren defaulted, farmers sued Cargill. Minnesota’s Supreme Court upheld Cargill’s liability because Cargill effectively controlled Warren’s business.

Question 2

General Automotive Mfg. Co. v. Singer

Answer 2

Key Rule: Employees owe a duty of loyalty to their employer and must avoid conflicts of interest or secret profits. Case Snippet: Singer was a manager who ran a competing business secretly and kept hidden profits. The court found Singer liable for breaching his fiduciary duty.

Question 3

Mill St. Church of Christ v. Hogan

Answer 3

Key Rule: An agent has “implied authority” to do what is necessary or customary to carry out an assigned task—even if not explicitly stated. Case Snippet: Bill Hogan was hired to paint a church and hired his brother Sam as a helper (as he had done before). Sam was injured on the job. The court held Bill had implied authority to hire Sam, making Sam eligible for workers’ comp from the church.

Question 4

Ophthalmic Surgeons, Ltd. v. Paychex, Inc.

Answer 4

Key Rule: A principal creates “apparent authority” when its conduct leads a third party to reasonably believe an agent can act on its behalf. Case Snippet: An employee (Connor) embezzled funds via payroll checks processed by Paychex. The court found that Ophthalmic Surgeons’ lack of oversight made Paychex reasonably rely on Connor’s apparent authority.

Question 5

Clover v. Snowbird Ski Resort

Answer 5

Key Rule: Employers are vicariously liable for employees’ torts if committed within the scope of employment. Case Snippet: A ski resort chef collided with Clover while checking another restaurant, but also taking ski runs. The Utah Supreme Court held a jury must decide if this was within his employment duties.

Question 6

Patterson v. Domino’s Pizza, LLC

Answer 6

Key Rule: A franchisor is typically not liable for a franchisee’s employment decisions unless it directly controls the franchisee’s day-to-day operations. Case Snippet: Patterson sued Domino’s for workplace harassment at a franchise. The California Supreme Court held Domino’s was not liable because it didn’t control daily employment matters at the franchise.

Question 7

Martin v. Peyton

Answer 7

Key Rule: A partnership requires two or more persons carrying on a for-profit business together. Simply sharing profits (e.g., as loan repayment) doesn’t automatically make lenders into partners. Case Snippet: Peyton loaned securities to a firm, getting profit shares but no operational control. The court found no partnership, so Peyton wasn’t liable for the firm’s debts.

Question 8

National Biscuit Company, Inc. v. Stroud

Answer 8

Key Rule: Each general partner is an agent who can bind the partnership in ordinary business, unless third parties know the authority is restricted. Case Snippet: Stroud tried to stop his partner Freeman from buying bread from Nabisco. The court held Freeman’s purchase was in the usual course of business, so Stroud remained liable.

Question 9

Meinhard v. Salmon

Answer 9

Key Rule: Partners must fully disclose business opportunities and avoid secret profits or self-dealing—this is a high fiduciary duty. Case Snippet: Salmon secretly negotiated a new lease instead of sharing it with co-venturer Meinhard. The court found Salmon in breach and awarded Meinhard half of the new lease interest.

Question 10

Kovacik v. Reed

Answer 10

Key Rule: If one partner invests only capital and another only labor, each bears their own losses unless there’s an agreement otherwise. Case Snippet: Kovacik put up capital, Reed provided labor. After the venture lost money, Kovacik sued Reed to share losses. The California Supreme Court held that the labor-only partner isn’t liable for financial losses by default.

Question 11

Giles v. Giles Land Co.

Answer 11

Key Rule: A court may dissociate a partner if their behavior makes it unreasonable to continue the partnership. Case Snippet: Kelly Giles’ actions severely damaged trust in a family-owned partnership. The court upheld his judicial dissociation, finding the partnership couldn’t continue with him.

Question 12

Elf Atochem North America, Inc. v. Jaffari

Answer 12

Key Rule: An LLC operating agreement binds its members even if the LLC itself didn’t sign it. Delaware law enforces arbitration and forum selection clauses in these agreements. Case Snippet: Elf Atochem sued Jaffari. The court dismissed the suit, enforcing the operating agreement’s arbitration clause. The Delaware Supreme Court held the LLC was bound by that agreement.

Question 13

Auriga Capital Corp. v. Gatz Properties

Answer 13

Key Rule: In Delaware, LLC managers owe default fiduciary duties of loyalty and care unless the operating agreement explicitly waives them. Self-dealing must be shown fair. Case Snippet: Gatz, an LLC manager, orchestrated a below-market sale to himself. The court found he breached fiduciary duties, confirming managers have default duties unless lawfully modified.

Question 14

Schnell v. Chris-Craft Industries, Inc.

Answer 14

Key Rule: Even if an action complies with statutes, it can be invalid if it’s inequitable or obstructs shareholder rights. Case Snippet: Management advanced the annual meeting date to thwart a shareholder proxy campaign. The Delaware Supreme Court reversed the lower court, ruling inequitable tactics invalid.

Question 15

McDermott Inc. v. Lewis

Answer 15

Key Rule: Under the internal affairs doctrine, the law of the company’s place of incorporation governs corporate matters—even if it differs from Delaware or U.S. law. Case Snippet: A Panamanian parent controlled a Delaware subsidiary, which held voting shares in the parent. Delaware law barred such voting, but Panamanian law allowed it. The Delaware Supreme Court applied Panamanian law, respecting the internal affairs doctrine.

Question 16

Walkovszky v. Carlton

Answer 16

Key Rule: Courts only pierce the corporate veil when owners treat the corporation like a personal alter ego—commingling funds or using it as a façade. A liability-minimizing structure alone isn’t enough. Case Snippet: Walkovszky was injured by a cab owned by a thinly capitalized corporation. The New York Court of Appeals refused to pierce the veil solely because the owner used many small corporations; there was no proof of personal misuse.

Question 17

Radazewski v. Telecom

Answer 17

Key Rule: A parent can be liable for a subsidiary’s actions if it dominates the subsidiary to commit wrongdoing. Undercapitalization alone isn’t enough if there’s sufficient liability insurance. Case Snippet: Radaszewski was severely injured by a subsidiary’s truck. Though the subsidiary was minimally capitalized, it carried $11 million in liability insurance. The Eighth Circuit declined to pierce the veil, finding no fraud or misuse.

Question 18

Freeman v. Complex Computing Co.

Answer 18

Key Rule: A court may pierce the veil and hold someone liable as an “equitable owner” if they exercise total control over a corporation for personal benefit, even if they’re not a formal shareholder. Case Snippet: Glazier dominated Complex Computing Co. without formally owning it. The court found he was the real owner (“equitable owner”) and held him personally liable, including binding him to arbitration clauses.

Question 19

Theberge v. Darbro, Inc.

Answer 19

Key Rule: Courts rarely pierce the veil in contract cases unless there’s fraud, illegality, or total domination for personal gain. “Sharp practices” alone don’t suffice. Case Snippet: The Theberges failed to get a personal guarantee from a corporate principal. They claimed he misled them about personal backing. The Maine Supreme Court found no fraud or illegal conduct, refusing to pierce the veil.

Question 20

Gardemal v. Westin Hotel Co.

Answer 20

Key Rule: A parent isn’t automatically liable for its subsidiary’s actions unless the parent exerts such complete control that the subsidiary is a mere alter ego. Case Snippet: A hotel guest drowned at a Mexican Westin hotel. The plaintiff tried to hold the U.S. parent (Westin) liable. The Fifth Circuit rejected it, finding the subsidiary was a separate entity and not fully controlled by the parent.

Question 21

OTR Associates v. IBC Services, Inc.

Answer 21

Key Rule: A parent may be liable for a subsidiary’s debts if the subsidiary has no real independent existence and is used to perpetrate fraud or injustice. Case Snippet: Blimpie created IBC solely to hold franchise leases with no assets or employees. A landlord believed it was dealing with Blimpie. The court pierced the veil, finding Blimpie used IBC as a shell to evade obligations.

Question 22

Manichaean Capital, LLC v. Exela Techs., Inc.

Answer 22

Key Rule: Delaware courts weigh factors like undercapitalization, insolvency, and lack of formalities. They may also use “reverse veil-piercing” in rare cases to prevent fraud or injustice. Case Snippet: Creditors of SourceHOV Holdings alleged Exela dominated SourceHOV and siphoned funds to avoid paying debts. The court recognized both traditional veil-piercing (targeting the parent) and reverse veil-piercing (reaching subsidiaries’ assets), given the allegations of fraud.

Question 23

Equity-Linked Investors, L.P. v. Adams

Answer 23

Key Rule: Directors must maximize long-term value for common shareholders unless there’s a specific contractual right for preferred shares or the company is insolvent. Case Snippet: A struggling biopharma firm secured financing favoring common shareholders’ long-term survival over immediate liquidation for preferred holders. The court ruled there was no breach because directors had no special duty to prioritize the preferred’s liquidation preference.

Question 24

Klang v. Smith’s Food & Drug Centers, Inc.

Answer 24

Key Rule: Under Delaware law (§160), a firm can repurchase its shares if it doesn’t impair capital, measured by “surplus.” Courts defer to good-faith valuations absent fraud or bad faith. Case Snippet: Smith’s repurchased stock even though book values showed negative net worth. The Delaware Supreme Court upheld the repurchase, endorsing a fair valuation over strict book values.

Question 25

Kamin v. American Express Co.

Answer 25

Key Rule: Courts won’t second-guess board decisions under the business judgment rule unless there’s fraud, bad faith, or self-dealing. Dividend choices typically get deference. Case Snippet: AmEx distributed certain shares as a dividend rather than selling them (which could have yielded a tax benefit). Shareholders sued. The court dismissed, finding no fraud or conflict of interest.

Question 26

Shlensky v. Wrigley

Answer 26

Key Rule: Absent fraud, illegality, or self-dealing, courts won’t override board decisions—even if they seem unwise financially. Case Snippet: Minority shareholder sued Chicago Cubs’ board for refusing to install lights for night games. The court upheld the board’s decision, deferring to its judgment on preserving neighborhood goodwill.

Question 27

Smith v. Van Gorkom

Answer 27

Key Rule: Directors breach the duty of care when they approve a merger without adequate information. Gross negligence isn’t protected by the business judgment rule. Case Snippet: The Trans Union board hastily approved a $55/share buyout with minimal analysis. The Delaware Supreme Court found them liable for failing to properly inform themselves.

Question 28

Francis v. United Jersey Bank

Answer 28

Key Rule: Directors must oversee corporate affairs, review financial statements, and act on misconduct. Inaction and ignorance can breach fiduciary duties. Case Snippet: Mrs. Pritchard ignored her sons’ embezzlement. The New Jersey Supreme Court held her estate liable because she never supervised or read corporate reports.

Question 29

Benihana of Tokyo, Inc. v. Benihana, Inc.

Answer 29

Key Rule: If a board’s approval of stock issuance is informed, in good faith, and not for entrenchment, it’s protected by the business judgment rule—even if a director has a conflict, so long as it’s disclosed and the board acts independently. Case Snippet: Benihana issued preferred stock to a company partly owned by a director, but the board knew of the conflict and got a fairness opinion. The court upheld the transaction under the BJR.

Question 30

Bayer v. Beran

Answer 30

Key Rule: Directors’ decisions are protected unless there’s evidence of self-dealing or fraud; if there’s a conflict, the directors must prove fairness. Case Snippet: A radio ad campaign featured the president’s wife as a singer. The court found no direct self-dealing but warned that undisclosed family ties invite strict review for fairness.

Question 31

Lewis v. Vogelstein

Answer 31

Key Rule: When shareholders ratify a self-dealing transaction like director compensation, the standard shifts from “entire fairness” to “waste,” meaning plaintiffs must show no rational person would approve it. Case Snippet: Mattel’s director stock-option plan, approved by shareholders, was challenged as excessive. The court applied the “waste” standard and dismissed, noting directors profit only if the stock price increases.

Question 32

Harbor Finance Partners v. Huizenga

Answer 32

Key Rule: A fully informed, uncoerced vote of disinterested shareholders triggers the business judgment rule. Plaintiffs can only claim “waste” if no sensible businessperson would support the deal. Case Snippet: After a merger approved by a disinterested vote, a shareholder challenged it as unfair. The court dismissed the suit, stating the only remaining claim was waste, and the plaintiff didn’t meet that high bar.

Question 33

Broz v. Cellular Information Systems, Inc.

Answer 33

Key Rule: Directors/officers may not take a business opportunity if it’s within the corporation’s line of business and the corporation can realistically pursue it. If the corporation isn’t interested or able, it’s not usurping a corporate opportunity. Case Snippet: Broz personally bought a cellular license after confirming CIS was too financially strapped. The Delaware Supreme Court held Broz acted properly and didn’t steal a corporate opportunity.

Question 34

In re The Walt Disney Company Derivative Litigation

Answer 34

Key Rule: Directors aren’t liable under the business judgment rule if they act in good faith, without gross negligence, and don’t breach loyalty—even if their process isn’t “best practice.” Case Snippet: Disney paid a large severance to Michael Ovitz after a short tenure. Shareholders alleged waste and bad faith. The court found no gross negligence or bad faith—just a flawed but ultimately protected decision.

Question 35

Graham v. Allis-Chalmers

Answer 35

Key Rule: Directors aren’t liable for employee wrongdoing unless they knew or had reason to suspect it. They can rely on subordinates’ integrity unless “red flags” appear. Case Snippet: Employees engaged in antitrust violations. The court held the board had no duty to install a special compliance system absent signs of wrongdoing.

Question 36

Stone v. Ritter

Answer 36

Key Rule: Directors fail the Caremark standard only if they utterly ignore oversight or consciously disregard obvious red flags. Negligence alone isn’t enough; bad faith is required. Case Snippet: AmSouth Bank paid fines for failing to file required financial reports. Shareholders sued, alleging oversight failures. The Delaware Supreme Court dismissed, citing no bad faith or complete oversight failure.

Question 37

Marchand v. Barnhill

Answer 37

Key Rule: Directors must implement a board-level system to monitor “mission-critical” risks. A total failure to do so is bad faith and a breach of loyalty. Case Snippet: Blue Bell had no board-level safety monitoring for its ice cream business, leading to a deadly listeria outbreak. The Delaware Supreme Court ruled the board violated its oversight duty.

Question 38

In re The Boeing Company Derivative Litigation

Answer 38

Key Rule: Directors can be liable if they fail to monitor critical risks or ignore red flags. Case Snippet: Boeing’s board disregarded safety warnings leading to two 737 MAX crashes. The court found plaintiffs stated a plausible Caremark claim because the board overlooked obvious safety threats.

Question 39

eBay Domestic Holdings, Inc. v. Newmark

Answer 39

Key Rule: Directors of a for-profit company can’t deploy anti-takeover measures just to thwart profit maximization if there’s no genuine corporate threat. Case Snippet: Craigslist founders set up defensive measures to block eBay, which owned a minority stake. The Delaware Court of Chancery struck down those defenses, saying you can’t impose a non-profit philosophy on a for-profit corporation to entrench control.

Question 40

Citizens United v. Federal Election Commission

Answer 40

Key Rule: The government can’t bar corporations/unions from making independent political expenditures; it may require disclosure but can’t suppress speech based on corporate identity. Case Snippet: Citizens United wanted to air a film critical of Hillary Clinton. The Supreme Court invalidated restrictions on corporate-funded political broadcasts near elections.

Question 41

State v. Christy Pontiac-GMC, Inc.

Answer 41

Key Rule: Corporations can be criminally liable for crimes requiring specific intent if employees commit those crimes within their job scope. Case Snippet: A car dealership used forged customer signatures for rebates. The Minnesota Supreme Court held the dealership criminally liable for theft and forgery, attributing employees’ acts to the corporation.

Question 42

Theodora Holding Corp. v. Henderson

Answer 42

Key Rule: Charitable donations are valid if reasonable in amount and purpose, even if they don’t directly maximize profits. Case Snippet: A corporation donated a significant amount of stock to charity. The Delaware Chancery Court upheld it as a valid donation, noting the reasonableness and broader corporate benefits.

Question 43

Tooley v. Donaldson, Lufkin, & Jenrette, Inc.

Answer 43

Key Rule: A claim is direct if the shareholder suffered harm and seeks relief personally; it’s derivative if the harm is to the corporation. Case Snippet: DLJ shareholders claimed they lost time-value of money due to a delayed merger closing. The Delaware Supreme Court found this was a direct (not derivative) claim because it harmed shareholders individually.

Question 44

United Food v. Zuckerberg

Answer 44

Key Rule: To skip making a demand on the board, plaintiffs must show (1) a director got a material benefit, (2) a director faces a substantial likelihood of liability, or (3) a director lacks independence. Case Snippet: Shareholders challenged Facebook’s share reclassification favoring Mark Zuckerberg. The Delaware Supreme Court said exculpated “duty of care” violations alone don’t excuse demand and adopted a revised three-part demand-futility test.

Question 45

Einhorn v. Culea

Answer 45

Key Rule: Under Wis. Stat. §180.0744, an SLC must be composed of independent directors free from extraneous influence. Courts examine overall circumstances to assess independence. Case Snippet: A Wisconsin corporation formed an SLC to review a derivative suit. The plaintiff challenged the SLC’s independence. The Wisconsin Supreme Court remanded for a thorough review of possible biases.

Question 46

In re Oracle Corp. Derivative Litigation

Answer 46

Key Rule: An SLC must be neutral and impartial. If reasonable doubts arise about independence, a motion to dismiss a derivative suit can be denied. Case Snippet: Oracle’s SLC members had significant ties to the accused directors through Stanford University. The court found these relationships compromised the SLC’s neutrality and denied its motion to dismiss.

Question 47

In re Fuqua Industries, Inc. Shareholder Litigation

Answer 47

Key Rule: Derivative plaintiffs must be knowledgeable about the suit, have no conflict of interest, and have competent counsel. Age, health, or reliance on counsel alone doesn’t disqualify them. Case Snippet: Two shareholders—one elderly and another who owned only 25 shares—were challenged as inadequate. The court held they were adequate plaintiffs as they had legitimate interests and capable attorneys.

Question 48

Auer v. Dressel

Answer 48

Key Rule: Shareholders can amend bylaws, issue non-binding recommendations, and remove directors for cause, provided there’s fairness and proper notice. Case Snippet: Shareholders demanded a special meeting to express support for a former president and remove certain directors. The court upheld their right to call such a meeting and pursue these actions, given due process.

Question 49

Campbell v. Loew’s, Inc.

Answer 49

Key Rule: Shareholders can fill newly created directorships and remove directors for cause—even if bylaws are silent—provided they give specific notice and an opportunity to defend. Case Snippet: Loew’s shareholders removed two directors and filled seats without explicit bylaw authority. The court allowed it but emphasized the need for proper procedural fairness.

Question 50

Blasius Industries, Inc. v. Atlas Corp.

Answer 50

Key Rule: A board can’t primarily act to block a shareholder vote unless it shows a compelling justification. Case Snippet: Blasius, holding 9% of Atlas, wanted a recapitalization vote. Atlas’s board took steps to prevent shareholders from effectively voting. The court invalidated the board’s interference, finding no compelling reason.

Question 51

Quickturn Design Systems, Inc. v. Shapiro

Answer 51

Key Rule: A board can’t adopt provisions that tie the hands of a newly elected board from exercising its statutory powers. Defensive devices limiting future board discretion violate Delaware law. Case Snippet: Quickturn’s poison pill included a Delayed Redemption Provision preventing a new board from redeeming the pill for six months. The Delaware Supreme Court invalidated it as an improper restraint on §141(a) powers.

Question 52

Rosenfeld v. Fairchild Engine & Airplane Corp.

Answer 52

Key Rule: Incumbent boards may spend corporate funds to defend policies in a proxy fight. Insurgents can get reimbursed only if shareholders approve. Case Snippet: Fairchild spent over $200k on proxy battles, some for the losing side and some for the winning new board. The court held incumbents can be reimbursed if expenses are reasonable and for policy defense; insurgents need shareholder approval.

Question 53

Lovenheim v. Iroquois Brands, Ltd.

Answer 53

Key Rule: A shareholder proposal can’t be excluded solely for minimal economic effect if it raises significant social or ethical policy issues. Case Snippet: Lovenheim proposed a foie gras ethical study. Iroquois tried to exclude it for lacking economic relevance. The court ruled social/ethical concerns were enough to require inclusion in proxy materials.

Question 54

State ex rel. Pillsbury v. Honeywell, Inc.

Answer 54

Key Rule: A shareholder must seek inspection for a proper purpose tied to financial or governance interests. Purely political motives don’t qualify. Case Snippet: Pillsbury bought a single Honeywell share just to protest the company’s bomb production. The Minnesota Supreme Court denied inspection, finding no bona fide investment purpose.

Question 55

Saito v. McKesson HBOC, Inc.

Answer 55

Key Rule: Shareholders may inspect documents relevant to potential corporate wrongdoing, but can’t demand records from before they owned shares or from separate entities, absent a compelling reason. Case Snippet: Saito sought HBOC documents related to an accounting fraud before HBOC merged into McKesson. The court allowed some inspection but limited it to post-ownership documents and excluded purely third-party or pre-merger records.

Question 56

AmerisourceBergen v. Lebanon County Employee’s Fund

Answer 56

Key Rule: A Section 220 demand is valid if the shareholder has a credible basis to investigate wrongdoing, even without specifying how they’ll use the info. Case Snippet: Shareholders wanted corporate records to investigate opioid-related mismanagement. The Delaware Supreme Court upheld their right to inspect despite the company arguing the request was vague.

Question 57

In re Tesla Motors, Inc. Stockholder Litigation

Answer 57

Key Rule: A minority shareholder may be “controlling” if they exert outsized influence (e.g., over board decisions). Conflicted transactions then face heightened scrutiny. Case Snippet: Elon Musk held ~22% of Tesla but allegedly dominated the board’s decision to acquire SolarCity. The Chancery Court applied entire fairness review, noting Musk’s unique influence.

Question 58

Sinclair Oil Corp. v. Levien

Answer 58

Key Rule: If a parent company’s transaction with its subsidiary benefits only the parent at the minority’s expense, the “intrinsic fairness” standard applies. Otherwise, business judgment rule applies. Case Snippet: Sinclair took large dividends from Sinven (97%-owned subsidiary). The court found no self-dealing in dividends because minority shareholders also got dividends proportionally, but did apply strict fairness on other alleged breaches.

Question 59

Wilkes v. Springside Nursing Home, Inc.

Answer 59

Key Rule: Majority owners in a close corporation owe minority owners a partner-like duty. Freeze-outs must have a legitimate business purpose and be fair. Case Snippet: Wilkes was removed from management and salary with no valid reason, effectively freezing him out. The Massachusetts court found that was a breach of fiduciary duty by the majority.

Question 60

Nixon v. Blackwell

Answer 60

Key Rule: Directors in a closely held corporation must act with “entire fairness” but need not give minority shareholders equal liquidity or benefits unless specifically agreed. Case Snippet: Minority shareholders demanded the same buyout benefits as employees under an ESOP. The Delaware Supreme Court ruled they had no contractual right to it, and the corporation didn’t breach any fiduciary duty.

Question 61

Unocal Corp. v. Mesa Petroleum Co.

Answer 61

Key Rule: A board can adopt defensive measures if it reasonably perceives a hostile takeover threat and responds proportionately. Case Snippet: Mesa made a two-tier “front-end” tender offer. Unocal’s board launched a self-tender at a higher price, excluding Mesa. The Delaware Supreme Court upheld it, noting the board’s good-faith response.

Question 62

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.

Answer 62

Key Rule: When a company is clearly for sale, the board must focus on maximizing shareholder value—unduly favoring one bidder may violate its duties. Case Snippet: Revlon’s board locked up a deal with Forstmann at the expense of a higher offer from Pantry Pride. The court ruled that once it was apparent Revlon would be sold, the board had to seek the best price.

Question 63

Paramount Communications, Inc. v. Time, Inc.

Answer 63

Key Rule: Revlon duties (maximize immediate value) only apply if the company is “in play.” Otherwise, Unocal’s “reasonable defensive measure” standard applies. Case Snippet: Time, Inc. pursued a merger with Warner for strategic reasons. Paramount’s higher bid didn’t trigger Revlon duties because Time wasn’t actively for sale.

Question 64

Corwin v. KKR Financial Holdings LLC

Answer 64

Key Rule: If a merger not requiring entire fairness gets approved by fully informed, uncoerced disinterested shareholders, the business judgment rule applies—shielding the transaction from most attacks. Case Snippet: KKR’s stock-for-stock merger with KKR Financial was approved by a majority of disinterested voters. The court dismissed challenges because the board wasn’t “controlling,” and the Corwin doctrine protected the deal.

Question 65

Basic Inc. v. Levinson

Answer 65

Key Rule: Information is material if a reasonable investor would find it significantly important—this includes early-stage merger talks if they could affect decisions. Case Snippet: Basic publicly denied merger negotiations. Shareholders claimed this misled them. The Supreme Court said the standard is whether the omitted info would matter to investors, rejecting the stricter “agreement-in-principle” test.

Question 66

Tellabs, Inc. v. Makor Issues & Rights, Ltd.

Answer 66

Key Rule: Plaintiffs must allege facts that strongly suggest an intent to deceive (scienter). The inference of fraud must be at least as compelling as any innocent explanation. Case Snippet: Tellabs was accused of inflating its stock with overoptimistic statements. The Supreme Court affirmed that under the PSLRA, courts weigh all plausible inferences when deciding if scienter is “strongly” indicated.

Question 67

Goodwin v. Agassiz

Answer 67

Key Rule: In an impersonal market, insiders typically have no duty to disclose unconfirmed or speculative info unless they’re defrauding or have a special fiduciary tie to the seller. Case Snippet: Mining company directors bought shares on the Boston market, knowing a geologist’s theory of potential wealth. The court held no breach of duty because the info was speculative and there was no direct dealing with the seller.

Question 68

Chiarella v. United States

Answer 68

Key Rule: Rule 10b–5 liability for silence only arises if there’s a fiduciary duty to speak. Just possessing material nonpublic info doesn’t create a duty by itself. Case Snippet: Chiarella, a printing-firm employee, deduced takeover targets and traded quietly. The Supreme Court reversed his conviction, holding no fiduciary tie existed between him and the sellers.

Question 69

Dirks v. Securities and Exchange Commission

Answer 69

Key Rule: A tippee’s duty to abstain from trading arises only if the tipper (an insider) breached a fiduciary duty for personal benefit and the tippee knew or should’ve known of that breach. Case Snippet: Dirks learned of fraud at Equity Funding from an insider but the insider wasn’t seeking personal gain. The Supreme Court ruled no liability because the tipper didn’t benefit from disclosing.

Question 70

United States v. O’Hagan

Answer 70

Key Rule: Trading on inside info misappropriated from someone to whom you owe a duty (e.g., employer or client) violates Rule 10b–5. The deception is against the source of the information. Case Snippet: O’Hagan, a lawyer, traded Pillsbury stock after learning confidential tender offer info. The Supreme Court upheld his conviction, endorsing the misappropriation theory.

Question 71

Foremost-McKesson, Inc. v. Provident Securities Co.

Answer 71

Key Rule: To trigger §16(b) liability for short-swing profits, a shareholder must hold over 10% both before and after the transaction. Buying over 10% with the same transaction doesn’t count. Case Snippet: Provident’s purchase pushed it past 10%, then it sold within six months. The Supreme Court held §16(b) didn’t apply because the 10% threshold wasn’t crossed before the purchase.