Cases

Question 1

Hoschett v. TSI International Software (1996)

Answer 1

i. The obligation to hold an annual meeting may not be satisfied by shareholder written consent action.

Question 2

Adlerstein v. Wertheimer (2002)

Answer 2

i. Directors may not act on a plan to remove a controlling shareholder director without first informing that person of the plan and giving him a chance to protect his interests.
ii. Alderstein caused a lot of problems; lying, sexual harassment etc. court held there needed to be notice about the subject matter in addition to the meeting in general

Question 3

C.A., Inc. v. AFSCME Employees Pension Plan:

Answer 3

i. A bylaw is permissible if it defines the process and procedure by which a board of directors makes business decisions.
1. Permissible if it regulates the process through which directors are selected
2. Delaware: bylaws are not intended to dictate how a board should decided substantive matters, but rather the procedures by which substantive decisions are made
ii. A corporation’s board may not enter a contract that requires it to act in a manner that would violate its fiduciary duty.

Question 4

Lovenheim v. Iroquois Brands, Ltd. (1985):

Answer 4

The meaning of “significantly related” in the SEC rule for omissions in Proxy Statements is not limited to economic significance.
ii. Facts: Shareholder proposal to form a committee to consider the distress/pain/suffering of animals in the production of paté de foi gras.

Question 5

Dodd-Frank Act

Answer 5

Requires Public Companies to conduct shareholder votes on executive compensation. “Say on Pay”

a. In the hands of directors not shareholders
b. Unclear that the level or trajectory of executive compensation has been changed by say on pay (executive pay levels seem to continue to rise steadily)

Question 6

Dodge v. Ford Motor Co. (1919):

Answer 6

Rule: A shareholder cannot take actions that harm its shareholders and are motivated SOLELY by humanitarian concerns, not business concerns.
ii. Concept- “Shareholder Primacy”: Primary Duty is to maximize wealth for the shareholders of the corporation.

Question 7

Northeast Harbor Golf Club, Inc. v. Harris (1995):

Answer 7

Rule: When the director of a corporation is presented with a business opportunity closely related to a business in which the corporation is engaged, the director must fully disclose the opportunity prior to taking advantage of it himself

Question 8

Broz v. Cellular Information Systems, Inc.:

Answer 8

Rule: Under the corporate opportunity doctrine, it is not required that the director in question formally present the opportunity to his corporation’s board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity.

Question 9

Sinclair Oil Corp. v. Levien (1971)

Answer 9

Rule: A parent corporation must pass the entire fairness test (aka intrinsic fairness test) only when its transactions with its subsidiary constitute self-dealing.
2. Entire Fairness Standard of Review: Directors demonstrate “utmost good faith and most scrupulous inherent fairness of the bargain”—Fair Dealing & Fair Price

Question 10

Calma v. Templeton (2015):

Answer 10

Rule: Directors can use shareholder ratification as an affirmative defense in the context of director self-compensation only if a majority of informed, uncoerced, and disinterested stockholders vote in favor of a specific decision of the board of directors.

Question 11

Smith v. Van Gorkham (Delaware) (1985):

Answer 11

Rule: There is a rebuttable presumption that a business determination made by a corporation’s board of directors is fully informed made in good faith and in the best interest of the corporation.
b. Rationale: Directors of Transunion breached their Fiduciary Duty to their Stockholders: (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger (GROSS NEGLIGENCE); and (2) By their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer

Question 12

Malpiede v. Townson (2001) (Delaware)

Answer 12

Rule: When a corporation has an exculpatory provision in its articles of incorporation, a complaint alleging breach of fiduciary duty by directors will be dismissed if the complaint does not adequately allege breach of the duties of good faith or loyalty.

*The provision shield its directors from personal liability provided they have not acted in bad faith or breached their duty of loyalty to the corporation.

Question 13

Stone v. Ritter (2006) (Delaware):

Answer 13

Rule: Directors can be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system or having implemented such a system, consciously fail to monitor or oversee its operation.

2. Caremark: “It is important that the board exercise a good faith judgement that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so it may satisfy its responsibility”
   a. The Duty of Good Faith cannot require directors to possess detailed information about all aspects of the operation of the enterprise.

Question 14

Aronson v. Lewis (1984) (Delaware):

Answer 14

Rule: Stockholders wishing to bring a derivative suit must first make a demand for redress to the board of directors, unless such a demand would be futile.

ii. Rationale: Unless facts are alleged with particularity to overcome the presumptions of independence and proper exercise of business judgement, in which case the directors could not be expected to sue themselves, a bare claim of this sort raises no legally cognizable issue under Delaware corporate law.
iii. In Determining “Demand Futility” the court in the proper exercise of its discretion must decide whether, under the facts alleged, a reasonable doubt is created that:
1. The directors are disinterested and independent; and
2. The challenged transaction was otherwise the product of a valid exercise of business judgement.

Question 15

In re The Limited, Inc. (Delaware) (2002):

Answer 15

Rule: If a director is beholden to a controlling shareholder or other director such that he lacks capacity for independent judgement, he is not independent for the purposes of demand excusal.

Question 16

How to evaluate breach of duty of good faith: (Caremark Standard and rales test)

Answer 16

i. Intentional Acts not in the best interest of the company
ii. Acts with intentional violation of law
iii. Intentionally fails to act in the face of a known duty to act
g. Rales Test (Current Directors not involved in the decision)
i. The reasonable doubt as to Independence or business judgement in responding to the demand.

Question 17

Zion v. Kurtz (NY)

Answer 17

i. Under Delaware corporation law, in a close corporation a written agreement between a majority of the stockholders is valid even if it restricts or interferes with the board of director’s powers.

Question 18

Ramos v. Estrada (CA)

Answer 18

Voting agreements are valid. Articles of incorporation need not explicitly say “this is a close corporation” for close corporation code to apply. *

Question 19

Zidell v. Zidell

Answer 19

i. A shareholder suing to compel a corporation to issue a dividend has the burden of showing that the directors acted in bad faith in declining to do so.
1. Facts relevant to the issue of bad faith:
a. Intense hostility of the controlling faction against the minority
b. Exclusion of the minority from employment by the corporation
c. High salaries/corporate bonuses made to officers in control
d. The fact that the majority group may be subject to high personal income taxes if substantial dividends are paid.
e. The existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible

Question 20

Donahue v. Rodd Electrotype Co.

Answer 20

Stockholders in a close corporation owe one another strict duties of care and loyalty, similar to the duties owed among partners in a partnership.

Question 21

Wilkes v. Springside Nursing Home, Inc

Answer 21

Majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty.

Question 22

In re Kemp & Beatley, Inc. (NY)

Answer 22

If majority shareholders take actions that substantially defeat the reasonable expectations of minority shareholders, they have engaged in oppressive conduct, and the court may order forced dissolution of the corporation.

Question 23

Gimpel v. Bolstein

Answer 23

In ruling on an involuntary dissolution petition, if the oppressiveness of the majority shareholder’s conduct cannot be determined by comparing the minority shareholder’s reasonable expectations, courts consider whether the majority’s conduct was inherently oppressive.

1. 2 Tests for Oppression:
   a. Reasonable Expectations of minority shareholders upon entering close corporation
   b. Majority must act with probity and fair dealing and if their conduct becomes burdensome, harsh and wrongful they may be guilty of oppression.

Question 24

Concord Auto Auction, Inc. v. Rustin (Mass)

Answer 24

Inadequacy of price is an insufficient justification to avoid specific performance of a stock repurchase agreement.

Question 25

Olson v. Halverson (Delaware)

Answer 25

A withdrawing partner in a limited partnership and a withdrawing member in an LLC are generally entitled to the fair value of their equity interest, but this may be modified by contract.

Question 26

Bay Center Apartments Owner, LLC. v. Emery Bay PKI, LLC.

Answer 26

In crafting an LLC agreement, parties have flexibility to eliminate some traditional fiduciary duties, but they must make their intent to do so clear and unambiguous.

Question 27

Kahn v. Pornoy (Delaware)

Answer 27

An LLC company can, by agreement, adopt and then modify corporation law default rules with respect to director’s fiduciary duties.
1. Must be careful about how clauses are drafted or the court may not honor contracting around the duty of loyalty.

Question 28

Fisk Ventures, LLC v. Segal (Delaware)

Answer 28

An LLC agreement regulates the terms by which members control the LLC, and a court will not insert itself into the agreement to decide which member’s business judgement was more in line with the LLC’s best interests.

ii. The court may decree dissolution whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.
1. Purpose need not be completely frustrated to be reasonably impracticable.

Question 29

R & R Capital, LLC. v. Buck & Doe Run Valley Farms, LLC.

Answer 29

Members of an LLC may waive their right to seek judicial dissolution through the LLC agreement.

Question 30

Powell’s 3 Part Test:

Answer 30

To Pierce the corporate veil requires that;

1. The parent completely controls and dominate the subsidiary
2. The parent’s conduct in using the subsidiary was unjust, fraudulent or wrongful toward the plaintiff
3. And, plaintiff actually suffered some harm as a result
   b. 3 Factors may affect the likelihood that veil piercing will occur:
   i. Plaintiff’s suing to enforce tort claims versus contract claims (slightly higher likelihood for tort claims)
   ii. Identity of the person behind the veil
4. Another corporation or an individual person?
   iii. Shareholders in a closely held corporation are much more likely to be subject to veil piercing than shareholders in a publicly held corporation.

Question 31

Consumer’s Co-Op v. Olsen

Answer 31

Absent evidence of pervasive control or failure to follow formalities, undercapitalization is insufficient grounds by itself to justify piercing the corporate veil.

1. Rationale: Alter Ego Theory for Piercing the Corporate Veil
   a. A Shareholder may be held liable for corporate debts where;
   i. There is evidence of complete domination of the corporation by an individual
   ii. This control has been used to commit fraud
   iii. The control caused the plaintiff’s injury
   b. 8 Factor Balancing Test to determine Alter Ego:
   i. Whether the company is being operated as a legitimate business entity
   ii. Co-mingling of funds and assets
   iii. Whether or not adequate records are kept
   iv. Nature of the business facilities misuse of the business
   v. Company under capitalized
   vi. Company shell of the business owners
   vii. Disregarding Corporate Formalities
   viii. Assets and funds of company used for non-company purposes

Question 32

K.C. Roofing Center v. On Top Roofing, Inc.

Answer 32

In Missouri, it is proper for the court to pierce the corporate veil if the plaintiff can show:

1. Control, complete domination
2. Used by the defendant to commit fraud or wrong
3. Proximate cause of injury/unjust loss

Question 33

Baatz v. Arrow Bar

Answer 33

A court may pierce the corporate veil and hold shareholders individually liable where the continued recognition of a corporation as a separate legal entity would produce injustices and inequitable consequences.

Question 34

Craig v. Lake Asbestos

Answer 34

The corporate veil of a subsidiary may only be pierced to reach the parent corporation when the parent so dominates the subsidiary that the subsidiary has no separate existence, and when the parent has used the corporate form to perpetuate fraud or injustice.

Question 35

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

Answer 35

Courts will defer to the board’s measurement of surplus, absent evidence of bad faith or failure, on the part of the board, to evaluate the assets on the basis of acceptable data it reasonably believed reflected current value.

1. DGCL 160: Forbids a corporation to repurchase its shares if doing so would cause impairment of capital
2. Balance sheet is not conclusive evidence of impairment as the balance sheet does not always reflect the actual current value of the corporation’s assets and liabilities.

Question 36

RKO-Stanley Warner Theatres, Inc. v. Graziano

Answer 36

Absent a clear agreement to the contrary, a promoter is personally liable for contracts she enters into on behalf of a yet-to-be-formed entity, even after the entity is created.
1. Promoter: Lays the groundwork for corporations as they get off the ground.

Question 37

Timberline Equipment Co. v. Davenport (Oregon

Answer 37

i. Under the Oregon Business Corporation Act (modeled after MBCA), a co-owner will be personally liable for a contract entered into on behalf of the business before a certificate of incorporation is issued.

Question 38

Shlensky v. Wrigley (1968):

Answer 38

i. Stockholders derivative suit against the directors for negligence/mismanagement
ii. Plaintiff contends that the Cubs lose money because they refuse to install lights that allow them to have night games. Claims defendant is not motivated by the best interest of the corporation but personal views that baseball is a “daytime sport.”
iii. Rationale: Unless the conduct of the defendants at least borders on fraud, illegality, or conflict of interest, the court should not interfere.
1. It cannot be said that directors, even those of corporations that are losing money, must follow the lead of other corporations in the field.
iv. Rule: As long as a corporations’ directors can show a valid business purpose for their decision, that decision will be given great deference by the court.

Question 39

Byker v. Mannes

Answer 39

A partnership is created when two or more parties agree to carry on as co-owners of a business for profit, regardless of whether they subjectively intend to form a partnership

Question 40

Hynansky v. Vietri

Answer 40

. A partnership agreement is strong evidence that the parties had the intent necessary to create a partnership, but it does not conclusively establish that a partnership exists.

Question 41

Kovacik v. Reed

Answer 41

Monetary losses will be apportioned equally between partners who make capital contributions; where one partner contributed labor and the other capital, the rule is not applied.

Question 42

Meinhard v. Salmon

Answer 42

Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture.

Question 43

Vigneau v. Storch Engineers

Answer 43

A Partner who breaches his duty of loyalty to the partnership is still entitled to recover his capital contribution to the partnership, though that sum may be reduced by the amount of any improper profits the partner earned due to the breach of duty.

Question 44

Starr v. Fordham (1995)

Answer 44

Starr v. Fordham (1995)
i. A partner violates the duty of loyalty and the implied covenant of good faith and fair dealing when he unfairly determines another partner’s profit share.

Question 45

McCormick v. Brevig:

Answer 45

Under RUPA, when a court orders the termination of a partnership, partnership assets must be converted to cash to pay creditors, with any remaining surplus going to the partners pro rata.

Question 46

Drashner v. Sorenson

Answer 46

A partner who dissolves a partnership in contravention of the partnership agreement is not entitled to a valuation that includes the going concern or good will value of the business

Question 47

Page v. Page

Answer 47

A partnership may be dissolved upon notice by any partner when there is no definite term set for the partnership.

Question 48

Bohatch v. Butler &; Binion

Answer 48

Fiduciary Limits on Expulsion of Unwanted Partners
i. A partnership may expel a partner for purely business reasons, to protect relationships within the firm and with clients, or to resolve a fundamental schism in the partnership.

Question 49

P.A.Properties Inc. v. B.S. Moss’ Criterion Center Corp

Answer 49

P.A.Properties Inc. v. B.S. Moss’ Criterion Center Corp.

i. A partner’s actions may bind the partnership to an agreement with a 3rd party even if the 3rd party is unaware that the partnership exists, as long as the partner intends the agreement to benefit the partnership.
b. Haymond v. Lundy (2002)
i. A lawyer referral fee is a material asset in the context of a partnership business.
ii. Lundy exceeded his authority under 5.01 (iv) by not obtaining his partners consent before making the agreement

Question 50

Haymond v. Lundy (2002)

Answer 50

A lawyer referral fee is a material asset in the context of a partnership business.
ii. Lundy exceeded his authority under 5.01 (iv) by not obtaining his partners consent before making the agreement

Question 51

Weinberger v. UOP, Inc.

Answer 51

1. Minority shareholders voting in favor of a proposed merger must be informed of all material information regarding the merger for the merger to be considered fair.

Question 52

vi. Kahn v. M & F Worldwide Corp.

Answer 52

1. In Controller buyouts, the business judgement standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority

Question 53

vii. Glassman v. Unocal Exploration Corp.

Answer 53

1. The parent corporation in a short-form merger does not need to establish entire fairness.

Question 54

viii. Stringer v. Car Data Systems, Inc

Answer 54

1. In the absence of fraudulent or unlawful conduct, a shareholder who dissents to a merger may seek judicial appraisal but no other remedy.

Question 55

b. Chiarella v. United States

Answer 55

i. Where printer handles documents and discovers insider information
ii. An allegation of securities fraud based upon nondisclosure of information will not succeed unless there is a duty to speak.

Question 56

a. Securities & Exchange Commission v. Texas Gulf Sulphur

Answer 56

i. Individuals with knowledge of material inside information must either disclose it to the public or abstain from trading in or recommending the securities concerned while the inside information remains undisclosed.

Question 57

United States v. O’Hagan

Answer 57

i. A person is guilty of securities fraud when he misappropriates confidential information for securities trading purposes, in breach of a duty to the source of that information.
s

Question 58

Salman v. United States

Answer 58

i. A tippee is liable for securities fraud if the tipper breaches a fiduciary duty by making a gift of the confidential information to a trading relative or friend.