Cases

Question 1

General Automotive v. Singer

Answer 1

Rule: Employees owe a fiduciary duty to their employers.

Facts: Singer was sued for breach of K and was found liable for breach of fiduciary duty because he did not disclose his decision and had to return the profits he made.

Question 2

Meinhard v. Salmon

Answer 2

Rule: Managing partners have a higher fiduciary duty than regular partners.

Facts: Meinhard was in a joint venture in a hotel. Salmon was approached about renewing the lease. Court found joint venturers who owe one another fiduciary duties when the new opportunity is an extension and expansion of the first opportunity.

Dissent: Fiduciary duty ends when the venture expires.

Question 3

Feinwick v. Unemployment

Answer 3

Rule: A partnership exists when two or more persons act as co-owner of a business.

Facts: Beauty saloon owner in “partnership” with secretary.

Courts looks specifically at:

1. intent of the parties
2. share of profits
3. sharing of losses
4. ownership and control
5. community of power in administration
6. language of agreement
7. conduct toward third parties (hold self out as partners)
8. Rights upon dissolution

Question 4

Martin v. Peyton

Answer 4

Rule: In order for a creditor to be a partner in a firm, the creditor must be closely enough associated with the firm so as to make it a co-owner carrying on the business for profit.

Facts: Peyton gave KNK a laon and in return received 40% of profits, veto rights, collateral securities, dividends, equiy option, and full access to inspect books, and veto power.

Court rules that they are not partners because these were ordinary precautions taken by a lender to protect their investment and was nto sufficent to establish Peyton as a co-owner.

Question 5

Young v. Jones

Answer 5

Rule: A person who represents, or permits another to represent, that he or she is a partner in an existing partnership or with other persons who are not partners, is liable to 3rd parties who rely on that representation.

Facts: Young loaned $500K to bank and PwC Bahamas issues an unqualified opinion. Young lost his investment. Young sued PwC claiming they are partners with PW Global (according to brochure). The investor didn’t present any evidence to suggest that he relied on information that PW-Bahamas was in a partnership with PW-US.

Question 6

National Bisquit Company (Nabisco)

Answer 6

Rule: In a general parternship with two partners, each party has the power to bind the partnership in matters pertaining to the partnership’s business.

Facts: Stroud and Freedman were partners in grocery store but were dissolving the partnership. Stroud ordered bread and it was delivered but, Freeman refused to pay. The ct found that since there can be majority under UPA §9 between 2 partners, and both have equal rights to manage, each has agency to order bread in the ordinary course of business.

Could have been avoided if Freeman sent an official letter to Nabisco explaing the Stroud was dissolving.

Question 7

Owne v. COhen

Answer 7

Rule: A court may order the dissolution of a partnership when the parties’ quarreling makes it impossible for them to cooperate, or when one partner’s acts materially hinder the partnership’s business.

Facts: Owen provided funds and Cohen managed a bowling alley. Owen sues to have the court dissolve the corp b/c Cohen mismanaged funds, humilated him, and conducted illegal business (gambling room). The ct held the standard to dissolve a parternship: uncooperatie disagreement needs to be enough to hinder management of the partnership.

Question 8

Cantor v. Sunshine

Answer 8

Rule: The act of executing the certificae of incorporation, the bona fide effort to file it and the dealings with plaintiffs in the name of that corporation fully satisfy the requiste proof of the existence of a de facto corporation.

Facts: Brunetti leased from Cantor (someone who has extensive experience leasing to corporations) on behalf of Sunshine. Filed with SOS but wasn’t incoporated b/c of delay at SOS. Sunshine defaulted on lease and Cantor sued Brunetti. Ct found B was not personally liable because corporation was a de facto corp.

Elements:

1. Good faith effort to incorporate
2. Had a legal right to form business
3. Acted as if the corp was formed
   - signed on behalf of corp.
   - business cards
   - appointed officers

Question 9

Duray v. Perrin

Answer 9

Rule: Where a body assumes to be a corporation and acts under a particular name, dealing with under such assumed name is estopped to deny its corporate existence.

Facts: Duray signed K with Perrin. Signed a new K with Outlaw, LLC. Outlaw defaulted on K and Duray sued. The court determined Duray was King with Outlaw, not Perrin. Does De facto and estoppel analysis.

Estoppel is an equitable remedy and does not concern legal status–> Duray thought that Outlaw was a valid LLC and proceeded to perform (Received billing, liability insurance from Outlaw) under the K as if that were the case.

Elements:

1. Incorporators have proceeded in good faith
2. Under a valid statute.
3. For an authorized purpose (legal business)
4. Have executed and acknowledged articles of association pursuant to that purpose, a corporation de facto comes into being.

Estoppel Elements:

1. Thought it was a corporation. Treated the entity as though it were a corporation
2. would earn a windfall (obtain an unfair advantage or disadvantage) now allowed to argue that entity was not a corporation.

Question 10

A.P. Smith

Answer 10

Rule: A corporation may take any action, including authorizing contributions/ donations, as long as it is consistent withs state law.

Facts: AP Smith donated $1500 to Princeton. Shareholder questioned this action. Court allowed the donation because it was given to benefit corporation, it was modest in amount and it wasn’t given to a pet charity.

Common law elements:

1. There must be some corporate benefit (PR).
2. Amount must be reasonable
3. Donation cannot be to a pet charity (ulterior motive)

Question 11

Dodge v. Ford

Answer 11

Rule: A company cannot take actions that harm its shareholders and are motivated solely by community/public interest concerns, rather than business concerns.

Facts: Ford began withholding shares to invest back into the community. Ford Motor was acting as a semi-charity instead of giving money back to shareholders. Ct determined withholding dividends is fine but it must be for the benefit of the corporation. Ct ordered Ford to pay dividends.

Question 12

Shlenksky v. Wrigley

Answer 12

Rule: A court will only interfere with the honest business judgment of the directors of a corporation if there is a showing of fraud, illegality, or conflict of interest that causes damages to the corporation.

Facts: P wanted D to install night lights at the baseball field.

Ct found failing to install night lights did not cause significant damage to the corporation. P did not consider the costs of the upkeep of lights, which could increase or further decrease profits. Damages to stockholders is a mere conclusion not supported by facts.

Question 13

In re Oracle:

Answer 13

Rule: A member of the board of directors cannot be independent if he or she cannot analyze a problem objectively, with only the best interests of the corporation in mind.

BCL §627 requires P to pay bond so if the Shareholder loses, the other shareholders will not be responsible for the attorney’s fees of corporation.

Facts: P brought a suit against Oracle for:

1) BOD and directors engaged in insider trading. They misrepresented infomation which caused the stock to plummet and used the information to trade before plummet.
2) Other members of the board did not trade but committed a caremark violation (sat idly by when they have a duty in good faith to look over actions of BOD…breach of fiduciary duty)

Issue: Whether SLC was independent enough so as to render an impartial decision regardig claims.

Can’t have substantial connections. Case by case analysis.

Question 14

Automati Self-Cleansing Filter Syndicate

Answer 14

Rule: A corporation’s board of directors is not bound to carry out the resolution of a simple majority of the shareholders in violation of the articles of association. Has a duty to the corporation.

Facts: Company’s shareholders voted to sell assets (55%). BOD declined to sell. Shareholders sued. Ct concluded that BOD is to be an agent of the entire corp, not just the majority.

Question 15

Jennings

Answer 15

Rule: Apparent authority cannot be established through the actions of the agent suggesting apparent authroity, but may be established through prior actions that are sufficiently similar and repetitive.

Facts: Mercantile was a publicly held company with 400 shareholders. Nine BOD and executive committee. Jennings solicited real estate bids for company. EC would determine whether company would accept any offers. J brought an offer and President accepted the offer. Ct determined Jennings could not recover because he WAS ON NOTICE. Public companies require BOD approval and they didn’t do a lot of deals like this.

Elements:

1) . Knowingly permits the agent to exercise; or
2) . holds im out as possessing authority

Analysis:

1. Private or public company
2. Is the transaction unique?
3. Repetitve in nature?

Question 16

Menhard

Answer 16

Rule: The president of a corporation has inherent agency power to bind the corporation to a contract if the contract was within the ordinary scope of his duties and the third party has no notice that he lacks authority.

Facts: Appellant corp offered to sell 30 acres of land. President of company accepted the offer in a written agreement. BOD refused the agreement. President of company has inherent authority. Actions were within normal business operations and appellant reasonably believed the president was authorized to contract.

Question 17

Walkovszky v. Carlton

Answer 17

Rule: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity.

Facts: Man owned 10 taxi corps, with two cabs in each. Each insured for the min. required by the state of $10K. Driver hit a man and man sued. Ct found P wasn’t abl to prove fraud or injustice. Legislative problem of only requiring $10K in insurance.

Elements:

1. Establish the corporation is an alter ego of individual
   a. Co-mingling of personal and corporate funds
   b. No corporation formalities
   c. Capitalization- does it have funding?
2. No fraud or injustice

Enterprise Entity Theory: All companies are separate but this gets ignored because they operate under a single enterprise. THIS IS NOT PIERCING THE CORPORATE VEIL.

Question 18

Sea-Land Services

Answer 18

Rule: A corporate entity will be disregarded and the veil of limited liability pierced when two requirements are met:

1. There must be such unity of interest and ownership that the separate personalities of the corporation and the individual or other corporation no longer exist; 2. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

*Must establish 1). Intent-2) strategic behavior (moving funds offshore); Assurance from D that something will be done or paid

Facts: Pepper company defrauded shipping company.

Question 19

Kinney Shoe v. Polan

Answer 19

Rule: A shareholder in a corporation may be held personally liable for corporate obligations once the corporate veil is pierced to prevent injustice. A fact-specific inquiry.

Facts: D (Industiral Industries) leased space from Kinney Shoe and then subleased to Polan Corp. D didn’t distribute stock, made no capital contribution, no corporate formalities, and elected no officers. D also attempt to protect his assests placing them in Polan.

Elements:

1) Unity of interest between the individual shareholder and the corporation
2) an inequitable result would occur if the shareholder was not held liable
3) Laya test would apply to banks and lenders

Question 20

Perpetual Real Easte Services, Inc.

Answer 20

P failed to show that D used the corporate form to disguise wrongs because:

• P was a voluntary creditor
• P had full knowledge of partnership’s structure and capitalization

Question 21

Francis

Answer 21

Rule: A director has a duty to know and be aware of, at least generally, the business affairs fo a corporation.

Directors duties include:

• Being informed on company’s performance
• Monitoring corporate affairs
• Attending board meetings regularly
• Making inquiries into questionable matters

Summary: Reinsurance company fraud by two sons. Widow inherited majority shares of company. She did not inform herself of the business.

Remember:

1. Zone of Insolvency- FD shifts from shareholders to creditors when company approaches bankruptcy
2. In order for BJR to apply, a decision must be made. ONLY protects informed decisions.

Question 22

Van Gorkum

Answer 22

Rule: Under the BJR, a business decision made by a corporation’s BOD is presumed to be fully informed and made in good faith and in the best interest of the corp.

Summary: Directors were liable for breaching their duty of care because they approved selling the company w/o:

1. Attempting to learn the company’s market value
2. Reviewing documents, fairness option from bank or outside evaluation
3. Didn’t take time to review documents or otherwise.

Decision wasn’t deliberate or informed.

Outcome: DE and NY amended BCL to indemnify directors. See 401(b)(1)

Question 23

Kamin

Answer 23

Rule: Courts will not interfere with an informed and delibereate business decision made by BOD absent of fraud, waste, illegality or self-dealing

Summary: BOD purchased shares on the open market. Turned out to be a bad investment. Ct found them not liable

Question 24

Disney

Answer 24

Rule: A Fiduciary fails to act in good faith when he intentionally acts with a purpose other than that of advancing the corporation’s interests, demonstrates a conscious disregard for his duties, or intentionally violates the law.

Question 25

Stone v. Ritter

Answer 25

Rule: BOD 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 operations.

Summary: Directors implemented monitoring systems compliant with BSA requirements, but the system failed. BOD did not consciously disregard their duty.

Question 26

Bayer v. Beran

Answer 26

Rule: Directors have an obligation not to put their own interests before the interests of the corporation.

Summary: BOD hired CEO’s wife for advertisements. Court found BOD did not breach loyalty b/c:

1. BOD believed radio program kept with the beauty and superior quality of their products
2. Acted after studies report
3. Employed an advertising agency and consultant
4. Agreed on budget
5. Wife K was negotiated through agent, she was paid comparably, and received less work than any other artist
6. Closely held corporation
7. She received no build up

Question 27

Broz

Answer 27

Rule: To determine if there was a COD that was usurped from a corporation do analysis:

1. Is there a corporate opportunity
2. Is the corporation financially able to exploit the opportunity?
3. Is the opportunity in the line of business as the corporation?
4. Is there an interest or expectancy in the opportunity?
5. Conflict of interest between the director and the opportunity?

• Did the director disclose the opportunity to the board in a formal meeting (not required but creates a safe harbor and standard of review will be deferred to BJR)?
• Opportunity given to director in personal or official capacity?

Question 28

In re eBay, Inc Shareholders Litigation

Answer 28

Rule: Directors of a corporation are not permitted to personally accept private stock allocations in an IPO of the corporation when the corporation itself could have purchased the stock.

Holding: Directors breached duty of loyalty because:

• eBay could financially exploit the opportunity
• eBay was in the business of investing securities
• eBay was never given an opportunity to turn down allocations.

Question 29

Sinclair Oil Corp

Answer 29

Duty to minority shareholders

If self-dealing use INTRINSIC FAIRNESS STANDARD

Analysis:

1. Did the minority get what they were proportionally entitled to?
2. Corporate opportunity (see Broz analysis)
3. If self-dealing is found, the intrinsic fairness standard shifts the burden to the company to prove action wasn’t self dealing.

Question 30

SEC v. WJ Howey (orange orchards)

Answer 30

Rule: Under Section 5, a K involving the investment of money for the purpose of gaining a profit due to the acts of the promoter or 3rd party is considered a security and therefore must be registered w/the SEC before it can be bought or sold.

Howey Test to determine if investment instrument is a security:

1. A person or entity must invest money or other forms of consideration (commodities, BITCOIN)
2. There is an expectation of profit
3. In a common enterprise (horizontal commonality OR vertical commonality)
4. Which is derived solely from the efforts of others (if MEANINGFUL CONTROL then not a security; see Robinson)

Question 31

Robinson v. Glynn

Answer 31

To qualify as a security, the economic reality of a membership interst in an LLC must be that the interest holder is a PASSIVE INVESTOR RELYING ON THE EFFORTS OF OTHERS.

LLC membership was labeled as a stock but didn’t carry chacteristics:

• voting rights
• dividends
• Ability to freely transfer ownership interest

Question 32

Doran

Answer 32

Rule: To constitute a private offering and thus be exempted from the registration requirement of §5 of the 1933 Act, the offeree in a sale must be furnished with or have access to information about the issuer that a registration statement would have disclosed.

To determine if offering is private:

1. Number of offerees and theofferees relationship to the issuer
2. The number of units offered
3. Size of offering
4. The requirement of available information (sophistication of investtor is considered but not dispositive).

Question 33

Santa Fe Industries

Answer 33

Rule: See 10b-5 A fraudulent transaction under 10b-5 must involve conduct that is maniupulative or deceiptive

No manipulation or deceptive conduct in the apprasals.

Question 34

Texas Gulf Sulpher (mineral mining)

Answer 34

10b-5 requires that corporate insiders with MNPI “abstain or disclose” under Cady Roberts. Disclosure must be done so that information disseminated in the public and absorbed by the marketplace

Test:

1. Non-public information
2. Would a reasonable investor attach importance to the information when deciding to buy, sell or hold the stock?
3. Probability-Magnitude Test: Balance the probablity that the event will occur and impacting the company and the magnitude of the financial impact
4. Security was bought or sold
5. If PRIVATE COA, P must show reliance

Question 35

Chiarella

Answer 35

Rule: Only parties in a “relationship of trust and confidence (e.g. Director to shareholder)” will have violated 10b-5. Absent a FD to company and shareholders, you do not have Cady Roberts duty (DISCLOSE or ABSTAIN).

Question 36

Dirks

Answer 36

Tippee assumes FD to shareholder when tipper giving the information received personal benefit or gain and Tippee knows or should have known tipper breached his FD in exchange for personal gain or benefit

Dirks test:

1. Does Original theory apply?
2. Original tipper must have breached FD by revealing MNPI for a personal gain or beenfit
3. Tippee knows or should have known that tipper breached FD for own personal gain
4. Tippee acted on info

Question 37

Salman

Answer 37

A tippee is liable for securities fraud if the tipper breaches a FD by making a gift of confidential MNPI to a friend or relative.

Question 38

Hagan

Answer 38

Rule: A person is guilty of securities fraud when he misappropriates confidential information for securities trading purposes, in breach of a duty of trust and confidence to the source of that information.

Summary: JOH’s firm represented GM. Pillsbury had a tender offer to buy GM. JOH bought Pillsbury stock and options. JOH was a constructive insider and owed a duty of trust and confidentiality to his firm and to his firm’s client, GM

Question 39

Wilkes (Nursing home)

Answer 39

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

Question 40

Smith v. Atlantic

Answer 40

A minority stockholder in a close corporation that requires unanimous vote for corporate action may not repeatedly vote against an action for personal reasons if the action would be in the best interest of the corporation.

Question 41

Elements corporate dissolution

Answer 41

1. directors of the corp have been guilty of illegal, frauulent or oppressive actionos toward the complaining shareholders.
2. property or assets of the corporation are being looted, wasted, or diverted for non-corporate purpose
3. Address 1111
4. any proceeding brought pursuant to section eleven hundred four-a of this chapter, any other shareholder or shareholders or the corporation may, at any time within ninety days after the filing of such petition or at such later time as the court in its discretion may allow, elect to purchase the shares owned by the petitioners at their fair value and upon such terms and conditions as may be approved by the court, including the conditions of paragraph (c) herein.  An election pursuant to this section shall be irrevocable unless the court, in its discretion, for just and equitable considerations, determines that such election be revocable.

Question 42

Kemp & Beatley

Answer 42

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 the forced dissolution of the corporation.

LOOK AT THE EXPECTATIONS OF THE SHAREHOLDERS WHEN THEY JOINED THE VENTURE. IF THEY EXPECTED TO RECEIVE DIVIDENDS, A COURT WILL LIKELY FIND THAT THEY ARE OWED DIVIDENDS