Corporation

Question 1

The Corporate Form: Directors

Answer 1

1. Directors
   a. Determine corporate policies, appoint and monitor corporate officers, and determine when and if dividends are to be paid to shareholders.
   b. Compensation not residual profits
   c. Incentives come from private ordering
   d. Centralized role by law
   e. Individual directors are not given general agency power to deal w/ outsiders
   f. Business Judgement Rule: Judicial presumption that directors acted properly
   g. “Inside Directors” and “Outside Directors”

Question 2

Officers

Answer 2

a. Responsible for day to day operations of business affairs.
b. Considered agents (& Corporation is considered principal)
c. Compensation not residual profits
d. Principal Officer is often termed “CEO”

Question 3

Shareholders

Answer 3

a. Shares=Fungible Ownership Units
b. Shareholders=Risk bearers & Residual Claimants
c. Elect directors and approve fundamental changes in the governing structure/rules, provide capital
d. Limited Liability
e. Vote, Sell, Sue!
f. Some changes to the bylaws may be made by shareholders
g. Can make suggestions to directors

Question 4

Where to Incorporate: State Corporation Laws as Competing Sets of Standard form rules

Answer 4

i. Courts look to the laws of the incorporating state to determine the basic rights and duties applicable to a particular corporation.
1. Model Business Corporation Act
2. Delaware General Corporation Law
3. Securities Exchange Act of 1935
ii. Articles of Incorporation:
1. Complete Articles of Incorporation and file with appropriate state
a. Minimal State Requirements
b. Corporation’s Purpose may but need not be stated; and every corporation is declared to have the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles.

Question 5

Determining Shares to Issue:

Answer 5

1. Shares that combine both residual claimant status & voting rights=common shares
2. Preferred Shares= More Sophisticated Investment Option that requires more research cost in ascertaining exactly what rights to attach to the share. May grant a dividend or liquidation preference over common shares

Question 6

Determining Voting Rights:

Answer 6

1. Default Rules: All shares have the same voting and economic rights
2. Most (though not all) default rules may be changed by private ordering such as shareholders’ agreements.
   a. Articles: Public Documents that can only be changed by Directors & Shareholders
   b. Bylaws: Can often be Changed by Directors alone and are not publicly filed.

Question 7

Straight Voting

Answer 7

One vote = one share. A shareholder with 51% of votes could elect 100% of the board.

Question 8

Cumulative Voting

Answer 8

Permits some minority shareholders to have a place on the board.
a. Allows votes to spread out among as many candidates as there are positions to be filled or concentrated in as few as one
b. To elect X number of Directors, a Shareholder must have more than:
(S*X) / (D+1) Shares
S= # of Shares Voting D= # of Directors Elected

Question 9

Class Voting

Answer 9

A Corporation may divide its shares into classes and permit each class to select a specified number of directors. (Dual-Class is a common mechanism)

Question 10

Classified Boards with Staggered Terms:

Answer 10

1. Staggered terms theoretically ensure that a corporation will always have experienced directors in office, and “2” meetings to replace a majority of the board.
2. Effective anti-takeover defense in public companies
3. Constraint on the majority shareholders’ ability to adapt to changed circumstances by quickly naming new directors. (Not barred forever)

Question 11

How Shareholders Act

Answer 11

1. Annual meeting and election of directors
   a. Most corporation codes provide summary judicial procedures to ensure that a failure to hold a required annual meeting is quickly remedied.
   i. Usually guaranteed to meet at least once per year.
   b. Special Shareholder meetings to address issues expressly identified in the meeting notice.
   i. MBCA: Authorizes holders of 10% or more of a corp’s stock to call a special meeting
   ii. Delaware: only directors can call special meeting- blocks shareholders initiated special meetings to oppose the current board
   c. Written consent in lieu of a meeting
   i. MBCA: Permits action by written consent only by unanimity
   ii. Delaware: permits written conset by majority vote
   d. Record date often determine which shareholders vote at a meeting (anywhere from 60 to 10 days before the meeting in question).
   i. They need to be shareholder within the 60-10 days, can’t be new ones

Question 12

Hoschett v. TSI International Software (1996)

Answer 12

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

Question 13

MBCA Removal of directors (and other midstream private ordering)

Answer 13

1. No restrictions on shareholders’ power to remove directors if the corp has staggered the board into staggered terms
2. If cumulative voting –shareholders cannot remove a director if the votes cast against removal would’ve been sufficient to elect that director
3. If director is elected by a particular class of shareholders that director can only be removed by a majority vote of that class

Question 14

Delaware removal

Answer 14

1. Adds members of staggered board to list of directors protected from removal
2. Provisions preserve shareholders’ power to remove even protected directors if done for cause
3. A lot of safeguards around “for cause” removals
4. Before directors can be removed for cause there must be the service of specific charges, adequate notice and full opportunity of meeting the accusation

Question 15

Adlerstein v. Wertheimer (2002)

Answer 15

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 16

Using Shareholder Authority to Change Bylaws & Centaur Partners IV v. National Intergroup, Inc

Answer 16

a. Depends on Corporate Structure
b. Centaur Partners IV v. National Intergroup, Inc.: “When a provision which seeks to require the approval of a super majority is unclear or ambiguous, the fundamental principle of majority rule will be held to apply”

Question 17

Limits on what Shareholder can do in Bylaws:

Answer 17

a. State corporation law grants primary management authority to the board of directors while reserving to the shareholders concurrent authority to make and amend bylaws.
b. Delaware provides board of directors has exclusive power to manage the business and affairs of a corporation unless a provisions in a cert. of incorporation limits the power and authority
c. Looking at Delaware G.C.L. 109, shareholders have inherent authority to take a broad array of actions “relating to the business of the corporation, the conduct of its affairs, and…the rights or powers of shareholders, directors, officers or employees.”

Question 18

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

Answer 18

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 19

How Publicly Held Corporations are Different?

Answer 19

a. The presence of a market for shares
b. The dominance of institutional shareholders among the census of shareholders of publicly held corporations
* Shareholders used to be passive but not anymore
* Value investors: activley seek to influence corporate management as to produce higher share value from underperforming companies
* Relational investors: Purchase large blocks in particular companies and seek long term relationship w/ management
* Social investors: give explicit priority to social needs in guiding investment decisions
c. The Practical necessity for shareholder action in public corporations to be by Proxy
d. Federal regulation based on a company having publicly traded shares
e. Class Notes:
i. Shares offered to the public
ii. Registration & Recording Requirements
1. Securities Exchange Act of 1933: registration reqs
2. Securities Exchange Act of 1934: disclosure reqs.
iii. Decisions take place via Proxy
iv. Institutional Shareholders are often dominant
v. Shares are more liquid (easier to sell/trade/etc.)

Question 20

Securities Markets; 3 Important Services to Corporations & Shareholders

Answer 20

a. Liquidity
b. Valuation
c. The Monitoring of Managers
i. Possibility of Corporate Takeover
ii. National Market System = Shareholder Confidence
iii. Market Efficiency: Professionals buy up stocks until they reach the “new” fair market price
iv. “Informationally Efficient”: Responds to new information almost instantaneously…You can’t beat the market

Question 21

Efficient Market Hypothesis

Answer 21

Shareholder’s confidence in these market systems make it impossible for corps to raise huge amounts of capital from investors

Question 22

Semi-Strong-Form Hypothesis

Answer 22

Asserts that you cannot develop a trading strategy that will beat the market by using publically available info relevant to the value of traded stocks. The market will be efficient in incorporating such information before you can effectively trade on it

Question 23

Dominance of Institutional Investors

Answer 23

a. Separation of Ownership from Control (most of the 20th century)
i. Shareholder’s Rational Apathy, almost entirely passive
ii. Mutual Funds= Largest Category of Institutional Investors
1. Rationally Reticent
iii. Rise of “Activist Investors”
1. Can use large shareholdings both to carry out traditional shareholder responsibilities and to engage corporate management in a sustained conversation about how corporations should be managed.
2. Gives shareholders a baseline of power.

Question 24

Proxy Voting

Answer 24

a. Most individual shareholders in publicly held corporations appoint a proxy to act on their behalf at shareholder meetings.
b. Proxy Process is federally regulated
i. SEC plays a significant role in setting the rules for the proxy and shareholders’ meeting process and in settling disputes between management and shareholders concerning the conduct of that process.
c. Can be a tangible document that evidences the relationship as in ‘he mailed his proxy’
d. May create an agency relationship that requires the proxy holder to follow the shareholder’s instructions or proxy holder may be given absolute discretion

Question 25

Federal Regulation of Publicly Held Companies: 5 Activities that Trigger Federal Disclosure Obligations

Answer 25

a. Issuing Securities
i. Company decides to raise money in the public markets
b. Periodic Reporting
i. Under Section 13 of Securities Exchange Act, annual reports, quarterly reports and certain immediate reports required.
c. Proxy Solicitation
i. Requiring federal disclosure only when state law requires or permits shareholders to act.
d. Tender-Offers
i. Disclosure when shareholders are asked to respond to a form of corporate takeover offer.
e. Insider Trading

Question 26

Shareholder Governance in the Public Corporation

Answer 26

a. New Deal reduced the role of investment bankers in underwriting and bankruptcy.
b. Securities Exchange Commission (SEC) = Regulatory Power over stock exchanges and broker dealers.
c. Substantive governance rights largely left to the states.
d. Shift towards substantive governance rights and power of shareholders.
e. Lovenheim v. Iroquois Brands, Ltd. (1985):
i. 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 27

Dodd-Frank Act

Answer 27

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 28

Business Judgement Rule

Answer 28

A Judicial Presumption that the directors have acted in accordance with their fiduciary duties of care/loyalty/good faith;

a. gives broad discretion to manage the corporation’s business;
i. helps prevent frivolous lawsuits;
ii. absent an abuse of discretion, the judgement will be respected by the courts;
iii. burden is on the party challenging the decision to establish facts rebutting the presumption
iv. In some cases directors/officers owe fiduciary duty to shareholders but in most circumstances directors/officers owe fiduciary duty to the corporation

Question 29

Shareholder Derivative Suit:

Answer 29

a. Involves 2 Actions brought by individual shareholders
i. An action against the corporation for failing to bring a specified suit, and;
ii. An action on behalf of the corporation for harm to it identical to the one which the corporation failed to bring.
b. Allows the plaintiff’s attorney to be compensated by a contingency fee payable out of the corporate recovery.
c.

Question 30

Discretion to Consider Interests of Non-Shareholder Constituencies

Answer 30

a. Directors may take other stakeholder interests into account such as: paying employees fairly, protecting the community in which the corporation lives, providing a safe work environment, etc.
b. “Directors may consider interests of other constituencies if there is some rationally related benefit accruing to the stockholders, or if so doing bears some reasonable relation to general shareholder interests.”
c. Dodge v. Ford Motor Co. (1919):
i. 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 31

D.G.C.L 144

Answer 31

*3 safe harbors to prevent nullification of potentially beneficial transactions simply bc of directors self-interest

No conflicting interest transaction shall be void or voidable solely by reason of the conflict if the transaction is (1) authorized by a majority of the disinterested directors; (2) approved in good faith by the shareholders; OR (3) fair to the corp at the time of the authorization

• Also makes director or shareholder apporval effective only if the interested director has disclosed all material facts
• Leaves lots of gaps for ct. to fill
• know the full statute :

(a)  No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if:
(1)  The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or
(2)  The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
(3)  The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders.
(b)  Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.

Question 32

Loyalty, Care, Good Faith & Fair Dealing

Answer 32

If there is a breach of duties shareholders may bring an action:

i. Direct Action
1. Corporation violates the direct right of a shareholder
ii. Shareholders’ Derivative Action
1. Shareholders believe directors or officers are in violation of their duties to the corporation; sue on behalf of the corporation.
iii. Defendants can raise the Business Judgement Rule
1. May be overcome by certain allegations
2. Can overcome the business judgement rule with fraud, illegality, or conflict of interest
iv. Defendants may use the “Entire Fairness” Test
1. Has to do with Fair Dealing & Fair Substance
v. OR Defendants may use a “Cleansing Vote”
1. Approval by Disinterested Directors or Shareholders
vi. Shareholders may Claim “Waste”
1. A transaction or action that no rational business person would agree to.
2. Defense: Unanimous approval of shareholders may combat an allegations of “waste.”

Question 33

Fiduciary Duty of Loyalty

Answer 33

i. Cases where failure to be completely candid= conclusive evidence of breach of duty of loyalty.
ii. Northeast Harbor Golf Club, Inc. v. Harris (1995):
1. 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.
iii. Broz v. Cellular Information Systems, Inc.:
1. 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 34

Conflicting Interests Statutes

Answer 34

i. Delaware Section 144
1. No conflicting interest transactions shall be void or voidable solely by reason of the conflict if the transaction is:
a. Authorized by a majority of the disinterested directors, or
b. Approved in good faith by the shareholders, or
c. Fair to the corporation at the time authorized

ii. Sinclair Oil Corp. v. Levien (1971)
1. 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.

iii. Calma v. Templeton (2015):
1. 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 35

e. Fiduciary Duty of Care

Answer 35

i. In Delaware the Fiduciary Duty of Care is defined by Judicial Doctrine.
ii. MBCA 8.30 (a) (2)
1. Requires a director to carry out her duties “with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”
2. 8.30 (b) “when becoming informed in connection with their decision-making function or devoting attention to their oversight function, [directors] shall discharge their duties with the care that a person in like position would reasonably believe appropriate under the circumstances.”

Question 36

Statutorily Authorized Exculpation Provisions (duty of care)

Answer 36

1. Contracting to eliminate shareholder litigation as a mechanism to enforce the duty of care.
   a. MBCA 2.02 (b) (4)
   b. Delaware G.C.L 102 (b)(7)
2. Legislation allowing corporations to limit or eliminate director’s liability for breach of fiduciary duty.
3. It is in the shareholders’ best economic interest to offer sufficient protection to directors from liability for negligence to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimalist procedures standards of attention, they can face liability as a result of a business loss.

Question 37

4. Smith v. Van Gorkham (Delaware) (1985): Controversial Decision

Answer 37

a. 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 38

i. Tax Credit

Answer 38

An amount that can be credited against tax a person or business entity might owe; dollar for dollar

Question 39

ii. Leveraged Buyout

Answer 39

A method of paying for a business. The buyer uses his own cash/assets plus borrowed money (debt) for the purchase price. The profits of the company serve as collateral for the debt.
1. Sometimes the debt is referred to as leverage because of the leveraging effect that debt has.

Question 40

Merger

Answer 40

In a merger, the company to be purchased is the target company, the acquiring company purchases the target’s stock, not the target’s assets. If the acquiring company is using cash it offers the target price/share. Usually the offering price is higher than the market price to entice shareholders to agree to the sale. Once the shares are paid for, the target merges into the acquiring company and disappears.

Question 41

5. Malpiede v. Townson (2001) (Delaware)

Answer 41

a. 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.

Question 42

Fiduciary Duty of Good Faith & the Caremark Cause of Action; stone v ritter

Answer 42

i. Stone v. Ritter (2006) (Delaware):
1. 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 43

XXVIII. The Role of the Business Judgement Rule in Circumstances where Director Independence and Disinteredness is lacking or in Doubt:

Answer 43

a. MBCA 1.43, 7.42-7.44
b. Directors’ management power and authority includes determining whether to pursue litigation with respect to potential legal claims, and a decision that litigation is not in the corporation’s best interest will normally be protected by the Business Judgement Rule.
c. Special Litigation Committee (SLC): 2 or more Independent/Disinterested Directors

Question 44

Aronson v. Lewis (1984) (Delaware):

Answer 44

i. 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 45

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

Answer 45

i. 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 46

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

Answer 46

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 47

h. Special Litigation Committee:

Answer 47

i. Arises because of shareholder demand
ii. Committee of disinterested directors
iii. Decision respected by the business judgement rule
iv. How much discretion to give the committee? Varies by the Business Judgement Rule.

Question 48

XXIX. Benefit Corporations

Answer 48

a. Designed to combat the cultural, ideological and investor pressures to use shareholder value maximization as the only legitimate metric for making or evaluating business decisions.
b. Purpose: To both pursue profit and make a positive impact on society (ie. Public benefit).
c. Examples: Ben & Jerry’s, Warby Parker, Honest Company, Seventh Generation, Patagonia
d. In Delaware there are 3 unique features of benefit corporations:
i. Corporate purpose
ii. Accountability: Pecuniary interest of stockholders, best interests of those materially affected by the corporation’s conduct and the identified specific public benefit purpose
iii. Transparency
e. Delaware 301: Standard of Conduct for Directors
i. Requires the consideration of interests of constituencies other than the shareholders
ii. Rejects Dodge v. Ford that directors must maximize the financial value of the corporation

Question 49

Close Corporations

Answer 49

a. Fewer Shareholders/Interlocking roles/not publicly traded
b. Dangers: Freeze-Out
c. Devices:
i. Shareholder’s Agreement
ii. Voting Agreement
iii. Shareholder’s Repurchase Agreement
d. Legal Protections:
i. Standard Business Judgement Rule
ii. Partnership Analogy
1. Heightened good faith/less harmful alternative
iii. Dissolution
e. 2 Qualities:
i. Fewer Participants with no rigid division between those contributing money capital and human capital
ii. No market exists for ownership interests

Question 50

Zion v. Kurtz (NY)

Answer 50

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 51

g. Ramos v. Estrada (CA)

Answer 51

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

Question 52

h. Zidell v. Zidell (Oregon)

Answer 52

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 53

i. Donahue v. Rodd Electrotype Co. (Mass)

Answer 53

i. 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 54

j. Wilkes v. Springside Nursing Home, Inc. (Mass)

Answer 54

i. 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 55

k. In re Kemp & Beatley, Inc. (NY)

Answer 55

i. 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 56

l. Gimpel v. Bolstein (NY)

Answer 56

i. 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 57

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

Answer 57

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

Question 58

LLC

Answer 58

a. The LLC permits planners to choose either a partnership-like or corporation-like allocation of functions.
b. May be member-managed or manager-managed
i. Neither members nor managers are personally liable for the LLCs obligations.
c. Absent significant misconduct by a controlling shareholder, courts are reluctant to dissolve a business entity that is profitable and not deadlocked.

Question 59

d. Olson v. Halverson (Delaware)

Answer 59

i. 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 60

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

Answer 60

i. 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 61

Kahn v. Pornoy (Delaware)

Answer 61

i. 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 62

g. Fisk Ventures, LLC v. Segal (Delaware)

Answer 62

i. 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 63

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

Answer 63

i. Members of an LLC may waive their right to seek judicial dissolution through the LLC agreement.
1. (In Washington you cannot waive the right to seek judicial dissolution of an LLC).

Question 64

Piercing the Corporate Veil

Answer 64

a. Powell’s 3 Part Test:
i. 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
1. 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 65

c. Consumer’s Co-Op v. Olsen

Answer 65

i. 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 66

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

Answer 66

i. 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 67

Baatz v. Arrow Bar

Answer 67

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 68

f. Craig v. Lake Asbestos

Answer 68

i. 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 69

The Corporation as a device to Allocate Risk

Answer 69

a. Klang v. Smith’s Food & Drug Centers, Inc.
i. 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 70

The Corporation as a device to Allocate Risk: b. RKO-Stanley Warner Theatres, Inc. v. Graziano

Answer 70

i. 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 71

The Corporation as a device to Allocate Risk:c. Timberline Equipment Co. v. Davenport (Oregon

Answer 71

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 72

i. Par Value

Answer 72

The value assigned to shares of stock representing the minimum amount for which each share may be sold.

Question 73

Balance Sheet

Answer 73

3 Core Sections; Assets (what we have), Liabilities (what we owe), Net Assets (what we are worth)

1. Assets = Liabilities + Net Assets
2. Assets – Liabilities = Net Assets

Question 74

Minimum Capital Requirements:

Answer 74

1. Stipulates a specific amount a entities must have at all times.
2. Disadvantage: Firm may have a better use for the money
3. Delaware: Must have Capital equal to the par value of the shares
4. Under MBCA par value is optional

Question 75

Restrictions on Dividends as Distributions:

Answer 75

1. Delaware: May only Declare out of Surplus
2. MBCA: Balance Sheet Test (may not declare if liabilities will exceed assets due to dividends) (aka distributions may not render the corporation insolvent).
3. There is a lot of manipulation that is possible to increase surplus (for example, selling shares in exchange for promissory notes).

Question 76

v. De Facto Corporation

Answer 76

: If people make a good faith effort to from a corporation the court recognizes despite technicality. (NO from WA) (No from MBCA)

Question 77

vi. Corporation by Estoppel

Answer 77

Sometimes corporations dissolve, etc. If a party has been treating the OP as a corporation, then they are estopped from seeking personal liability.

Question 78

vii. Ultra Vires Activities

Answer 78

• may not be used as a defense):
  1. Activities beyond the scope of the stated purpose
  2. Example: When a corporation’s articles of incorporation says its purpose is to create software and then the President of the corporation enters into a real estate agreement. Shareholders may sue for breach of contract.
  a. The corporation would have a cause of action against the president.

Question 79

Shlensky v. Wrigley (1968):

Answer 79

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.