Corporations (Delaware) Flashcards
Basics: Foundation of Corporations Law
Delaware General Corporation Law (DGCL)
Basics: Order of Authority
1) Statute (DGCL)
2) Cases
3) Certificate of Incorporation
4) Bylaws
5) Any other contracts
Basics: Characteristics of a Corporation - Liability Shield
Corporations shield personal liability for owners/investors
Basics: Characters - Registered Agent + Shareholders + Directors + Officers
RA - receives service of process
Shareholders - owners
Directors - managers
Officers - day-to-day operations
Forming the Corporation: Mandatory Provisions within the Certificate of Incorporation
Mandatory provisions:
1) NAME of the corporation (must be unique)
2) Registered Agent
3) Purpose
4) Capitalization (number of shares authorized)
5) Incorporator (name and address)
6) Initial Board (names and addresses)
Forming the Corporation: What Happens if An Individual Fails to Form a Corporation?
A general partnership is created without any protections of the corporation.
Forming the Corporation: Permissive Provisions Within the Certificate of Incorporation
1) Any provisions governing management
2) Preemptive rights (rights the shareholder has to invest further should additional shares be issued)
3) Supermajority Vote
4) Duration
5) Exculpation Clause
6) Forum Selection
Forming the Corporation: Preemptive Rights - Proportional Ownership
The shareholder has the right to maintain the proportional shares if further shares are issued (if he owns 40% now, he can purchase 40% of newly issued shares)
Forming the Corporation: Duration
A corporation is assumed to have a perpetual life, though the incorporators may form it for a specific period of time.
Forming the Corporation: Exculpation Clause + Officers
Limits or eliminates personal liability for directors for breaches of the DUTY OF CARE (i.e. 102(b)(7))
This DOES NOT apply to officers of the corporation
Forming the Corporation: Amendments to Certificate of Incorporation
A certificate may be amended so long as they would be lawful and proper to insert in an original certificate
Bylaws: Who may Adopt Bylaws
Bylaws may be adopted by:
1) the incorporator,
2) the initial board (if authorized to do so by the certificate of incorporation), and
3) the shareholders
Bylaws: Inconsistencies with Certificate of Incorporation
Bylaws may not be inconsistent with Certification of Incorporation OR DGCL.
Formation: Getting Up and Running
To finalize formation, the corporation must either:
1) hold an organizational meeting, or
2) file an incorporator’s statement.
Jurisdiction: The Internal Affairs Doctrine
The internal affairs doctrine is a choice of law principle that recognizes the state of incorporation (Delaware) should have authority to regulate the corporation’s internal affairs.
Jurisdiction: Directors and Officers - Long Arm Statute
Any person who accepts appointment or election as a director of a Delaware corporation is deemed to have impliedly consented to jurisdiction of the courts of Delaware (e.g., high ranking officers, such as CEO, COO, etc.)
Shareholders and Their Rights: How Shareholders Exercise Control
Shareholders exercise indirect control through the election of directors, approval of certain significant transactions, and bylaws via two forms:
1) meetings, and
2) written consent.
Shareholders and Their Rights: Meetings - Ways to Vote
Shareholders can vote in two ways:
1) In person, or
2) Proxy (meaning, assignment to another person of a shareholder’s right to vote).
Shareholders and Their Rights: Meetings - Annual Shareholder Meeting + Timing
Here, shareholders elect directors and transact any other proper business that comes before the corporation.
An annual meeting is required every 13 months, and a shareholder may petition the court of chancery to hold the meeting if it is not within 13 months.
Shareholders and Their Rights: Meetings - Special Shareholder Meeting
These meetings may be called by the boar or those authorized in the COI or bylaws and only the matters contained in the NOTICE OF THE MEETING can be acted on.
Shareholders and Their Rights: Contested Eelections
Shareholders and directors have the right to challenge the validity of a contested election as well as the appointment, removal, or resignation of any director of officer.
Shareholders and Their Rights: Quorum Default + Minimum
Absent specifications in the bylaws or COI, a quorum is a MAJORITY OF SHARES.
A quorum can be set as more or less than a majority, but it can NEVER BE SET LESS THAN ONE-THIRD.
Shareholders and Their Rights: Record Date + Time Limits
The record date determines which shareholders have a right to vote at an annual or special meeting.
The board of directors may fix the record date which CANNOT BE LESS THAN 10 DAYS OR MORE THAN 60 DAYS.
Shareholders and Their Rights: Record Date - Separate Record Date and Voting
While typically the record date will be both the date for determining who is entitled to notice and the who is entitled to vote at the meeting, the board may choose to set a later date for determining who may vote at the meeting.
Shareholders and Their Rights: Record Date - Minimum Record Date for Major Transactions
Certain transactions require greater minimum notice record date of 20 DAYS (e.g. merges and asset sales)
Shareholders and Their Rights: Record Date - Adjourning Meetings + If No Date Is Set
If the board adjourns a meeting for LESS THAN 30 DAYS, no new record date is required (the same shareholders who were eligible to vote at the original meeting will be able to vote at the reconvened meeting.
If the board adjourns for MORE THAN 30 DAYS, new notice of the adjourned meeting must be given, if no date is set the record date is the day before the notice.
Voting Rights: Default Rule for Shares Per Vote + Deviations
In general, the rule is one vote per share. If the corporation wants shareholders to be entitled to multiple votes per share, this MUST be included in the COI.
Voting Rights: Proxies - Irrevocable Proxies + Duration
A proxy will be irrevocable if it SO STATES and IS COUPLED WITH AN INTEREST
A proxy is valid for 3 YEARS unless otherwise provided.
Voting Rights: Voting Trusts v. Voting Agreements
Voting Trust - A voting trust is an agreement among shareholders that vests voting rights in a trustee, this MUST BE FILED WITH THE CORPORATION.
Voting Agreement - A voting agreement is an agreement between shareholders to vote a certain way. No requirement to file with the corporation.
Voting Rights: Cumulative Voting
Used only in the election of DIRECTORS, allows shareholders to accumulate their votes so they can cast a total number of votes in favor of a single directors (usually used for minority shareholders). THIS MUST BE PROVIDED FOR IN THE COI.
Shareholder’s Rights: Action By Written Consent
Any action that can be taken at a meeting can also be taken by written consent by a shareholder.
Shareholder’s Rights: Action By Written Consent - Requirements
Written consents must be written ON PAPER and DELIVERED (not e-mail)
Shareholder’s Rights: Action By Written Consent - Record Date
The record date for written consents MAY NOT BE PRIOR TO OR MORE THAN 10 DAYS after the date on which the board fixes the record date.
Shareholder’s Rights: Action By Written Consent - Required Vote + Timing
Vote by consent must be the MINIMUM REQUIRED to take the specific action at a meeting at which ALL SHARES ENTITLED TO VOTE ARE PRESENT (typically, majority of shares present)
Delivery to the corporation of the required number of consents to pass action must be WITHIN 60 DAYS OF DELIVERY OF THE FIRST CONSENT.
Shareholder’s Rights: Notice Contents
Notice of a shareholder meeting may be in writing or electronic medium and contain the PLACE, DATE, AND TIME of the meeting.
Shareholder’s Rights: Notice - Length of Notice (Minimum, Maximum, and Major Transactions)
Notice must be given to record shareholders entitled to vote as of the notice record date a minimum 10 days, maximum 60 days, or 20 days for major transactions.
Shareholder’s Rights: Notice - Adjournments
If a meeting is adjourned and reconvened within 30 days, NO NEW NOTICE IS REQUIRED (so long as the date, time, and place were announced). But, if reconvened more than thirty days out, a new notice is required.
Shareholder’s Rights: Notice - Waiver + Exception
Notice can be waived in writing PRIOR TO OR AFTER A MEETING.
Attendance at a meeting is deemed a wavier UNLESS the sole purpose for attendance is to object to the lack of notice.
***Shareholder’s Rights: Appraisal + Mergers Where Appraisal Is Available
An appraisal is the judicial determination of the “fair value” of stock of a Delaware corporation
Appraisal is available in the following mergers:
1) a merger in which shareholders receive CASH OR SECURITIES other than the stock of a widely held company (meaning on national securities exchange or held by more than 2,000 holders), surviving company, or mix of the two, or
2) short-form mergers (merger between parent and at least 90% owned subsidiary).
Shareholder’s Rights: Appraisal - Procedure (Before, During, and After Merger) + Short Term Mergers
Before vote - shareholder must deliver to the corporation a written demand to exercise their appraisal rights
During Vote - shareholder must NOT vote in favor of merger
After Vote - File for appraisal within 120 days
For short term mergers - shareholder must demand appraisal within 20 days AFTER DATE NOTICE IS MAILED to shareholders.
Shareholder’s Rights: Appraisal - Value
The court will determine the “fair value of the shares” based on “all relevant factors”
***Shareholder’s Rights: Inspection Rights
Shareholders have the right to inspect:
1) stocklist (or shareholder list), and
2) books and records
Shareholder’s Rights: Inspection Rights - Stocklist Process + Burden of Proof
To exercise the right to inspect a company’s stocklist, the shareholder must deliver to the corporation:
1) A demand,
2) In writing,
3) For a proper purpose (reasonably related to interest as shareholder) (i.e., proxy solicitation to oust management, encouraging appraisal demands, or purchasing additional shares from other shareholders)
Burden - The CORPORATION has the burden to establish the shareholder’s purpose is improper
Shareholder’s Rights: Inspection Rights - Compelling Inspection
If a corporation doesn’t respond within 5 days, a shareholder may apply to the Court of Chancery to compel inspection of stocklist.
THIS IS THE SAME FOR BOOKS AND RECORDS
Shareholder’s Rights: Inspection Rights - Books and Records Process + Burden of Proof
To exercise the right to inspect a company’s books and records, the shareholder must deliver to the corporation:
1) A demand,
2) In writing,
3) For a proper purpose (i.e., management misconduct, challenge executive compensation)
The burden is on the SHAREHOLDER to establish a proper purpose
Stocks & Dividends: Common Stock
Common stock represents a proportionate interest in the corporation and is LAST to participate in any distributions.
Stocks & Dividends: Preferred Stock
The rights, preferences, and limitations of preferred stock are defined in the certificate of incorporation or in the certificate of designations.
Stocks & Dividends: Preferred Stock - Conversion Rights
Any class or series of stock may be converted into other series or classes if provided in the certificate of incorporation.
Stocks & Dividends: Preferred Stock - Blank Check Stock
This gives the directors the right to issue certain preferred stock, including new stock (as provided in the COI)
Stocks & Dividends: Capital and Surplus
Capital - Minimum amount of value in a corporation
Surplus - Corporation’s value in EXCESS OF CAPITAL
Stocks & Dividends: Consideration for Stock + Liability to Creditors
The board can authorize the issuance of capital stock for consideration consisting of cash, any tangible or intangible property, any benefit to the corporation, or any combination thereof.
Shareholders can be held liable to creditors for any unpaid portion of stock value.
Stocks & Dividends: Dividends + Liability
Distributions made payable to the shareholders, DECLARED BY THE BOARD, and generally paid out of SURPLUS or, if no surplus, from profits of present or prior year.
DIRECTORS are personally liable for unlawful dividends paid from something other than surplus or profits.
Stocks & Dividends: Purchase of Stock by Issuer + Liability
The board has the power to purchase stock from shareholders or redeem preferred stock
Like dividends, the DIRECTORS can be found liable if they invade capital to buy shares.
Stocks & Dividends: Rights and Options + Fiduciary Obligations
Rights and options are instruments used to reflect the right to acquire shares of the corporation
There are NO FIDCUCIARY OBLIGATIONS owed to people who are rights or option holders, but like all contracts, there is the duty of good faith and fair dealing
Stocks & Dividends: Stock Certificates and Restrictions on Transfers
Common stock may be certified or uncertified, meaning subject to a transfer restriction.
Transfer restrictions MUST BE NOTED CONSPICUOUSLY on certified shares in order to be binding on subsequent purchasers
Directors Obligations
The board MANAGES business and affairs of the corporation
Directors: Qualifications for the Board + Minimum & Maximum Number
Only NATURAL PERSONS may serve as directors of a Delaware corporation (not LLC, partnership or other association).
There must be at LEAST ONE director, but there is no upper limit.
Directors: Term of Office
Directors hold office until successors are elected and qualified OR until their resignation, removal, or retirement.
Directors: Term of Office - Removal
Directors can be removed with or without cause by a MAJORITY OF SHAREHOLDERS (DIRECTORS MAY NOT REMOVE OTHER DIRECTORS)
Directors: Vacancies
Vacancies may be filled by the majority of remaining directors even tough the remaining directors may be less than a quorum. Replacement directors will hold office until the next election of directors
Directors: Board Action
A board can take act in two ways (same as shareholders):
1) by meetings, and
2) by written consent
Directors: Board Action - Meetings Requirements
Meetings must be held by quorum (majority of directors) with notice (time, place, and date)
Directors: Board Action - Written Consent
Must be UNANIMOUS (unlike shareholders who only need majority).
Directors: Delegation to Committees + Nondelegable Duties
The board may establish committees and may delegate certain responsibilities to them, EXCEPT for the following
1) amending COI
2) adopting agreement of merger
3) recommending sale of assets to shareholders
4) recommending dissolution to shareholders,
5) amending bylaws
6) declaring a dividend
7) authorizing issuance of stock
Directors: Delegation to Officers
The board may delegate MANAGEMENT to officers, but retains oversight over responsibility
Directors: Defective Corporate Acts May Be Ratified
If a corporate act is taken that didn’t adhere to the corporate formalities, the board may adopt a resolution ratifying the defective act, obtain shareholder approval if required, and file a certificate of validation with the secretary of state.
Directors: Right to Inspect
Directors may seek courts assistance in inspecting books and records if they have a PROPER PURPOSE (reasonably related to director’s role)
***Directors: Role in Mergers - Long-Form Merger + Process
Long-form mergers occur when a corporation merges with a company in which the corporation owns LESS THAN 90% OF STOCK.
The process is as follows:
1) Adopt merger agreement,
2) Board approves
3) Notice to shareholders (at least 20 days, but no longer than 60 days prior to shareholder meeting)
4) Approval by majority vote or shareholders
5) Execute, file, and record merger agreement
***Directors: Role in Mergers - Short-Form Merger + Fiduciary Duty of Majority Shareholder
Short-form mergers occur when a corporation owns MORE THAN 90% OF THE STOCK Shareholder vote is NOT REQUIRED
Fiduciary duty of majority shareholder - the majority shareholder HAS NO DUTY to make the terms of merger fair to minority shareholders, they only need to provide full disclosure
Directors: Sale of Assets
Shareholder approval by a MAJORITY OF STOCK OUTSTANDING is required if the board sells or leases ALL OR SUBSTANTIALLY ALL of the corporation’s assets.
Directors: Sale of Assets - Test for Sale of Substantially All Assets
A court will analyze whether the assets are VITAL to the operation of the corporation and whether it’s out of the ORDINARY AND SUBSTANTIALLY AFFECTS THE EXISTENCE of the corporation.
Directors: Permissive Indemnification
A corporation may indemnify its past and present officers or directors in connection with action due to director or officer’s SERVICE TO CORPORATION
Directors: Mandatory Indemnification
A corporation may indemnify its past and present officers or directors IF SUCCESSFUL IN DEFENSE OF AN ACTION, including EXPENSES
Directors: Indemnification - Advancements
Indemnification is backwards looking, however expenses MAY BE ADVANCED, provided indemnitees repay the money if they ultimately don’t satisfy the standard for indemnification
Directors: Indemnification - Fees for Fees
A corporation IS NOT required to pay legal fees for indemnitees forced to bring suit against the corporation to enforce their rights to indemnify. HOWEVER, they may recover for any action brought in relation to recovery of fees if a provision mandates it specifically to the fullest extent of the law.
***Fiduciary Duties: Duty of Care + Breaching Duty
Requires directors to act on an INFORMED BASIS and to EXERCISE CARE IN ALL ASPECTS OF THEIR ROLE
A director will be liable if found GROSSLY NEGLIGENT .
Fiduciary Duties: Duty of Care - Good Faith
Directors are protected if they RELY IN GOOD FAITH upon the records of the corporation or opinions, reports, or statements from the board
Fiduciary Duties: Duty of Care - Prima Facie Case
If a shareholder establishes the director violated their duty of care, a prima facie case of liability is established and the director bears the burden of showing the transaction was “fair” to the company and shareholders.
Fiduciary Duties: Duty of Care - Affirmative Defense for Exculpatory Clause (Section 102(b)(7)) + Impact of Duty of Loyalty
The COI may include a provision shielding directors from personal liability for breaches in duty of care
However, this provision does not protect for a breach of duty of loyalty
***Fiduciary Duties: Duty of Loyalty
The interests of the corporation and its shareholders must take precedence over the director’s or officer’s personal interest.
Any time something may raise an issue of whether the directors are acting for their own self-interest rather than the corporation’s interest, it may implicate the duty of loyalty.
Fiduciary Duties: Duty of Loyalty - Permitted Self-Dealings
Self-dealings may be permitted if “ENTIRELY FAIR” to the company.
Fiduciary Duties: Duty of Loyalty - Fiduciary Duty of Majority Shareholder
When a shareholder owns a majority interest in a corporation, they have fiduciary duty of loyalty to MINORITY SHAREHOLDERS
Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine
A fiduciary can’t take opportunities that belong to the corporation
Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Test
An opportunity belongs to the corporation if:
1) the corporation is FINANCIALLY ABLE to take advantage of the opportunity,
2) the opportunity is WITHIN THE LINE OF BUSINESS of the corporation,
3) the corporation HAS A REASONABLE EXPECTATION IN THE INTEREST of the opportunity, and
4) taking the opportunity will PREVENT THE CORPORATION FROM FULFILLING ITS DUTIES.
Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - When Fiduciary May Take Opportunity
A fiduciary may take the corporate opportunity if:
1) the opportunity is presented to the director in their INDIVIDUAL CAPACITY,
2) the opportunity is NOT ESSENTIAL TO THE CORPORATION,
3) the corporation holds NO INTEREST in the opportunity, and
4) the directors has NOT WRONGFULLY EMPLOYED RESOURCES OF THE CORPORATION.
Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Presentment of Opportunity
A fiduciary may present the opportunity to the corporation and allow the board to either accept or reject the opportunity, which creates a SAFE HARBOR to avoid liability of the fiduciary.
Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Safe Harbor
An interested director will not be found liable for breaching the duty of loyalty if ANY ONE of the following are present:
1) the MATERIAL FACTS ARE DISCLOSED to the board, and the BOARD AUTHORIZES the transaction,
2) a MAJORITY OF THE BOARD APPROVE THE TRANSACTION, or
3) its ENTIRELY FAIR to the corporation
Fiduciary Duties: Duty of Loyalty - Duty of Good Faith
Subsumed within the duty of loyalty, this can be violated if the fiduciary: (i) acts in BAD FAITH, or (ii) FAILURE OF OVERSIGHT
Fiduciary Duties: Duty of Loyalty - Duty of Good Faith - Bad Faith
A fiduciary breaches the duty of good faith if it either:
1) INTENDS TO DO HARM, and
2) FAILS TO ACT in the face of a known duty to act
Fiduciary Duties: Duty of Loyalty - Duty of Good Faith - Failure in Oversight
In addition to showing the directors failed to discharge fiduciary obligations, they must show:
1) the directors UTTERLY FAILED TO IMPLEMENT A REPORTING SYSTEM, or
2) having implemented such system, the director FAILED TO MONITOR OR OVERSEE its operations.
Fiduciary Duties: Duty of Disclosure (Candor) + Materiality Standard (Examples of Situtations)
Directors must disclose facts which a reasonable person would consider important in making decisions
Materiality standard - facts for which there is a SUBSTANTIAL LIKELIHOOD that a REASONABLE PERSON would consider them important (i.e., public statements made to the market, statements made to shareholders when seeking shareholder action)
Fiduciary Duties: Duty of Disclosure (Candor) - Breach + Limitations
Corporate fiduciaries breach duty of disclosure by making a materially FALSE STATEMENT, OMITTING material fact, or by making a PARTIAL DISCLOSURE that’s materially misleading.
Directors do NOT need to disclose common knowledge or SOFT INFORMATION (e.g., valuations based on forward looking information)
Fiduciary Duties: Duty of Disclosure (Candor) - Remedies
Injunctive relief or damages
Fiduciary Duties: To Whom Are Fiduciary Duties Owed? + Creditors
Directors, officers, and majority shareholders owe fiduciary duties to the CORPORATION and SHAREHOLDERS
Creditors ARE NOT owed fiduciary duties UNLESS bringing a DERIVATIVE CLAIM
Fiduciary Duties: Standard of Review - Business Judgment Rule + Plaintiff’s Burden + Burden Shifted to Defendant
The business judgment rule works as a REBUTABLE PRESUMPTION that the defendant acted in compliance with their fiduciary duties. (minimum scrutiny)
The PLAINTIFF HAS THE BURDEN of showing the director was GROSSLY NEGLIGENT in not becoming adequately informed or acting in bad faith.
If plaintiff meets burden, defendant must show the transaction was ENTIRELY FAIR
Fiduciary Duties: Standard of Review - Entire Fairness Standard
Defendant must prove FAIR DEALING (the process) and FAIR PRICE (the economic terms) (court will analyze closer than business judgment rule)
Fiduciary Duties: Standard of Review - Enhanced Scrutiny
This applies where the record reflects that a board took defensive measures (e.g., making a takeover more difficult) in response to a perceived threat.
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Unocal Test + Draconian Defenses
If defendants actions were (i) REASONABLE and (ii) PROPORTIONAL, the transaction will be governed by the regular business judgment rule
Reasonableness requires the board demonstrate a danger to the corporation existed (court looks at price, timing, etc.)
Proportionality requires the board demonstrate the actions where reasonable in relation to the threat posed.
If the defense that is being proffered by the board is COERCIVE OR PRECLUSIVE, it will be draconian, and will be struck down, but if not it will be reasonable.
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Sale of Control + Merger
If directors believe the sale of a company is in the best interest of the shareholders, they are duty bound to seek the BEST TRANSACTION REASONABLY AVAILABLE.
The court will analyze the REASONABLENESS and ADEQUACY of the transaction.
Adequacy - the director’s decision making process
Reasonableness - directors engage in a course of action reasonable under the circumstances
A merger not involving a sale of control is governed by the BUSINESS JUDGMENT RULE
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Deal Protection Devices
Contractual measures aimed at deterring others from trying to interfere with the deal will be analyzed with STRICT SCRUTINY.
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Hostile Takeovers
Hostile takeovers implicate enhanced scrutiny, these are transactions in which an acquirer gains control of a target company by going directly to the shareholders WITHOUT CONSENT FROM THE BOARD OF DIRECTORS.
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Delaware Takeover Statute + Avoiding Statute + Exemptions
This DELAYS BUSINESS COMBINATIONS FOR 3 YEARS with acquirers not approved by the target’s board of directors, UNLESS 85% of shares are obtained in the first step transaction.
Acquirer can avoid the statute if:
1) board approves
2) 85% of shares are obtained (if not, an exemption can be granted with board approval and 2/3 vote of unaffiliated shareholders)
This DOES NOT APPLY for companies whose shares are not:
1) traded in a public exchange, or
2) held of record by more than 2,000 shareholders
Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Interference with Corporate Franchise
Actions taken by the board to disenfranchise shareholders or to interfere with the exercise of shareholder franchise are measured under heightened scrutiny. Here, the board must show a COMPELLING JUSTIFICATION for such action
Fiduciary Duties: Controlling Shareholder Transactions (Long-Form v. Short-Form) + Procedural Safeguards
Shareholders who have a controlling position in a corporation and assert control have fiduciary duties to the corporation
Long-Form Mergers - governed by ENTIRE FAIRNESS STANDARD (show merger was product of FAIR DEALING and FAIR PRICE)
Short-Form Mergers - Only PRICE is considered
Procedural Safeguards - If the company has safeguards to protect from controlling shareholders power, the entire fairness standard applies but the burden shifts to plaintiffs to show the transaction was not entirely fair (possibly business judgment rule)
Fiduciary Duties: Controlling Shareholder Transactions - Tender Offer for Minority Shares
A tender offer by a majority shareholder to acquire minority shares, the entire fairness standard DOES NOT APPLY and CANNOT BE CHALLENGED FOR BREACH OF FIDUCIARY DUTY
Fiduciary Duties: Controlling Shareholder Transactions - Tender Offer for Minority Shares - Test To Be Deemed Noncoercive
Such tender offers are SUBJECT TO INJUNCTION if deemed coercive. These will be deemed NONCOERCIVE if the following criteria is met:
1) tender offer must subject to a nonwaivable majority of the minority shareholder vote,
2) the controlling shareholder must promise to promptly consummate a short-form merger thereafter at the same price and for the same consideration as the tender offer
3) the controlling shareholder must not make any retributive threats
Shareholder Litigation: Direct Action
In direct actions, shareholder is injured directly/independently of corporation. Plaintiff must show the duty breached was owed to the shareholder (no prerequisites)
Shareholder Litigation: Derivative Action + Typical Claims
Here, the corporation has been harmed and shareholders assert claims on behalf of their corporation
Typical claims include mismanagement, violation of duty of loyalty or care, waste of corporate assets
Shareholder Litigation: Derivative Action - Prerequisites + Exceptions
1) A plaintiff must be a shareholder AT THE TIME OF THE TRANSACTION (contemporaneous ownership)
2) Plaintiff must CONTINUOUSLY HOLD SHARES throughout the litigation (continuous ownership)
3) Demand futility (shareholder has: (i) made a demand on the corporation and has been wrongfully refused or (ii) demand would be futile)
Exceptions of continuous ownership: (i) fraud and (ii) reorganization (merely reorganizes corporation)
Shareholder Litigation: Derivative Action - Aronson Test + Exception (Rales Test)
The Aronson test of demand futility has 2 elements, whether the facts in the complaint create a REASONABLE DOUBT that:
1) the directors are disinterested and independent, OR
2) the challenged transaction was otherwise the product of a valid exercise of business judgment
The Aronson Test will NOT be applied and demand will be excused if particularized factual allegations create a REASONABLE DOUBT that the board of directors could have properly exercised its independent and disinterested business judgment in responding to the demand
Shareholder Litigation: Derivative Action - Demand Refused
If the board refuses the demand, its decision will be protected if it was a product of the valid exercise of BUSIENSS JUDGMENT
Shareholder Litigation: Derivative Action - Special Litigation Committee + Court’s Determination
The board of directors may appoint a special litigation committee to determine if litigation is in the best interest of the corporation.
If the special litigation committee wishes to dismiss the litigation, the court must determine whether the committee:
1) acted INDEPDENDENTLY,
2) acted in GOOD FAITH, and
3) has shown a REASONABLE BASIS for its determination.
Shareholder Litigation: Derivative Action - Equitable Limitations - Inequitable Manipulation of Corporate Machinery + When To Raise
That which is legally possible WILL NOT be allowed IF INEQUITABLE
Raise this whenever there is a question involving the shareholder voting process (even if everything is correct, mention the inequitable manipulation of corporate machinery to complete the analysis)
Shareholder Litigation: Derivative Action - Equitable Limitations - Independent Legal Siginificance
Actions taken pursuant to sections of DGCL are acts of INDEPENDENT LEGAL SIGNIFICANCE, meaning so long as one section of the DGCL makes the transaction legal it WILL BE UPHELD
Dissolution: Procedure
The steps for dissolution of a corporation are:
1) Board RESOLVES,
2) A majority of the shareholders APPROVE, and
3) the corporation FILES AND RECORDS a certificate of dissolution.
Dissolution: Status of Corporation After Dissolution
A corporation usually CONTINUES FOR 3 YEARS, and may be sued and make payments to creditors and shareholders during this period.
Dissolution: Forced Dissolution
The Court of Chancery may order dissolution of a corporation for abuse, misuse, or nonuse of corporate powers, OR failure to pay franchise tax will result in void status.
Dissolution: Appointment for Custodian or Receiver + Custodians Powers
Court may appoint custodian if:
1) shareholders are unable to elect directors,
2) corporation is deadlocked and business suffers, or
3) corporation abandoned business.
Custodians may ask the court to order sale.
Fiduciary Duties: Exceptions to an Exculpatory Clause
A Delaware corporation may adopt a provision in its certificate of incorporation which limits or eliminates director’s liability for breach of fiduciary duty, EXCEPT FOR:
1) Duty of Loyalty,
2) Acts or omissions not in good faith,
3) Unlawful payment of dividends or unlawful stock repurchase or redemption, or
4) Any transaction from which the director received an improper personal benefit
Instances Where Court Can Appoint Custodians for a Solvent Corporation
An appointment of a custodian for a solvent corporation by the Court of Chancery may be granted:
1) When stockholders are so divided at a meeting they are UNABLE TO ELECT DIRECTORS whose terms have expired,
2) The corporation is DEADLOCKED (i.e., members of the board and the stockholders both disagree on the management of the business), or
3) The corporation as abandoned its business and has failed within a reasonable time to make steps to dissolve liquidate or distribute assets
Appraisal: Boards Consideration of Accomplishments After the Merger
The Court will determine fair value of the shares based on ALL RELEVANT FACTORS when determining an appraisal action. However, the Court MUST EXCLUDE any element of value arising from the accomplishment of the merger.
Appraisal: May the Court Award To Stockholders An Amount Lower Than The Price Paid In A Merger?
Yes, the Court determination of fair value may be MORE OR LESS than merger consideration
