Corporations (Delaware)

Question 1

Basics: Foundation of Corporations Law

Answer 1

Delaware General Corporation Law (DGCL)

Question 2

Basics: Order of Authority

Answer 2

1) Statute (DGCL)
2) Cases
3) Certificate of Incorporation
4) Bylaws
5) Any other contracts

Question 3

Basics: Characteristics of a Corporation - Liability Shield

Answer 3

Corporations shield personal liability for owners/investors

Question 4

Basics: Characters - Registered Agent + Shareholders + Directors + Officers

Answer 4

RA - receives service of process
Shareholders - owners
Directors - managers
Officers - day-to-day operations

Question 5

Forming the Corporation: Mandatory Provisions within the Certificate of Incorporation

Answer 5

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)

Question 6

Forming the Corporation: What Happens if An Individual Fails to Form a Corporation?

Answer 6

A general partnership is created without any protections of the corporation.

Question 7

Forming the Corporation: Permissive Provisions Within the Certificate of Incorporation

Answer 7

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

Question 8

Forming the Corporation: Preemptive Rights - Proportional Ownership

Answer 8

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)

Question 9

Forming the Corporation: Duration

Answer 9

A corporation is assumed to have a perpetual life, though the incorporators may form it for a specific period of time.

Question 10

Forming the Corporation: Exculpation Clause + Officers

Answer 10

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

Question 11

Forming the Corporation: Amendments to Certificate of Incorporation

Answer 11

A certificate may be amended so long as they would be lawful and proper to insert in an original certificate

Question 12

Bylaws: Who may Adopt Bylaws

Answer 12

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

Question 13

Bylaws: Inconsistencies with Certificate of Incorporation

Answer 13

Bylaws may not be inconsistent with Certification of Incorporation OR DGCL.

Question 14

Formation: Getting Up and Running

Answer 14

To finalize formation, the corporation must either:

1) hold an organizational meeting, or
2) file an incorporator’s statement.

Question 15

Jurisdiction: The Internal Affairs Doctrine

Answer 15

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.

Question 16

Jurisdiction: Directors and Officers - Long Arm Statute

Answer 16

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.)

Question 17

Shareholders and Their Rights: How Shareholders Exercise Control

Answer 17

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.

Question 18

Shareholders and Their Rights: Meetings - Ways to Vote

Answer 18

Shareholders can vote in two ways:

1) In person, or
2) Proxy (meaning, assignment to another person of a shareholder’s right to vote).

Question 19

Shareholders and Their Rights: Meetings - Annual Shareholder Meeting + Timing

Answer 19

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.

Question 20

Shareholders and Their Rights: Meetings - Special Shareholder Meeting

Answer 20

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.

Question 21

Shareholders and Their Rights: Contested Eelections

Answer 21

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.

Question 22

Shareholders and Their Rights: Quorum Default + Minimum

Answer 22

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.

Question 23

Shareholders and Their Rights: Record Date + Time Limits

Answer 23

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.

Question 24

Shareholders and Their Rights: Record Date - Separate Record Date and Voting

Answer 24

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.

Question 25

Shareholders and Their Rights: Record Date - Minimum Record Date for Major Transactions

Answer 25

Certain transactions require greater minimum notice record date of 20 DAYS (e.g. merges and asset sales)

Question 26

Shareholders and Their Rights: Record Date - Adjourning Meetings + If No Date Is Set

Answer 26

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.

Question 27

Voting Rights: Default Rule for Shares Per Vote + Deviations

Answer 27

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.

Question 28

Voting Rights: Proxies - Irrevocable Proxies + Duration

Answer 28

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.

Question 29

Voting Rights: Voting Trusts v. Voting Agreements

Answer 29

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.

Question 30

Voting Rights: Cumulative Voting

Answer 30

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.

Question 31

Shareholder’s Rights: Action By Written Consent

Answer 31

Any action that can be taken at a meeting can also be taken by written consent by a shareholder.

Question 32

Shareholder’s Rights: Action By Written Consent - Requirements

Answer 32

Written consents must be written ON PAPER and DELIVERED (not e-mail)

Question 33

Shareholder’s Rights: Action By Written Consent - Record Date

Answer 33

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.

Question 34

Shareholder’s Rights: Action By Written Consent - Required Vote + Timing

Answer 34

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.

Question 35

Shareholder’s Rights: Notice Contents

Answer 35

Notice of a shareholder meeting may be in writing or electronic medium and contain the PLACE, DATE, AND TIME of the meeting.

Question 36

Shareholder’s Rights: Notice - Length of Notice (Minimum, Maximum, and Major Transactions)

Answer 36

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.

Question 37

Shareholder’s Rights: Notice - Adjournments

Answer 37

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.

Question 38

Shareholder’s Rights: Notice - Waiver + Exception

Answer 38

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.

Question 39

***Shareholder’s Rights: Appraisal + Mergers Where Appraisal Is Available

Answer 39

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).

Question 40

Shareholder’s Rights: Appraisal - Procedure (Before, During, and After Merger) + Short Term Mergers

Answer 40

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.

Question 41

Shareholder’s Rights: Appraisal - Value

Answer 41

The court will determine the “fair value of the shares” based on “all relevant factors”

Question 42

***Shareholder’s Rights: Inspection Rights

Answer 42

Shareholders have the right to inspect:

1) stocklist (or shareholder list), and
2) books and records

Question 43

Shareholder’s Rights: Inspection Rights - Stocklist Process + Burden of Proof

Answer 43

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

Question 44

Shareholder’s Rights: Inspection Rights - Compelling Inspection

Answer 44

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

Question 45

Shareholder’s Rights: Inspection Rights - Books and Records Process + Burden of Proof

Answer 45

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

Question 46

Stocks & Dividends: Common Stock

Answer 46

Common stock represents a proportionate interest in the corporation and is LAST to participate in any distributions.

Question 47

Stocks & Dividends: Preferred Stock

Answer 47

The rights, preferences, and limitations of preferred stock are defined in the certificate of incorporation or in the certificate of designations.

Question 48

Stocks & Dividends: Preferred Stock - Conversion Rights

Answer 48

Any class or series of stock may be converted into other series or classes if provided in the certificate of incorporation.

Question 49

Stocks & Dividends: Preferred Stock - Blank Check Stock

Answer 49

This gives the directors the right to issue certain preferred stock, including new stock (as provided in the COI)

Question 50

Stocks & Dividends: Capital and Surplus

Answer 50

Capital - Minimum amount of value in a corporation

Surplus - Corporation’s value in EXCESS OF CAPITAL

Question 51

Stocks & Dividends: Consideration for Stock + Liability to Creditors

Answer 51

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.

Question 52

Stocks & Dividends: Dividends + Liability

Answer 52

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.

Question 53

Stocks & Dividends: Purchase of Stock by Issuer + Liability

Answer 53

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.

Question 54

Stocks & Dividends: Rights and Options + Fiduciary Obligations

Answer 54

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

Question 55

Stocks & Dividends: Stock Certificates and Restrictions on Transfers

Answer 55

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

Question 56

Directors Obligations

Answer 56

The board MANAGES business and affairs of the corporation

Question 57

Directors: Qualifications for the Board + Minimum & Maximum Number

Answer 57

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.

Question 58

Directors: Term of Office

Answer 58

Directors hold office until successors are elected and qualified OR until their resignation, removal, or retirement.

Question 59

Directors: Term of Office - Removal

Answer 59

Directors can be removed with or without cause by a MAJORITY OF SHAREHOLDERS (DIRECTORS MAY NOT REMOVE OTHER DIRECTORS)

Question 60

Directors: Vacancies

Answer 60

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

Question 61

Directors: Board Action

Answer 61

A board can take act in two ways (same as shareholders):

1) by meetings, and
2) by written consent

Question 62

Directors: Board Action - Meetings Requirements

Answer 62

Meetings must be held by quorum (majority of directors) with notice (time, place, and date)

Question 63

Directors: Board Action - Written Consent

Answer 63

Must be UNANIMOUS (unlike shareholders who only need majority).

Question 64

Directors: Delegation to Committees + Nondelegable Duties

Answer 64

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

Question 65

Directors: Delegation to Officers

Answer 65

The board may delegate MANAGEMENT to officers, but retains oversight over responsibility

Question 66

Directors: Defective Corporate Acts May Be Ratified

Answer 66

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.

Question 67

Directors: Right to Inspect

Answer 67

Directors may seek courts assistance in inspecting books and records if they have a PROPER PURPOSE (reasonably related to director’s role)

Question 68

***Directors: Role in Mergers - Long-Form Merger + Process

Answer 68

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

Question 69

***Directors: Role in Mergers - Short-Form Merger + Fiduciary Duty of Majority Shareholder

Answer 69

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

Question 70

Directors: Sale of Assets

Answer 70

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.

Question 71

Directors: Sale of Assets - Test for Sale of Substantially All Assets

Answer 71

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.

Question 72

Directors: Permissive Indemnification

Answer 72

A corporation may indemnify its past and present officers or directors in connection with action due to director or officer’s SERVICE TO CORPORATION

Question 73

Directors: Mandatory Indemnification

Answer 73

A corporation may indemnify its past and present officers or directors IF SUCCESSFUL IN DEFENSE OF AN ACTION, including EXPENSES

Question 74

Directors: Indemnification - Advancements

Answer 74

Indemnification is backwards looking, however expenses MAY BE ADVANCED, provided indemnitees repay the money if they ultimately don’t satisfy the standard for indemnification

Question 75

Directors: Indemnification - Fees for Fees

Answer 75

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.

Question 76

***Fiduciary Duties: Duty of Care + Breaching Duty

Answer 76

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 .

Question 77

Fiduciary Duties: Duty of Care - Good Faith

Answer 77

Directors are protected if they RELY IN GOOD FAITH upon the records of the corporation or opinions, reports, or statements from the board

Question 78

Fiduciary Duties: Duty of Care - Prima Facie Case

Answer 78

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.

Question 79

Fiduciary Duties: Duty of Care - Affirmative Defense for Exculpatory Clause (Section 102(b)(7)) + Impact of Duty of Loyalty

Answer 79

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

Question 80

***Fiduciary Duties: Duty of Loyalty

Answer 80

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.

Question 81

Fiduciary Duties: Duty of Loyalty - Permitted Self-Dealings

Answer 81

Self-dealings may be permitted if “ENTIRELY FAIR” to the company.

Question 82

Fiduciary Duties: Duty of Loyalty - Fiduciary Duty of Majority Shareholder

Answer 82

When a shareholder owns a majority interest in a corporation, they have fiduciary duty of loyalty to MINORITY SHAREHOLDERS

Question 83

Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine

Answer 83

A fiduciary can’t take opportunities that belong to the corporation

Question 84

Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Test

Answer 84

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.

Question 85

Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - When Fiduciary May Take Opportunity

Answer 85

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.

Question 86

Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Presentment of Opportunity

Answer 86

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.

Question 87

Fiduciary Duties: Duty of Loyalty - Corporate Opportunity Doctrine - Safe Harbor

Answer 87

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

Question 88

Fiduciary Duties: Duty of Loyalty - Duty of Good Faith

Answer 88

Subsumed within the duty of loyalty, this can be violated if the fiduciary: (i) acts in BAD FAITH, or (ii) FAILURE OF OVERSIGHT

Question 89

Fiduciary Duties: Duty of Loyalty - Duty of Good Faith - Bad Faith

Answer 89

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

Question 90

Fiduciary Duties: Duty of Loyalty - Duty of Good Faith - Failure in Oversight

Answer 90

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.

Question 91

Fiduciary Duties: Duty of Disclosure (Candor) + Materiality Standard (Examples of Situtations)

Answer 91

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)

Question 92

Fiduciary Duties: Duty of Disclosure (Candor) - Breach + Limitations

Answer 92

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)

Question 93

Fiduciary Duties: Duty of Disclosure (Candor) - Remedies

Answer 93

Injunctive relief or damages

Question 94

Fiduciary Duties: To Whom Are Fiduciary Duties Owed? + Creditors

Answer 94

Directors, officers, and majority shareholders owe fiduciary duties to the CORPORATION and SHAREHOLDERS

Creditors ARE NOT owed fiduciary duties UNLESS bringing a DERIVATIVE CLAIM

Question 95

Fiduciary Duties: Standard of Review - Business Judgment Rule + Plaintiff’s Burden + Burden Shifted to Defendant

Answer 95

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

Question 96

Fiduciary Duties: Standard of Review - Entire Fairness Standard

Answer 96

Defendant must prove FAIR DEALING (the process) and FAIR PRICE (the economic terms) (court will analyze closer than business judgment rule)

Question 97

Fiduciary Duties: Standard of Review - Enhanced Scrutiny

Answer 97

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.

Question 98

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Unocal Test + Draconian Defenses

Answer 98

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.

Question 99

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Sale of Control + Merger

Answer 99

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

Question 100

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Deal Protection Devices

Answer 100

Contractual measures aimed at deterring others from trying to interfere with the deal will be analyzed with STRICT SCRUTINY.

Question 101

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Hostile Takeovers

Answer 101

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.

Question 102

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Delaware Takeover Statute + Avoiding Statute + Exemptions

Answer 102

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

Question 103

Fiduciary Duties: Standard of Review - Enhanced Scrutiny - Interference with Corporate Franchise

Answer 103

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

Question 104

Fiduciary Duties: Controlling Shareholder Transactions (Long-Form v. Short-Form) + Procedural Safeguards

Answer 104

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)

Question 105

Fiduciary Duties: Controlling Shareholder Transactions - Tender Offer for Minority Shares

Answer 105

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

Question 106

Fiduciary Duties: Controlling Shareholder Transactions - Tender Offer for Minority Shares - Test To Be Deemed Noncoercive

Answer 106

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

Question 107

Shareholder Litigation: Direct Action

Answer 107

In direct actions, shareholder is injured directly/independently of corporation. Plaintiff must show the duty breached was owed to the shareholder (no prerequisites)

Question 108

Shareholder Litigation: Derivative Action + Typical Claims

Answer 108

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

Question 109

Shareholder Litigation: Derivative Action - Prerequisites + Exceptions

Answer 109

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)

Question 110

Shareholder Litigation: Derivative Action - Aronson Test + Exception (Rales Test)

Answer 110

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

Question 111

Shareholder Litigation: Derivative Action - Demand Refused

Answer 111

If the board refuses the demand, its decision will be protected if it was a product of the valid exercise of BUSIENSS JUDGMENT

Question 112

Shareholder Litigation: Derivative Action - Special Litigation Committee + Court’s Determination

Answer 112

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.

Question 113

Shareholder Litigation: Derivative Action - Equitable Limitations - Inequitable Manipulation of Corporate Machinery + When To Raise

Answer 113

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)

Question 114

Shareholder Litigation: Derivative Action - Equitable Limitations - Independent Legal Siginificance

Answer 114

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

Question 115

Dissolution: Procedure

Answer 115

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.

Question 116

Dissolution: Status of Corporation After Dissolution

Answer 116

A corporation usually CONTINUES FOR 3 YEARS, and may be sued and make payments to creditors and shareholders during this period.

Question 117

Dissolution: Forced Dissolution

Answer 117

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.

Question 118

Dissolution: Appointment for Custodian or Receiver + Custodians Powers

Answer 118

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.

Question 119

Fiduciary Duties: Exceptions to an Exculpatory Clause

Answer 119

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

Question 120

Instances Where Court Can Appoint Custodians for a Solvent Corporation

Answer 120

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

Question 121

Appraisal: Boards Consideration of Accomplishments After the Merger

Answer 121

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.

Question 122

Appraisal: May the Court Award To Stockholders An Amount Lower Than The Price Paid In A Merger?

Answer 122

Yes, the Court determination of fair value may be MORE OR LESS than merger consideration