Final

Question 1

Zuckerberg test for demand futility

Answer 1

Demand excused as futile if at least half of demand board answers yes to ANY of the following:
-Director PERSONALLY and MATERIALLY benefit from alleged misconduct?
-SUBSTANTIALLY LIKELY that director would FACE LIABILITY for any claims in demand?
-LACKS INDEPENDENCE from someone who personally/materially BENEFITTED or someone substantially likely to FACE LIABILITY
-lacks independence = material ties to person that raises doubts about impartiality

Question 2

If board creates SLC to dismiss derivative, apply Zapata two step test

Answer 2

1) Board has burden to prove committee’s:
-INDEPENDENCE (neither interested nor dependent)
-interested: will receive something from committee’s action that other shareholders will not
-dependent: beholden to interested party or so under their influence that their judgment cannot be trusted
-GOOD FAITH
-INFORMED/reasonable investigation
2) if met, then court can apply their own business judgment

Question 3

Promoters generally liable for Ks they enter into on corps behalf before incorporation UNLESS

Answer 3

1)de facto:
-statute that made incorp possible
-colorable attempt to comply with statute
-use or exercise of corp privilege
2)Corp by estoppel
- third party doing business with Corp is estopped from denying existence if they treated Corp as if it existed
i. Both parties to the contract reasonably believed the corporation existed at the time they signed the agreement;
ii. Both parties reasonable relied on the corporation’s existence (by entering into the contract, this is always true); and
iii. Justice requires that the corporation be held liable on the contract rather than the promoters

3) parties contract otherwise
—Promoter was negotiating an option which corp was free to accept or reject once formed
—Promoter binds themselves to the K, with the understanding once the company is formed it will take his place and relieve him of liability - most likely
—Promoter bind himself personally to the K and hopes corp will indemnify
—Promoters are promising to form new corp, which will ratify the agreement

Question 4

Veil piercing

Answer 4

-fraud/illegality OR
-alter ego
1) single economic entity
—obey Corp formalities?
—used as personal bank account
—undercapitalized
2) element of injustice or unfairness

Question 5

Firing directors GR + exceptions

Answer 5

Directors can be fired with or without cause by majority of shares at any time for any reason UNLESS exceptions apply
-staggered board
-classified stock
-cumulative voting

Question 6

Unocal trigger

Answer 6

Defensive measures/protection devices against hostile takeover

Question 7

Unocal rules

Answer 7

Before BJR presumption can apply to board’s actions, must pass intermediate scrutiny of Unocal.
-board must show
1) reasonable grounds for believing threat to corporate policy or effectiveness
2) AND response proportionate to the threat

Question 8

Types of Unocal threats

Answer 8

-opportunity loss
-substantive coercion
-structural coercion
-good faith + reasonable investigation + reasonableness of conclusion that threat exists

Question 9

Opportunity loss

Answer 9

When a hostile offer threatens to deprive shareholder of chance to take a better deal offered by board or third party

Question 10

Structural coercion

Answer 10

Hostile offer is structured to create a stampeding effect, with two tier front loader offer

Question 11

Substantive coercion

Answer 11

Inadequate price/SH refuse to believe management assurances that company is worth more than hostile acquirer is offering

Question 12

If no hostile offer

Answer 12

Directors have burden to show good faith and reasonable investigation showing reasonableness of conclusion that threat exists

Question 13

Proportional response test

Answer 13

Met when measures are not DRACONIAN, meaning not coercive and not preclusive
-coercive: force SH to take management sponsored alternative
-preclusive: prevents SH from receiving all tender offers
IF either is true, fails Unocal.
If not draconian, apply range of reasonableness test

Question 14

Range of reasonableness test

Answer 14

If not draconian, was response within the board’s statutory power?
If yes, was response proportional to the threat?
If passes Unocal = BIR
If flunks = board action Invalid

Question 15

14a-9 proxy statements

Answer 15

Prohibits any
1)MISREPRESENTATION or OMISSION
—omission of info necessary to make included statement not misleading or correct a statement that has become misleading
2)made w/ scienter (intent/knowledge)
3)reliance causing damage
—met when materiality is proven
4)materiality if misrep/omission
—material when info a reasonable investor would want to know when making investment decision
5) in a proxy statement

Question 16

10b-5 GR (insider trading)

Answer 16

Bars fraud using interstate commerce, the mails, or nat’l securities exchange in connection with purchase or sale of securities

Question 17

10b-5 insider trading elements (about omission)

Answer 17

1)purchase or sale of security
2)made in interstate commerce, mails, or nat’l securities exchange that involved
3) OMISSION (duty to speak)
4) of a material fact
5) made w/ scienter
6) reliance/causation

Question 18

Insider trading omission rule

Answer 18

Omissions are only fraudulent when there is a duty to speak. A duty to speak comes from a fiduciary duty to keep the information secret and not use it for personal gain.

Question 19

Theories of fiduciary duties: Classic

Answer 19

Classic fiduciary duty of officers, directors, 10% shareholders as insiders of company’s stock they purchased

Question 20

Temporary insider

Answer 20

Someone working for Corp and given confidential information for corporate purpose

Question 21

Misappropriation

Answer 21

• Misappropriates info for securities trading purposes
• for PERSONAL GAIN
• in breach of a duty owed to the SOURCE of the info. To show fiduciary duty, must show:
o Receiver agreed to keep the information confidential OR
o that her relationship with discloser implied a confidential agreement
—history, pattern, or practice of sharing confidences”
—family relationship

Question 22

Tipper/tippee

Answer 22

if person did not trade, most they can be is tipper
-tipper provides tipee with secret material information
-in violation of tipper’s fiduciary duty to source of material/company that tippee purchased stock in
-tipper personally benefits from disclosure
—Personal benefit defined broadly, includes solidifying a business relationship, enhancing the tipper’s reputation, and even a personal gift.
-tippee liable if knows that tipper violated duty and they traded anyways

Question 23

10b-5 false statement elements

Answer 23

-false
-material statement
-made w/ scienter
-in connection w/ purchase or sale of security
-causation/reliance
—causing loss to buyer/seller who reasonably relied on falsity

Question 24

10b-5 causation/reliance

Answer 24

P must prove two kinds of causation
-transaction causation: misrep caused to transact
-loss causation: misrep caused the loss

Reliance argument
-fraud on the market theory/presumption: when falsity is publicly released to market, there is presumption that shareholders relied on statement by relying on integrity of market price

Question 25

Staggered board exception

Answer 25

Require Cause
-behaviors harming Corp
-procedural reqs: notice to director of the charges and opportunity to respond

Question 26

Classified stock exception

Answer 26

-director elected by a certain class of stock can only be removed WITHOUT CAUSE by that class of stock
-if shareholders outside class want to fire, need CAUSE + majority vote

Question 27

Cumulative voting

Answer 27

-Minority elected director can only be fired with CAUSE + majority vote
-if the amount of shares voting to keep director (voting no) would be enough to elect the director in actual election then they are a minority director

Question 28

SH power to pass bylaws

Answer 28

Limited power to pass bylaws.
Cannot pass bylaws that cause directors to violate fiduciary duty
Can pass:
-advisory/precatory bylaws
-mandatory bylaws that are procedural
—concerning the process by which the corporation makes decisions and the creation of officer positions and how they are selected

Question 29

Requirements for SH proxy proposal

Answer 29

-owned at least either $2,000 or 1% of a company’s stock for at least one year
Exceptions apply to keep proposals out
-SH

Question 30

Exceptions to keep shareholder proposals off proxy

Answer 30

a. Improper subject for shareholder action under state law
1. Board deals with substance
2. Shareholder deals with mandatory process or precatory substance
—-Exception: but precatory resolutions may get in “board requests”
b. Causes board to violate fiduciary duties
c. Economic irrelevance: if the proposal relates to less than 5 percent of the company’s assets, and for less than 5 percent of its net earnings and gross sales
i. But socially significant proposals may get in anyway if related to the company’s business (Lovenheim)
ii. Sufficiently related to what company does
d. Ordinary business operations
i. Not important enough to bother shareholders with
1. Ex. What kind of staples using in office, time factories open
e. Proposal would cause corporation to violate state, federal or foreign law

Question 31

SH records requests

Answer 31

DE s 220 provides that shareholders have access to the corporation’s
books and records for a proper purpose. —A purpose is considered proper if it is reasonably related to the
shareholder’s interest as a shareholder.
—when a shareholder has both a
proper and improper purpose for asking, the proper purpose is sufficient to
establish to the information request.
—if request is for shareholder list, burden is on Corp to show improper purpose. For everything else, burden is on SH

Question 32

Efficient Capital Market Hypothesis (ECMH)

Answer 32

Three different definitions of efficient
1. Weak: market is a random walk – share prices include all information about past share prices (v)
2. Semi-strong: share prices include all publicly available information (v)
3. Strong: share prices include all available information, both public and private (insider trading) (x)

Question 33

c. DGCL §141(a) Core Corporate Governance Principal

Answer 33

The business and affairs of every corporation shall be managed by or under the direction of a board of directors with some exceptions
1. The board chooses/hires/fires the officers (some officers might also be on the board – usually the CEO is also on the board of directors)
2. The board decides dividends

Question 34

Caremark -breach of duty of CARE

Answer 34

Under Caremark, to be liable for breach of duty of CARE for failing to engage in corporate oversight, a director must
1) fail to implement any reporting system or 2) fail to monitor an implemented system. Only an utter failure to try to implement a reasonable monitoring system will result in the board’s liability.
1. To show failure to monitor an implemented system, the director must know that they weren’t engaging in proper oversight and thus know they are not making a good faith effort to act in corporation’s interest.
iii. Elements:
1. Critical issue to health of company
2. No regular monitoring system in place

Question 35

Failure to pay dividends

Answer 35

The controlling group’s fiduciary duty to the minority is met in regard to the payment if dividends if the decision is made in good faith and reflects legitimate business purposes rather than the private interests of a control group (essentially BJR)
1. Hallmarks of bad faith include (these must be the motivation for the decision to count as bad faith)
a. Hostility between majority or minority
b. Exclusion of minority from employment by the corporation
c. High salaries, bonuses or loans to the control group
d. A desire by the control group to buy out the minority at a low price

Question 36

When can shareholder bring direct suit?

Answer 36

Test for if shareholder can bring direct suit:
1. Will wrongdoer remain in control of any recovery? = direct
2. Is low risk of having a lot of lawsuits based on same conduct? = direct
a. If risk of multiplicity of suits = derivative
3. Will creditors be harmed if suit is brought directly?
a. In derivative suit Corp gets recovery and it is then available to creditors, good for creditors
b. In direct suit company never touches recovery bc it goes to shareholders, bad for creditors
c. If company has no creditors = direct
d. If creditors need settlement = derivativ

Question 37

Involuntary dissolution grounds

Answer 37

1. DE sharply limits the availability of involuntary dissolution to when
   a. 2 shareholders
   b. Each owns 50% of the stock
   c. Joint venture (sharing control)
   d. Stockholders unable to agree upon the desirability of discontinuing the joint venture
   e. Certificate does not provide otherwise

i. New York law permits the holders of at least 20% of the outstanding shares of a company whose stock is not traded on an exchange to petition for dissolution under special circumstances (illegal, fraudulent or oppressive conduct)