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Final Flashcards

1
Q

Efficiency

A

Pareto - Focuses on individual welfare

Kaldor-Hicks - Focuses on total welfare

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2
Q

Agency

A

R3d Agency 1.01: The fiduciary duty that arises when a principal manifests assent to an agent that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act

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3
Q

Agency Termination

A

Can be terminated at any time

No specific performance

Damages or liquidated damages as remedy

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4
Q

Authority

A

Empowers agent to act on behalf of principal

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5
Q

Actual Authority

A

R3d 2.01: When a reasonable person in the position of the Agent would infer from the manifestations of the Principal

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6
Q

Apparent Authority

A

R3d 2.03: When a reasonable third party would understand that the Agent had authority to act based on the manifestations of the Principal

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7
Q

Inherent Authority

A

Flows from the nature of the agency relationship itself, not any specific manifestations of the parties

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8
Q

Respondeat Superior

A

R3d 2.04: A principal is liable for torts committed by his employees in the scope of employment

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9
Q

Employees vs. Independent Contractors

A

Employee - Principal has right to control manner and means of performance

Indpendent Contractor - Principal has less control and is not liable for agent’s actions

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10
Q

Jenson

A

A principal-agent relationship exists between a creditor and debtor when teh creditor intervenes in the business affairs of the debtor

Consent to agency is objective, subjective intent does not control

Consent can be express or implied-in-fact by the parties’ conduct

Court looks for control to determine whether implied consent was given

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11
Q

White

A

A purported agent’s claims regarding the existence or scope of his authority, without more, are insufficient to create apparent authority

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12
Q

Humble Oil

A

A master-servant relationship exists when two parties agree that one party will work on behalf of another and be subject to that party’s control of how the job will be performed

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13
Q

Sun Oil

A

An independent contractor relationship exists when one party works on behalf of another independently, with no control exerted by the other party over the contractor’s day-to-day operations

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14
Q

Partnership

A

Default business association

2 or more persons

Mutual agency-Partners liable for fellow partners’ acts

Partners are agents of the partnership

Partners are jointly and severally liable for the debts of the partnership

Equal share of control

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15
Q

RUPA 2.02(a)

A

The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership

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16
Q

Partnership Property

A

Partners have no personal interest in partnership property, a right to a share of the profits

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17
Q

Partnership Decision Rule

A

Ordinary Course Matters-Majority vote

Anything else requires unanimous vote

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18
Q

Partnership Termination

A

At will

Disassociation - Remaining partners buy out leaver

Disollution - Ends partnership

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19
Q

Parntership Liability (creditors)

A

Creditor must exhaust partnership assets before advancing a claim against partners’ personal property

Partnership creditor’s claim subordinate to creditor of individual partners IFF:

UPA governs AND federal bankruptcy law does not apply

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20
Q

Limited Partnership

A

Limited partners enjoy limited liability, general partner does not

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21
Q

Limited Liability Partnership

A

All partners enjoy limited liability and control

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22
Q

Taxation

A

Partnership income passes through to the partners

Corporate income taxed as corporate earnings and as dividends

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23
Q

Vohland

A

A partnership may be formed if both parties voluntarily agree to carry on a business as owners and intend to do those things which constitute a partnership

Key elements to finding a partnership:

Control over enterprise

Risk-sharing

Intent

Profit sharing and joint ownership indiciative of partnership, but neither sufficient

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24
Q

Meinhard

A

Co-venturers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture

DOL requires partners to:

Account for any partnership benefit

Refrain from taking adverse positions

Refrain from competing

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25
Q

Corporation

A

A legal entity with a distinct legal personality, limited liability for shareholders, and centralized management by a board of directors

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26
Q

Key Features of Corporations

A

Separation of ownership and control

Legal personality and indefinite life

Limited liability

Transferrable ownership

Choice of law

Centralized management by a board of directors

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27
Q

Takeover Defenses

A

Entrench managers

Dual-class stock

Staggered board

Poison pill

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28
Q

DGCL 141(a)

A

Authorizes shareholders to delegate management authority to a board of directors

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29
Q

Board Powers

A

Appoint and remove officers

Declare and pay dividends

Amend bylaws

Initiate sale of the company

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30
Q

Board Elections

A

Default - 1-year terms with entire board reelected each year

DE law allows 3 staggered classes

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31
Q

Certificate of Incorporation

A

Filed at state office

Determines basic characteristics of corporation

Can be amended only by shareholder vote

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32
Q

DGCL 109

A

Allows bylaws to be amended by shareholder vote or board resolution

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33
Q

Form 8-K

A

Unscheduled disclosures to SEC

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34
Q

Cunninghame

A

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

In corporate arrangement, the Principal is ALL of the shareholders, not a majority of shareholders

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35
Q

Jennings

A

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

Officers are agents of the corporation

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36
Q

Corporate Finance

A

Corporations need capital to finance operations so they sell claims on their future cashflows in the form of debt (fixed) and equity (residual)

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37
Q

Accounting Equation

A

Assets = Debt + Equity

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38
Q

Expected Value

A

Probability-weighted average of all possible outcomes

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39
Q

Discount Rate

A

Percent difference between present value and future value

PV = FV / (1 + r)

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40
Q

Diversification

A

Mitigating the risk associated with one asset by investing in an offsetting asset

Only non-diversifiable risk affects the discount rate

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41
Q

Efficient Market Hypothesis

A

Stock prices accurately reflect all relevant information

If true, you cannot beat the market

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42
Q

Event Studies

A

Statistical method that uses changes in stock prices to estimate the effect of an event on a company’s value

Accepted by courts as a valid measure of damages

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43
Q

Shareholder Voting

A

Shareholders exercise control over corporations by voting:

To approve fundamental changes, such as mergers and charter amendments

To elect directors (DGCL 211)

On shareholder resolutions (SEC Reg. 14A)

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44
Q

Shareholder Voting-Place and Time

A

Sharholeders vote at:

Annual mandatory meeting (DGCL 211(b))

At special meetings that can only be called by the board (DGCL 211(d))

By written consent in lieu of a meeting (DGCL 228)

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45
Q

Shareholder Voting-Who Can Vote?

A

Shareholders who hold stock on the record date (10-60 days before the vote)

Even if they have since sold the stock (DGCL 213)

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46
Q

Shareholder Voting-How?

A

Shareholders typically authorize someone to vote on their behalf by proxy (DGCL 212(b))

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47
Q

Proxy

A

Can refer to:

The power of attorney to vote someone’s share

The person voting on the other’s behalf

The proxy card (corp. ballot)

The proxy statement

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48
Q

Proxy Card

A

Board has sole control over contents (But see SEC Rule 14a-8), which include:

Nominations for director seats

Proposals needing shareholder approval

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49
Q

Default Rules for Director Elections

A

Annual election of all directors

One share, one vote (DGCL 212(a))

Straight voting (separate election for every seat)

Directors elected by plurality vote

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50
Q

Cumulative Voting

A

DGCL 214: Shareholders allocate votes among candidates, usually resulting in proportional representation

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51
Q

Shareholder Voting Other Than Director Elections

A

DGCL 216: Most matters require a majority for quorum and a majority voting in favor

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52
Q

Required Form for Soliciting Proxies

A

Schedule 14A

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53
Q

Shareholder Proposals

A

Rule 14a-8

Non-Binding

Board can exclude proposals that relate to the nomination of a director or seek to affect the current election

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54
Q

DGCL 112 and 113

A

Authorizes proxy access and reimbursement of solicitation expenses

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55
Q

Why Is There A Holding Requirement For Proxy Access?

A

Proxy access is costly

Long-term holders have incentives to maximize long-term profits (but don’t short-term holders?)

56
Q

Shareholder Proposals: Eligibility

A

Rule 14a-8: Shareholders who have held a 1% or $2,000 stake for one year can include one proposal on company proxy

57
Q

Omission of Shareholder Proposals If:

A

Unimportant (“Ordinary course”)

Only of personal interest to shareholder

Seeks to nominate/remove a director or affect the current election

The board receives a no-action letter from SEC

58
Q

Common Shareholder Proposals

A

Corporate social responsibility

Corporate governance

Board composition and structure

Executive compensation

Voting rules

59
Q

Proxy Fraud

A

Rule 14a-9 prohibits proxy statements that are false or misleading with respect to any material fact (Vir. Bankshares)

Implied private right of action

2nd Circuit standard is negligence

Causation and reliance can be implied if misrepresentation is material and the proxy solicitation was an essential link in the transaction

60
Q

Virginia Bankshares

A

A statement of belief by a board of directors can be a material misstatement if the statement is false

61
Q

Schnell

A

Corporate directors may not act with the sole purpose of obstructing shareholder action, even if the methods are legally permissible

Inequitable action will not be permitted, even if it does not violate the charter, bylaws, or DGCL

Shareholders have no duty to anticipate inequitable action by management

62
Q

Blasius

A

A board generally cannot undertake action with the primary purpose of interfering with shareholder voting, even if it acts in the good faith pursuit of the corporation’s best interests

DE law will not let directors meddle with the machinery of elections

63
Q

Duty of Care

A

Fiduciaries must take care when acting on behalf of the Principal

Applies to directors, officers, and controlling shareholders

Covers mistakes and unconflicted transactions

Requires the fiduciary to monitor the corporation and make informed decisions

64
Q

Protection Against DOC Liability

A

Business Judgment Rule

Waiver (DGCL 102(b)(7))

Indemnification and insurance (DGCL 145)

65
Q

Business Judgment Rule

A

Presumption that a fiduciary satisfied his fiduciary duties by actingin good faith, on an informed basis, and in the honest belief that his actions were in the best interests of the company

66
Q

Duty of Care Waiver

A

DGCL 102(b)(7): Corporation may waive directors’ personal liability for breaches of DOC by charter provision

Cannot waive liability for breach of DOL or acts made not in good faith

67
Q

DOC Indemnification and Insurance

A

DGCL 145 enables indemnification to reimburse directors for liabilities and insurance policies that pay out if director is liable

D and O actions made in good faith may be indemnified

Successful defense expenses must be indemnified

Any liability can be insured (DGCL 145(g))

68
Q

Oversight Liability

A

Instances in which the Board fails to monitor agents of the corporation

69
Q

Sarbanes-Oxley 404

A

Requires management to certify that they evaluated their company’s financial reporting systems and disclosed any material weakness

70
Q

Van Gorkom

A

There is a rebuttable presumption that a business determination made by a corporation’s board of directors is fully informed and made in good faith and the best interests of the corporation

Takeaways: Board should at least go through the motions and create a paper trail

May really be about heightened DOC standards in the takeover context

71
Q

Disney

A

The concept of intentional dereliction of duty and a conscious disregard for one’s responsibilitiesis an appropriate standard for determining shether fiduciaries acted in good faith

Good faith includes:

Intentionally failing to act in the face of a known duty to act, demonstrating a conscious disregard for one’s duties

Acting with a purpose other than advancing the best interests of the corporation

Acting with intent to violate applicable law

72
Q

Allis Chalmers

A

Red-flag approach: Directors have no duty to act absent reasonable suspicion of wrongdoing

73
Q

Caremark

A

The directors of a corporation have a duty to make good-faith efforts to ensure that an adequate internal corporate information and reporting system exists–only a sustained or systematic failure to exercise oversight will establish the lack of good faith that is a necessary precondition to liability

Overruled Allis Chalmers: Directors must actively monitor, even in the absence of red flags

Signs of good faith attempts to monitor:

System of compliance

Ongoing improvements

Reporting mechanism

74
Q

Stone v. Ritter

A

Directors will be liable for failure to engage in proper corporate oversight where they fail to implement any reporting or information system, or having implemented such a system, consciously fail to monitor or oversee its operations

Good faith is an element of both DOC and DOL, but not an independent duty

75
Q

Citigroup

A

Under the BJR, corporate directors will not be held personally liable for failure to manage business risk unless their conduct rose to the level of gross negligence

The duty to monitor laid out by Caremark is to detect employee misconduct, not business risk generally

76
Q

Duty of Loyalty

A

Fiduciaries must act in the principal’s interests and not use the principal’s assets for personal gain

77
Q

DOL Salience

A

Conflicted Transactions-Where the fiduciary has a personal interest adverse to the corporation

Fundamental Transactions-Change the relationship among shareholders and management

78
Q

Safe Harbor for Interested Transactions

A

DGCL 144: Transactions between the corporation and a director or officer are not void solely for that reason or because the D/O participated in the meeting approving it, provided one of the following is satisfied:

Full disclosure and good-faith authorization of a majority of disinterested directors

Full disclosure and good faith authorization of the shareholders

Transaction is fair under entire fairness standard

Interested directors can’t vote but can count toward a quorum

79
Q

Interested Transaction Standards

A

Entire Fairness if no disclosure and good-faith approval

BJR if disclosure and good faith approval AND:

No majority shareholder in shareholder approval or

If Board approval, majority of board is not conflicted

80
Q

Corporate Opportunities Doctrine

A

Corporate fiduciaries may not appropriate a business opportunity that belongs to the corporation because, in doing so, the fiduciary would exploit its position and compete with the corporation

81
Q

Corporate Opportunities Doctrine Exceptions

A

Proper presentation is made to Board or shareholders

Corporation is disabled from taking the opportunity

Waived under DGCL 122(17)

82
Q

Line of Business Test

A

How did D/O discover the opportunity?

How distant is the opportunity from the corporation’s core conomic activities?

How was the opportunity pursued? With corporate resources?

83
Q

Corp. Opp. Doctrine Defenses

A

Waiver (complete)

Good-faith belief (lots of luck)

84
Q

Cooke v. Oolie

A

When shareholders challenge the fairness of an action taken by interested directors with approval from the disinterested directors after full disclosure, BJR applies

But interested controlling shareholders are not entiteld to BJR protection, even iif DGCL 144(a)(1) is satisfied

85
Q

Lewis v. Vogelstein

A

Disinterested corporate shareholders may ratify the act of the Board in adopting director compensation plan granting outside directros stock options, subject to judicial review for corporate waste

Shareholder ratification does not have the same effect as a Principal’s ratification in Agency Law when a majority of those affirming the transaction were conflicted or the transaction constitutes corporate waste

86
Q

Sinclair Oil

A

A parent corporation must pass the EF test only when its transactions with its subsidiary constitute self-dealing

Self-dealing requires a divident payment to be disproportional or taken to the exclusion and at the expense of minority shareholders

87
Q

Weinberger

A

Minority shareholders voting in favor of a proposed merger must be informed of all material info regarding thebmerger for the merger to be considered fair

Plaintiff has tbe burden to show that the majroity of the minority vote was not informed to trigger EF review

88
Q

Entire Fairness Review

A

Defendant has burden to demonstrate by a preponderance of the evidence:

Fair dealing (includes process, negotioations, disclosure)

Fair price

89
Q

Fliegler

A

Shareholder ratification of a transaction in which directors are personally interested will not shift the burden of proof to an objecting shareholder when themajority of shares that voted in favor of the transaction were held by interested directors

90
Q

Shareholder Litigation

A

Primary mechanism for enforcing fiduciary duties

91
Q

What Distinguishes Direct From Derivative Suit?

A

Ask whether it is the shareholder or the corporation that suffered the harm and would receive the benefit of recovery

92
Q

Derivative Suits: Procedural Requirements

A

Contemporaneous ownership (DGCL 327)

Demand (Del. Chancery Rule 23.1)

93
Q

Demand Requirement

A

The act of demand concedes that the Board is independent and idsinterested so plaintiff should instead plead that demand would be futile (Demand Excused)

94
Q

Special Litigation Committees

A

Used by corporations to intervene when a shareholder skips demand in a derivative suit

95
Q

SLC Timeline

A

Demand-Excused derivative suit survives motion to dismiss

Board forms SLC composed of disinterested directors

SLC moves for dismissal on behalf of the corporation

DE court considers motion with some deference

96
Q

Attorney’s Fees

A

DE courts usually award to prevailing plaintiff

97
Q

Fee-Shifting to Shareholders

A

DGCL 102(f) does not allow, even if shareholder loses on all claims

98
Q

Levine

A

Under DE law, shareholders may only file a derivative suit without first making demand on the board if doing so would be futile because a majority of the directors are interested or lack independence

99
Q

Test for Demand Excused

A

Plaintiff must plead specific facts that allege that a majority of the board is interested or lacks independence or failed to exercise due care

100
Q

Zapata

A

A corporate board of directors cannot dismiss a derivative lawsuit based solely on the fact that a committee composed of disinterested directros found that the litigation is not in the corporation’s best interests

Court will balance interests of the corporation against interests of the plaintiff to maintain enforcement power while discouraging meritless suits

Two steps;

Corporation must demonstrate that SLC is convened and investigation conducted in good faith and that the SLC members are independent

Court should then apply its own judicial business judgment

101
Q

Oracle

A

A member of the board of directors cannot be independent if he or she cannot analyze a problem objectively with only the best interestss of teh corporation in mind

Court will grant limited discovery to investigate:

Independence of SLC

Good faith of investigation

Reasonableness of bases for its conclusion

102
Q

Control Transactions

A

Shareholders are controlling if they possess the means to direct management, typically through ownership of voting shares

103
Q

DGCL 203

A

Prohibits combinations with a person who becomes an interested/controlling shareholder (owning at least 15%) for 3 years unless:

Board approval of transaction taht resulted in shareholder owning at least 15%

The interested shareholder owns at least 85%

The board and 2/3 of other shareholders approve the combination

Corporations can opt out of 203 in charter

104
Q

Control Premium

A

Amount above prevailing market price per share buyers are willing to pay for the benefits of control

105
Q

Market Rule

A

The sale of control blocs does not create rights or duties to other shareholders, it is merely a market transaction between buyer and seller

106
Q

Market Rule Exceptions

A

Collective Opportunity-Controller cannot sell opportunities that belong to the company

Sale of Office-Controller cannot sell their office for a premium because they hold the office as a fiduciary

Looting-Controller must take care not to sell to looters

107
Q

Tender Offers

A

A public offer to purchase stock from any shareholder at a stated price, accepted by shareholders tendering their shares

108
Q

Early Warning

A

SEA 13(d) requires owners of more than 5% of company stock to disclose their identity within 10 days

109
Q

Rules for Tender Offers

A

Open 20 days

All holders best price

Pro-rata if oversubscribed

110
Q

Perlman

A

Where a sale of a corporation’s controlling interest comannds an unusually high premium due to a market shortage of the corporation’s product, a fiduciary may not appropriate to himself the value of that premium

111
Q

Perlman Dissent

A

Probably position DE court would take today

Majority does not explain what duty defendant violated. Controlling shareholders are entitled to sell their shares at the best price they can get

112
Q

Merger

A

Two companies merge into one

DGCL 251 requires board and majority shareholder approval of both corporations

Board resolution alone sufficient if surviving company issues less than 20% of its stock to acquire target

113
Q

Acquisition

A

One company buys another

114
Q

Triangular Merger

A

Buyer creates subsidiary shell corporation then merges shell with target. Target becomes wholly owned sub of buyers

115
Q

Asset Sale

A

DGCL 271: Alternative to statutory merger that involves selling off company assets one by one

116
Q

M and A Value Created by:

A

Economies of scale

Vertical integration

Management improvement

Project diversification

117
Q

M and A Value Transferred by:

A

Diverting tax revenue to shareholders

Leveraged buyouts

Freezeouts

118
Q

M and A Value Destroyed by:

A

Empire Building

Overconfidence

Collective action failures

119
Q

Hariton

A

A sale of assets accompanied with a mandatory plan of dissolution and distribution is legal even if no appraisal rights are given to shareholders

But in a true merger, shareholders who vote against are entitled to DGCL 262 appraisal rights

120
Q

2 Methods for Hostile Takeover

A

Tender offer

Proxy Contest

121
Q

Poison Pill

A

Takeover defense designed to deter hostile acquisition of large stake in a corporation

Triggered by outsider acquiring large stake (typically 15%)

Board authorized to issue new shares to other shareholders at a discount, diluting holdings of acquirer

Because only the board can waive this, acquirer needs board approval

122
Q

Shadow Pill

A

Board can adopt a poison pill in the bylaws very quickly, so there is always a threat posed by a shadow pill

123
Q

Unocal

A

A board of directors may repurchase stock from a selected segment of its stockholders in order to defeat a perceived threat to the corporation’s business so long as the board’s selection of which stockholders to repurchase from is reasonable in relation to the threat and not motivated primarily by a desire to effectuate a perpetuation of control

Defensive measures that are reasonablein relation to the trreat posed are entitled to BJR

124
Q

Reasonable Concerns Under Unocal

A

Inadequacy of hostile bidder’s offer

Illegality

Impact on other constituencies

Risk of non-consummation

125
Q

Greenmail

A

Buying enough shares to threaten a takeover with the intent of coercing the corporation into repurchasing your shares at a premium

126
Q

Revlon

A

When the break-up of a corporation is inevitable, the duty of the corporation’s board of directors changes from maintaining the company as a viable corporatte entity to maximizing the shareholder’s benefit when the company is eventually sold

127
Q

When are Revlon Duties Triggered

A

Definitely in a break-up sale for cash

Change of control is a necessary condition

If biddre has no control post merger, only Unocal applies

If buyer will control the target, Revlon applies

128
Q

Securities Fraud and Insider Trading

A

Insiders, such as directors, officers, and corporatios, are subject to myriad duties and linmitations when dealing in the corporation’s securities

As agents of the corporation, directors cannot exploit info that belongs to the corporation for personal gain

129
Q

SEC Rule 10b-5

A

Principle basis for regulating securities fraud

Specifically includes trading on the basis of material, non-public info as a manipulative and deceptive device

Enforced by DOJ, SEC, or private action

130
Q

Insider Trading Fiduciary Duty Theory

A

Duty owed to company whose securities are traded

Duty established by proving RETAC between trader and company

Trading counterparties have private remedy if they can show a fiduciary relationship

131
Q

Insider Trading: Misappropriation Theory

A

Duty owed to principal in any fiduciary relation or RETAC

Duty established by proving fiduciary relationship or confidentiality agreement

Principal has private remedy, but not counterparties

132
Q

Chiarella

A

An allegation of securities fraud based on nondisclosure will not succeed unless there is a duty to speak (i.e. some rando with no duty to corp. can use info however he wants)

Requires fiduciary relationship or RETAC

133
Q

Dirks

A

A breach of an insider’s fiduciary duty, such as the insider personally benefitting from the disclosure, must occur before a tippee inherits a duty to disclose inside info

Liable only if:

Insider’s tip constituted a breach of fiduciary duty AND

Tippee knew or should have known of the breach

134
Q

O’Hagan

A

A person is guilty of securities fraud when he misappropriates confidential info for securities trading purposes in breach of a duty to the source of that info

135
Q

Misappropriation Theory

A

Independent basis for liability for securities fraud that requires 1) deception and 2) RETAC between trader and source of info

Business Associations (1 decks)

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