Final Flashcards
Efficiency
Pareto - Focuses on individual welfare
Kaldor-Hicks - Focuses on total welfare
Agency
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
Agency Termination
Can be terminated at any time
No specific performance
Damages or liquidated damages as remedy
Authority
Empowers agent to act on behalf of principal
Actual Authority
R3d 2.01: When a reasonable person in the position of the Agent would infer from the manifestations of the Principal
Apparent Authority
R3d 2.03: When a reasonable third party would understand that the Agent had authority to act based on the manifestations of the Principal
Inherent Authority
Flows from the nature of the agency relationship itself, not any specific manifestations of the parties
Respondeat Superior
R3d 2.04: A principal is liable for torts committed by his employees in the scope of employment
Employees vs. Independent Contractors
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
Jenson
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
White
A purported agent’s claims regarding the existence or scope of his authority, without more, are insufficient to create apparent authority
Humble Oil
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
Sun Oil
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
Partnership
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
RUPA 2.02(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
Partnership Property
Partners have no personal interest in partnership property, a right to a share of the profits
Partnership Decision Rule
Ordinary Course Matters-Majority vote
Anything else requires unanimous vote
Partnership Termination
At will
Disassociation - Remaining partners buy out leaver
Disollution - Ends partnership
Parntership Liability (creditors)
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
Limited Partnership
Limited partners enjoy limited liability, general partner does not
Limited Liability Partnership
All partners enjoy limited liability and control
Taxation
Partnership income passes through to the partners
Corporate income taxed as corporate earnings and as dividends
Vohland
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
Meinhard
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
Corporation
A legal entity with a distinct legal personality, limited liability for shareholders, and centralized management by a board of directors
Key Features of Corporations
Separation of ownership and control
Legal personality and indefinite life
Limited liability
Transferrable ownership
Choice of law
Centralized management by a board of directors
Takeover Defenses
Entrench managers
Dual-class stock
Staggered board
Poison pill
DGCL 141(a)
Authorizes shareholders to delegate management authority to a board of directors
Board Powers
Appoint and remove officers
Declare and pay dividends
Amend bylaws
Initiate sale of the company
Board Elections
Default - 1-year terms with entire board reelected each year
DE law allows 3 staggered classes
Certificate of Incorporation
Filed at state office
Determines basic characteristics of corporation
Can be amended only by shareholder vote
DGCL 109
Allows bylaws to be amended by shareholder vote or board resolution
Form 8-K
Unscheduled disclosures to SEC
Cunninghame
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
Jennings
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
Corporate Finance
Corporations need capital to finance operations so they sell claims on their future cashflows in the form of debt (fixed) and equity (residual)
Accounting Equation
Assets = Debt + Equity
Expected Value
Probability-weighted average of all possible outcomes
Discount Rate
Percent difference between present value and future value
PV = FV / (1 + r)
Diversification
Mitigating the risk associated with one asset by investing in an offsetting asset
Only non-diversifiable risk affects the discount rate
Efficient Market Hypothesis
Stock prices accurately reflect all relevant information
If true, you cannot beat the market
Event Studies
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
Shareholder Voting
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)
Shareholder Voting-Place and Time
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)
Shareholder Voting-Who Can Vote?
Shareholders who hold stock on the record date (10-60 days before the vote)
Even if they have since sold the stock (DGCL 213)
Shareholder Voting-How?
Shareholders typically authorize someone to vote on their behalf by proxy (DGCL 212(b))
Proxy
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
Proxy Card
Board has sole control over contents (But see SEC Rule 14a-8), which include:
Nominations for director seats
Proposals needing shareholder approval
Default Rules for Director Elections
Annual election of all directors
One share, one vote (DGCL 212(a))
Straight voting (separate election for every seat)
Directors elected by plurality vote
Cumulative Voting
DGCL 214: Shareholders allocate votes among candidates, usually resulting in proportional representation
Shareholder Voting Other Than Director Elections
DGCL 216: Most matters require a majority for quorum and a majority voting in favor
Required Form for Soliciting Proxies
Schedule 14A
Shareholder Proposals
Rule 14a-8
Non-Binding
Board can exclude proposals that relate to the nomination of a director or seek to affect the current election
DGCL 112 and 113
Authorizes proxy access and reimbursement of solicitation expenses
Why Is There A Holding Requirement For Proxy Access?
Proxy access is costly
Long-term holders have incentives to maximize long-term profits (but don’t short-term holders?)
Shareholder Proposals: Eligibility
Rule 14a-8: Shareholders who have held a 1% or $2,000 stake for one year can include one proposal on company proxy
Omission of Shareholder Proposals If:
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
Common Shareholder Proposals
Corporate social responsibility
Corporate governance
Board composition and structure
Executive compensation
Voting rules
Proxy Fraud
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
Virginia Bankshares
A statement of belief by a board of directors can be a material misstatement if the statement is false
Schnell
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
Blasius
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
Duty of Care
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
Protection Against DOC Liability
Business Judgment Rule
Waiver (DGCL 102(b)(7))
Indemnification and insurance (DGCL 145)
Business Judgment Rule
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
Duty of Care Waiver
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
DOC Indemnification and Insurance
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))
Oversight Liability
Instances in which the Board fails to monitor agents of the corporation
Sarbanes-Oxley 404
Requires management to certify that they evaluated their company’s financial reporting systems and disclosed any material weakness
Van Gorkom
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
Disney
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
Allis Chalmers
Red-flag approach: Directors have no duty to act absent reasonable suspicion of wrongdoing
Caremark
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
Stone v. Ritter
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
Citigroup
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
Duty of Loyalty
Fiduciaries must act in the principal’s interests and not use the principal’s assets for personal gain
DOL Salience
Conflicted Transactions-Where the fiduciary has a personal interest adverse to the corporation
Fundamental Transactions-Change the relationship among shareholders and management
Safe Harbor for Interested Transactions
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
Interested Transaction Standards
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
Corporate Opportunities Doctrine
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
Corporate Opportunities Doctrine Exceptions
Proper presentation is made to Board or shareholders
Corporation is disabled from taking the opportunity
Waived under DGCL 122(17)
Line of Business Test
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?
Corp. Opp. Doctrine Defenses
Waiver (complete)
Good-faith belief (lots of luck)
Cooke v. Oolie
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
Lewis v. Vogelstein
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
Sinclair Oil
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
Weinberger
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
Entire Fairness Review
Defendant has burden to demonstrate by a preponderance of the evidence:
Fair dealing (includes process, negotioations, disclosure)
Fair price
Fliegler
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
Shareholder Litigation
Primary mechanism for enforcing fiduciary duties
What Distinguishes Direct From Derivative Suit?
Ask whether it is the shareholder or the corporation that suffered the harm and would receive the benefit of recovery
Derivative Suits: Procedural Requirements
Contemporaneous ownership (DGCL 327)
Demand (Del. Chancery Rule 23.1)
Demand Requirement
The act of demand concedes that the Board is independent and idsinterested so plaintiff should instead plead that demand would be futile (Demand Excused)
Special Litigation Committees
Used by corporations to intervene when a shareholder skips demand in a derivative suit
SLC Timeline
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
Attorney’s Fees
DE courts usually award to prevailing plaintiff
Fee-Shifting to Shareholders
DGCL 102(f) does not allow, even if shareholder loses on all claims
Levine
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
Test for Demand Excused
Plaintiff must plead specific facts that allege that a majority of the board is interested or lacks independence or failed to exercise due care
Zapata
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
Oracle
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
Control Transactions
Shareholders are controlling if they possess the means to direct management, typically through ownership of voting shares
DGCL 203
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
Control Premium
Amount above prevailing market price per share buyers are willing to pay for the benefits of control
Market Rule
The sale of control blocs does not create rights or duties to other shareholders, it is merely a market transaction between buyer and seller
Market Rule Exceptions
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
Tender Offers
A public offer to purchase stock from any shareholder at a stated price, accepted by shareholders tendering their shares
Early Warning
SEA 13(d) requires owners of more than 5% of company stock to disclose their identity within 10 days
Rules for Tender Offers
Open 20 days
All holders best price
Pro-rata if oversubscribed
Perlman
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
Perlman Dissent
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
Merger
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
Acquisition
One company buys another
Triangular Merger
Buyer creates subsidiary shell corporation then merges shell with target. Target becomes wholly owned sub of buyers
Asset Sale
DGCL 271: Alternative to statutory merger that involves selling off company assets one by one
M and A Value Created by:
Economies of scale
Vertical integration
Management improvement
Project diversification
M and A Value Transferred by:
Diverting tax revenue to shareholders
Leveraged buyouts
Freezeouts
M and A Value Destroyed by:
Empire Building
Overconfidence
Collective action failures
Hariton
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
2 Methods for Hostile Takeover
Tender offer
Proxy Contest
Poison Pill
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
Shadow Pill
Board can adopt a poison pill in the bylaws very quickly, so there is always a threat posed by a shadow pill
Unocal
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
Reasonable Concerns Under Unocal
Inadequacy of hostile bidder’s offer
Illegality
Impact on other constituencies
Risk of non-consummation
Greenmail
Buying enough shares to threaten a takeover with the intent of coercing the corporation into repurchasing your shares at a premium
Revlon
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
When are Revlon Duties Triggered
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
Securities Fraud and Insider Trading
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
SEC Rule 10b-5
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
Insider Trading Fiduciary Duty Theory
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
Insider Trading: Misappropriation Theory
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
Chiarella
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
Dirks
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
O’Hagan
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
Misappropriation Theory
Independent basis for liability for securities fraud that requires 1) deception and 2) RETAC between trader and source of info
