Final Exam - Cases Flashcards
Gorton v. Doty
Agency
Rule: AGENCY RELATIONSHIP RULE: Agency: the relationship which results from the manifestation of consent by one person (P) to another (A) that A shall:
- Act on P’s behalf
- And subject to P’s control
- And A consents to so act
Cargill
Agency
Rule: A principal is liable on contracts made by an agent on the principal’s behalf. Here, on behalf, control, consent. Web of control.
Mill Street Church
Authority
Implied actual authority - manifestation of consent from P to A, A reasonably believes that has authority. Can be implied from past practice, lack of clear instructions to the contrary, belief by T that properly hired. Here, implication from history and circumstances. Do things that usually accompany or are reasonably necessary for the task
370 Leasing
Authority
implied apparent authority: RULE: an agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose the agent had the authority he purports to exercise.
Absent knowledge on the part of 3rd parties to the contrary, apparent authority to do the things usual and proper to the conduct of the business which he is employed to conduct.
Watteau v. Fenwick
Authority
Rest. § 8A: Inherent authority
Not apparent because undisclosed principal, but transacting as usual in business and on P’s account was enough to find inherent authority
Botticello v. Stefanovizc
Marriage
Marital status cannot in and of itself prove agency. For ratification, must know or have reason to know all of the relevant facts.
Hoddeson v. Koos Bros
Agency/authority
Agency/authority by estoppel
1. Acts or omissions by the principal, either intentional or negligent, which created the appearance of authority in the purported agent
2. The third party reasonably and in good faith acts in reliance on such appearance of authority
3. The third party changed her position in reliance upon the appearance of authority
Atlantic Salmon
Partially disclosed P
“unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract” § 321.
Humble and Sun
IC or Employee?
when determining if IC or employee relationship, look to level of risk and control
More control and less risk is more like employee
Holiday Inns
Agency relationship but no liability. Control over the instrumentality that caused the harm
Clover v. Snowbird
Skiing between restaurants quickly was not a frolic and detour, and thus was within the scope of employment, because not total abandonment, stayed on grounds, not substantial deviation.
Bushey v. US
sailor case
Scope of employment
Tests for scope of employment:
1. purpose to serve master (here not used)
2. economic - least cost avoider
(here not used)
3. foreseeability - was the conduct foreseeable by P.
Here yes foreseeable because drunk sailers do stupid things.
Manning v. Grimsley
intentional torts
RULE: about purpose to serve the master
“employee’s assault was in response to conduct which was presently interfering with the employee’s ability to perform his duties successfully” Throwing ball at crowd was in purpose to serve the master - to pitch in the game. Not about foreseeability.
Majestic Realty v. Tori
IC
A P is not generally liable for the negligent acts of an IC in performance of the contract unless:
- P retains control
- incompetent independent contractor
- performance of contractor’s task is inherently dangerous
- non-delegable duty
Here, breaking down building is inherently dangerous and negligent - P liable
Reading
Disgorgement of secret profits made in connection with transactions conducted on behalf of the P.
Duty of Loyalty: “An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position.”
Rash v. J.V. Intermediate
Duty not to compete with one’s P.
Duty not to act as adverse party. Failure to reveal was a problem.
Fenwick v. Unemployment Compensation Commission
Factors to determine whether partnership are sharing in loss and profits and control of operation.
agreement with obligation to share in profits created prima facie case, but not partnership.
No shared control. Also consider share in losses, property, conduct, rights on dissolution.
Not partnership.
Young v. Jones
bank Bahamas PW case
Partnership by estoppel: “A person who represents himself, or permits another to represent him, to anyone as a partner in an existing partnership or with others not actual partners, is liable to any such person to whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership”
Here, yes representation, but P did not rely on it when making decision.
Meinhard v. Salmon
Apartment Case
Partners have a duty to inform of business opportunity (even if not to share it) in order for the other party to be able to compete.
Consider closeness of product, geography, and time to determine if partnership opportunity or outside scope
Sandvick v. LaCrosse
JV
investment in leases. Similar to partnership, more limited in scope and duration.
“for a business enterprise to constitute a joint venture,” must have:
1. Contribution by the parties of money, property, time, or skill in some common undertaking (not necessarily the same)
2. Proprietary interest and right of mutual control over the engaged property
3. Express or implied agreement for the sharing of profits, and usually…of losses
4. Express or implied contract showing a joint venture was formed
People needed to inform others in the joint venture
Meehan v. Shaughnessy
Lawyers leaving P
Can plan to compete with entity to which owes allegiance, but can’t violate fiduciary duties. Left the partnership but lied to partners and didn’t give clients choice.
Putnam v. Shoaf
Leaving Partnership - PROPERTY
Selling partnership interest contains partnership property, including legal claims.
A partner does not personally own any specific property of the partnership and therefore cannot retain any rights to the partnership after she conveys it to another. No right to share in gain after conveying interest in the business.
National Biscuit v. Stroud
bread
Every partner is agent of the partnership for apparently carrying on the business in the usual way.
Resolution of difference as to ordinary course of business requires majority. One could not restrict purchase of bread when two disagreed. Carrying on the business of the partnership binds the partnership, partner retained authority.
Summers v. Dooley
garbage men
Dooley hires and pays new employee. Seeks reimbursement from partner. Nope. Change in business must be decided by the majority
Owen v. Cohen
bowling
Partnership was for term because Owen was to be repaid by partnership out of profits “as soon as it could reasonably do so” - continue until profitable. But court says its fine to dissolve - rightful - dude was making it hard to carry on a business.
Page v. Page
brothers
Not for term based only on need to repay loan. [While there was an agreement to repay one partner, no evidence as to whether that had to be done before the partnership was dissolved.] At will. Can’t seek to resolve to take advantage of other partner.
Prentiss v. Sheffel
partnership auctions
Winding up = auction for the business. Partners may vote with that auction, even with paper dollars.
When a partnership is going through dissolution, the partners may bid during the judicial sale of partnership property
Kovacik v. Reed
service provider
In pure service partnership, service provider not liable for capital losses (eliminated mostly in RUPA)
Southern Gulf Marine v. Camcraft
Corporation by estoppel. Promised to create court in particular jurisdiction, but then went somewhere else. Other party wanted to renege on the contract.
Court will treat a firm improperly incorporated as a corporation if third parties:
i. Thought was a corporation
ii. Would earn a windfall if they were now allowed to deny that the business was a corporation.
protect corporation
Walkovszky v. Carlton
taxis
Attempt to pierce the veil, which would have allowed suing the owner because the owner owned many additional companies. Not allowed. Not alter ego because formalities were followed. It was okay to create small taxicab companies with limited liability and assets. Not fraudulent to incorporate for the purpose of limited liability. Damages are the same.
Sea-Land Services
Piercing Veil
Reverse veil piercing - after initial piercing to owner, get to other companies owned by the same. To pierce the corporate veil, a court must find: a unity of interest and ownership, determined by looking at four factors:
i. the lack of corporate formalities,
ii. the commingling of funds and assets,
iii. under-capitalization, and
iv. the use by one corporation of assets of another, and
AND a situation where failing to PCV would either
i. sanction fraud or
ii. promote injustice.
[unjust enrichment]
Here, failure to maintain records, commingling of funds, undercapitalization = unity of interest and ownership BUT no demonstration of fraud or injustice
Roman Catholic Archibishop v. Sheffield
dogs
No respondeat superior between archdiocese and monetary.
Head of the business cannot be reached by veil piercing - ONLY OWNER.
Enterprise liability. Where parent controls several subsidiaries, each does not become liable for the acts of the other. No exchange of assets or shared accounts between San Fran people and Swiss monks.
court looks for injustice - here P could sue in Switz.
Bristol Myers/Silicone gel
Parent company fails to follow formalities with its wholly owned subsidiary.
Sub went for long periods without board meetings, and parent sometimes directly made made decisions for the subsidiary
[DE courts do not necessarily require showing of fraud for veil piercing if subsidiary found to be mere instrumentality/alter ego.]
Frigidaire Sales v. Union Properties
LP
When the general partner of a LP is a corporation, the limited partners do not become liable just by virtue of being directors/officers of the GP.
Individuals must make clear the context in which they are acting.
Cohen v. Beneficial
Derivative lawsuits choice of law
- Posting bond: corporation demanded that P post security
- Such requirements are perfectly constitutional
- substantive law for Erie purposes so state law.
- choice of state law that this state uses here considers the issue to be procedural and therefore applies its own law
Choice of law in derivative case in NJ - state law under Erie, home law because procedural question
Medtronic
merger and shareholder suit
To determine whether direct or derivative, focus on the injury. When injuries to corporation itself/shared by all SHs, then derivative. When injury of shareholders not shared by corporation, direct. Also consider if recovery would be the same for all shareholders.
1. Waste is always derivative
2. Dilution - direct. In this case, only old Medtronic shareholders were diluted, others were not. About relative power of shareholders (in relation to others within the corporation).
3. shareholder tax consequences - direct. all shareholders treated differently in damages, pay taxes based on how many shares they own
Grimes v. Donald
Demand
Demand requirement excused if P shows reasonable doubt (pretty easy showing) that either:
a. A majority of the board has a material financial or familial interest,
b. A majority of the board is incapable of acting independently for some other reason such as domination or control,
c. OR the underlying transaction is not the product of a valid exercise of business judgment.
Here, that test doesn’t apply because filed a demand. Demand refusal doctrine means decision protected by BJR.
Zapata v. Maldonado
Special litigation committee (SLC)
Designed to give corporation another chance to reject a suit. Corp asks court to apply BJR
Two-step test when corp or committee files pre-trial motion to dismiss [when demand excused]
1. Court should inquire into the independence and good faith of the committee and bases supporting committee’s recommendation. Corporation has burden proving independence, good faith, and reasonable investigation
2. Court may apply its own independent business judgment as to whether the case should be dismissed (opposite of BJR)
Dodge v. Ford Motor Co.
Ford was being too charitable denying dividends to build a factory to help the community. run as charitable institution. Need bigger dividend.
Shlensky v. Wrigley
Baseball case
Business Judgment Rule: Court does not deeply probe explanation for a decision that may have been motivated by some desire other than profit. [will not resolve questions of policy and management for a corporation unless tainted with fraud. Presume that in good faith and designed to promote best interests. Authority of directors is absolute when acting within the law. It was fine to decide not to install lights for night baseball games.]
Kamin v. Amex
stupid business decision
Amex made stupid choice to distribute shares instead of selling, which would have saved them millions of dollars. Even though decision based on accounting, court will deferentially apply BJR. Majority are disinterested and board acted after deliberation on basis of expert advice. Just because imprudent or misjudgment does not mean overcomes BJR.
Cinerama
like VG
what to look at to determine if fair?
CEO was pretty diligent but could be problem. BJR rebutted because did not make informed decision, but fine because agreement was entirely fair. Able to meet entire fairness test = NO BREACH OF DUTY. Look at timing, initiation, negotiation, structure, disclosure to and approval by directors and shareholders.
Francis v. United Jersey Bank
mom ignores sons
A failure to act rebuts the BJR. Lillian violated duty of care to creditors (because tasked with holding funds of others in trust) because she did not pay attention to the affairs of the corporation
Bayer v. Beran
radio contract
Company hires chairman’s wife as opera singer. The BJR is rebutted when there is a conflict of interest. But apply entire fairness test, and transaction here was fair. Even if conflict of interest, not necessarily violation of duty of loyalty.
Benihana of Tokyo v. Benihana, Inc.
interested transactions and DE
Sometimes a Board initially sloppy may revisit an issue to show that has carefully consider
Test: whether primary purpose is entrenchment.
Majority of disinterested directors approved the advertising campaign/contract believing in good faith that it was the best way to finance necessary improvements. No breach of duty.
Broz v. Cellular Information Systems, Inc.
cell service licensing opportunity
Illustrates problems from being board member of a competitior.
An officer/director violates the DoL by embracing a business opportunity if:
Corporation financially able to take it,
Opportunity is in corporation’s line of business,
Corporation has interest or expectancy in the opportunity, and
By embracing the opportunity, the officer/director would create a conflict between self-interest and that of the corporation.
Here, while the licensing deal offered to B was in CIS’s line of business, the other elements were not met. Fine to take the opportunity.
Ebay
Line of business = investing in securities yes because eBay invests a lot. Needed to give eBay opportunity to buy discounted IPO offerings. Doesn’t matter if risky. Conflict of interest because the offers who got the IPOs made the quick profit, not the corporation.
Beam [Martha Stewart]
Selling of shares by individual officer might compete with the firm’s own sales of shares, but not in the line of business so no violation
Sinclair
Parent coporation obligations
Excessive dividends were fine - no duty of loyalty problem even if some wanted them for than others (also dangerous to keep money in VZ)
Preventing expansion of operations/choosing one subsidiary over another was not self-dealing - Sinven couldn’t get Alaska’s jobs anyway - geographic limitations
Breach of contract was a self-dealing issue, so entire fairness applied and parent company could not meet its burden
Zahn
tobacco
Directors redeemed preferred (convertible) shares because they discovered that there was serious opportunity for profit and shares would be worth more.
With full disclosure of facts of tobacco store, stockholders would have made informed decision (and likely converted class A stock to class B, rather than allowing it to be redeemed by board).
BJR rebutted because conflict of interest. Breach of duty of loyalty because for personal gain, did not adequately inform the shareholders. Needed to disclose.
[Shareholders entitled to damages for loss of ability to convert.
Preferring some shareholders is fine as long as all shareholders given all information needed to make their own decision.]
Wheelaborator - effect of ratification
Effect of ratification on duty of loyalty claims:
Against directors: Ratification invokes the BJR and limits review to issues of gift or waste with burden of proof on the party attacking the transaction
Against shareholders: Ratification by shareholders shifts burden of proof to P to show unfairness.
Disney
excessive severance package?
To demonstrate bad faith, must show either:
1. Subjective – actual intent to harm corporation (enough)
2. Intentional dereliction of duty, conscious disregard for one’s responsibilities. Extreme violation of duty of care (enough)
3. [Gross negligence not sufficient on its own]Here, board members were informed, no violation of duty of good faith.
Stone v. Ritter
corporation didn’t monitor compliance with securities laws?
Breach of oversight duty? NO. Received and approved relevant policies and procedures delegated to certain employees and departments, relied on reports
Breach of duty of good faith? GOOD FAITH PART OF DUTY OF LOYALTY.
Conditions for director oversight liability:
CAREMARK:
1. Directors utterly failed to implement any reporting or information system of controls OR
2. Having implemented such system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention
Focus is on whether reasonable, not necessarily effective
Robinson v. Glynn
Geophone and field test
(from Howey) An investment contract is:
1. an investment of money
2. in a common enterprise (horizontal or SOMETIMES vertical - investor with promoter)
3. with profits to come solely from the efforts of others.
Here Robinson not passive investor but knowledgeable executive actively protecting interest and position.
A stock
must be called a stock, and bear usual characteristics:
- receipt of dividends based on profits
- negotiability
- voting rights in proportion to shares.
Not a security.
Escott v. BarChris
misrepresentation liability - experts/nonexperts
misrepresentation in registration statement under SA §11/due diligence requirements:
Experts are:
- not liable for nonexpertised part
- defense for expertised part, if after reasonable investigation, reasonable ground to believe and did believe that statements were true OR statements did not reflect work
Nonexperts are:
- defense for expertised part if no reasonable ground to believe and did not believe that statements were misleading
- defense for nonexpertised part, if after reasonable investigation, reasonable ground to believe and did believe that statements were true
Goodwin
mining company and copper
Common law of insider trading:
When directors of corporation bought a shareholder’s shares on the securities market after discovering there may be copper deposits under the land, they had no duty to disclose to shareholder.
- Duty is to the corporation, not the shareholders
- in the “nebulous” stage/highly speculative
- unclear buyer and seller/on open securities market
Chiarella v. US
traditional theory of insider trading
printer employee
Employee at financial printer gets info about acquirer in merger transaction and trades in target. Under the traditional theory, since not an insider of the target company, no duty to abstain from trading - no relationship of trust/breach of fiduciary duty.
If hired by acquirer, can still trade in target
A violation is trading by an insider of material, nonpublic information. Not an insider.
Dirks v. SEC
trying to publish problems with company
- Two elements of 10b-5 violation:
- The existence of a relationship affording access to inside information intended to be available only for a corporate purpose
- The unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure.
Tippee Liability:
2. Tippee receiving tip from insider is liable if:
- The insider/tipper breached their fiduciary duty by disclosing the information AND
[ must be violation of duty of loyalty, liability only if disclosure for personal benefit, carelessness not enough]
- The tippee knows or should know that there has been a breach
Salman v. US
info to brother
gifting information can be breach of fiduciary duty - for personal benefit
Carpenter and Chestman - misappropriation?
WSJ reporter telling friends was not enough.
Husband did not participate in confidential business discussions and familial relationship standing alone did not create fiduciary relationship to be breached by trading
Rosenfield v. Fairchild Engine & Airplane Corp.
insurgents v. incumbents compensation
In proxy fights that are bona fide policy contests:
- For incumbents: management may look to the corporate treasury for the reasonable expenses incurred in good faith of soliciting proxies to defend its position
- For insurgents: same but can only be reimbursed if they win
Seinfeld v. Bartz
calculation not done
Including enough information for sophisticated investors to calculate the value of the options but not the calculations was not a material omission. Only material if “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”
Stroh v. Blackhawk Holding
IL state constitution prohibited non-voting common stock, but court allows stock with no economic rights. Unless one share, one vote principle, any allocation of power (economic and voting rights) between different shareholders is possible.
Espinoza v. Zuckerberg
In a close corporation, after the fact approval by disinterested controlling shareholder was not proper ratification of interested board’s decisions - must adhere to the corporate formalities specified in law for taking stockholder action to give minority shareholders the chance to raise objections.
Entire fairness applies because interested vote and no valid ratification
CA v. AFSCME
shareholder proposals
While a bylaw can be a proper subject for a shareholder proposal in DE if procedural, but in this case it related to compensation, which restricted fiduciary duties of the board with no fiduciary out. Not allowed. Grounds for excusal of shareholder proposal.
Lovenheim
foie gras
When a shareholder proposal has a low economic significance, it may still have sufficient noneconomic[ethical/social] significance to require inclusion in the proxy. Here, animal welfare.
Trinity Wall Street v. Walmart
guns
To determine if a proposal is excludable on the basis of relating to a company’s ordinary business operations, ask:
1. what is the subject matter of the proposal
2. is that related to normal business operations?
3. if yes, is this a significant policy issue that transcends ordinary business operations, or is it entanged?
Ringling
shareholder agreements - circus
SH Agreements in close corps - voting pool agreement valid but no specific performance. Votes in violation of the agreement were simply not counter
McQuade
NY Giants
When stockholders of closely held corp agreed to do their best to elect one another as directors and keep as officers, the agreement was void against public policy, because Board must be able to exercise business judgment on behalf of the shareholders.
Clark v. Dodge
IP v. capital
Distinguished from McQuade because no minority shareholders. Here the agreement between shareholders to keep one on as director was valid. No fiduciary duty to other SHs
To create homemade McQuade, could have created minority shareholders
NetJets
piercing veil of LLC
A court will pierce the veil of an LLC, but harder because an LLC generally follows less formalities than a corporation. Less emphasis on observance of formalities - look to fraud/injustice. Corp was owner’s piggybank/pocket
New Horizons
Since Haack did not prove that amounts distributed to her on dissolution were less than the amount of the debt owed to NH, she was liable for the entire amount. Need to follow formalities in dissolution/distribution of remaining assets
Farris v. Glen Alden Corp.
PA: De Facto Merger Doctrine - a transaction that has the form that’s not a merger but substantively results in a merger must receive the procedural protections of a merger. Here, purchase of assets was equivalent to merger, which would have granted appraisal rights and shareholder vote.
“essential nature test”
Terry
PA legislature overturned doctrines but it might exist in minnow swallowing the whale case
Hariton
No de facto merger doctrine - each form of organization is of equal dignity.
Coggins
Patriots
MA - A legitimate business purpose for freeze-out mergers is required, and cannot simply be that of controlling SH. Just wanting to get rid of minority shareholders not valid business purpose
Rauch
De facto merger in DE?
DE:
Preferred shareholders were not given $100 redemption for their shares during triangular merger, Ps say that merger was in effect a redemption. Court respects form of transaction - if structured as a merger, not something else. Opposite of de facto merger.
VGS
LLC merger
Director who defects
Majority owner gets to pick 2 of 3 managers. One elected defects, those two agree to merger that would make majority owner not majority owner.
Operating agreement says majority is fine, which is normally alright (default is unanimous).
Court says that this was breach of fiduciary duties, because needed to disclose to other member (who would have removed the guy). Upon disclosure, never would have happened.
Cheff
greenmail
Greenmail = corporation buys back shares from would-be acquirer at a premium.
Court says okay if proper business purpose - here yes because reputation as liquidator and employee unrest
Standard for evaluating defensive tactic:
- must show reasonable grounds to believe danger to corporate policy and effectiveness exists. Show good faith and reasonable investigation
Omnicare
When lock-up included provision submitting offer to SHs even when board disagreed, it was void, because it violated the board’s fiduciary duties. Promise by majority shareholders to support the deal would prevent shareholders from taking a better one. Needed fiduciary out.
CTS v. Dynamics
anti-takeover law of IN
IN law gave shareholders the power to refuse to give an entity whose ownership rose above certain levels voting power.
Does not violate Williams Act or Commerce Clause because
1. allows shareholders to discuss together the fairness of an offer. Reduces coercive nature. Protects independent shareholder.
2. Commerce clause protects from out-of-state discrimination. Here the law applied whether acquirer was in or not in IN.
Different than IL law with hearing without deadline, preference for board not acquirer, and review by state secretary of state.
Sharon Steel
successor obligor clause
In case of merger or sale of assets, surviving corp assumes issuer’s debt. BUT in liquidation, must pay off.
No assignment of debt to another party unless all or substantially all are transferred at the time the plan of liquidation is determined to a single purchaser.
If all assets are sold as the last stage of a planned liquidation, that counts as a liquidation, not a sale of assets. In liquidation, debt callable.
Nabisco
indentures and covenants
No implied covenant in indenture. When debtholder knew of risky business and did not amend covenant, that was its own problem
