Final Exam Review Flashcards
1
Q
Test for Inherent Authority
A
(1) Undisclosed P; (2) Hires A to manage a business; (3) A’s actions, even if expressly forbidden by P, are usual to the business; (4) P is liable.
2
Q
Test for Agency Estoppel
A
P may be estopped to deny the existence of the agency relationship if: (1) P’s intentional or negligent acts, including omissions, created an appearance of authority in A; (2) on which III party reasonably and in good faith believed (justifiably was induced to believe) [that the impostor was acting as A of the P]; and (3) relying on this situation, made a detrimental decision; (4) P failed to take reasonable precautions.
3
Q
Test for Ratification (Agency)
A
(1) principal has knowledge of all material facts regarding the contract; (2) principal manifests asset to the transaction or principal accepts the benefits; and (3) ratification must follow the very same contractual term of the contract to be ratified.
4
Q
Duty of care for agents:
A
Duty to act with the care, competence, and diligence normally exercised by agents in similar circumstances.
5
Q
Duty of Loyalty for Agents:
A
Agent cannot put her own interest (or those of third parties) ahead of the principal.
No secret profits
No conflict of interest and self-dealing
No usurping business opportunities from principal.
No grabbing and leaving: An agent has a duty: (1) not to use property of the principal for the agent’s own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party.
6
Q
What is test for grabbing and leaving?
A
An agent has a duty: (1) not to use property of the principal for the agent’s own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party.
7
Q
Test for Tort Liability (Agent)
A
(1) the existence of employment (agency) relationship
* Master-Servant Relationship: The principal has sufficient control over day-to-day operations.
* Independent Contractor: A principal is not vicariously liable to an independent contractor. The most important factor in distinguishing an independent contractor is the degree of control.
(2) Tort was committed within the scope of employment.
(i) Was the conduct of the same general nature to that which the employee was employed (or authorized) to perform (not so unusual or startling)
(ii) Was the conduct substantially removed from the authorized time and space limits of the employment? Was the agent on a frolic and detour?
8
Q
Test for Partnership by Estoppel
A
(1) Representation (express or implied) of a partnership to a third party by or attributable to the alleged partner;
(2) Reasonable reliance in good faith by a third party that such partnership exists; and
(3) Third Party, who relies on this apparent partnership, changes position in reliance on the representation to its detriment.
9
Q
Test for Partner Duty of Care
A
refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
10
Q
May a partnership agreement alter duty of care?
A
Yes. If not manifestly unreasonable, the partnership agreement may alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law, and alter or eliminate any other fiduciary duty.
11
Q
Test for Partner Duty of Loyalty
A
Partners have a fiduciary duty to act in the interest of the partnership. “Not honestly alone, but the punctilio of an honor the most sensitive.” Meinhard.
(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner;
(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership;
(3) to refrain from competing with the partnership in the conduct of the partnership’s business before the dissolution of the partnership; or
(4) to refrain from taking for herself a business opportunity that belongs to the partnership.
12
Q
What are Meinhard elements?
A
(1) An opportunity presented to a partner because of her role as a partner in the venture;
(2) “Fitting of the Partnership”: The opportunity is one that the partnership would likely take advantage of. (Identify the opportunity. How close is it to the partnership’s purpose?)
(3) If 1 and 2 are met, the partner must disclose the opportunity to the partnership.
13
Q
Can partnership agreement eliminate duty of loyalty?
A
No. While a partnership agreement cannot eliminate a partner’s duty of loyalty, a partnership agreement can provide that a partner’s profiting from a deal with the partnership does not violate the duty of loyalty, if approved by a majority of disinterested partners after full disclosure, RUPA 103(b)(3)–(5). A partnership agreement can exempt certain activities from duty of loyalty scrutiny, “if not manifestly unreasonable.”
14
Q
What is test for partner expulsion?
A
When a partnership exercises its power under a partnership agreement to expel a partner, it must be done in good faith and for a bona fide reason, otherwise the agreement is breached.
15
Q
What is test for judicial dissolution?
A
all confidence and cooperation between the parties has been destroyed or one of the parties by his misbehavior materially hinders proper conduct of partnership business.
16
Q
What is judicial decree test for dissociation?
A
On application by partnership or another partner, the person is expelled as a partner by judicial order because the person: (1) engages in wrongful conduct that damages the partnership’s business; (2) has committed willfully or persistently a material breach of the partnership agreement or breaches duty of loyalty; or (3) has engaged in conduct relating to the partnership’s business which makes it not reasonably practicable to carry on the business with the person as a partner
17
Q
Are shareholders involved with issuance of stock?
A
Shareholders involved only if (1) Board wants to sell more shares than are presently authorized in its AoI; or (2) Board wants to issue a new class of shares not authorized in the AoI.
18
Q
Who can adopt, amend, or repeal Articles of bylaws?
A
The certificate of incorporation may empower the board to adopt, amend, or repeal bylaws, but the shareholders still retain their power to adopt, amend, or repeal bylaws as well. Bylaw provisions must not be “inconsistent with law.” The term “law” includes the provisions of the Delaware General Corporation Law and, in particular, DGCL § 141(a) according to which “[t]he business and affairs of every corporation … shall be managed by or under the direction of a board of directors.”
- Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. Boilermakers.
19
Q
Test for piercing corporate veil
A
- unity of interest (between shareholder and corporation: alter-ego; between two entities that their separate existence had de facto ceased: enterprise liability).
- Factors of a PCV (both alter ego and enterprise liability):
- (1) Failure to maintain adequate corporate records or to comply with corporate formalities;
- (2) Commingling of funds and assets;
- (3) Undercapitalization
- adherence to the fiction would sanction fraud and promote injustice
* Unjust enrichment or fraud to creditors (Sea Land).
20
Q
Can corporation give donations for charities?
A
Yes. Corporations are allowed to make gifts to charity. However charitable contributions must bring some benefits the corporation. A.P. Smith. Assuming no fraud, self-dealing, or illegality, court will not review whether corporation received benefit.
21
Q
How many votes are required for shareholder meeting?
A
Default rule: validity quorum: A majority of the shares entitled to vote, present in person or represented by proxy.
Certificate of incorporation or bylaws can set a different quorum, but no less than 1/3 of the shares entitled to vote at the meeting
22
Q
Who can call a special shareholder meeting?
A
Special shareholder meetings may only be called “by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.”
23
Q
Can shareholders take action without a meeting?
A
Yes. Unless otherwise provided in the certificate of incorporation, under Delaware law, stockholders can assent to a corporate decision by a formal vote or by written consent. Such written consent of the controlling stockholder(s) does not need prior notice, a vote, or a meeting to be effective, but it does require prompt notice of such consent to nonconsenting stockholders.
24
Q
When are reimbursements for proxy fights allowed for incumbents/insurgents?
A
Reimbursement only allowed if dispute concerns questions of policy.
Incumbents can be reimbursed if they win or lose (do not need shareholder approval). In a proxy contest over policy, the incumbent board (in bone fide) may charge the firm for reasonable (and fair) proxy solicitation expense.
Insurgents can be reimbursed if (i) they win and (ii) shareholders ratify the payment.
25
Test for proxy violation?
No false or misleading representations or omissions of material facts in proxy communications.
Where an omission in a proxy statement is determined to be material, the shareholder has established sufficient causation between the violation of Section 14(a) and his injury. *Mills*
**Elements of Action** (burden of proof on the plaintiff) **(*Mills*)**
* **Materiality:** A fact is material if there is a ***substantial likelihood*** that a reasonable shareholder would consider it important in deciding how to vote.
* **Causation**: Defect has a ***significant propensity*** to affect the voting process. If the defect is material, and if the proxy solicitation was essential, plaintiff has satisfied the requirement of proof of causation.
* For isntance, if a favorable vote by two-thirds of the outstanding shares is required to obtain approval for a corporate transaction, *Mills* specifically applies only in cases in which the solicitor owns or controls less than two-thirds of the outstanding shares.
26
Shareholder proposal exclusion: test for improper under state law
Two-Step approach: (1) who can amend bylaws; (2) does the proposal eliminate discretion in the Board
Bylaws may be unilaterally adopted by shareholders only when they appropriately ***relate to corporate processes*** rather than substantive decisions and do not otherwise violate the law.
The bylaws may provide for the reimbursement by the corporation of expenses incurred by a stockholder in soliciting proxies.
27
Shareholder proposal exclusion: test for relevance
If the proposal relates to operations which (1) account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, (2) for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and (3) is not otherwise significantly related to the company's business.
The meaning of “significantly related” in the SEC rule for omissions in proxy statements is not limited to economic significance.
Ethical and social significance of a proposal can be significantly related to a business if they might affect and implicate significant level of sales. *Lovenheim*
28
Shareholder proposal exclusion: test for ordinary business operations
(1) What is the ***subject matter*** of the proposal? The subject matter of a proposal ***is*** the “ultimate consequence” resulting from the proposal.
(2) Does the proposal deal with matter relating to the company’s ***ordinary business operations***?
(3) Does the proposal (i) ***raise policy issues*** ***so significant*** that it would be appropriate for a shareholder vote (i.e significant social policy exception); _and_ (ii) ***transcend the day-to-day business matters*** of the company?
29
Shareholder proposal exclusion: test for directors elections
Test for exclusions:
(i) Would ***disqualify a nominee*** who is standing for election;
(ii) Would ***remove a director*** from office before his or her term expired;
(iii) Questions the ***competence, business judgment, or character*** of one or more nominees or directors;
(iv) Seeks to ***include a specific individual*** in the company's proxy material for election to the board of directors; or
(v) Otherwise could ***affect the outcome of the upcoming election*** of directors.
30
When can a shareholder inspect records?
Any stockholder, upon written demand, has the right to inspect for any ***proper purpose***. A proper purpose means a purpose *reasonably related* to such person's interest as a stockholder.
Demands for shareholders lists: the firm must prove that the shareholder does not have a proper purpose.
Demands for other corporate documents: the shareholder must prove that she has a proper purpose.
31
What is the test for excuse of futile demand?
a plaintiff must allege with particularity that a reasonable doubt exists that (1) a majority of the board has a ***material financial or familial interest*** in the challenged transaction; (2) a majority of the board is ***incapable of acting independently*** for some other reasons such as domination or control by the alleged wrongdoer; or (3) the underlying ***transaction is not the product of a valid exercise of business judgment.***
32
What is traditional test for derivative action?
Test: (1) injury to the corporation and only indirectly suffered by shareholders; and (2) the corporation is entitled to the recovery for the injury.
* Injury due to dilution of shareholders’ interest (exchange ratio): direct
* Injury to shareholders for capital gain tax: direct
* Injury due to the excise-tax reimbursement: derivative
33
How to courts review decision of special litigation committee for derivative action?
Step 1: The SLC was (1) ***independent***; and (2) followed ***proper and complete procedures*** in reaching its decision not to litigate.
* Not half-hearted, pro-forma, shallow.
* Considerations of friendship and financial dependence shall be considered together for independence inquiry. *Sanchez***.**
* The burden of proof is on the defendant corporation; if the Court is not satisfied about the findings on the first step, then move to step two.
Step 2: Court should determine, applying its own independent business judgment, whether the motion to dismiss should be granted
34
How does a director escape liability for an interested transaction?
If a transaction is an interested director transaction, the director escapes judicial relief against her or the transaction if the (1) transaction is approved by a majority of the disinterested directors or (2) by the disinterested holders of a majority of shares.
35
How to courts review the determination of SLC for derivative action?
Step 1: The SLC was (1) ***independent***; and (2) followed ***proper and complete procedures*** in reaching its decision not to litigate.
* Not half-hearted, pro-forma, shallow.
* Considerations of friendship and financial dependence shall be considered together for independence inquiry. *Sanchez***.**
* The burden of proof is on the defendant corporation; if the Court is not satisfied about the findings on the first step, then move to step two.
Step 2: Court should determine, applying its own independent business judgment, whether the motion to dismiss should be granted
36
What is the BJR?
The BJR is a presumption that in making a business decision the directors acted on an ***informed basis***, in ***good faith***, and in the ***honest belief*** that the action was taken in the best interest of the corporation.
37
How do you rebut the BJR? Two jurisdictional approaches?
To rebut the BJR, the plaintiff must show ***fraud***, ***bad faith***, or that the directors acted in ***gross negligence*** (substantive due care) or in an ***uninformed way*** (procedural bad faith). There are two different jurisprudential approaches:
1. For a plaintiff showing gross negligence or uninformed decision-making process, plaintiff shows with preponderance of evidence the breach of duty of care.
1. *Cinerama* and *Disney* stand for the proposition that after the BJR is rebutted, the burden of proof shifts on the defendant to show the entire fairness (fair process/dealing and fair price) of the transaction.
38
What is procedural bad faith?
Directors may be held liable if they ***fail to adequately inform themselves*** before making the decision. (*Francis and Van Gorkom*).
However, only an ***extreme departure*** will result in liability.
The standard is one of ***gross negligence***.
Courts will not generally second-guess the amount of information directors have if they make an ***honest, good-faith attempt*** to inform themselves about the substance of the decision.
Directors can rely on information and opinions from consultants, management, and employees, but they must make a good-faith determination that those persons can competently produce the reports and make the analyses on which the board relies.
39
What is substantive due care?
Directors may be held liable if the decision was grossly negligent and constituted a corporate waste. If the decision is so outrageous that no plausible, good faith argument can be made that the corporate could benefit from it, directors can be liable.
40
What are three additional obligations of directors that may breach duty of care?
Oversight, Inattention, and Monitoring
41
Explain duty to monitor
In a public company, the board of directors also has an obligation to put in place a corporate compliance and monitoring system designed to detect wrongdoing or business problems and bring those matters to the attention of the board.
However, the details of such a system are protected by the business judgment rule.
If the directors in good faith put a system in place, they are not liable just because that system fails to catch a particular problem that results in a loss.
However, if the system does bring wrongdoing to the attention of the directors, or brings to light a red flag that justifies further inquiry, the directors can be liable for not following up.
42
Explain duty to oversee operations
Directors can also be held liable if the corporation suffers a loss that the directors could have prevented by properly exercising oversight (Ritter and Caremark). However, directors are not liable for all such losses.
43
Explain obligation to be attentive
A director has an obligation to pay attention to corporate affairs—to ask questions about what’s going on at the company and follow up if any red flags or other issues arise. However, the directors are liable for a loss only if proper attention to corporate affairs could have prevented the loss.
44
What is the effect of Section 102(b)(7) for director's duty of care?
A corporation’s certificate of incorporation can provide that directors have no personal liability for breach of duty of care.
45
Can directors escape liability for relying on outside information?
Yes. Under section 141(e) of the Delaware General Corporation Law, directors can escape liability for breach of duty of care if their actions or inactions were based on reasonable reliance on the information and advice of officers, employees, or outside experts.
46
What is the duty of loyalty and three categories?
The duty of loyalty requires that directors act and make decisions in the best interest of the corporation, not in their own personal interest. The duty of loyalty embodies an obligation to refrain from conduct that would harm the corporation and its stockholders. The duty of loyalty has important implications for several different categories of activities.
Three categories: interested director transactions, corporate opportunities, and bad faith.
47
What are interested director transactions?
Interested transactions are not protected by the business judgment rule, and the statutory limitation of liability under Section 102(b)(7) of the DGCL is unavailable. If a majority of the directors approving a transaction are not disinterested, the decisions of the board are reviewed for their entire fairness. If a majority of the directors approving a transaction are disinterested, the board remains entitled to the presumptions of the business judgment rule.
* Disinterested directors are protected by the business judgment rule in setting executive and officer compensation.
* A director does not breach his or her fiduciary duty by approving a radio advertising program in which the wife of the corporate president, who was also member of board of directors, was one of the featured performers. *Bayer*.
48
When are interested director transactions generally permiited?
First, the director escapes judicial relief against her or the transaction by proving “the entire fairness” of the transaction to the corporation at the time of the transaction. *Weinberger*. Under the entire fairness standard, the defendant directors have the burden of proving both (1) “fair dealing” and (2) price was fair.
Second, interested transactions are typically acceptable if ratified by a majority of disinterested directors or shareholders, provided that there has been a *full disclosure of the material facts*.
49
What is the *Broz* test for corporate opportunities?
1. Corporation is ***financially able*** to take the opportunity. This factor is met if the usurper had a parallel contractual obligation to present corporate opportunities to the corporation
2. Opportunity is ***in line*** with the corporation's business. If the investment applies to an ancillary business, generally there is no business opportunity.
3. Corporation has an interest or a ***reasonable expectancy*** in the opportunity. A reasonable expectancy is something the corporation would face in the ordinary course of business. An interest is something to which the firm has better rights.
4. ***Embracing the opportunity***, the ***self-interest*** of the fiduciary (officer or director) would be brought into conflict with that of the corporation.
50
What is bad faith standard?
(1) subjective bad faith = conduct motivated by an intent to do harm.
(2) intentional dereliction of duty or a conscious disregard of one's responsibities.
Because a finding of gross negligence is necessary to establish a breach of the duty of care, a bad-faith act must be “qualitatively more culpable than gross negligence.” *Disney.* An element of scienter, or actual or constructive knowledge of the improper action, is necessary
51
What is disagreement of bad faith in courts?
There is disagreement and inconsistency on how to fits good faith among fiduciary duties. Some decisions talk about a triad: duty of care, duty of loyalty, duty of good faith. Other decisions, like *Disney* and *Ritter*, see good faith as a subsidiary element, a condition of the fundamental duty of loyalty. In this scenario, exculpation under Section 102(b)(7) is unavailable for breaches of the duty of loyalty. As a consequence, if the board’s wrongful conduct is committed in bad faith, the directors at fault cannot rely on the charter’s exculpation provision.
52
In a third party suit against director or officer, when is indemnification allowed?
Must have acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation.
53
In a third party suit or suit by corporation over director or officer, when is indemnification mandatory?
If director has been successful on the merits. A complete win.
54
In a suit by corporation against director and shareholder derivative suits, when is indemnification permitted?
Must have acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation. Expenses only.
55
Why do corporations obtain D&O insurance?
Corporations buy premium for director & officer insurance. This is the way around the outer limit of good faith. For conduct that falls outside 145(a), corporations can buy insurance
56
What is test for determining a close corporation?
A close corporation is a corporation whose certificate of incorporation provides that (i) all of the corporation's issue stock of all classes shall be held by not more than a specified number of persons, ***not exceeding 30***; and (ii) all of the issued stock of all classes shall be subject to 1 or more of the restrictions on transfer permitted by § 202 of this title.
57
When are shareholder agreements struck down?
Courts tended to invalidate agreements among the shareholders of a close corporation that curtailed the powers of the board. *McQuade.* However, agreements among *all* shareholders of a close corporation that involved only a slight impingement on the statutory norms were generally upheld.
58
What are shareholder solutions to restriction of share transfers?
Close corporation often restrict shares transfer, and minority shareholders may have no voice and control over the corporations’ activities. Solutions include a voting trust, shareholder agreement, irrevocable proxy, and buy-sell agreements.
59
What are fiduciary duties of stockholders in close corporation?
Stockholders in a close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.
Utmost good faith and loyalty (*Donahue*).
60
When do majority shareholders violate fiduciary duty?
Majority shareholders in a close corporation violate this duty when they act to “freeze out” the minority (i.e. frustrate the minority’s reasonable expectations of benefit from their ownership of shares). Brodie.
61
What are fiduciary duties of controlling stockholder in close corporation?
Stockholders in close corporations owe one another strict duties of care and loyalty, similar to the duties owed among partners in a partnership. *Donahue.* Controlling shareholders of a close corporation owe a fiduciary duty to minority shareholders to accord them an equal opportunity to sell their stock to the corporation.
62
What is the rule for controlling shareholder selling shares for a premium? Is there a duty to minority shareholders?
A controlling shareholder is free to sell his or her controlling block of stock and seek a premium for it. However, the controlling shareholder does owe a duty to the other shareholders to avoid bad faith, such as fraud, usurpation of corporate opportunities, or looting of assets.
63
What is the proper purpose test for controlling shareholder in close corporation?
1. Shareholders in close corporations owe each other a duty to strict good faith.
2. If challenged by a minority shareholder, a controlling group must show a ***legitimate business objective/purposes*** for its actions.
3. If proved so, the burden of proof, shift to the minority shareholder to show ***less harmful alternatives*** to accomplish the same business objective.
4. If so, the ***court must balance the legitimate business purpose against the practicability of the proposed alternative.***
64
Examples of freeze-out in close corporation
The majority:
* “may refuse to declare dividends;
* “may drain off the corporation’s earnings in the form of exorbitant salaries and bonuses to the majority shareholder-officers and perhaps to their relatives, or in the form of high rent by the corporation for property leased from majority shareholders ...;
* “may deprive minority shareholders of corporate offices and of employment by the company;
* “may cause the corporation to sell its assets at an inadequate price to the majority shareholders....”
65
What is the remedy for freeze-out of minority shareholder?
Proper remedy for a freeze-out of minority shareholder:“to restore the minority shareholder as nearly as possible to the position as she would have been in had there been no wrongdoing. ***The remedy cannot place the minority shareholder in a significant better position*** that she would have enjoyed absent the wrongdoing.
66
Dissolution in close corporation: conditions for director deadlock
* The directors must be evenly divided and therefore unable to make corporate decisions,
* The shareholders must be unable to resolve the deadlock.
* The deadlock must threaten ***irreparable injury to the corporation*** or ***prevent the business of the corporation from being conducted to the advantage of the shareholders***.
67
Dissolution in close corporation: conditions for shareholder deadlock
* the corporation must have two 50% stockholders
* those stockholders must be engaged in a joint venture corporation, and
* they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.
68
What are shareholder remedies in squeeze our or buyout in close corporation?
**Shareholder remedies in squeeze out or buy out:** (1) buyout agreement in Articles of Bylaws; (2) petition court for involuntary dissolution; (3) statutory appraisal right in merger context; or (4) *equitable remedy for breach of fiduciary duties: buyout*
69
What must minority shareholder prove to dissolve close corporation?
To dissolve, the minority shareholder (plaintiff) must prove oppression, illegality or fraud in the majority actions, or a waste of corporate assets. (*Alaska Plastics*).
70
What is the *Pearlman* rule for transfer of control?
Where the sale of a corporation’s controlling interest commands an unusually large premium due to a market shortage of the corporation’s product, a fiduciary may not appropriate to himself the value of that premium. *Perlman*.
71
What is test for controlling shareholder selling at a premium?
A controlling shareholder may sell her stock at a premium without being obliged to share the premium without the minority shareholders, absent (Zetlin): (1) looting of corporate assets, (2) usurpation of corporate opportunities, and (3) fraud.
72
Who must vote in a substantial sale of assets?
Delaware § 271(a) requires approval of a sale of substantially all the corporation’s assets by the board and shareholders of the _selling corporation_
Shareholder approval must be by a _majority of the outstanding shares_
73
Are there appraisal rights in asset sale?
No. Nobody gets appraisal rights under Delaware law in an asset sale transaction.
74
What are steps for statutory merger?
Boards’ Approval (both T and A boards)
* T and A boards adopt Merger Agreement [1-6: content of the MA]
* DGCL § 251(b)(3): surviving entity’s AoI can be amended at this point
* DGCL § 251(b)(5): types of consideration paid to shareholders (stock for stock; cash for stock; stock for assets; cash for assets)
Shareholders’ Approval (both T and A boards) [remember §228 & approval by written consent if in the bylaws]
* SHs vote at the A and T on the MA
* ***Majority of outstanding (entitled to vote) stock***.
* Vote of the surviving company not required if: (i) no AoI amendments; (ii) no change in outstanding shares; and (iii) consideration is in stock and no more than 20% of outstanding shares is issued.
DGCL § 251(c): if merger vote is successful
* File articles of merger with the state official
* Merger effective at this point
DGCL § 262: **Appraisal rights **
* DGCL § 262: Appraisal rights of the ***fair value***, available to any shareholders of both corporations who did not vote in favor of merger:
* ***no appraisal rights if the shares are publicly traded*** or the ***firm has at least 2000 shareholders*** (market exemption §262(b)(1)) [this exemption does not apply to short form mergers].
* however: GCL § 262(b)(2): yes ***appraisal right if consideration is cash or debt***.
75
When are appraisal rights not granted? What is the one exception?
***no appraisal rights if the shares are publicly traded*** or the ***firm has at least 2000 shareholders*** (market exemption §262(b)(1)) [this exemption does not apply to short form mergers].
However: GCL § 262(b)(2): yes ***appraisal right if consideration is cash or debt***.
76
What is the test for a short-form merger?
DGCL § 253: merger of parent and subsidiary
* A must own at least 90% of the T’s outstanding shares
* Merger agreement requires _only approval of the A’s board_, no shareholder vote required.
* If the parent corporation does not survive the merger, then the merger requires the approval of the parent corporation’s shareholders, DGCL § 253(a)
* A short form merger under DGCL § 253 does not require the approval of the shareholders of the subsidiary corporation. Hence, in a short form merger, the minority shareholders of the subsidiary do not get to vote on the merger.
77
What must a plaintiff do to challenge cash-out merger?
Who is the burden on?
How can shareholders shift burden?
The plaintiff in a suit challenging a cash-out merger must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfairness of the merger terms to the minority shareholders.
It is first the burden of the plaintiff attacking the merger to demonstrate some basis for invoking the fairness obligation.
But where corporate action has been approved by an informed vote of a majority of the minority shareholders, the burden shifts to the plaintiff to show that the transaction was unfair to the minority. Though the burden remains on those relying on the vote to show that they completely disclosed all material facts relevant to the transaction, where “material” information is “information such as a reasonable shareholder would consider important in deciding whether to sell or retain stock.
78
Standard of Review (merger): Fully independent and disinterested board of directors; no controlling stockholder
BJR
79
Standard of review (merger): Majority of board is independent and disinterested; no controlling stockholder
BJR
80
Standard of review (merger): Board is evenly split between directors who are independent and disinterested and directors who are not independent and disinterested; no controlling stockholder
Entire fairness.
Business judgment if transaction is approved by a properly functioning special committee or a fully-informed, uncoerced stockholder vote.
81
Standard of review (merger): Majority of board is not independent and disinterested; no controlling stockholder
Entire fairness.
Business judgment if transaction is approved by a properly functioning special committe or a fully-informed, uncoerced stockholder vote.
82
Standard of review (merger): None of the board members is independent and disinterested; no controlling stockholder
Entire fairness.
Business judgment if transaction is approved by a fully-informed, uncoerced stockholder vote.
83
Standard of review (merger): Transaction with a controlling stockholder where majority of the board is independent and disinterested
Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff.
Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority.
84
Standard of review (merger): Transaction with a controlling stockholder where a majority of the board is not independent and disinterested
Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff.
Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority.
85
Standard of review (merger): Controlling stockholder; majority of the board is independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder is treated the same as other stockholders
BJR
86
Standard of review (merger): Controlling stockholder; majority of the board is not independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder is treated the same as other stockholders
BJR
87
Standard of review (merger): Controlling stockholder; majority of the board is independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder receives different treatment in the transaction than other stockholders
Entire fairness, but either (a) a properly functioning special committeeor (b) approval of a majority of the minority will shift the burden of proof to the plaintiff
Business judgment if both (a) a properly functioning special committee and (b) approval a of majority of the minority
88
Standard of review (merger): Controlling stockholder; majority of the board is not independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder receives different treatment in the transaction than other stockholders
Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff
Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority
89
Transaction involving self-dealing of controlling shareholder: what is the test?
Entire fairness applies, unless the *Kahn* test is triggered. The BJR will apply only if:
(i) the controller ***conditions*** the procession of the transaction on the ***approval of both a Special Committee and a majority of the minority stockholders***;
(ii) the ***Special Committee is* *independent***;
(iii) the ***Special Committee is empowered to freely select its own advisors and to say no definitively;***
(iv) the ***Special Committee meets its duty of care*** in negotiating a fair price; (v)
the ***vote of the minority is informed***; and
(vi) there is ***no coercion of the minority***.
90
What are standards of review for takeovers?
***_Standards of review_***:
1. ***_BJR_*** applies when a board decides to enter into a merger transaction that does not involve a change in control
2. ***_Revlon_*** applies when the board enters into a merger transaction that will cause a change in control, initiates an active bidding process seeking to sell the corporation, or makes a break-up of the corporate entity inevitable
3. ***_Unocal_*** applies when a board adopts defense measures in response to a hostile takeover proposal that the board reasonably determines is a threat to corporate policy and effectiveness—regardless of whether the merger transaction involves a change of control
91
What is the *Unocal* test?
Under Unocal and its progeny, the burden of proof is initially on the Board to prove:
(1) they did not act solely or primarily out of a desire to entrench themselves in office;
(2) they were disinterested;
(3) they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person’s stock ownership (directors satisfy this burden by showing good faith and reasonable investigation; the showing is easier if there was approval by a board composed of majority of independent directors); and
(4) the defensive measure is reasonable in relation to the threat posed (not “coercive” or “preclusive”) and within a “range of reasonable responses to the thread perceived”: disjunctive analysis.
* A defense is coercive if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer.
* A defense is preclusive if it deprives stockholders of the right to receive all tender offers or precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise.
If the directors carry their burden, the burden of proof shifts back to plaintiff, who must rebut the BJR. If not, the defense must pass muster under the intrinsic fairness standard of the duty of loyalty.
92
When are *Revlon* duties triggered?
(1) **Active Bidding Process**. Revlon is triggered if the board initiates an active bidding process to sell itself or to effect a business reorganization to breakup the company. Deciding to do a stock-for-stock merger, without more, does not trigger Revlon. *See Paramount v. Time.*
(2) **Abandoning Long-Term Strategy**. Revlon is also triggered if, in response to a hostile offer, the target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company. *Paramount v. Time*.
(3) **Sale of Control**. Revlon is triggered by a sale of control—a transaction that will give a single shareholder or group of shareholders control of the company, so that this is the other shareholders’ last opportunity to obtain a control premium. *QVC.*
93
What is a lockup agreement?
Lock-up agreements provide friendly acquirors and white knights assurance that the planned transaction will be consummated without interference from hostile offers and/or that they will be compensated if the deal is not consummated.
94
What is a no-shop provision?
* A no-shop provision is a covenant by the target company not to solicit or encourage anyone to make a competing bid or to engage in any negotiations with or supply any information to any other person who expresses an interest in acquiring the target company. In Revlon, the court held that a no-shop provision, while not illegal per se, 'is impermissible... when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder.'"
95
Can shareholders challenge the board's action in *Revlon* mode?
Yes. For a claim of bad faith (duty of loyalty), plaintiff must show that the directors knowingly disregarded their Revlon duties. When a fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for this duty. Revlon does not require a particular path for the directors to obtain the best price.
96
What is a limited partnership?
A limited partnership formed by two or more persons and having one or more general partners and one or more limited partners. To validly form a LP, the partners must file documents (i.e. certificate of limited partnership) with the Secretary of State.
97
Who is a general partner in limited partnership?
General partners: fully personally liable, but entitled to control
* Corporations can serve as general partners.
* General partners manage the business and have the power to bind the partnership.
* They are personally liable for the partnership debts.
98
Who is limited partner in limited partnership?
Limited partners (passive limited liability investors)
* Silent/passive partners without management rights.
* Not personally liable except in extraordinary circumstances.
* No fiduciary duties.
99
When does a limited partner become liable as general partner?
A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, [s]he takes part in the ***control*** of the business.”
100
Do conflict of interest transactions violate fiduciary duties in limited partnership?
Conflict of interest actions do not constitute a breach of fiduciary duties if they are approved by a majority of the Conflicts Committee acting in good faith
101
What is default rule for partners sharing profits and losses in LP?
Partners in a LP share profits and losses in proportion to their respective capital contributions.
102
Can corporations serve as genearl partners? What is the effect of this?
Corporations can serve as general partners.
Howerver, if the “corporate general partner device” has been used to shield the potential liability of its shareholders, then plaintiff can pierce the corporate veil. Piercing of the corporate veil is possible if the shareholders (directors and officers of the corporation): (1) Fail to “conscientiously keep the affairs of the corporation separate from” their own; (2) Commit fraud or “manifest injustice” upon third parties who deal with the corporation.
103
Who Is Liable for the Debts of a Limited Partnership?
First, the limited partnership is an entity and so it is liable for its own debts.
Second, the general partners are jointly and severally liable for the debts of the limited partnership.
Third, the limited partners of a limited partnership are generally not liable for the debts of a limited partnership. (limited partners, like shareholders, are generally passive investors, and so, like shareholders, are not personally liable for the business’s debts.)
Fourth, under RULPA, a limited partner is personally liable for the debts of the limited partnership only if she “participate[s] in the ***control*** of the business but also her conduct causes the creditor to believe she was a general partner.”
104
What are the duties in a LP?
First, the limited partner has no such liability exposure. The limited partner, like a shareholder, is a passive investor and so, like a shareholder, owes no legal duties to the business entity.
Second, the general partner of a limited partnership does have liability exposure to the limited partnership. The general partner of a limited partnership has the same duty of care and duty of loyalty as the general partner of a partnership, and if she breaches that duty she is liable.
Third, under the Delaware limited partnership law, the limited partnership agreement can eliminate the general partner’s duty of care and loyalty.
105
What is a limited liability partnership?
A limited liability partnership is a general partnership that elects its status as a limited liability entity by filing a statement of qualification with the Secretary of State.
Upon successful registration, all partners of an LLP assume limited liability for debts, obligation, and other liabilities of the partnership (as limited partners in a limited partnership), but maintains the same rights as general partners. Generally limited liability is restricted to tort claims.
106
What are the attributes of a LLC?
Mix between corporation and partnership:
* Corporation: limited liability
* Partnership: tax advantages
107
Who Makes Decisions for a Business Structured as an LLC?
The owners of an LLC can select the form of management. Every state’s LLC statute affords the owners (members) the option of electing to manage the business themselves—“member-managed company”—or have managers—“manager-managed company”
The decision-making authority of the members of a member-managed company is much like that of the partners in a general partnership.
The decision-making authority of the managers of a manager-managed company is much like a corporation with a board of directors, professional managers, and separation of ownership and management.
108
How are profits and losses structured in a LLC?
Absent contrary agreement, most LLC statutes allocate profit and losses on the basis of the *value of member’s contributions*
109
How do you form a LLC?
Filing **Articles of Organization** with Secretary of State (required and optional content) + pay filing fee and franchise tax
***Draft _operating agreement_*** (the equivalent of a bylaws, but with a wider reach)
110
How is management structured in a LLC?
Absent contrary agreement, ***each member has equal right in the management*** of the LLC.
***Majority vote*** is the general rule in decision making
***Unanimity*** is required for significant matters (i.e. mergers, admission of new members dissolution; etc.)
Possibility to have in place delegated management
* CEO, Board of Directors
* It must be specified in the Articles of Organization
111
Can a member assign interest in LLC?
Unless otherwise provided in the LLC's operating agreement, a member may assign his financial interest in the LLC.
112
Can a member withdraw from LLC?
Member may withdraw and demand payment of his/her interest upon giving the notice specified in the statute or the LLC's operating agreement
113
What are fiduciary duties in a LLC?
**Fiduciary obligations depend on management structure** (*McConnell*)
* Member-managed: Members have duties
* Manager-managed: Managers have duties, and _sometimes_ members do, too
* An operating agreement may limit or define the scope of the fiduciary duties imposed upon the LLC’s members; however, the default rule: members owe one another the duty of utmost trust and loyalty
**Default duties** – Analogous to fiduciary duties of partners and corporate directors.
* Duty of care
* Duty of loyalty
* “Obligation of good faith”
* “Duty of candor”
114
What is test for de facto corporation doctrine?
Establishes the legal existence of a corporation if the organizers (1) in good faith tried to incorporate (executed and acknowledged the article of association); (2) has a legal right to do so (“under a valid statute, and for an authorized purpose”); and (3) acted as a corporation
115
What is the test for corporation by estoppel doctrine?
Prevents one from arguing against the existence of a corporation. If the third party (creditor) dealing with the firm (1) thought it was a corporation all along; **and** (2) would earn a windfall if now allowed to argue that the firm was not a corporation.
A creditor is estopped from denying the corporate existence and holding the shareholders personally liable. Corporation by estoppel is an equitable remedy, prevents one from arguing against a corporation which third party have been dealing with.
116
May the fiduciary duties of an LLC member or manager be expanded, restricted, or eliminated by the LLC agreement?
Yes. Delaware’s Limited Liability Act allows a member or manager’s fiduciary duties to be expanded, restricted, or eliminated by the LLC agreement. Accordingly, LLC members cannot be liable for breach of fiduciary duty if the LLC agreement states that members have no duties other than those articulated in the agreement, and the agreement does not articulate any fiduciary duties.
117
May a court insert itself into an LLC agreement to decide which member’s business judgment was more in line with the LLC’s best interests?
No. Delaware's Limited Liability Act provides for freedom of contract for LLCs. An LLC agreement regulates the terms by which members control the LLC, and a court will not insert itself into the agreement to decide which member’s business judgment was more in line with the LLC’s best interests.
118
When will the court pierce the LLC veil?
A court will pierce the LLC veil if:
(1) there is overall injustice or unfairness and
(2) the LLC is a mere instrumentality or alter ego of its owner, in that the LLC and the owner operate as a single economic unit.
Factors relevant to the alter ego analysis include whether: the LLC was adequately capitalized, the owner siphoned LLC funds, and “in general, the [LLC] simply functioned as a facade for” the owner. *NetJets.*
119
Can a standard capital call provision be invoked to satisfy a judgment against a limited liability company?
No. A standard provision in an operating agreement calling for occasional capital infusions, without more, does not constitute a clear and unequivocal statement of a member’s intent to be personally liable.
Members of an LLC may, pursuant to a written agreement, agree to be personally liable for the debts and obligations of the LLC. However, a member’s intent to become personally liable must be stated in clear and unequivocal language.
120
In a suit by a creditor against a broke LLC, can the court order the LLC manager to make a call for additional capital from the members in an amount sufficient to pay off creditor?
No. Would defeat statutory policy of limited liability. Only option is to pierce LLC veil.
121
What is dissociation of a LLC?
* Withdrawal or expulsion of a member
* Business continued per § 802(b)
* Requires unanimous consent
* Makes clear that disassociated member entitled to vote
* Purchase of disassociated partner’s interest (§ 701)
122
What is dissolution of LLC?
* Winding up of LLC triggered (ULLCA § 801) by operation of law
* Upon the happening of any event specified in LLC operating agreement
* Operating agreement triggered dissolution upon resignation
* Vote of members (as specified in operating agreement)
* It becomes unlawful to carry on the business
* Upon court order:
* Economic purpose frustrated
* Misconduct by members
* Business must be “wound up”
* Any “member” who did not wrongfully dissolve may participate in winding up
123
Upon liquidation of a dissolving LLC’s assets, may a creditor sustain a claim against a member of the LLC if the creditor was not formally notified of dissolution procedures or schedule?
Yes. When notice of dissolution is not given to such creditors, they are entitled to go after members of the LLC individually.
124
May a court dissolve an LLC when it has an exit mechanism written into the LLC agreement?
Yes. A court may dissolve an LLC when it is not reasonably practical to carry on the business in conformity with the LLC agreement and the LLC agreement does not provide a sufficient exit mechanism. *Haley.*
The LLC dissolution provision may be interpreted by analogy to § 273 of the Delaware General Corporation Law. Under § 273, a shareholder is entitled to dissolution on grounds of deadlock if three conditions are satisfied: (1) the corporation must have two 50% stockholders, (2) those stockholders must be engaged in a joint venture, and (3) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets. All elements are satisfied.
125
Is a principal-agent relationship established between the owner of a car and a driver when the parties agree that the driver will operate the car pursuant to a condition imposed by the owner?
Yes. When the owner of a car authorizes an individual to drive that car for a specific purpose, the driver acts as an agent for the owner. *Gorty.*
126
Is a creditor liable as a principal for the contracts of a debtor when the creditor takes control of the debtor’s business functions?
Yes. When a creditor exerts control over the operations of a debtor, a principal-agent relationship is created between the parties, and the creditor is liable for the contractual obligations of the debtor. *Cargill.*
127
Is a soldier entitled to keep the profit he made by using his military status to further the business interests of a third party?
No. If a servant unjustly enriches him or herself by engaging in unauthorized activities while acting in the capacity for which he or she was hired, the master is entitled to keep any profits made thereby. *Reading.*
128
May persons who were employed by a company solicit that company’s customers for a competing business after they have terminated their employment?
No. A customer base that is procured though the business’s hard work and advertising is part of a business’s good will, and may not be solicited by former employees. *Town & Country.*
129
Can implied authority be established by evidence showing a course of conduct between two parties which would lead an agent to reasonably believe that a principal intended the agent to have authority under the circumstances?
Yes. When a principal has routinely granted an agent certain powers, implied authority is assumed when the agent exercises those powers. Implied authority is proven circumstantially when it is shown that the principal intended the agent to have such authority as was necessary to perform the duties the principal assigned. *Mill Street.*
130
Does a salesperson have authority to bind a company to a sales agreement when the company apparently holds the salesperson out as its agent?
Yes. When a company gives a salesperson various powers in a sales transaction, it is reasonable for the customer to believe that the salesperson, acting in that capacity, has the power to bind the company to a sales contract. *Three-Seventy.*
131
Is a principal bound by an agent’s unauthorized actions in the course of duty when the agent does not disclose the identity of the principal to a third party with whom the agent contracts.
Yes. An undisclosed principal who employs an agent to run a business is liable to third parties who contract with the agent for transactions typical in the line of business, even if the agent’s actions violate an agreement between the agent and principal. *Watteau*
132
Does a person’s acceptance of the benefits of an agreement to which she was not a party constitute ratification of that agreement?
No. The mere receiving of benefits, without more, does not prove ratification of an agreement. A person’s acceptance of benefits can be illustrative of ratification if an intent to ratify and knowledge of material circumstances are also proven, which they were not in this case. *Botticello.*
133
Is a proprietor liable to a customer for money lost to an unauthorized person who convincingly pretends to be the proprietor’s agent?
Yes. A proprietor has a duty to exercise reasonable care to prevent customers from being defrauded by unauthorized persons. *Hoddeson.*
134
Is an oil company liable for the negligence of an employee of a gas station manager with whom the oil company contracts to sell their products, when the oil company has power over the gas station’s daily business?
Yes. A master is responsible for the torts of a servant. A master-servant relationship arises from a contract, such as the subject Agreement, providing that one party has authority over the day-to-day operations of another party’s business. *Humble Oil.*
135
Is an oil company liable for the negligence of an employee of a service station manager with whom the oil company contracted, when the oil company does not have authority over the gas station’s daily business?
No. A company is not responsible for the negligence of an independent contractor or its employees. A company is an independent contractor if its contract with another entity does not enable that entity to control the company’s day-to-day operations and that entity does not exert any such control.
136
Is an employer liable for an employee’s damage when it was foreseeable that the damage could have been caused in the scope of employment, even if the employee was not performing a duty for the employer?
Yes. An employer cannot disclaim responsibility for the acts of employees that are foreseeable as part of the operation of the employer’s business. *Ira S. Bushey*.
137
Is a partnership established by an agreement stating that two parties are partners, if one party retains sole ownership of the business and the parties conduct themselves as employer and employee?
No. In order for a partnership to be formed, the parties involved must have co-ownership of a business. *Fenwick.*
138
Do agreements intended to protect the financial interests of creditors necessarily make them partners of a debtor firm?
No. A partnership is not formed unless two or more parties are closely associated so as to be co-owners carrying on a business for profit. When, as here, creditors have executed loan documents with a debtor firm that contains provisions for the collection of collateral, this court must examine the extent to which those documents associate the creditors with the business operations of the firm. *Martin.*
139
Does a partnership by estoppel exist when a third party does not rely on any statement or act by two companies it alleges were holding themselves out as partners, and when no credit was extended based on the representation of a partnership?
No. A partnership by estoppel is created when a third party relies on the representation of a person that he or she is part of an actual or apparent partnership. *Young.*
140
Can one general partner restrict another partner from conducting business on behalf of a two-person partnership?
No. Each partner has an equal right in the management and conduct of a partnership, and differences within a partnership are decided by a majority of the partners. *Nabisco.*
141
Is a partner who refused to hire an additional employee liable to a co-partner for expenses incurred in hiring a new worker?
No. In a general partnership, each partner has equal rights regarding the management of the ordinary affairs of the partnership. Unless there is an agreement to the contrary, differences between the partners about everyday business are to be decided by a majority of the partners. When a partnership consists of only two partners, one partner cannot unilaterally bind the partnership by incurring expenses over the objection of the other. *Dooley*.
142
Is a co-adventurer required to inform another co-adventurer of a business opportunity that occurs as a result of participation in a joint venture?
Yes. As sharers in a joint venture, co-adventurers owe each other a high level of fiduciary duty. *Meinhard.*
143
Does a joint purchase of a lease for the purpose of selling the lease for profit constitute a joint venture?
Yes. *Sandvick.*
144
Is it a breach of fiduciary duty for partners, while associated with a partnership, to secretly solicit the partnership’s clients for their own gain, while denying their intentions to other partners?
Yes. Partners owe each other a fiduciary duty to act with loyalty and in good faith to each other. Consequently, partners may not use their status as partners to purely benefit themselves, particularly if their actions harm the other partners. *Meehan.*
145
Is it a breach of fiduciary duty for “executive” law firm partners to not consult with all the other partners regarding proposed changes to the internal structure of the partnership?
No. Partners have a fiduciary duty to act in the interest of the partnership. Hence, partners may not withhold any information that results in them being personally enriched while harming the partnership. That did not occur in this case. The executive S&A partners did not gain financially nor did they increase their authority as a result of the merger. *Sidley & Austin.*
146
Does a partnership act in bad faith by expelling an unproductive partner who violated terms and conditions to which that partner agreed?
No. A partnership owes a duty of good faith to each of its partners. That duty includes exercising good faith in critical matters such as involuntary expulsion of a partner. A partnership that terminates a partner in bad faith breaches its agreement with that partner. *Lawlis.*
147
Should a partnership be dissolved when one partner engages in a series of hostile actions that harm the partnership?
Yes. A partner has a duty to act in the best interest of the partnership. When a partner continually antagonizes the other partner to the extent that business is adversely affected, the partnership can rightly be dissolved. *Owen.*
148
Can a partner legally force dissolution of a partnership when but for that partner’s actions, the other partner could have performed his or her required duties?
No. In an action in equity, a court will force the dissolution of a partnership when, for example, a partner has breached his or her fiduciary duty to the partnership or the other partners. When a partner has performed his or her obligations and has not otherwise harmed the partnership, another partner cannot force dissolution through the courts. *Collins.*
149
Is dissociation appropriate where the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner?
Yes. Dissociation may be proper based on impracticability or a partner’s wrongful conduct. Dissociation on account of impracticability is based on dissolution law. Dissociation is appropriate if the partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with the partner. *Giles.*
150
May partners who legally excluded a third partner from management duties be permitted to buy partnership assets at a judicially-supervised dissolution sale?
Yes. Partners may dissolve a partnership-at-will by excluding another partner from management duties, as long as they act in good faith. Such partners may also bid on and purchase any assets in a dissolution sale. *Prentiss.*
151
Can the terms of a partnership agreement override statutory law?
No. The agreement stated that the partnership would be perpetual, except by mutual agreement of the parties. The parties agreed that by ending the partnership unilaterally, Pav-Saver ended it wrongly. Because the partnership was terminated wrongfully, the Uniform Partnership Act gave Vasso the right to continue the business. Vasso elected to continue the business, and to continue in possession of the partnership property. That property includes the intellectual property contributed by Pav-Saver, which is absolutely essential to the manufacture and sale of paving machines. While the partnership agreement stated that Pav-Saver was entitled to return of its property, that agreement does not override the Partnership Act in force. *Pan-Saver.*
152
(1) Does the filing of a complaint seeking remedies including the judicial dissolution of a partnership act as a dissolution of the partnership?
(2) Is a partner’s capital account calculated by adding up the cost basis of all contributions the partner has made to the partnership and then subtracting all distributions the partner has received?
(1) No. The mere filing of a complaint seeking remedies including the judicial dissolution of a partnership does not act as a dissolution of the partnership. If a partner acts in contravention of a partnership agreement, so that it would be impracticable to carry on the partnership with that partner, the partner's wrongful conduct gives a court the power to dissolve the partnership.
(2) Yes. A partner’s capital account is calculated by adding up the cost basis of all contributions the partner has made to the partnership, then subtracting all distributions the partner has received. *G&S Investments.*
153
Are forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders facially invalid?
No. Forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. In terms of statutory validity, the proper subject matter for bylaws under Delaware law includes “process-oriented” directives “relating to the business of the corporation,” such as regulation of stockholder meetings and the board of directors. Forum selection bylaws, while not traditional bylaw subject matter, are “process-oriented,” because they determine where stockholders can file lawsuits, as opposed to whether stockholders can file lawsuits. Accordingly, the forum selection bylaws at issue in this case are not statutorily invalid. *Boilermakers.*
154
May a party maintain a cause of action to pierce the corporate veil without alleging that a shareholder used the corporate form to conduct business in an individual capacity?
No. At the pleadings stage, it is insufficient to state that a corporation lacked a separate identity, was part of a single enterprise, and was deliberately undercapitalized. Rather, the plaintiff must show that a shareholder used the corporation as his agent to conduct business in an individual capacity. *Walkovsky.*
155
When multiple companies share all the funds and staff with each other and with their owner, can a creditor to one of those businesses collect its debt from the other companies?
Yes. Veil piercing requires two things: first, that there be a strong alignment of interest between the shareholders and the business itself, and second, that observing the corporate form would promote injustice or fraud. *Sea-Land.*
156
Can a company make a donation to an important local university, as authorized by state law, when its certificate of incorporation is silent on the matter?
Yes. While the corporate charter did not specifically authorize these kinds of donations, it did not bar them. Barlow did not and could not contend that A.P. Smith’s small donation to Princeton harms his interest as a shareholder. *A.P. Manufacturing.*
157
Can a company choose to stop paying dividends and instead invest its profits in the communities in which it is active?
No. A business exists to conduct business on behalf of its shareholders. It is not a charity to be run for its employees, or neighbors. *Dodge.*
158
Can a single aggrieved shareholder sue a board of directors alleging that the board is not maximizing profits?
No. A corporation’s president and board have authority to determine what course of action is best for the business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference. *Wringley.*
159
Is using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest illegal or unfair?
No. Using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest is not illegal or unfair if the amounts paid by the corporation are not excessive. *Levin.*
160
In a proxy contest over policy, may directors make expenditures from the corporate treasury in order to solicit stockholders’ support?
Yes. In a proxy contest over policy, corporate directors have the right to make reasonable and proper expenditures from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe are in the best interests of the corporation. *Rosenfeld.*
161
Does a private federal cause of action exist for rescission or damages to a stockholder with respect to a consummated merger which was authorized pursuant to the use of a proxy statement alleged to contain false and misleading statements?
Yes. A private federal cause of action exists for rescission or damages to a stockholder with respect to a consummated merger which was authorized pursuant to the use of a proxy statement alleged to contain false and misleading statements. *Borak.*
162
Where an omission in a proxy statement is determined to be material, has the shareholder established sufficient causation between the violation of Section 14(a) and his injury?
Yes. Where an omission in a proxy statement is determined to be material, the shareholder has established sufficient causation between the violation of Section 14(a) and his injury. *Electric Auto.*
163
Are Black-Scholes valuations material information?
No. Only material information needs to be included in proxy statements and based on various precedents, the court determines that Black-Scholes valuations are not material information. *Bartz.*
164
Can a company exclude from a proxy statement a shareholder proposal that focuses on a matter of significant social policy related to the company’s day-to-day business operations if the policy issue transcends those operations?
No. A company cannot exclude from a proxy statement a shareholder proposal that focuses on a matter of significant social policy related to the company’s day-to-day business operations if the policy issue transcends those operations. Generally, a company can exclude a shareholder proposal from a proxy statement if the proposal relates to the company’s ordinary business operations. To make such a determination, courts consider the subject matter of the proposal and whether that subject matter relates to the company’s ordinary business operations. However, even if a proposal involves the company’s ordinary business operations, the company cannot exclude the proposal if its focus is a matter of significant social policy that goes beyond the company’s day-to-day business operations. *Trinity.*
165
Is the meaning of “significantly related” in the SEC rule for omissions in proxy statements limited to economic significance?
No. The meaning of “significantly related” in the SEC rule for omissions in proxy statements is not limited to economic significance. *Lovenheim.*
166
Does a shareholder proposal “relate to an election” under the SEC’s rules for exclusion from a proxy statement if it seeks to amend the corporate bylaws to establish a procedure by which certain shareholders are entitled to include in the proxy materials their nominees for the board of directors?
No. A shareholder proposal does not “relate to an election” under the SEC’s rules for exclusion from a proxy statement if it seeks to amend the corporate bylaws to establish a procedure by which certain shareholders are entitled to include in the proxy materials their nominees for the board of directors. *AFSCME.*
167
(1) Is a bylaw permissible if it defines the process and procedure by which a board of directors makes business decisions?
(2) May a corporation’s board enter a contract that requires it to act in a manner that would violate its fiduciary duties?
(1) Yes. A bylaw is permissible if it defines the process and procedure through which a board of directors makes business decisions. This is explicitly stated in Delaware statutes.
(2) No. A corporation’s board may not enter a contract that requires it to act in a manner that would violate its fiduciary duties. Delaware General Corporation Law § 109(a) vests the power to adopt, amend, or repeal a corporation’s bylaws concurrently in a corporation’s directors and its stockholders. *C.A. Inc.*
168
May a stockholder inspect the corporation’s list of stockholders to ascertain the identity of fellow stockholders for the purposes of communicating a tender offer?
Yes. A stockholder may inspect the corporation’s list of stockholders to ascertain the identity of fellow stockholders for the purposes of communicating a tender offer. *Crane.*
169
May a shareholder inspect corporate records if his sole purpose in doing so is to convince the corporation to adopt his political concerns, without any regard for his financial interest in the corporation?
No. Shareholders must have a proper purpose germane to their economic interest in the corporation to inspect corporate records. *Pillsbury.*
170
Is production of an out-of-state corporation’s shareholder and NOBO lists to an in-state resident permitted when the shareholder was not able to obtain the lists under the law of the state of incorporation?
Yes. Production of an out-of-state corporation’s shareholder and NOBO lists to an in-state resident is permitted when the corporation is doing business in the shareholder’s state, even when the shareholder was not able to obtain the lists under the law of the state of incorporation. *Sadler.*
171
Does a limitation on a class of stock that prevents the stock from receiving dividends invalidate the stock?
No. A limitation on a class of stock that prevents the stock from receiving dividends does not invalidate the stock. *Stroh.*
172
Can a controlling stockholder(s) of a Delaware corporation ratify an interested board’s decision without adhering to the corporate formalities for taking stockholder action?
No. A controlling stockholder(s) of a Delaware corporation cannot ratify an interested board’s decision without adhering to the corporate formalities for taking stockholder action. Under Delaware law, stockholders can assent to a corporate decision by a formal vote or by written consent. Such written consent of the controlling stockholder(s) does not need prior notice, a vote, or a meeting to be effective, but it does require prompt notice of such consent to nonconsenting stockholders. *Zuckerberg.*
173
Is an action brought against a corporation’s board of directors to redress direct injury to the corporation’s shareholders not shared with the corporation itself a shareholder derivative action?
No. An action brought against a corporation’s board of directors to redress direct injury to the corporation’s shareholders not shared with the corporation itself is not a shareholder derivative action. Steiner’s excise tax claim alleges that the corporation was injured due to improper compensation to directors to cover their excise tax liabilities. If the claim were upheld, the recovery would go to the corporation. *In re: Meditronic.*
174
(1) Does a board of directors abdicate its directorial authority simply by making a business decision that limits the board's freedom of future action?
(2) If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, may the shareholder then assert that demand is excused with respect to other legal theories in support of the same claim?
(1) No. An informed business decision made by a board of directors is not an abdication of directorial authority merely because the decision limits the board's freedom of future action. Directors may not delegate away their duties to manage the corporation.
(2) No. If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, the shareholder may not then assert that demand is excused with respect to other legal theories in support of the same claim. *Grimes.*
175
Does New York’s law stating that a complaint in a derivative case must detail a plaintiff’s efforts to change board policy mean that New York has a universal demand requirement?
No. *Marx.*
176
When a special litigation committee composed of disinterested members decides that continuing a shareholder derivative litigation will not be in the corporation’s best interest, are the courts bound to dismiss that litigation?
Yes. The business judgment rule exists because the board of directors is better situated than the courts to make decisions about what is in the best interests of the company. As long as the decisions of the board are being made by disinterested decision makers, those decisions deserve the business judgment protection. Here, the special litigation committee, exercising the power that the full board delegated to it, made the disinterested, informed decision that the shareholder litigation would be bad for General Telephone. *Auerbach.*
177
In reviewing an independent committee's motion to dismiss a shareholder's derivative lawsuit on the basis that maintaining the lawsuit is not in the corporation's best interest, must the chancery court first analyze the committee's independence and good faith and the bases supporting the committee's conclusions, and then, if the court is satisfied that the committee was independent and acting in good faith, apply its own independent business judgment to determine whether the motion should be granted?
Yes. *Zapata.*
178
To survive a motion to dismiss a shareholder derivative claim in which the plaintiff is asserting that demand is excused due to lack of director independence, must the plaintiff plead particularized facts that create a reasonable doubt about the directors’ independence?
Yes. To survive a motion to dismiss a shareholder derivative claim in which the plaintiff is asserting that demand is excused due to lack of director independence, the plaintiff must plead particularized facts, that when considered in a light most favorable to the plaintiff, create a reasonable doubt about the directors’ independence. The court must analyze the facts that the plaintiff pleads with respect to the directors’ lack of independence in their totality and not independent of one another. *Sanchez.*
179
Can a stockholder maintain a claim against the directors of a corporation if the stockholder alleges only that a particular course of action would have been more advantageous than the course of action the directors took?
No. Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing. The only wrongdoing that the plaintiffs claim is that the directors should have done something differently with the DLJ stock. This allegation without more is not sufficient to maintain a claim. *Kamin.*
180
May directors of a corporation be liable to shareholders under the business judgment rule for approving a merger without reviewing the agreement and only considering the transaction at a two-hour meeting?
Yes. Under the business judgment rule, a business determination made by a corporation’s board of directors is presumed to be fully informed and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that the directors were grossly negligent in that they did not inform themselves of “all material information reasonably available to them.” *Van Gorkom.*
181
Must the court appraisal process consider non-speculative future value attributable to the acquiring party’s post-merger plans for the company?
Yes. A shareholder that dissents to a merger is entitled to receive his proportion of the enterprise’s going concern value. That valuation is calculated as of the date of the merger, but projected future value as of that time may be considered. *Cinerama.*
182
Does a director necessarily breach his duty of loyalty to a corporation by advertising the corporation’s product on a program on which the director’s wife is a singer?
No. Directors have an obligation not to put their own interests before the interests of the corporation. This duty of loyalty supersedes the business judgment rule so that fraud may be avoided. *Bayer.*
183
Can a corporation’s transaction directly benefitting one of the corporation’s directors be valid?
Yes. A transaction involving an interested director is valid if the material facts as to the director’s interest are disclosed or known to the board of directors and the board in good faith authorizes the transaction by an affirmative vote of the disinterested directors. *Benihana.*
184
Under the corporate opportunity doctrine, must the director in question formally present the opportunity to his corporation’s board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity?
No. There is no requirement that the director take into consideration future interests of an at-that-time third party corporation, and there is no requirement that the director in question formally present the opportunity to his corporation’s board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity. *Broz.*
185
Are directors of a corporation personally permitted to accept private stock allocations in an initial public offering of the corporation’s stock when the corporation itself could have purchased said stock?
No. Directors of a corporation are not permitted to personally accept private stock allocations in an initial public offering of the corporation’s stock when the corporation itself could have purchased said stock. *Ebay.*
186
Must a parent corporation always pass the intrinsic fairness test when it transacts business that affects its subsidiary?
No. A parent corporation must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing in that the parent is on both sides of the transaction with its subsidiary and the parent receives a benefit to the exclusion and at the expense of the subsidiary. *Sinclair.*
187
May directors declare dividends for the purpose of personal profit?
No. Directors may not declare or withhold the declaration of dividends for the purpose of personal profit. Doing so is a breach of the duty of loyalty. *Zahn.*
188
Will shareholder ratification of a transaction in which directors are personally interested automatically shift the burden of proof to an objecting shareholder to demonstrate that the transaction is unfair?
No. Generally, shareholder ratification of a transaction in which directors are personally interested shifts the burden of proof to an objecting shareholder to demonstrate that the transaction is unfair. However, this is not the case when the majority of shares that voted in favor of the transaction were held by interested directors. The burden remains on the directors to show that the transaction is objectively fair. *Fliegler.*
189
Is bad faith properly defined as an intentional dereliction of duty and conscious disregard for one’s responsibilities?
Yes. One definition of bad faith is the intentional dereliction of duty and conscious disregard for one’s responsibilities. *Disney.*
190
Can directors be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system, or having implemented such a system, consciously fail to monitor or oversee its operations?
Yes. Directors can be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system, or having implemented such a system, consciously fail to monitor or oversee its operations. The standard for such a determination is whether the directors knew that they were not fulfilling their oversight duties and thus breached their duty of loyalty to the corporation by failing to act in good faith. This is a forward-looking standard and hindsight cannot be used to determine whether directors exercised their corporate oversight responsibilities in good faith. *Ritter.*
191
For purposes of indemnification, is a defendant “successful” in defense of the claim against him if he assumes no liability and does not have to pay the settlement because his employer paid the whole settlement payment?
Yes. A court will not go “behind the result” and inquire as to why a defendant assumes no liability or payment in a claim against him. *Waltuch.*
192
Is an agreement between two shareholders in a closely held corporation to vote jointly a binding and enforceable contract?
Yes. A shareholder generally has significant freedom in how he or she votes and an agreement between two shareholders in a closely held corporation to vote jointly is a binding and enforceable contract. Although the contract in the current case provided that the arbitration was binding, there was no enforcement instrument in the contract to make it so. However, by not voting according to the arbitration, Mr. Haley (on behalf of Mrs. Haley) breached the contract and Mrs. Ringling is therefore entitled to relief. *Ringling.*
193
Is a contract that requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties void?
Yes. A contract that requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties is void. A director’s primary duty is to the corporation and its shareholders. Shareholders may combine their votes to elect directors, but they may not extend this power to limit directors' authority to run the corporation, such as in the selection of officers or fixing salaries. *McQuade.*
194
Is an agreement between directors in a close corporation valid if it calls for the election of a certain person to an office, a minimum dividend to an individual each year, and a continuation of salary to the successor in interest of a deceased director?
Yes. In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language. *Galler*
195
Are pooling agreements valid if one of the parties seeks to get out of the agreement?
Yes. Pooling agreements are valid and specifically enforceable even if one of the parties seeks to get out of the agreement. A pooling agreement does not constitute a proxy that may be revoked by a party at any time. *Estrada.*
196
Are majority shareholders in a close corporation liable for breach of a fiduciary duty to a minority shareholder if they remove him from office and cut off his salary without any showing of misconduct?
Yes. Majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty. Where no legitimate business purpose can be shown, the majority shareholders are liable for their breach of that duty. *Wilkes.*
197
Does a minority shareholder in a close corporation, by that status alone, acquire a right from the corporation or majority shareholders against discharge from his employment in the corporation?
No. The duty a corporation owes to a shareholder as a shareholder is different from a duty that the corporation might owe to a shareholder as an employee. *Ingle.*
198
Should a minority shareholder reasonably expect that the majority shareholders should be forced to buy out her shares upon request?
No. Stockholders in a close corporation owe to one another a duty of the utmost good faith and loyalty. When that duty is breached in the form of a freeze out, the proper remedy is to restore to the minority shareholder the benefits from the corporation that she reasonably expected, but did not receive due to the breach. Absent applicable language in a corporation’s articles of organization or bylaws, a forced buyout of the minority shareholder’s shares would exceed the minority shareholder’s reasonable expectations. *Brodie.*
199
May a minority stockholder in a close corporation that requires a unanimous vote for corporate action repeatedly vote against an action for personal reasons if the action would be in the best interest of the corporation?
No. Stockholders in a close corporation owe to one another a duty of the utmost good faith and loyalty. Because of the nature of close corporations, majority stockholders may actually require protection from minority stockholders in some cases. In any case, each director in a close corporation carries the same fiduciary duty. In the present case, the 80 percent provision as it was carried out made Wolfson the de facto majority stockholder because his became the controlling interest. By refusing to vote for dividends, the refusal of which resulted in IRS penalties, Wolfson acted unreasonably and not in the best interest of the corporation. *Atlantic Properties.*
200
Is a judgment ordering a close corporation to buy a minority shareholder’s stock at fair value based on a breach of fiduciary duty an appropriate remedy when the benefits received by the other shareholders do not include selling their stock back to the corporation?
No. A judgment ordering a close corporation to buy a minority shareholder’s stock at fair value is an appropriate remedy when (1) it is provided for in the incorporating documents, (2) the court orders an involuntary dissolution of the corporation, (3) there is significant change in the corporation’s structure, or (4) if there is a breach of a fiduciary duty among the directors. Rationale (4) is only appropriate in so far as the buyback is a benefit that other shareholders in the corporation had received and the complaining shareholder did not. *Alaska Plastics.*
201
Can a director breach a fiduciary to the corporation if the corporation’s value does not decrease as a result of the director’s actions?
Yes. Shareholders in a close corporation owe each other a strict duty of the utmost good faith and loyalty, including a duty to deal “openly, honestly and fairly.” *Pedro.*
202
Does a merger constitute a sale of stock from one entity to the other?
No. In a merger, the acquired corporation ceases to exist as an entity. A merger does not constitute a sale of stock from one entity to the other as the acquired corporation’s shares are extinguished into the other entity, not bought. *Sundquist.*
203
Are minority stockholders generally entitled to share equally in a premium paid for a controlling interest in a corporation?
No. Absent fraud or other illegal activity, a stockholder with a controlling interest in a corporation is free to sell that interest at a premium price as a controlling amount of shares is more valuable per share than a non-controlling amount. Minority stockholders, however, are not entitled to share equally in that premium paid for a controlling interest because the controlling interest was no theirs to sell. *Zetlin.*
204
Are minority stockholders ever entitled to share equally in a premium paid for a controlling interest in a corporation?
Yes. Where the sale of a corporation’s controlling interest commands an unusually large premium due to a market shortage of the corporation’s product, a fiduciary may not appropriate to himself the value of that premium. *Pearlman.*
205
Is a provision in a contract for the sale of stock that calls for the immediate transfer of control of a board of directors illegal per se?
No. A provision in a contract for the sale of majority share control in a corporation that calls for the immediate transfer of control of a board of directors to the buyer is not illegal even if the buyer cannot convert that share control into operating control immediately. *Essex.*
206
May a shareholder be entitled to appraisal rights if a combination of two corporations is consummated by contract and not in accordance with the statutory merger procedure?
Yes. Under the de facto merger doctrine, a shareholder may be entitled to appraisal rights even if a combination of two corporations is consummated by contract and not in accordance with the statutory merger procedure. *Farris.*
207
Is the business judgment rule the appropriate standard of review for a merger between a controlling stockholder and its subsidiary that is conditioned upon (1) the approval of an independent, special committee that fulfills its duty of care and (2) the informed vote of a majority of the minority stockholders?
Yes. The standard of review for a merger between a controlling stockholder and its subsidiary that is from the outset conditioned upon: (1) the approval of an independent, adequately-empowered special committee that fulfills its duty of care or (2) the uncoerced, informed vote of a majority of the minority stockholders is entire fairness. However, when a merger between a controlling stockholder and its subsidiary is conditioned upon both protections, the business judgment rule applies. *Kahan.*
208
If a board’s buying out of a dissident stockholder was motivated by a sincere belief that the buyout was necessary to maintain what the board believed to be proper business practices, will the board be held liable for the decision?
No. If a board’s buying out of a dissident stockholder was motivated by a sincere belief that the buyout was necessary to maintain what the board believed to be proper business practices, the board will not be held liable for the decision. Although in cases where shares are purchased by a corporation with corporate funds to remove a threat to control, the burden is on the directors, the business judgment rule kicks in when the directors prove a good faith and reasonable investigation behind their decision. *Cheff.*
209
May a board of directors repurchase stock from its stockholders selectively?
Yes. Although in cases where a corporation purchases shares with corporate funds to remove a threat to control the burden is on the directors to prove that their actions were reasonable, the business judgment rule kicks in when the directors prove a good faith and reasonable investigation resulted in the purchase. *Unocal.*
210
When the break-up of a corporation is inevitable, does the corporation’s board of directors violate its duty of loyalty to the shareholders if its first consideration is not maximizing the shareholders’ benefit when the company is eventually and inevitably sold?
Yes. The Revlon board’s duty was changed from maintaining Revlon as a viable corporate entity to maximizing the shareholders’ benefit when the company was eventually and inevitably sold. *Revlon.*
211
May a board of directors enter into a transaction in order to defeat a perceived non-economic threat to the corporation’s business?
Yes. Under Unocal, a board of directors may enter into a transaction in order to defeat a reasonably perceived threat to the corporation’s business so long as the board’s decision is reasonable in relation to the threat posed. Such perceived threats include, but are not limited to inadequate value of the tender offer. *Time.*
212
May a no-shop provision in a merger agreement between two corporations define or limit the fiduciary duties of the directors of one or both of the corporations?
No. When a corporation undertakes a transaction which will cause a change in corporate control or a break-up of the corporate entity, the directors’ obligation is to seek the best value reasonably available to the stockholders. Defensive measures such as a no-shop provision making it difficult or unfeasible for a corporation to accept another offer may not legally prevent directors from carrying out their fiduciary duties to the corporation and its stockholders. *QVC*
213
Is a fiduciary’s standard of good faith met if the entity making the determination has a subjective belief that the determination is in the best interests of the limited partnership?
Yes. The standard for good faith requires a subjective belief that the determination is in the best interests of the limited partnership. Although objective facts are relevant to such an inquiry, courts “avoid replacing the actual directors with hypothetical reasonable people.” In other words, the determination must be objectively, egregiously unreasonable to constitute subjective bad faith. *El Paso Pipeline.*
214
Does a fiduciary satisfy the good-faith requirement if it cannot be demonstrated that the fiduciary intentionally failed to act in the face of a known duty to act?
Yes. A court will find that a director acted in bad faith if the director intentionally failed to act in the face of a known duty to act, demonstrating a conscious disregard for the duty. Thus, if a failure or disregard cannot be demonstrated, the fiduciary satisfies its good-faith obligation. Under Revlon, directors have a duty to obtain in a sale the best available price for the stockholders. Importantly, Revlon does not require a particular path for the directors to obtain the best price. *Lyondell.*
215
Are deal-protection devices that are designed to force the consummation of a merger and foreclose consideration of any superior transaction enforceable?
No. Deal-protection devices that are designed to force the consummation of a merger and foreclose consideration of any superior transaction are preclusive and coercive, and they are thus unenforceable. *Omnicare.*
216
May a board of directors of a target corporation entrench itself in the face of a hostile takeover attempt by effectively removing the right of the corporation’s shareholders to vote on who can serve on the board?
No. A corporation’s board of directors has power over the management of the corporation, but that power is limited by the right of the corporation’s shareholders to vote for the members of the board. A board’s response is not reasonable if it takes the right of the shareholders to vote for members of the board away without “compelling justification.” *Hilton.*
217
Can a creditor that has never dealt with a company’s owners as anything other than representatives of the company hold those owners generally liable for the company’s debts?
No. While Union acted through its owners and officers to control the operations of Commercial, those officers were only acting as agents of Union. Union exerted sufficient control over the operations of Commercial to be held liable for Commercial’s obligations, as the corporate setup explicitly allows for that. Nothing bars a corporation from being a partner in a partnership, and there was no fraud involved in Union being the managing partner for Commercial. *Frigidair.*
218
Are the de facto corporation and corporation by estoppel doctrines applicable to limited liability companies?
Yes. *Duray.*
