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Corporations > Review for Corps Final > Flashcards

Review for Corps Final Flashcards

1
Q

what is the principal-agent relationship

A

Parties consent that the agent will act on the principal’s behalf and subject to
the principal’s control
* Look for manifestation of consent
* But note, consent can be found despite parties’ intentions to the contrary
* A principal is liable for acts undertaken by her agent, when those acts are
within agent’s authority

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2
Q

what are the theories of principal liability

A

actual authority, apparent authority, inherent authority and ratification

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3
Q

what are the three types of principals

A

fully disclosed, partially disclosed and undisclosed

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4
Q

what is a fully disclosed principal

A

Third party knows
A is an agent and
knows the
identity of P

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5
Q

what is a partially disclosed principal

A

Third party knows
A is an agent and
of the existence
of a principal, but
does not know
the identity of P

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6
Q

what is an undisclosed principal

A

Third party knows
neither that A is
an agent nor of
the existence or
identity of P, so
inherent
authority
substitutes for
apparent
authority

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7
Q

what is an agent’s duty of loyalty

A

Agent must act in principal’s best interest, rather than her own
* Principal may recover all profits from the agency relationship
* Tarnowskiv. Resop(Minn. 1952)
* Reading v. Attorney - General (House of Lords, 1951)
* Prevents unjust enrichment
* Heavy penalty acts as deterrent

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8
Q

what are the two theories of nature of partnerships

A

aggregate and entity

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9
Q

what are features of aggregate partnerships

A

UPA; partner liability and taxation; dissolution default rules

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10
Q

what are features of entity partnerships

A

RUPA; ability to sue and be sued; property ownership

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11
Q

what is the UPA

A

A partnership is an association of two or
more persons to carry on as co-owners
a[n unincorporated] business for profit.”

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12
Q

what is the RUPA

A

“Partnership … means an association of two or more persons to carry on as co-owners a business for profit ….”

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13
Q

what are some factors in partnership determination

A

profit sharing (prima facie evidence); control; loss sharing; contributions; labels (no formalities required)

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14
Q

what is partner appartent authority

A

Each partner is an agent of other partners, and her actions bind the
partnership to third parties so long as they are “for apparently carrying on in the usual way the business of the partnership

mandatory rule: cannot be changed by agreement

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15
Q

what is profit/loss sharing in partnership operations

A

every partner shares equally in profits and losses

default rule: applies in the absence of a contrary agreement

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16
Q

what are torts and fraud liability for partnerships

A
  • Partners jointly and severally liable
  • One partner or all can be sued
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17
Q

what are contractual claims for partnership liabilities

A
  • Partners are jointly liable
  • All need to be joined in suit
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18
Q

are partners personally liable for all partnership debts?

A
  • Partner can seek apportionment among the other partners and contributions from them
  • Still, many (especially passive) investors
    dislike the partnership form for this reason
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19
Q

how is partnership property determined?

A

Property used by partnership may be deemed either partnership property or property of a particular partner. This can matter for:
Transfer rights
Creditor access
Application on dissolution

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20
Q

who do partners owe a duty of loyalty to

A

partnership AND co-partners

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21
Q

what are the limits of partnership duty of loyalty

A

self-dealing; competition; non-disclosure; other disloyal behavior

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22
Q

what are some triggers for partnership dissolution

A

end of term; will of partners at will; death, bankruptcy, incompetency of partner; judicial decree; judicial decree by wrongful act by partner; expulsion

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23
Q

what are the stages of partnership dissolution

A

dissolution; winding up; termination

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24
Q

what are the consequences of dissolution

A

pay off liabilities; pay out capital accounts; distribute surplus in accordance with statute and agreement

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25
Q

what is a forced sale

A

traditional interpretations of UPA require

Establishes FMV but raises fire sale concern

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26
Q

what is a buyout dissolution

A

RUPA and Creel-type interpretations of UPA permit
Need legitimate accounting

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27
Q

what is an in-kind dissolution

A

Default rules disfavor but can be ordered to do “equity”

partners can negotiate

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28
Q

what are the types of partnership dissolution

A

rightful or wrongful

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29
Q

what are some considerations for choosing a business form

A

liability; transferability; continuity; management practices; entity status; formalities

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30
Q

what are features of partnerships

A

Partners personally liable
* Partners can refuse to accept new
partner
at-will partnership can dissolve at any time; partnerships for term also time-limited
all partners have an equal say in partnership management
often treated as aggregate
formation is bespoke and informal

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31
Q

what are some features of a corporation

A

shareholders have limited liability; shares are freely transferable; perpetual existence is the norm; centralized management by board of directors; formation requires filing but off-the-rack version available

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32
Q

why is delaware popular for incorporations

A

hospitable climate; expert judges; well-developed case law; race-to-the-top or race-to-the-bottom?

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33
Q

what is the basic process for corporate formation

A

incorporators; certificate includes statement of purpose; incorporators act as or appoint directors

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34
Q

what are the basic features of common stock (equity)

A

Voting rights
Profit sharing
Midstream
(dividends)
Residual value
Behind preferred
Lowest priority on
liquidation

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35
Q

what are some basic features of bonds (debt)

A

No voting rights
No profit sharing
Fixed rate of return
Highest priority on
liquidation
Various types (bonds,
debentures, notes)

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36
Q

what are some features of preferred stock (equity with priorities)

A

May have voting rights
Profit sharing
Priority over common for dividends and
residual value
Priority between debt and common on liquidation

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37
Q

what are general types of investor preferences?

A

loss protection; control; potential gain

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38
Q

what are preemptive rights

A
  • Right to subscribe to maintain one’s percentage of ownership
  • No longer default
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39
Q

what is “par value”

A

Minimum
amount that
must be paid in
return for share

Creditor protection

Investor protection

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40
Q

what is watered stock

A

Shares of stock
issued for less than
stated par value
when consideration
overvalued

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41
Q

what do corporate objectives do

A

Clarify aims of corporation’s
business for:
* Directors, officers, employees
* Shareholders
* Other corporate stakeholders
(creditors, employees, suppliers,
society)
* Corporate law gives little guidance

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42
Q

what are the usual goals of corporate objectives

A

maximize value for shareholders; promote interests of all corporate stakeholders

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43
Q

what are the ways to maximize shareholder value

A

earnings per share; share price; time horizon

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44
Q

how can the interests of all corporate stakeholders be promoted

A

prioritization; values; time horizon

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45
Q

what are other objectives beyond shareholder value?

A

corporate social responsibility; charitable contributions

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46
Q

what did Unocal mean for “other constituencies”?

A

Delaware Supreme Court recognizes directors may consider needs of other constituencies (creditors, customers, employees, etc) as a general matter

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47
Q

what was decided in ebay v craigslist

A

Delaware Chancery Court enjoins some (not all) of these defensive actions over majority shareholder argument they would maintain “community service orientation” as insufficiently connected to value for stockholders

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48
Q

what are pros of limited liability corps

A
  • Efficient capital formation
    across various shareholders
  • Pro-rata alternative
  • Firm-level externality
    regulation
  • Jurisdictional competition
  • Exceptions provide safety
    valve against unfairness
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49
Q

what are some cons of limited liability corps

A
  • Discourages internalization
    of externalities
  • Unfairness for creditors
  • Especially tort creditors
  • Exceptions are quite
    narrow
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50
Q

what does veil piercing require

A

company acting as alter ego; examples: cash management system, veto right, overlapping boards, marketing; evidence of injustice or unfairness

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51
Q

what is enterprise liability

A

separate corporations are really part of one enterprise; liable for each other’s debts

CASE: Walkovszky

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52
Q

what helps courts to allow piercing/reverse piercing?

A

unity of ownership; fraud/injustice

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53
Q

what are the categories of piercing facts

A

formalities; economic integrity; fraud/unfairness/injustice; under-capitalization; tort or contract

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54
Q

what are board formalities

A

meetings; notice; quorum; voting; committees

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55
Q

what matters require shareholder votes

A

director election; certificate amendment; extraordinary corporate transactions (ie: merger; sale of all/substantially all assets; dissolution); director removal for cause (with opt in)

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56
Q

what matters permit shareholder votes

A

bylaw amendments; shareholder resolutions; director removal without cause (certificate generally must opt in)

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57
Q

what elements give power to shareholder voting mechanics

A

higer voting threshold for fundamental transactions; classified (aka- staggered) boards; straight v. cumulative voting; plurality v. majority rules; short slates

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58
Q

what are some major corporate officers

A

president or CEO; vice presidents; secretary; treasurer

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59
Q

what are some authorities given to officers

A

president can take ordinary business actions—NOT actions that would change the structure, nature or control of the enterprise

vice presidents have little authority-may have signatory authority

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60
Q

what are some limits on board power

A

Shareholders prevail as protection for
corporate democracy; “inequitable
action does not become permissible
simply because it is legally possible.”

SCHNELL V CHRIS CRAFT

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61
Q

what happened in Blasius?

A

established the standard of compelling justification

higher than business judgment rule and per se invalidity

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62
Q

who can amend corporate bylaws

A

either directors or shareholders unilaterally

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63
Q

who can access shareholder lists

A

available to shareholders for bona fide purchases

64
Q

what is a NOBO list

A

Data on beneficial owners entitled to economic & governance
rights of shares held in street name (if owners don’t object)

DE RULES: DE: Corp must produce record list, but only NOBO list already in existence

65
Q

what is a proxy

A

A proxy is an authorization for
someone other than the owner of
the shares to vote those shares

VERSUS in person

66
Q

what did the separation of ownership and control mean

A

small, dispersed holdings

Lack of expertise/capacity, rational apathy/Wall Street Rule

Collective action problems

Demographics of ownership (Haan article; racial wealth gap)

67
Q

what are the key elements under section 14/rule 14a

A

proxy statements requirements
-makes producing proxy statements expensive

proxy solicitation process
-promoted communication among shareholders

proxy anti-fraud rule

shareholder proposals

68
Q

what is the proxy anti-fraud rule

A

no false or misleading statements with respect to any material fact AND/OR omits to state any material fact necessary in
order to make the statements therein not false or misleading or necessary to correct any statement

69
Q

does causation require proof of reliance

A

no! TSC clarifies Mills standard that information is material if reasonable shareholder would consider it important in “total mix” when deciding how to vote

70
Q

what are the key requirements under 14a-8

A

size of stake; ownership duration; meeting date; one per shareholder per meeting; length and subject matter of proposal

71
Q

what are some 14a-8 exclusions

A

Majority: Proposals that raise significant policy
issues are excludable only if they transcend
ordinary business operations and this one
doesn’t – just about product mix

  • Concurrence: When a proposal raises a
    significant policy issue, it will transcend ordinary business operations and will not be excludable, but this one is too vague as written
72
Q

what are some concepts for standards to assess fiduciary compliance

A

begin with duty of care/BJR; consider which standard applies and which party holds burden;

73
Q

what is standard of conduct review

A

Requires degree of skill, diligence, and
care a reasonably prudent person
would exercise in similar circumstances
As attentive and informed as
reasonable person
Delegation permitted
Take only risks reasonable under the
circumstances

74
Q

what is a standard of review

A

Business Judgment Rule

Only gross negligence/ irrationality leads to liability if directors:
-Make a decision
-Make an informed decision
-Act in good faith
-Act without conflict of interest

No liability for ordinary negligence if these preconditions apply

75
Q

how does one challenge a director action under delaware law (BJR)

A

BJR acts as a presumption

Plaintiff challenging
director action must prove
absence of one or more
preconditions to avoid BJR
and obtain more rigorous
review

If plaintiff cannot do so,
plaintiff must show
substance of decision
grossly negligent/irrational
to succeed

76
Q

what did Francis v United Jersey Bank establish

A

Directors must “discharge their duties in good
faith and act as ordinarily prudent persons would
under similar circumstances in like positions:”
* Understand business
* Keep informed
* Monitor corporate affairs (e.g., attend
meetings)
* Investigate “red flags”
* Be especially attentive to the unique risks in
financial institutions

77
Q

what is a leveraged buyout

A

rely heavily on 2 types of debt financing

large loan secured by acquired company’s assets

“bridge” loan becomes high interest low priority debt AKA JUNK BONDS

78
Q

what are some of the BJR rationales

A

encourage risk-taking; hindsight bias; judicial competence; board recruitment; reputational risk

79
Q

what is DGCL 102b7

A

Allows adoption of charter provision “eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director:
* (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders;
* (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
* (iii) under §174 of this title [unlawful dividends]; or
* (iv) for any transaction from which the director derived an improper personal benefit.”
* Confers major litigation advantage upon directors by blocking duty of care-only claims at motion to dismiss stage, and thereby avoiding discovery

80
Q

what did Caremark establish

A

Caremark: Liability only for “sustained or
systematic failure of the board to exercise
oversight,” which would demonstrate lack
of good faith
* Standard not likely met in this case
* So, settlement’s “modest benefits” = fair
* Creates challenging standard for plaintiffs

81
Q

what are some features of corporate compliance

A
  • Attention to internal controls
    becomes key board issue
  • Audit committees now best practice and can be required by hard or soft law
  • Growth of compliance officers and departments, especially in heavily regulated industries
82
Q

what is a failure of good faith

A
  • Act with intention to harm corporation?
    -Also called “subjective bad faith”
  • Intentional dereliction of duty/conscious disregard?
    -Like in Massey but not limited to Caremark claims
  • Act other than to advance best interests of the corporation?
  • Act with intent to violate law?
    -Like the claim alleged in AT&T
83
Q

What did Stone v. Ritter clarify

A

Lack of good faith is a duty of loyalty violation

84
Q

does the BJR apply to breaking the law

A

BJR does not apply to illegal action (Miller v. AT&T)

85
Q

what are the layers of director protection

A

BJR; exculpation (102b7); demanding bad faith standard; indemnification; insurance

86
Q

what are some duty of loyalty features other than GF

A

standard of review again dominates; violations not necessarily more harmful; combination of statutory and common law regulation; easier path to plaintiff success than duty of care or lack of good faith; imposes liability for a broad range of actions; rejects per se liability approach of agency law

87
Q

what was the holding of Shocking Tech v. Kosowsky (for self-interested transactions)

A

Under fairness standard, director’s argument it was
“short-term pain for long term gain” fails

88
Q

what was the holding of Shocking Talbot v. James(for self-interested transactions)

A

Under fairness standard, director argument re:
benefit from conflict fails because no disclosure

89
Q

what happened in Lewis v. SL&E

A

Two corporations, SLE and LGT, are operated by the same family group but plaintiff was only part of one

90
Q

what are the elements of fairness

A

fair price; fair dealing; fair transaction

91
Q

what are some remedies for breaches of loyalty

A

restitution and additional damages; punitives damages possible; attorneys fees possible; injunctive relief where applicable; other remedies

92
Q

what are the three situations DGCL examines

A

disclosure and director pre-approval; disclosure and shareholder preapproval; disclosure or pre-approval absent

93
Q

what is the standard of review and BoP for disclosure or pre-approval absent under DGCL 144

A

fairness standard; defendant holds B/P

94
Q

what is the holding in cookies food products

A

duty of loyalty applies as its a director, officer or controlling shareholder; fair price requires market comparison

95
Q

what is the standard for waste

A

transaction was an exchange of corporate assets for so little consideration, it is essentially a gift

96
Q

what is the ALI approach

A

defines corporate opportunities; fairness standard applies; B/P on defendant

97
Q

what is a corporate opportunity

A

identified in connection with performance of fiduciary functions; identified through use of the corporation’s information or property; or line of business

98
Q

how can a fiduciary avoid liability for a corporate opportunity

A

approved in advance by disinterested directors satisfying BJR; approved or ratified by disinterested shareholders, satisfying waste or fair to competition

99
Q

what are the main types of shareholder conflicts

A

controlling v. minority; preferred v common; multiple classes of common shareholders

100
Q

what are the fiduciary duties of controlling shareholders

A

apply when act as directors would or dominate
* Requires controlling shareholder to act fairly, in best interest of all shareholders
* Controlling shareholder holds B/P
* Fair dealing
* Fair price
* Fair transaction
* Transamerica meets none of these (Zahn)
* Special considerations
* Parent-subsidiary (Sinclair)
* Independent committee (Kahn)

101
Q

what is the Sinclair threshold test

A

treats transaction as self-
dealing, triggering fairness review, if the transaction provides the parent controlling
shareholder with a benefit to the exclusion of and detriment to the minority shareholders

102
Q

what does Kahn v. Lynch do to the B/P?

A

shifts B/P from controlling shareholder to plaintiff due to independent committee; standard remains fairness

103
Q

what is an independent review`

A

broadly independent members; arms length bargaining power; information

104
Q

what was established in Johnes v. HF Ahmanson

A

Court holds controlling shareholder:
* Owes fiduciary duty to corporation and its minority shareholders
* Must show fairness to minority as well as legitimate business purpose
* Duty applies even though taking actions outside of directorial role
* Allows direct (not derivative) suit and individual damages for plaintiffs

105
Q

what happens to a premium during sale of control?

A

Absent special circumstances (looting, usurping corporate opportunity, fraud, etc.), controlling shareholders keep premium received for shares
* Constrains most worrisome sales of control with
exceptions rather than equal opportunity rule

106
Q

can directorships be sold?

A

No! also excessive premium suggest sales of office

107
Q

what are the basics of a derivative suit

A

enforcement problem; equity responds; incentives for shareholders and attorneys; strike suit problem; specialized procedures (incl demand); direct v derivative distinction

108
Q

what determines derivative v direct with B/P on plaintiff shareholders?

A

whether harm alleged was suffered by the
corporation or its shareholders individually
* whether the corporation or the shareholders
should receive any recovery

109
Q

what is the universal demand alternative

A
  • Make a demand in every
    derivative action
  • Submit to court decision on
    whether rejection was
    appropriate
  • Recommended by ABA Model
    Business Corporations Act and
    American Law Institute
  • Adopted in almost half of the
    states, usually by legislation
110
Q

what are some examples of disinterest and independence?

A
  • Social-circle v. close personal friendships (Beam)
  • Extra scrutiny of independence for SLCs (Oracle)
  • Scrutiny of connections and actions (Kahn)
111
Q

what is the 2 step review process from Zapata v. Maldonado

A
  • Mandatory process inquiry: corporation holds B/P to show independence, good faith, and reasonable
    investigation
  • Discretionary substantive review: court decides if
    dismissal warranted under own business judgment
112
Q

are all fiduciary claims derivative

A

YES!
-loyalty breach for interested directors
-care breach for disinterested directors, exculpated unless lack of good faith

113
Q

what are features of close corporations

A

number of shareholders; control and ownership overlap; lack of market for shares; partnership analogy; ex ante and ex post protections

114
Q

what are some ex ante tools to protect close corporation shareholders

A

vote pooling; voting trusts (stat. rules including time limit); shareholder voting systems; shareholder voting regimes; board voting regimes; agreements re: board decisions; transfer restrictions

115
Q

what is the enhanced fiduciary duty to close corporations under Donahue

A

Court applies enhanced fiduciary duty to close corporation shareholders due to threat of oppression by squeeze-out
* Close corporation as akin to partnership
* Contrasts to general absence of shareholder fiduciary duty

116
Q

what are the oppression risks per Donahue

A

differential liquidity options; employment issues

117
Q

what are limited liability companies?

A
  • Limited liability
  • Defaults typically to owner management
  • Default to partnership tax treatment
  • Highly variable by contract
    -generally utilized for small firms (usually formed in state of operations)
118
Q

what is a transfer of assets

A
  • Acquirer purchases assets
    of transferor corporation
  • Generally followed by a
    liquidation of transferor
    corporation and distribution
    of the consideration to the
    transferor corporation’s
    stockholders
  • Requires board approval
    and shareholder approval
    for transferor (DE)
  • Consideration in cash, debt
    or stock
119
Q

what is a merger or consolidation

A
  • Merger: two companies
    combine; one merges into
    the other and disappears
  • Consolidation: two
    companies combine; new
    company is created, both
    original ones disappear
  • Can use subsidiaries
    (triangular)
  • Requires board and
    generally shareholder
    approval (DE)
  • Consideration in cash, debt
    or stock
120
Q

what is a tender offer

A
  • Acquirer purchases stock of the target directly from the target corporation’s
    shareholders
  • Target board can be out of
    the picture or negotiating in
    background but no formal
    board or shareholder vote
  • Greater regulatory load for
    acquirer than merger or
    sale of assets (federal
    Williams Act)
  • Consideration can be cash,
    debt, or stock
121
Q

what are the statutory requirements for a transfer of assets under DGCL

A

§271 every corp may sell lease or exchange ALL or substantially ALL of its property or assets
-as BOD deems expedient and for best interests of the corporation
-resolution adopted by majority of shareholders
-meeting called with 20 days notice

122
Q

what does DGCL §262 say

A

buyout rights: no appraisal rights for sales of assets

123
Q

DGCL §271 requires shareholder vote for what?

A

ALL or substantially all of the assets

124
Q

what are the statutory protections under DGCL §251

A

voting rights for shareholders of survivor corporation, and
* Voting rights for shareholders of transferor corporation
* Subject to exceptions

125
Q

what are some appraisal concerns

A

judicial concerns; inconsistency across transactons; procedural barriers; non-exclusive remedy; arbitrage; potential cash drain (n.b. market out)

126
Q

what is the market out exception to appraisal

A

DGCL262b1-no appraisal rights for shareholders of corporations with either more than 2000 shareholders OR national exchange listing

DGCL 262b2-appraisal rights are available regardless of market opportunities if the consideration in the transaction is cash

127
Q

what are freezeouts

A
  • Eliminate minority shareholders from controlled corporation
  • Minority shareholders receive cash for shares
  • Various forms possible, but cashout merger dominant
    -Controlling shareholder structures merger with cash
    consideration to minority
    -Controlling shareholder ensures board approvals and shareholder votes approving merger on both sides
    -Minority shareholders have appraisal rights due to cash consideration, but cannot stop deal
128
Q

how can controlling shareholders shift the B/P

A
  • Majority of minority shareholder approval (approved in
    theory but not applicable in Weinberger)
  • Independent committee review (approved in theory but not applicable in Kahn v. Lynch)
129
Q

what is the process for controlling shareholder tender offer transactions subject to limited review

A
  • General fairness review inapplicable
  • Ask: Any false or misleading disclosures?
  • Ask: Is transaction coercive? (In re Pure
    Resources Del. Ch. 2002) Non-coercive
    transactions will contain:
  • non-waivable majority-minority
    tender condition
  • promise of a prompt short-form
    merger at same price
  • no retribution
130
Q

what is the statutory provisions for no-vote controlling shareholder mergers on the heels of tender offers

A
  • Offer for all shares of listed company or
    one with >2000 shareholders
  • Pursuant to negotiated agreement contemplating second step merger at for
    same consideration as tender offer
  • Post-offer offeror controls sufficient shares to control merger vote
  • If majority of disinterested target shareholders tender, fiduciary review only for disclosure, disinterest, non-coercion (In re Volcano, Del. Ch. 2016)
131
Q

what is the williams act

A
  • Applies to tender offers: typically
    understood as general invitation to most or
    all target shareholders to purchase their
    shares at a specified price
  • Can be subject to a minimum and/or a
    maximum amount offeror will accept
  • Mandates timely disclosure by offeror
  • On acquiring >5% of any class of
    registered equity, file Schedule 13D with
    the SEC (and copy issuer) within 10 days,
    including plans for acquisition or
    changes at target
  • Similar statement required by any
    person making tender offer
  • Rule 14e-2 mandates timely disclosure by
    target board as well
  • Include opinion, reasons for opinion,
    conflicts of interest, other transactions
    currently under review, etc.
132
Q

what are some tender offer defenses

A

make it less attractive; more difficult; more expensive

133
Q

what is the unocal standard

A
  • If plaintiff challenges defensive action, B/P on directors to show:
    -Reasonably perceived threat
    -Proportionate action within range of reasonable responses
    —Preclusive or coercive actions are per se unreasonable (Unitrin)
    -Directors may consider needs of other constituencies (creditors,
    customers, employees, etc.)
    -If directors make these showings, BJR deference applies
134
Q

what does Unitrin establish

A

Draconian defenses are per se unreasonable! included in this are :
-preclusive defenses: make tender offers impossible on real terms
-coercive defenses: force shareholders hands pushing target management’s preferred alternative on them

135
Q

what is a poison pill

A
  • Poison pill grants to existing shareholders (other than
    acquirer) rights to purchase additional shares at a discount,
    often 50% of market price
  • Triggered by an event, e.g., tender offer or an acquirer
    reaching a significant ownership stake
  • Rights can be made redeemable by issuer for nominal price
  • Flip-in poison pill
    -Right holders can purchase discounted shares of target
    -Dilutes acquirer’s position, makes acquisition more
    expensive
  • Flip-over poison pill
    -Right holders can purchase discounted shares of acquirer
    -Threatens dilution of acquirer’s own shareholders
  • Only effective in tender offers followed by second-step merger, often required by financing
136
Q

what does AirProducts mean

A

chancery emphasizes it is not saying directors can “just say never”

137
Q

what is the Revlon standard

A
  • New standard needed when board decides company is up for sale; long-term no longer matters
    -Revlon standard: directors must act as auctioneers,
    getting the best price for shareholders
    -Defenses preferencing one bidder violate standard
    -Enjoins lock-up, no-shop, termination fee
  • “Other constituencies” irrelevant when Revlon applies
    TRIGGERS IN END GAME SCENARIOS
138
Q

what are the fiduciary review of defensive actions

A

unocal standard
-reasonably perceived threat
-proportional response?

Unitrin Gloss
-coercive or preclusive defenses are draconian
-they are per se unreasonable

Blasius if applicable
-primary purpose to interfere with shareholder voting?
-if so, enjoin unless compelling justification

Revlon duties
-to maximize shareholder value
-apply when breakup becomes inevitable

139
Q

what happened in QVC

A

But DESC applies Revlon because
* Viacom transaction will result in post-merger controlling shareholder
* Endgame for shareholders; Paramount shareholders will have no future chance to sell control at a premium

140
Q

what happened in Omnicare review

A
  • Reasonably perceived threat? Yes, if no deal, bankruptcy
    inevitable
  • Reasonable response? No, both coercive and preclusive
  • Coercive: forces shareholders’ hands; they cannot
    stop merger
  • Preclusive: makes tender offer impossible in real
    terms because combination of the merger agreement
    and voting agreements made merger a fait accompli
  • Per se unreasonable as draconian so no
    proportionality review required
  • Majority highlights importance of fiduciary out – lacking
    here – over a vigorous dissent urging pragmatism
  • Revlon moment had not yet occurred
141
Q

what review did Blasius cause DE to adopt

A
  • Chancery adopts compelling justification standard of review for actions taken for
    primary purpose of interfering with shareholder voting
142
Q

what is section 10b of federal securities statutes

A

anti fraud! any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

143
Q

what is rule 10b5

A

To employ any device, scheme or artifice to defraud,
To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
To engage in any act, practice or course of business which operates or would
operate as a fraud or deceit on any person,

144
Q

what are the elements of 10b5 securities fraud actions

A

interstate commerce; manipulative or deceptive device; materiality; purchase or sale; causation

145
Q

what is a manipulative or deceptive device

A

*Misrepresentations/misstatements
* Omissions when there is a duty to speak
* Half-truths
* Duty to correct
* Duty to update
* Entanglement
* Insider trading (addressed in next module)

  • Opinion statements rarely qualify
  • Forward-looking statements only qualify if outside bespeaks caution doctrine or PSLRA safe harbor
146
Q

what is the holding from Basic

A
  • Facts are “material if there is a
    substantial likelihood that a reasonable shareholder would consider [them] important in deciding” what to do with her shares (TSC v. Northway)
  • USSC adopts 2nd Circuit approach
    balancing probability and magnitude to determine materiality
  • Are preliminary merger negotiations, which are speculative, material?
  • Yes, merger is an event of great magnitude; even if its probability is not great, the pre-merger negotiations can be material
  • USSC remands for application of
    standard
147
Q

what is the FOTM theory

A

investors in
large securities markets rely on
analysts to review material public
information and establish price

“Efficient markets
hypothesis,” that market reflects
all public information
* Basic permits plaintiffs to use
indirect reliance (FOTM) to raise a
presumption of causation in a
10b-5 misrepresentation claim

148
Q

what is the holding from goodwin about insider trading

A
  • Court announces the majority rule that
    fiduciary duty runs to the corporation; no
    fiduciary obligation runs to shareholders
    that would require disclosure
  • Exception for prior relationships
  • “Special facts” doctrine
  • Minority rule required trading fiduciaries
    to disclose MNPI to shareholders
  • Not widely adopted out of concern re:
    director recruitment
149
Q

what is the duty under Cady Roberts and Co?

A

DUTY=disclose or abstain

150
Q

what are some policy arguments on insider trading regulation?

A

pros-market efficiency; fair play; market integrity; corporate property

cons: rewarding executives; getting information into price

151
Q

what are the traditional parties to 10b5 insider trading claims

A

plaintiffs: SEC; DoJ; private plaintiffs

Defendant: traditional insiders; misappropriators; tippees of either

152
Q

what is insider trading liability under Chiarella

A
  • USSC connects 10(b)/10b-5 to common
    law fraud
  • For fraud based on omission,there
    must be a duty
  • Congress did not prohibit someone
    without a duty from purchasing
    shares on the basis of material nonpublic information

CAUSES SEC to promulgate rule 14e3

153
Q

what does rule 14e/e3 refer to?

A

applies to trades on MNPO regarding tender offers (O’Hagan); no requirement of a breach of duty; strict liability rule

154
Q

what does rule 10b5-1 do?

A
  • Addresses activity that counts as trading on inside information versus merely trading with inside info
  • Creates safe harbor for trades planned in writing in advance
  • Will not be treated as trades on material nonpublic information even if trader possesses MNPI at time of trade
155
Q

what does Dirks do?

A
  • Tipper is liable for trading/tipping if tip breaches duty
  • Breach = tipper gains personal advantage from tipping
  • Includes tips as gifts, especially to family or friends
  • Salman v. U.S. (USSC 2018): tip to insider’s brother is breach sufficient to ground insider trading liability
  • Tippee is liable if tipper breaches and tippee knows/ should know of breach
156
Q
A

Corporations (3 decks)

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