TOCForm of Business 1Incorporation1 Characteristics/Structure of
Corp2Mechanics of Corp3Double Entry Accounting4Dividends4Corporate
Formalities: Directors5Corporate Formalities: Officers5Corporate
Formalities: Shareholders6Federal Securities Acts: General: 1933
Act, 1934 Act, 10b-5 Generally, Williams Act 14e-3, 14a-9,
14a-87Reimbursement for Proxy Contests8Duty of Care and BJR9Duty of
Loyalty: Self Dealing10Duty of Loyalty: Corporate
Opportunities11Duty of Loyalty: Controlling Shareholders12Direct
and Derivative Litigation13Securities Fraud: 10b-5 elements;
Misdisclosure Actions14Securities Fraud: Insider Trading: Classical
and Misappropriation Theories; 14a-3 Tender Offer Reqs.15Appraisal
Rights16Takeovers Unocal Test; Williams Act; Blasius; Liquid Audio;
Lockups17Takeovers- Revlon Duties; QVC; Time Warner; Omnicare18
Biz Form + IncorporationForm of business0) General NoteMay
contract around most of these provisions. These are tax
distinctions more than distinctions in reality.1) Sole
Proprietorship/ General partnershipBenefits: Flow Through Tax, No
formalities. Disadvantages: Full liability, Destroyed if principal
dies or leaves. Examples: Lemonade stand (SP), his In-Law's
Bakery2) CorporationsBenefits: 1)Ltd Liability; 2)perpetual
existence; 3)Entity Status; 4)Transferability of ownership
interests;5) Central management. (Also: ability to raise capital)
Disadvantages: "double taxation" (entity-level and personal income
taxation); significant formalities; organizational costs. 3)Ltd.
PartnershipBenefits: Flow Through Tax, Ltd Liability for Ltd
partners. Disadvantages: Minor formailities, Full liability for
general managers, General Mgrs. Must be owners. Examples: Hedge
funds, Venture Capital. Note: IRS will treat you as a corporation,
not LP, if you behave like a Corp (If Bd is passive, pass through
tax; if active, treated as corp)3.1) Hedge Funds"lightly regulated
investment vehicles": A firm that pools the capital of generally
[(Liabilities)+(Stated Capital)].1.1) Equity InsolvencyPassed if
can pay debts as they can come due.1.2) Balance Sheet/Impairment of
Capital Isolvency[ Passed if Assets > (Liabilities)+(Stated
Capital) Del 160] [(Klang: may not use a stock repurchase to impair
capital, since a repurchase is similar to a dividend) , Del
170.]1.3) Bankruptcy InsolvencyPassed if Assets >
Liabilities1.4) Earned Surplus TestPassed if Assets >
Liabilities+Stated Capital+Capital Surplus. (No one uses this)1.5)
Nimble Dividend TestPassed if there were profits in last one or two
years. Del 1702) Test to pay Dividends under RMBCA 6.40cMay pass
BOTH 1)Equity Insolvency AND 2)Balance Sheet Insolvency test (Both
RMBCA and CA 501 are moves away from capital impariment test and
toward insolvency test)3) Test to pay Dividends under CA 500 and
501 [CA 500 a) May issue dividends up to amount of retained
earnings OR b) {After paying the div: 1) assets would be 1.25 times
liabilities AND 2) current assets would be at least equal to
current liabilities, or [(average earnings over past two years)-(
average interest expense over last 2 years)=1.25*current
liabilities]} (Further details page 1184 Statutes) [501- Equity
insolvency test: No dividends if paying them would make corp unable
to meet its liabilities as the come due.]4) Dividend
Theories"Left": Dividends are disfavored because Board should
invest in company to create cash buffer against bankruptcy and
destruction of jobs. "Right": Make lots of dividends, which will
trickle down to SH and to fight agency costs by taking cash from
managers. "Middle" - Modigliani and Miller say it doesn't matter.
Focus of managers is to keep a stable dividend from year to year.
(Skeel: these labels are pretty arbitrary)
4
Directors + OfficersCorporate Formalities: Directors1)
Directors: DE Sec. 141(a)A company is managed by the board;
directors make decisions at meetings. (b)Quorum: 50% of board must
be present by default, but cert/bylaws can set it as low as 33%.
Vote is by a majority present, by default (bylaws or cert can set
higher req.). Board members may resign at any time (c) Board can
set up committee and delegate powers of the board, except mergers,
sales of corp assets, and changes in cert, which require full
board. (Compensation and Audit Committess must be independant -
Sarbanes Oxley) (f) no board meeting required if board members give
written consent or use electronic communication. (k) Directors may
be removed w/o cause by default. BUT: if Staggered board, removal
only for cause.1.1) Straight VotingUsed by vast majority of firms:
1 share = 1 vote; votes for each director are separate, so majority
can elect all dirs.1.2) Electing Directors: Cumulative VotingEach
SH gets a number of votes equal to (Shares)*(# directors being
elected). This practice is in decline and in the extreme minority.
Can be set up in the Cert.1.21) Directors: Cumulative Voting
FormulaN=[(x)(D+1)]/S X=number of shares controlled by minority
D=number of directors that can be elected S=Total Shares that will
be voted Solve for N, the number of directors minority can be
assured of electingunder cumulative voting.1.3) Dirs:
Removal141(k)Any director can be removed with or without cause, by
a majority SH vote, EXCEPT: 141(k)(ii)Must have cause to remove
dir. from staggered board.). DE 228: SH action may be taken on
written consent, rather than at an election.1.31) Replacement DE
223(a)(1): Remaining directors can fill a vacancy, but if don't
before next SH meeting, then replcmt by SH vote.1.4) Directors:
CommitteesDE 141(c) Board can set up committee and delegate powers
of the board, except mergers, sales of corp assets, and changes in
cert, which require full board. (Compensation and Audit Cmtes must
be independant - Sarbanes Oxley) 1.5) Restrictions on Power: SH
Voting[Blasius] Directors may not take actions with primary purpose
of limiting SH franchise. A compelling justification must be shown
to limit SH franchise - THIS TEST HAS NEVER BEEN MET.1.51)
Directors: Restrictions on Power: SH Voting [Liquid Audio]
synthesizes Unocal+Blasius: 1) Directors of target must show a
reasonable belief of a threat to the corporation (compelling
justification requirement) 2) Defensive measures must be reasonable
in relationship to the magnitude of threat (Action may not be
draconian. Draconian=coercive or preclusive) (Blasius plays in
here)1.6) Directors: Reforms: Sarbanes OxleyHistorically there were
managing, inside boards (unpaid for their roles on the board), but
in the 70's, there was a transition to outside directors (paid)
that were supposed to monitor the officers, and the officers would
run the company. Sarbanes -Oxley was adopted in early 90's because
boards were not effective monitors. Section 404: internal controls
requirement to ensure financial info received by board was
dependable. Prohibits auditors from advising or consulting for the
board. Audit committee must be comprised entirely of independent
directors, and that independant committee selects the auditing
firm. Compensation and Nominating cmte. must be outside dirs.1.61)
Reforms: NYSE rules changesSection 303(a) Majority of Board must be
independent (Somone holding a lot of stock may still be
independent). Officers1.7) Hiring of OfficersDel 142: Directors
hire officers, not SH (Charleston Boot v Dunsmore) (SH may only may
make precatory motions)2) Officers: AuthorityActual Authority: 1)
Express authority (given in formal doc) or 2)implied (inferred from
way corp is set up. 2.1) Officer Authority: Apparent Authority:
Authority a 3d party would reasonably expect the officer to have.
CEO can enter into ordinary transactions BUT NOT extraordinary
transactions (long term deals, big money, politically
explosive.)
5
SHsCorporate Formalities: Shareholders3.1)SH: MeetingsDel
222(b): Meetings must be held annually, and Must be noticed at
least 10 and not more than 60 days before meeting. Must include
proxy statement/agenda. Purpose need not be stated. Del 211(c) If
no annual meeting held, SH may compel by petition to Chancery
court. Del 228: Anything at a meeting may be done w/o a meeting by
written consent. 3.11) SH: Special Meetings211(d) Special meetings
may be called by Bd itself, or cert may authorize meeting under
other special circs. 211(a) SH must be told purpose of a special
meeting.3.2) SH: Voting216: Requires vote of majority of shares
present or in proxy at meeting. But a fundamental change requires a
majority of all shares with voting rights. Fundamentals: 271 (sale
of most or all for firm assts); 275 (dissolution); 242 (cert
amendment); 251 (mergers) . 3.21) Record Date213(a): Board sets
record date of who is SH for voting purpose. Date must be at least
10 and not more than 60 days from vote. 3.22) SH: Record Holders,
Beneficial OwnersRecord Holder: Depository or Brokerage holds the
actual stock certificates and owns the technical right to vote.
Beneficial Owner owns the economic rights attached to the stock.
The SEC tries to get the votting rights to the beneficial owners by
proxy - Non-Objecting Beneficial Owner rules facilitate this. NYSE
tries to make the brokers get the vote to the beneficial owners as
well.3.23) SH: Cumulative VotingEach SH gets a number of votes
equal to (Shares)*(# directors being elected). This practice is in
decline and in the extreme minority. Can be set up in the
Cert.3.231) SH: Cumulative Voting FormulaN=[(x)(D+1)]/S X=number of
shares controlled by minority D=number of directors that can be
elected S=Total Shares that will be voted Solve for N, the number
of directors minority can be assured of electingunder cumulative
voting.3.24) Straight VotingUsed by vast majority of firms: 1 share
= 1 vote; votes for each director are separate, so majority can
elect all dirs.3.25) SH: Voting on SH rights plan(Int'l.
Brotherhood of Teamsters): SH have right to propose bylaw change to
require SH voteon implementatino of poison pill. Although options
plans are normally voted on by Directors (Del 157), because this
affected SH voting rights, SH were given the right vote on it. A
bylaw rquirement for a SH approval before Directors could adopt a
poison pill is not contrary to Del Sec. 109. 3.31) SH: Information
Rights to SH list220(c) Burden on Corp to show SH doesn't have
proper purpose to requirest SH list. SH must make written demand of
Board during normal business hours. If Corp doesn't produce,
Chancery can compel. Statute is SH-Friendly, but not in
practice.3.32) SH: Information Rights to books and records220(c) :
Burden on SH to show they have a proper purpose to get books and
records other than a SH list. Company must turn over information
only if it has the information in its control or has the legal
right to get it from a subsidiary (Subsidiary must turn info over
to SH if SH has a right to get it from the parent). (Pillsbury: not
proper purpose if SH doesn't care about the economics of the
company) (Saito: whether or not you have standing to make
derivative suit under DE 327, will not affect your SH rights under
DE 220)3.33) SH: Examples of Proper purpose(Pillsbury) Examples
include: Determine whether Corp has been properly managed; to
determine financial condition of corp, acertain value of
petitioners shares.
6
Securities ActFederal Securities Acts: 1933 Act, 1934 Act, 10b-5
Generally, 14a, Williams Act1) 1933 Sec. ActRegistration and
disclosure reqs of IPOs and subsequent sales of Stocks (rules for
issuing stock)2) 1934 Sec. ActACT APPLIES ONLY TO FIRMS W/>$10M
and >500 SH. Filings, tender offers, and proxy contests (rules
for when stock is out there.) 12(g) Act applies to firms W/>$1M
in assets and >500 SH. EXCEPT every corporation is subject to
Section 10(b)/Rule 10b-5. Rule 12g: Increases to $10 Million in
Assets.2.1) 1934 Act: Periodic Disclosure RequirementsDisclosure
when something major happens. 14a-2: Defines who is subject to
proxy rules (Corporations and SH are and so may not solicit proxy
voting withoutcomplying with proxy rules. Note: Institutional SH
can make public statements and talk to each other without offically
soliciting a proxy) 14a-3: info that must be provided in proxy
statment, including an annual report. 2.2) 1934 Act: Rule
14a-8(b)SH right to place SH's proposal in company's proxy material
at company's expense: 14a-8(b): SH must have continuously held
$2000+ of stock for a year prior to submission of proposal. 2.3)
1934 Act: Rule 14a-8(i)Reasons to exclude SH proposal from Company
proxy: 1) Improper under state law 2) Violation of law 3)Violation
of proxy rules 4) personal grievance 5) Relevence (excluded as de
minimis if deals with less than 5% of company assets and net
earnings) 6)Absence of power to do what's proposed (non-precatory
proposal) 7) Management functions (ordinary business or management
power) (Roosevelt v DuPont: proposal concerned timing of action)
(Exception for socially important issues) (Beginning of 1990s,
Social issues are excluded more often - Phillip Morris SH proposal
for divestment of tobacco excluded) 8) Related to Directorial
elections (own rules in DE 109 etc.) 9) Conflicts with something
Company already proposing 10)Substantially implemented already 11)
Duplicates another proposal 12) Resubmissions 13) Dividends2.4)
Williams Act: Rule 14e-3Regulation of tender offers and takeovers.
Deals with fraud in the tender offer context. Broader than 10b-5.
2.5) 1934 Act: Rule 14a-9Applies only to Proxy statements:
Elements: 1)materiality (What a reasonable SH would care about) 2)
False Fact (either [material subject matter is false] or [both a
lie AND subject matter is false]) 3) Causation (Can't establish
essential link if vote doesn't matter for vote's passage, unless
potential P lost cause of action). (From Mills v. Electric Auto
Light [materiality def. and no damages if it's fair transaction]
and Virginia Bankshares [Causation req: As result of misstatement,
P lost appraisal rights after 60 days passed, and .: established
causation. ).
7
Proxy ReimbursementReimbursement for Proxy Constests2.51)
Reimbursement for Proxy contest costs(Rosenfeld v. Fairchild)
Reimbusement for proxy fight will be appropriate -- For Incumbents
when: 1) contest over policy 2) good faith 3) in best interests of
the corp. 4) expenses were reasonable. -- For Successful
Insurgents, 1) newly elected directors propose reimbursement per
incumbent rules 2) SH ratify. Practically, only successful
insurgents get reimbursed.2.511) Rosenfeld v Fairchild
OpinionsFroessel (3 votes, controls: [the holding above] ) Desmond
(1, concurrence: agrees with Van Vorhis on merits, but concurs in
judgment for failure to prove cause of action ) [Van Vorhis (3,
dissent: doesn't want to encourage proxy contests, and says any
reimbusement was ultra vires)
8
Duty of Care+BJRDuty of Care and BJR1) Duty of Care: GeneralDuty
is owed by Directors to SH, but in Insovency, Dir. owes same duty
of care to creditors as to SH. Directors causing Corp to violate
law is Per Se breach of duty of care.1.1) Duty of Care:
102(b)(7)(From Van Gorkem). DE Corporations can waive Dir.'s
personal, monetary liability for breach of duty of care by placing
102(b)(7) clause in cert (But do not assume presence of this
clause). Does not eliminate 1) non-monetary/injunctive relief; 2)
violations of duty of good faith 3)violations of duty of
loyalty.1.2) Duty of Care: RemediesSH will be awarded difference
between what they got and what they should have gotten, absent the
misconduct. Also, injunctive relief possible, if appropriate.1.3)
Duty of Care: OmmisionsIf Ommission: 1) No Business Judgment
Protection. Skeel: Did not pursue proper process. 1.31) Duty of
Care: Internal Monitoring. (Caremark) Lack of internal controls is
an omission - No BJR] Must have a compliance program to prevent
problems and make board aware. Cannot merely put things on paper
and rely on that (must be active)1.32) Internal Mnitring (Sarbanes
Oxley Section 404) Codfies mandate of internal auditing and
disclosure.1.33) Duty of Care: Internal Monitoring. (1934 Sec. Act,
Rule 13a-15) (A)Controls management reporting (B)assessment of
effectiveness of disclosure control procedures1.4) Duty of Care:
Commissions1)Check for BJR protection 2)If no BJR, the Duty of Care
test. (Sinclair) BJR vs Fairness (Which world are we in?) 1.411)
BJR: DelawareSkeel says 1) Check for proper process (apply Francis
Std to process) 2) Check for proper substance (Reviewed under Gross
negligence std. - A very high bar for Plaintiff to meet. [(Aronstin
v. Lewis) Presumption: Directors acted properly by 1) acting on
informed basis (employing proper process) 2) acting in Good Faith,
and 3) reasbly believes the act is in best interests of corp.
Burden on SH to show at least one of the three is not met. If SH
meets burden, burden shifts to Dir. to show they fulfilled the duty
of care. (Van Gorkem [DE]: This, together, is the a gross
negligence standard)]1.412) Duty of Care: Delaware (From Francis v.
United Jersey Bank): 1) Check for good faith; 2) Check for
102(b)(7) clause (don't assume); 3) Entire Fairness standard
.1.421) Duty of Care/BJR: ALI 4.01BJR if: (a)Dir acts in good faith
and (c) Dir is 1)Not interested 2) informed as to subject matter of
the business judgment to extend Dir. Reasonably believes
appropriate under circs. 3) Dir. rationally believes the business
judgment is in best interests of the corp. No BJR protection under
ALI = Failure of the Duty of Care.1.43) Duty of Care: RMBCA 8.30
(a) Dir. must act 1)in good faith 2) as Dir reasonably believesis
is in best interest of corp. (b) board or committee when [becoming
informed about decisions] or [exercising oversight] shall exercise
same care a person in a like position would reasonably believe
appropriate under the circs. [Measured by a minimum standards, with
a scale sliding up with relevant expertise. Sarbanes Oxley raised
the min. stds. bar in some circs.]1.5) Duty of Care: CausationThere
is no requirement for causation in a breach of Duty of Care action,
EXCEPT (Barnes v Andrews) that in some Jxs, (Not Delaware), no
cause of action if loss would have occurred even if every director
had fulfilled duty of care.
9
Loyalty - Self DealingDuty of Loyalty: Self Dealing
Transactions2) Duty of Loyalty: Cannot waive duty of loyalty2.1)
Duty of Loyalty: Self Dealing, Iowa Statute[Cookies, IA 108] Must
have: 1) One of [a) Disclosed to Dirs. and approved b) Disclosed to
SH and approved c) the transaction was fair and reasonable AND
2)Good Faith 3) Honesty 4) Fairness] Facts of case: Director
negotiated terms of royalties/distribution/warehousing deal for BBQ
sauce and taco sauce recipe, but they were fair to the company.2.2)
Duty of Loyalty: Self Dealing, ALI 5.025.02(a): A self dealing
transaction is valid only if it fulfills duty of fair dealing by
(1): transaction and conflict of interest disclosed to the
corporate decision maker AND (2) EITHER (A) [the transaction is
fair to corp (Burden to self dealer)] OR (B) [the transaction is
authorized in advanced by disinterested directors who reasnbly
condlude it was fair, following disclosure of conflict and
transaction to the board (burden on P)] OR (D) [Transaction
authorized in advance or subsequently ratified, after full
disclosure, by disinterested SH and doesn't constitute waste
(burden on P)]. [(5.02c): 5.02(a)'s disclosure req. is satisfied by
ratification by board, SH or decision)]2.3) Duty of Loyalty: Self
Dealing, DE 144A self dealing transaction is not void or voidable
solely because it is SD if any one of: (1)disclosed to and
authorized by Bd or Cmte, or it is known by Bd or Cmte. (2)
material facts are disclosed to or known to SH, who approve in good
faith (approval by majority of disintered) (3) transaction is fair
to corp. [Skeel: Transaction must also have some measure of
fairness, but, If disinterested directors approve the transaction ,
then BJR applies.]2.4) Duty of Loyaty: DamagesDisgorgement: Penalty
is to give up amount violator earned by the breach2.5) Duty of
Loyalty: Self Dealing: Compensation ContextIf Bd is voting to
change compensation of someone on Bd, it is not treated by DE
courts as a normal duty of loyalty issue (cts very deferential).
(Disney: Eisner wasn't yet on the board, so no duty of loyalty
issue in his compensation package) (Tournament theory: View high
CEO salary as incentive performance. Note: in law firms, not
everyone vying for prize, and multiple "co-equal" partners).
Current event: SH approval of compensation is coming.
10
Loyalty - Corp OppDuty of Loyalty: Corporate Opportunities2.6)
Duty of Loyalty: Corporate OpportunitiesDisclosure is very
important (Hawaiian Intl v. Pablo: nondisclosure of finders fee
[Dir. Went to CA and finds property for corp, but keeps the finders
fee])2.71) Corporate Opportunities: ALI 5.05 {In brief: Cannot take
a corporate opportunity unless first offered to corporation. Under
5.05(e) Exception: No relief if Dir. didn't present opportunity
because of belief it was not a corp opp., but presented it to board
soon after suit filed} Test: (1) Determine whether a corp
opportunity [For Dirs and Officers: used firm assets to pursue,
learn of it in firm capacity, rsbly expected that it would be
offered to corp AND/OR for Officers: closely related to business]
(2) If so, present to corp (3) If rejected, was it rejected
permissibly because one of (a) fair to corp (b) rejected by
disinterested dirs (in advance) (c) rejected by disinteresed SH.
(either in advance or ratification within reasonable time after
transaction)2.711) Corporate Opportunities: ALI 5.05 : burden of
proof Burden of Proof: If Decision maker approved the transaction,
Burden on P. If not approved, burden on D. 2.712) Corporate
Opportunities: ALI 5.05 : Example(Northeast harbor Golf Club v
Harris: Pres. of the golf club used corp opportunity (to buy second
golf course, opp learned of while golfing on own course), never
offered it to club, was a breach)2.72) DE "Line of Business Test"An
"AND "Test: 1) is it in the line of business + 2) Could the firm
afford to pursue the financial opportunity (*** different from ALI)
+ 3)Opportunity is of practical advantage to corp + 4) Corp has an
interest or reasonable expectation in the opportunity + 5) By
taking opp for own, forced Dir into conflict with interests of
corp.2.73) MA "Fairness Test"Is it fair for the executive to take
the Opp?2.74) "Two Step Test"1) Was there an expectency or interest
in the opp? 2) Equitable Considerations (fairness)2.75) Corporate
Opportunities: RemedyDisgorgement of Opportunity and profits
11
Loyalty - Controlling SHDuty of Loyalty: Controlling
Shareholders2.8) Duty of Loyalty: Duties of Controlling SH: DE Case
lawA Controlling share is techincally 50.01%, but it can be much
lower if the Corp is sufficiently widely held. 2.81) Duty of
Loyalty: Duties of Controlling SH: DE Case law: Disclosure[Zahn]
Controlling SH must give all material info to minority SH. Facts:
Tobacco company has spike in profits during WWII, then decides to
liquidate and take profits. Has two classes of stock: Class A has
liquidation preference and economic rights; Class B Has control
rights. Directors call class A, without disclosing the impending
liquidation of the company, so Class B gets more in liquidation
than it would have gotten had Class A held onto their shares.2.82)
Duty of Loyalty: Duties of Controlling SH: DE Case law: Intrinsic
fairnessDoes the transaction have a negative, disproportionate
effect on minority SH? [Sinclair] If no disporpotionate effect on
minority SH, then BJR. If disproportionate, then use "intrinsic
fairness" standard. ("Fair dealing + Fair Price")2.83) Duty of
Loyalty: Duties of Controlling SH: Sale of Control RightsGenerally,
Controlling SH may sell stake in corp at a premium that includes
the control rights. No duty that restricts a controlling SH from
buying or selling interest to anyone they want, EXCEPT: [Zeitlin]
Controlling SH must use discretion not to sell to looters. Red
Flags: 1) Company with very liquid assets easy to loot 2) Buyer
offering unrealisticly high price [Gerdes] 3) reason to believe
buyer will do something pernicious. [Perlman, Steel case]
Controlling SH may sell his stake for a control premium, but may
not take advantage of strange mkt conditions. 2.831) Duty of
Loyalty: Duties of Controlling SH: Seriatum resignationWhen selling
a controlling share of board, the majority directors resign and are
replaced by the new owner 1 at a time. (mechanism used is DE
Section 223)Duty of Loyalty: 4.5) Duties of Controlling SH: Special
Committees used to provide "fairness" cover If there is a truly
independent committee --> burden shifts to plaintiff. Committee
is independent and effective if: 1) Controlling SH does not dictate
terms of merger 2) Special committee must have real bargaining
power that is can exercise with controlling SH on arms-length
basis.
12
SH Litig. - GeneralDirect and Derivative Litigation 0) GeneralIn
Delaware (Tooley v DLJ) : Direct action lies if the harm was
"connected to the intimate rights of the SH) (right to vote,
dividends, pre-emptive rights[right to purchase amount of new
shares issued], appraisal rights). A Derivative action arises out
of "general corporate harm" and is brought on behalf of the
corporation. Note: Direct is better for SH, because recovery goes
to SH. In Derivative action, recovery goes to the corp. Exception
outside of Delaware (Barth v Barth): If corp is closely held, may
bring a suit for general corpoate harm directly against corp
unless: 1)It would expose corp to multiplicity of actions OR 2) it
would materially predjudice the creditors of the corp. OR 3) it
would interfere with the fair distribution of recovery. Some states
allow direct suit if SH can show special injury by director, but
this was rejected by DE SCt in Tooley: You must look to the nature
of the wrong and to whom relief should go.
1) Derivative Suits1) Contemporary Ownership, DE 327: Must have
been SH at time of harm to Corp (New Owner exception: damage done
by former owners not reflected in stock price) (Operation of Law
exception: SH have standing if you get shares through law, such as
through inheritence) (Continuing harm exception: harm contintues
presently, even though initial harm occured prior to ownership.)
AND 2) Security for Expenses (Not req. in DE, is req. in NY) P must
post bond to cover D's fees if judge so awards. 3) Demand on SH
(Unless too expensive: Skeel says not usually required, but may now
be because Internet makes it easier) 4)Demand on Corporation,
unless excused (See below). Demand req. is outcome determinative in
DE (Court will not reverse bd. decision to kill suit unless breach
of good faith.) 1.1) Standing: Demand on Corp. Requirement: DE
Futility Test(Aronson/ Futility test): Demond on corp not necessary
if SH can show reaonable doubt on: 1)Disinterested/Independence OR
2) Valid exercise of BJ [Disinterest/independence is easier. Disney
was rare example of faulty Business Judgment] Must make written
Demand that Board. Demand req. is outcome determinative in DE(Court
will not reverse bd. decision to kill suit unless breach of good
faith.) 1.11) Standing:Demand on Corp. Requirement: Independent
Cmte Req.(Zapata Test) If Demand would be excused and isn't made,
but company sets up cmte to take control of litigation, Court will
examine 1) Independence and good faith of Cmte AND 2) Court will
determine, using its own business judgment, whether the suit should
go forward. (2nd Prong is discretionary by Court, and the test is
meant to be unfriendly to Dirs.). Zapata Facts: Directors as a
group monkey with dates of their options plans to allow themselves
to profit. 1.2) Role of Plaintiff Attny.Benfits: minitgates
collective action problem. Deterrence for other corp. Concerns:
Collusive settlements (Pay attny a lot, Corp minimal damages,
little SH recovery.
13
Securities Fraud-MisdisclosuresSecurities Fraud: 10b-5 Elements
and Reforms; Misdisclosures2) 10b-5"Forbids the use, in connection
with the purchase or sale of any security, of any device, scheme,
or artifice to defraud or any other act, practice or course of
business the operates as a fraud or deceit." Scope: Applies to
1)insider trading(disgorgement) and 2) mis-disclosure (financial) .
Applies to EVERY firm with securities. Includes both civil (private
P and SEC) and criminal actions (DOJ and State AGs). 2.1) 10b-5:
Elements[Dura] 1)Material Misrepresentation or Omission (Basic) 2)
Scienter (Ernst) 3) In connection with purchase or sale of security
(Zandford: securites must be integrally connected to the
transaction) 4) Reliance (Basic) - Mis-disclosure: personal
reliance; Insider Trading: Fraud on the market 5) Economic Loss 6)
Loss causation (Apollo: loss must be related to false statement or
omission. Termporal coincidence of revelation of fraud and price
change. Revelation must be mirror image of false statement.) 2.2)
10b-5 reformsPSRLA of 1995: Reformed securities litigation, and
made it more difficult to bring, because it tightened scienter
rquirement. Stoneridge (2008) and Central Bank (1995) severly limit
ability of private plaintiffs to bring 10b5 actions against
secondary actors (accountants, lawyers, consultants), unless they
personally meet all the elements of 10b-5, including reliance
(usually statments must be attributed to actor personally)2.3)
Mis-disclosuresAffirmative Duty to Disclose: Delaware: few, other
than 14(a)(9): Must disclose if the fact would change the total mix
of info a person would use to decide to perform the transaction.
NYSE 202.03: If there are rumors, Corp must clear them up.2.31)
Mis-Disclosures: Fraud on the market(Basic) Presuming a semi-strong
efficient market, FOTM lowers the bar of reliance by saying price
of stock is determined by available public market info, if lie that
affects the price of stock, element reliace is satisfied for any
who traded in the stock.2.32) Mis-disclosures: Right to Lie
ArgumentArgument that Dir should lie, if it would maximize SH
value. Counter: hurt those who would react to lie, and undermines
efficiency of market.
14
Securities Fraud-Inside trading Insider Trading: Classical+
Missappriation; 14a-3 Tender Offer Reqs3) Insider TradingMust
disclose material non-public info OR abstain from trading on it. If
you trade on security before the market price reflects all the
information you are liable.3.11) Insider Trading: Single Person,
Classical TheoryArises from definition of CL Fraud in context of
Fiduciary Duties to Company. Must have 1) Duty to company whose
stock was being bought or sold. (A duty to someone else doesn't
matter) 2) Personal profit from the information. (Chiarella:
Employee of financial printer who individually figured out details
of another company's transactions in course of him employment was
not liable because of lack of duty)3.12) Insider Trading: Single
Person, Misappropriation Theory(O'Hagan) 1) Misapppropriates
(=deceptive device) 2) confidential information 3) for purpose of
trading on securities 4) in volation of duty owed to source of
information. BUT: Full, sufficiently public disclosure forecloses
10b-5 liability (Disclose or abstain). Pure Stealing does not equal
misappropriation3.2) Insider Trading: Fraud on the Market
Theory(Basic) Presuming a semi-strong efficient market, FOTM lowers
the bar of reliance by saying price of stock is determined by
available public market info, and trading on other non-public
material info constitutes fraud by putting inside trader at unfair
advantage. 3.31) Insider Trading: Tipper Liability(Dirks) For
Tipper Liability: 1)Someone in chain must buy or sell stock, and 2)
Tipper must have a duty under [classical theory (duty to company
whose stock is bought or sold)] or [misapropriation theory
(expectation of confidence or trust with source) (10b-5(2): duty
arises from agreement to keep info confidential; history of sharing
confidences; receipt of non-public info in family situation(unless
established that there is no history on confidence in the family
relation)] 3) Expectation to receive a direct or indirect personal
gain (broadly interpreted), or must mean the info as a gift. 3.32)
Insider Trading: Tippee Liability(Dirks) 1)Everyone earlier in the
chain must have tipper liability 2) Tippee must have known or
should have known that BOTH: Tipper was breaching Duty AND Tipper
expected a benefit or intended it as a gift. 3.4) Insider Trading:
Rule 14e-3Disclose or Abstain: If any person who has taken a
substantial step to commence a tender offer it is a fradulent act
for any person who is in posesssion who is in possession of
material info that the know is non-public to purchase or sell, or
cause to be purchased or sold, any connected securities.
15
Appraisal RightsAppraisal Rights1) GeneralAppraisal rights are a
SH protection. If not happy w/ merger, SH can force buyout by Corp
at agreed upon or judicially determined price. Appear ONLY in
merger context. Policy: want to prtect SH who cannot easily trade
their share on the open market at a fair price, and to compensate
minority SH for losing their veto rights.1.1) DE 262(B)Appraisal
rights if there is a merger AND ( 1. Company is non-public OR 2. SH
will be required to accept something other than survivor stock or
stock of another publicly held company). Notes: "other than
survivor stock" = getting cash, mix of cash and something else. No
Appraisal rights for fracitonal shares. A company is public (and
therefore no appraisal rights attach) if: 1) Traded on national
exchange OR 2) has >2K SH. 1.15) Caveats to DE 262262(c): Can
make appriasal right mandatory for ever merger in cert. NEVER
Appriasal rights in small scale merger under DE 251(f). ALWAYS
appraisal rights in a Short Form Merger under DE 253. 1.16) DE
251(f)NEVER appraisal rights for bidder/survivor in a small scale
merger (where survivor does not pay stock or the stock they use to
effect the merger is