德州大学阿灵顿分校商业法律课笔记

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BLAW53301-23-07TortsNegligenceAccidentaltort;Putoutaproductthatwasdangerous-youareliable.ThisphilosophytracesfromthelawthatifyoudealwithsomethingdangerousandthathurtssomeoneelseContractor/dynamite:100%liablebecausetheyaredealingwithsomethingthatisinherentlydangerous.RangersandFireworksCompany:bothareliableFirestonetiresareexample:EthicsEnron,WorldCom,Tyco-proventhattheyweredeceivinginvestorsFederalEEOLaws(possibleessayquestion)■CivilRightsAct-1964oIncludesallorganizationswith15ormoreemployeesoEnforcedbytheEqualEmploymentOpportunityCommission■Investigatecomplaints■Voluntaryconciliation(onceadecisionituptothecompanytocomply)■Filescasesinfederalcourt■AgeDiscriminationinEmploymentActoEmployeeswhoare40-t-years(noupperlimit)oCoversorganizationswith20+employeesoEnforcedbyEEOC■AmericanswithDisabilitiesActoProtectsthosewithdisabilities■Physicalormentalimpairmentthatsubstantiallylimitsamajorlifeactivity(doesnothavetoberelatedtowork)■Recordofimpairmentexists■RegardedashavingsuchimpairmentoMustmakereasonableaccommodations,Reassignmarginalduties,Modifyworkschedule■Modifytestingmaterials■Permittinguseofpaid/unpaidleaveoEnforcedbyEEOC

1Paper:Effort,citations,references:BOOKNOTESPRINCIPAL/AGENTAgency:youcouldbeoneifyouareimWhatdoyouneedtocreateanagency?Theagententersintocontractsfortheprincipal.Theagentdoesnothavetohavecapacity.Hecouldbeunderagehecouldbederanged.Theprincipalisboundonthecontractandhastohavecapacity.Whatisnecessarytocreateaprincipalagentrelationship?•Doesnothavetobeacontract(oftenis)•Isconsiderationrequired-•SaleofLand:thatagreementhastobeinwriting(generally)•Nowritingisrequired•Musthavemutualconsent:Principalthattheagentactforhim/her•Agencyiscreatedbyparties(haveunderstanding)canbecreatedbecauseanimpressionhasbeengiven(canbeinpublic)•AgentowestheprincipalLoyalty(violatingyourdutyofloyalty:principalcanmaketheagentgiveittohimforwhathepaidforitanddoesnothavetopayacommission)•DutyofObedience■•DutyofreasonablecareoDutytonotifyprincipalofanythingthathemaywanttoknow•Ifhedoesn'tdothesethingshecansuetheagentfbrcontractdamages.Ifitamountstoatorthecansue.Theprincipalcanacquirethesecretprofit(bribesbelongtoprincipal)•RemedyofthePrincipal:hedoesn'thavetopaytheagentanythingifheviolateshisdutyofloyalty•IfagenthasauthoritytohirethesubagentbecomesanagentoftheprincipalPage16Case:Decidedin1952(jutebox)RouteofcoinoperatedmachinesPrincipalasksagenttogoandpurchasearouteRPage18examplesCommentaonsubsection1PrincipalsdutiesPayhim•Payhim•Expenses•Contractualduties•CooperatewiththeagentoIfyouenterintoadealtosellwidgets-youhavetosupplythemwiththewidgets

2•AgentcansuetheprincipalAuthorityKey,biggieaboutagencyWheredoestheagentgethisauthoritytoact?•Actualauthority:whattheagentbelieves(reasonably)oExpress(hehaswhathewastoldthathehas)Couldbeoralorinwritinggivingtheagentinstructions/Authoritygrantedmistakenly:canstillbeexpressauthority.oImplied:expresslyhiresomeonetomanageyourstoreimpliesthatyouhireandfire,buyinventory,arrangeforcleaning,addecisions,etc.oCustomandusagecangiveyouimpliedauthority.oImpliedauthoritythroughacquiescenceoftheprincipal(hiresomeonetostoremanager:onedayyounegotiatewithunionandagreetoanewunioncontract(don'thaveexpressauthority)butthecompanyownersaysgoodjob.Afterawhileyoubelievethatyouhaveimpliedauthoritybecausetheybackyouup.oImpliedauthoritythroughemergencyornecessity:highestrankingpersononthescenehasimpliedauthoritytomakedecisionsoAbilitytodelegateanythingministerial(nodecisionmakinginvolved)Terminationofauthority•Time•Actionisaccomplished(salesquotareached,•Changeincircumstances•Lawmaymakethetransactionillegal•Ifagentorprincipalbecomesinsolvent•Eitherpartybreechestheagreement(fireorquit)•Agentorprincipaldies(doesn,tmateriftheyknow)deathorlossofcapacityAgenciesaregenerallyrevocableTruewithexcept:agencycoupledwithaninterest•Aowesb$,givesBauthoritytosellthelandandthenpaythemselveswhatAowesandextragoestoA.Aisprincipal,Bisagent,•AborrowsmoneybutbeforeBmakesloanheuseslandassecurity.AgivesBPowertosellifIdon'tpay.Apparentauthority(to3rdparties)Basedonwhatimpressionstheyarebeinggivingbytheprincipaloragent(iftheprincipaldoesnotcorrectthe3rdparty)•AgenthasnoauthorityoImposters:twocasesincasebook:negligentlyallowedhimtobebehindthereand3rdpartiesbelievedit.oLingeringapparentauthority:theindividualusedtoworkforyou.Indiciaofauthority.Peoplebelievethattheystillworkforyou.BLAW5330

31-30-07ActualAuthority(whatagentbelieves)•Express•ImpliedApparentAuthority(Whatthirdpartiesbelieve)•NoauthorityoImpostersoLingering(apparentauthority)■Youshouldgiveimmediatenoticetoall•SomepresentactualauthorityoPrioractsoPosition:youhavecertainauthorityinthis.Assumethatthereissomelimitationsasfaras$amountandyouexceed•InherentAuthorityoYoudon'thaveactuallyauthoritybutthirdpartiesdonotknowthatoHiredasbouncer:jobistokeeppeace:youbreaksomeone'sleg:youweren'tauthorizedbutitisclosetowhatyouactuallyhadtheauthoritytodo.Thereforetheprincipalisliable.oClosestthingwouldbepositionWehavebeendiscussingwaysinwhichtheagentmakestheprincipalliable.Netresultisthattheprincipalisliableinthecontract.VoluntarywaythataPrincipalbecomesliable:ratificationDrawing:caronroad,plotoflandonthesideoftheroad.Salesmanisdrivingdowntheroadandseesalotforsale.Hehasheardthathiscompanyislookingforapieceoflandresemblingthislot.Hemeetswiththeownerofthelandandsignsacontractonbehalfofthecompany.Ishiscompanyliabletobuythatland?No,becausehedoesn'thaveactualauthority,impliedauthority,noinherentorapparentauthorityasaSalesman.Thecompanyhastherighttogobackandsaythattheylikethecontractandapproveitbyratifyinghisactions.Ratification(p.13):uponratificationtheprincipalisbound.•Principalmusttaketheentiretransaction,notjustthepartsthathe/shelikes.•Ifthethirdpartyfindsoutthattheagentdoesnothaveauthorityandreceivesabetterofferhecanwithdrawfromtheofferbeforeitisratified.Thepartythatisnormallyboundonacontractistheprincipal.Howevertherearealsosituationswheretheagentisalsoliable(bond).

4•FullydisclosedagencyoFactofagencyisknownoIdentityofprincipalisknownoAgentnotliable(bond)oPrincipalLiable(he/sheistheonlyonethatcanenforcethecontract)•UndisclosedagencyoFactofagencynotknownoIdentityofprincipalnotknownoAgentisliableoPrincipalisliabletoo•PartiallyDisclosedagencyoFactofagencyknownoIdentityofprincipalnotknownoAgentisliableoPrincipalisliabletoo•ThirdParty'srightsdependonJurisdiction.oTexas:TPcansuebothbutcanonlysatisfythejudgmentagainstoneofthem.•Iftheagentfraudulentlyconcealstheidentityoftheprincipal,theprincipalcannotenforcethecontract.•OriftheTPentersintoacontractwithAgencythatrequirestheTPtomeetrequirementsandthentheTPfindsoutthatitmustmeettherequirementsofthePrincipal,theTPcangetoutofthecontract.CASE:MorrisOilCo.v.RainbowOilfieldTrucking,Inc.

5p-2Defendant:DawnPossessesstatelicenseFarmingtonRainbowDoesnothavelicenseAny$thatitmadeincontractstheywouldgivetoDawnandthenDawnwouldpaythemselvesfirstandthengivethemthenetprofits.Plaintiff:MorrisProvidedfueltoRainbow,whichtheydidnotQuestion:WhatistherelationshipbetweenDawnandRainbow?PrincipalandAgentDawnisliableforthecontractsofRainbowUponAppeal:thecourtsdeterminedthatitwasanundisclosedprincipal/agencyrelationship.RainbowwasliabletoMorrisbutsowasDawn.UnfortunatelyRainbowdidnothaveanymoneyleftsoDawnwasliable.HowevernoneofthiswasneedbecauseDawnratifiedthecontracttoMorris.Cantheagentoftheemployeemaketheprincipaloremployerresponsible?RespondeatSuperior:letthemasteranswerforthat•TheonewhodoesthedamagemustactuallybeanemployeeoIfheisanindependentcontractortheprincipalwillnotbeliable■Theywillhavetheirownbusiness,tools,facility■Thereisaskillthattheindependentcontractorwouldhave,i.e.:distinctskill,Termofemploymentisfinite■UsuallysetfeeandpaidperjoboComesdowntowhetherornottheprincipalhastherighttocontrolwhattheemployee/agentdoes?Ifhedoesthanitisanagent.•MustbeactingwithinthescopeofhisemploymentEstoppel:youractionscanmakeyouliableifthereisasituationthatyoushouldcorrect/stopbutdon't.i.e.Departmentstorewillbeliableforanindependentshoerepairmanwithintheirstoreiftheydonotnotifythepublicthatitisnolongerresponsibleforwhathappensinsaidarea.Extensionofapparentauthority.

6Principalcanbeliableforanindependentcontractorif:(bothwillbeliable)•IndependentContractorisdoingsomethinginherentlydangerousoWindowwasher,fireworks•Ifyouknowingornegligentlyselectanindependentcontractwhohasaknownrecordof•SomedutiesthatareoApartmentorrealproperty:hasadutytomaketheareasafe.Theyhireasecurityfirmtokeepitsafeandthesecurityguardfallsasleep.Theapt.ownerwillbeliable.Smoking:travelingsalesmanbumsdownahotelwhilesmoking.Morecourtsaresayingthattheemployerisnotresponsible.IntentionalTorts:Ifyouhaveauthorizedsomeonetouseforceinwhattheydoyouwillbeliablefortheiractions.•Bouncer:faroutexampleofinherentauthority.Bouncerisauthorizedtousesomeforcebutgoestoofar.•Billcollector•StoreManager:hurtsacustomerinascuffle.RespondeatSuperior.Hewastryingtoservehisemployeranditwentalittletoofar.Theprincipalisliable.Theprincipalwouldnotbeliableifheenteredintoafightwhenhewasnotdoingthecompany'sbusiness(sportsfight).Hehasdepartedfromthescopeofhiswork•Hiredthesalespersontosaythings,hemakesstatementsthatarenottrue.Theprincipalwillbeliableforfraud(Principalcantakeactionagainstagent).Chapter2PartnershipPg.314ofstatutesPartnership:Associationoftwoormorepersonstocareonabusinessforthepurposeofearningaprofit.•Isapartnershipanentity?Doesisrisetothelevelofbeing•1.01.11(p.312)•2.01(p.314)Partnershipisanentitydistinctfromitspartners.Itdoesnotmeanthatitisacorporationbutitcansueandbesued,ownpropertyinitsownnameandbeconsideredapartfromtheactualpartners.•Texas:RevisedUniformPartnersAct(p.311)•SomestatesdonotusetheRUPA-theyusetheUPA•Wewillonlybediscussingmainprinciples.Howdoyouformapartnership?•Twopeoplegettogetherandplantostartabusinesswiththeideaofmakingaprofitinmind.•Eachpartnerisanagentandaprincipalandtheymusthavecapacity.•Donotneedawriting.Canbeoral.•Onlyneedawritingifitisgoingtolastlongerthanayear.

7•Partnershiphastobelegal.Truewithall:LimitedPartnership,LLC,p.321UniversalPointtoknow4.01gNewpartner:apersonmaybecomeapartneronlywiththeconsentofallotherp.3142.03a:sharingprofits,intentexpresstobepartnersparticipationsharinglossescontributingoragreeingtocontributemoney2.03b:NotapartnershipReceivingprofitsbutreceivingthemaswages,compensationortopayadebt.PayingrentPayinginterestonaloanPayingoffaformerpartnerReceivingpaymentforthesaleofsomethingtothepartnership2.03c:Itisnotnecessarytohaveanagreementtosharelosses.Youonlyhavetohaveanagreementtoshareprofits.Why,becauselossesfollowprofits.Example:Aownsavilla;Busesitasanartgallery.Arequires15%ofsalesofartwork.Needmorefactstodetermineifthisisapartnershiporlandlord/tenant.CASE:MartinV.Peytonp.28Peyton,Perkins,Freeman$2,500,000instokesinbonds9K.N.&K.Inreturn:K.N.&K.wasgoingtogivePeytoncollateral(speculativesecurities)andtheyweregoingtopayPeyton40%ofprofitsfromtheS&B(liquidassets).K.N.&K.wastousethesehighqualitysecuritiestogetbackontheirfeetandsecureloans.Despitethis,K.N.&K.wentunder.DebtorsarecomingafterK.N.&K.Peytontookoutalifeinsurancepolicyonthemanager(asadditionalcollateral)p.30Terms:Courts:NeededtodeterminedwhetherornotPeyton/FreemanandK.N.&K.arepartnersornot.Andisthe$2,500,000partnershipmoneyornot?■Didtheytakeitoutaspartnersorasacreditor?

8■Peytonhassomecontrolovertheirbusiness(abilitytoveto)■EachmemberassignedtheirpartnershiptoPeytonandFreeman(theycanfireanyonewhenitwants),Peytonalsohasoptiontobecomeapartner.■PeytonhadcontrolofK.N.&K,(theycanvetoloans),profits,Theydeterminethatitisacreditor(lender)protectingtheirloanbyhavingcontroloverabusinessthatputthemintroubleinthefirstplace.CASE:Lupienv.MalsbendenCarwaspaidforbutneverdelivered.Question:wasthisapartnership?Canyouhaveapartnershipbyestoppel?ABC(Principal/Pamtership)D(representstoaTPthattheyareapartner-eventhoughtheyarenotBank(TP)Dnevertoldthebankthattheyweren'treallyliablesowhenABCdefaultsonloan,Dwillbeliablebyestoppel.ABCD(ABCtellsTPthatDisapartner)Bank(TP)DdoesnotpaybackloanbuttoTPDisapartnerbecauseABCsaidso.ThereforeABCisliable.Sameasabove,butAdoesnottellTPthatDisapartner.Dcan'tpaybacksoonlyB&Careliableasindividual.PartnershipProperty■IfthepropertywaspurchasedinthenameofthepartnershiporA,asmemberofpartnershipthenitispropertyofthepartnership■Ifpartnershipmonies/creditwereusedtopurchaseitispartofthepartnership■Buyitinthenameofapartnerwithnoindicationthattheyaretakingitaspartnersitwillbecomepropertyofthesoleindividual.

9p.323s5.01■PartnerisnotacoownerinpropertyoPartnerdoesnotownthepropertythatthepartnershipownsjustbecauseheisamemberofthepartnership.oApartnerownsaninterestinthepartnershipwhichmeansthatyouareentitledtoashareoftheprofits.(Creditorcoulduseachargingordertogetapieceofthoseprofitsforanindividualloan)p.312s1.0113■PartnershipInterest:op.323s5.02a■Apartnerspartnershipinterestisp.3204.01b■ABCpartnersoA:$60koB:$30koC:$10k■Profitsthisyearare$9k•Absentofanagreementtheprofitsaresharedequally•Absentofanagreementthelossesaresharedequally(lossesfollowprofits)•Welooktohowprofitsaresharedandthatwilldeterminelosses.P.323s5.03a■ActivetransferofpartnershipinterestispermissibleoJusthavetomakeadeliveryandhaveacceptance,oWritingwillhelpbutisnotnecessary■Ifyoutransferyourpartnershipinterest?oABtransfersC'sinteresttoD(Disnotapartnerbecauseallpartnersmustagree)oDwouldbeanassignee(notabadthingtobe)RighttoparticipateinManagementSituation:$60,$30,$10:hasapurchasedcontrol?p.320s4.01d

10■Eachpartnerhasequalrightsinbusinessandmanagementandconductofabusinesspartnership.oEveryonehasarighttobeconsultedSectionh■AdecisionarisinginthemajorityofinterestinthepartnershipcontrolsoIftheycan'tagree,$60controls.oTheoneorcombinationofthosewhoholdmajorityinterest.p.322s4.04bCASE:Meinhardv.Salmonp.53(DutyofLoyalty)■Property:intersectionon5thand42nd,HotelBristol■GerryenteredintoaleasewithSalmon(1902)■Salmonbroughtinajointventurer-Meinhard(forlimitedamountoftime).Gerrydidnotknowanythingaboutit.■Gerrydied,andinterestwenttoElbridgeGerrywhoownedadditionalpropertiestangenttotheHotelBristol.Hedecidedthathewantedtogetsomeonetofurtherdevelopallofthepropertiestowardstheendofthelease(1922).SohelookstoSalmonandtheysignanotherleasefor80years.Profitswillbesplit.■SalmondidnottellMeinhardaboutthenewdeal.■Meinhardisupsetandsaysthatpartnersowedutiesandloyalty.■TheCourtsareincensedthatSalmonwasthemanagingpartnerandhadadutytonotifyMeinhard.Especiallybecausethecaseflowedfromthefirstone.■Page54paragraph2-oneofthemostfamous.Conveysthemeaningofthecourt:ajointventurerlikeapartnerowesadutytotheothertoputtheinterestofthepartnerabovehis/herown.■Page57:p.322s4.04c■Partnersarenotautomaticallyentitledtoasalary.■Partnersareentitledtobereimbursed■Partnersareentitledtolookatthebooks■Partnerscansuethepartnershiporotherpartners(oftenwhenotherpartnersfeelliketheyarebeingcheated)o4.06boActionforAccounting:partneraskaTPtocomeinadecidewhatmoniesbelongtothepartnershipandindividual■Agency,regardingTPandwhattheybelieveaboutauthority:oPartnerhaswhateveractualauthoritythatthecontractgiveshim.oCanhaveimpliedorexpressauthority

11■Notallstateslookatmajorityofinterest.Somelookatmajorityofmembers.CASE:Summersv.Dooleyp.38■Summersthinksthatweneedtohighersomeoneasanemployee,DooleydisagreedsoSummershireshimanywayandpayshimoutofhisownpocket■SummersthenwantsDooleytostartpayinghalfandhedoesn'twanttosoSummerssueshim.■CourtsaysthatyouhavetohavemajorityofpartnersagreeanddecidesforDooley.CASE:Sanchezv.Saylorp.40■2partnersthatcan'tagree:dissolutionistheonlysolutionQUESTIONp.41■Dependsonwhatthestatuesays,majorityofinterestormajorityofpartners.NextClass:Moretimeonpartnership.Wewillgettonumber3andafewpagesintonumber4(read20pagesofthat)BLAW53302-6-07RevisedUniformPartnershipAct(p.41)•NotesfrompageoneaboutmajorityinterestormajorityofpartnersCASE:NorthmonInvestmentCompanyv.MilfordPlazaAssociatesp.44•Someofthepartnershaveenteredintoaleasefor99yearsandotherpartnersobjected•Lawsuitamongstpartners•Dotheyhavearighttocomplainaboutit?Yestheydo.Theyhavetherighttoatleastbeconsultedandaninputandavote.•Evenifthesepartnersobjectwerenotthemajorityininterestorpartnerstheystillhadtheabilitytoblockwhatwasdonebecausethepartnershipdoesnotlastthetimeofthelease.•Theywouldinfactbeextendingtheirtimeaspartnerssotheyhadtherighttovetothevote.ApparentAuthorityInherentAuthority•Duderanch-partnerentersintoauthority

12Noteknowledgeandnotice.p.313-1.023s•Ifyoutellanyonepartnersomething-aslongasheisinthebusinessofactingforthepartnerthenthepartnershipknows.Similartoagency.Knowledgegiventoonepartnermeansthatallpartnersknow.LiabilitiestothePartners•YouareliableforwhatotherpartnersdoUFAStates-UniformPartnershipActPA,OH,NY•Example-ABCDmakeuppartnership•ContractualLiability:partnershiphasenteredintoacontractoMustsueallbecausetheyhavejointliability•SomestatesthathaveUPAhavestatutespermittingsuitagainstpartnershipalso-goingfortheirassets•TortLiability:partnershiphasinjuredsomeone•Cansueany,someorallmembersofthepartnershipoPartnershipisjointandseveralRUPA-RevisedUniformTX•Example-ABCDmakeuppartnership•ContractandtortoMustsuethepartnershipfirstandmustattempttocollectfor90daysoThenyoucansuetheindividualsoJointandseveralliability(cansueany,oneorall)oMustsueboth!Canbeconcurrent.■DownsideinPartnershipisthatyourpersonalassetsareatstaketoo.QUESTION:NewPartnerEnters•Havepartnership,newmemberjoins(p.318s3.07)•Theygetsuedonpre-existingevent•Isnewpartnerliable?No!oHemaylosehisinvestmentinthepartnershipbuthewillnotbepersonallyliableunlesstheyenterintoanewobligationPartnerLeaves•Youareresponsiblefordebt

13•IfacreditoragreestoletapartnergowesaythatthereisaNovation(p.328s7.03)•Asapartnerthatleavesyouaregoingtowanttonotifytheworldthatyouarenolongertheresothatyouarenotliable.CASE:DavisV.Loftusp.46•Incomepartnersdonotshareinprofitsbuttheycontributeanamountofmoneythattheycantakewhentheyleave-althoughitisnotaugmentedbyadditionalfunds.Theydonotmakedecisionsaboutanything.•Thecourtsaidthatwithregardtotheseindividuals-theywerenotpersonallyliablebecausetheyweremorelikeemployees.•WhatIFoneoftheincomepartnersdidsomething,whowouldbeliable?Theentirepartnershipbecausetheywereanagent(apparentauthority)oRespondeatSuperior-themasterhastoanswer.DissolutionofPartnershiporanImbedofWithdrawal•UPA•Dissolutioniscausedwhenapartnerleaves(death,losealicense,justsaythatyouwanttogo,bankruptcy,chargedwithcrime)apartnerceasestobeorhavearelationshipwiththeotherpartners.•Partnershipterminates•Thismeansthattheyshouldstopdoingnewbusiness.oWindingupoldbusiness,fulfillcontractsandpayobligations.Notifyallcreditors.oDonotdonewbusinessunlessyouaredoingittoavoidfinancialcatastropheoTermination:sellassets,payofcreditors,notify,paypartners.•Partnershipagreementcansaythatifpartnershipleaveshereiswhathappens.Buttechnically(eyeblink)itterminatesitreforms.CASE:GirardBankv.Haleyp.57•Shewantedtoleaveandpartnershipsaidno•Courtsaidno-itisapartnershipatwillanddissolutionhasoccurred.•RUPA-Dissolution•Eventsofwithdrawal:oPartnershipcontinuesopartnerisnolongerapartneroDissociation:jettisonoP.342s6.01-thelistofevents•Wanttoleave•Somethingcausingthepartnerswithdrawal•Youkickhimout•Courtkickshimout

14•Die•YourexistenceterminatesoP.325s6.02•Leavewrongfully•CanbeconsideredabreachofcontractandcanwithholdmoniesdueoP.325s7.01•Ruleforpayingpeopleo仔•K:deferralofpayment-unlesso7.03•EventsthatrequirewindingupoWindingupoTerminationoP.328s8.01-list•Definiteterm•Majorityofinterestscallitquitsifitispartnershipatwillo8.01gorc?•Continuationofpartnership•P.327-8.02•ApparentAuthorityoOneyearfromthedateyouleave•Generalnoticeinpapers•DirectnoticetocreditorsCASE:Creelv.Lillyp.58•Maryland-RUPA•Creelstartedanoralpartnershipandhehadalotofinventoryonhandandcontributedit.•Hediedandtheremainingpartnerstookinventoryandtoldwidowthattheyweregoingtostartanewpartnershipandtheyaddeduptheassets.•ShewantedthemtofollowUFAandsellallassetsandgivehertheirshare•CourtagreesthatitmaybewastefuloNewpartnershipisasuccessfulpartnersoWifeisentitledtobepaido仔•FallsbetweenUPAandRUPA-courtsinterpretthelawJointVentures(p.64)•Aretypicallytreatedasapartnership.•Itisusuallyprojectspecificandwhentheprojectisoverthejointventureisover•CASE:Pagev.Pagep.65

15•Businessisinvolvedingarmentoruniformmaintenanceforthemilitaryandothers•PartnershipconsistedofA&B•Theneededacashinfusionfromcorporationandtheyowethecorp.$47koBowns100%ofcorp•ThispartnershiphadbeenintheredoNoagreementsoprofitsweresharedequally•AirForceBasewasestablishednextdoor•BwantedtobringanactiontodissolvepartnershipandAopposesthatsayingthatheisdoingitinbadfaithbecauseyouaretheonlybuyer.AndIwillhavetopayyou(asownerofthecreditor)•AsaysthatBwascontenttosharethelossesbutnowhedoesn'twanttoshareprofits•CourtsaysthattheyagreewithA.•TheLawwillsayalwaysthatyouhaverightstodothingsbuttheymayalsosaythattheywillnotauthorizeitbecauseyouaredoingitforabadpurpose.p.68-readCASE:Drashnerv.Sorensonp.70•Drashnerwoulddrinkalot,causeproblems,demandingmoneybeyondagreement.•Heoncesaid•Wrongfullywithdrawal-partners•Courts:theyconcludethathiswithdrawalwaswrongfulandisnotentitledtoshareingoodwill.Andshareiszero.Whenpartnershipsbreakup•Youpayoffallcreditorsfirst(includingpartners)•Thenyougivethepartnerstheircapitalaccountsback.Ifthereisnotenoughmoneyleftthanthepartnersmustsharethedebtasdeterminedintheiragreement.CHAPTER3TheCorporateFormCharacteristicsoftheCorporation•Legalentity•Rightsofdueprocess,freespeechAdvantages:•LimitedLiability•Transferownershiprights•ManagementStructureinplace•Canlastforever

16Disadvantages•Stepstoformit•Taxes(unlessitisanscorporation)•Hardertomakedecisionsanddothingsquickly.Howdoyou•ArticlesofIncorporationwithSecretaryoftheState•Definespurposeandstructure(public)P.28s2.23•Establishbylaws(notpublic)•AdoptedbyBoardofDirectorsDeJure:doyoucomplywitheverythingDeFacto:youarecorporationandwewilltreatyouthatwaybutyoureallyhaven'tcompliedwitheverything.CorporationbyEstoppel:FactsHowdoyoubecomeaDeJurecorporation:•Musthaveanincorporator:he/shefilesthearticlesofincorporation•P.46s3.02defineswhatmustbeinthearticles•Musthavecorporationinyournamesothat3rdpartiesknowwhotheyaredealingwith•2.06:youcanreservethatnamefor120daysbeforeyoustartdoingbusiness•Initialdirectors:1directormandatoryinTX•Purpose:maybespecificandleaveabackdoortoexpand•Capitalstockstructure•Nameandaddressofcorporateagent(thiswillbethepersonsued)•Nameandaddressoftheincorporators•Afteryoucomplywithallofthis(itcanbeelectronically)theSecretarymustapprove•CallthefirstmeetingwiththeBoardofDirectors•StartdoingbusinessrightawayDelaware:•Welldevelopedcourtsystemfordealingwithcourtmattersorbusinessmatters.•Thecourtsappearfavorboardofdirectorsovershareholders•UnderDelawarelawitisveryhardtosueadirectoroEvenifyouaregrosslynegligentyoucannotbesued•P.79PreemptiveRightsoAcmeCorp

17o1,000sharesissuedandoutstanding•A:600•B:300•C:100•Corporationdecidestoissuenewstockat1,000shares•D:•E:•F:•A,B,andC•p.27s2.221A•Shareholdershavearighttoacquireadditionalsharesifitisincorporatedbefore101-2003unlessthearticlestakeitway•Ifincorporatedafter10-1-2003youdonothavetherightsunlessgiventoyou.READALLOFTHIS:CommonStock•Votingrights•NosetpricePreferredStock•Entitledtoadefinitepayment•Maybecumulativeornot•Mayhaveabilitytovoteornot•Canparticipateindividends•PaidfirstuponliquidationInitialDirectors:p.84•StateshandleitindifferentwaysoTX:nameinitialdirectorsinarticlesandthenduringthefirstmeetSubscriptionsforShares:p.84•Personagreestobuythestockandnamedinarticlesofincorporation•Doyouhavetobuythestock:YES!Youroffertobuyisirrevocablefor6months(article2.164)Promoters:p.85•Apromoterisapersonwhotransformsanideaintoabusinessbybringingtogethertheneededpersonsandassetsandthesuperintendingthevariousstepsrequiredtobringthenewbusinessintoexistence.•Actions:oFindtheplacetodobusiness-somaysignaleaseoLoan(s)

18oEmploymentcontractsoBusinesscontractsoAdvertising•AtthispointthecorporationdoesnotexistsothePromoterwilldothisforthecorporation.oTheyarepersonallyliableonthecontractandremainsliableevenafterthecorporationisformedunlesscreditorletshim/hergo.oNovationoccurswhencreditorletspromotergoforcontracts•TheprincipaladoptstheconceptortheoffertodobusinessoCannotbeconsideredratificationbecausetheprincipaldidnotexistwhenthedealwasmade.CASE:Goodmanv.LaddEstateCo.p.96•Goodmanwasliableasapromoterandtheywerenotgoingtonovatehim.CASE:PotteryWarehouse,Incp.87•BroughtactionagainstJanebutthecourtslethero仔thehookbecauseofthewordinginthecontract.Sometimespromoterswillselltheirownpropertytogetstock.Theycansometimesovervaluetheirproperty.•IftheshareholdersorboardfindouttheycangobackandgetthatstockbackThePromotercanbuyassetsandifhedidnotbuythemforenoughmoneythecorporationcanaskforthatmoneyback.Hehasfiduciarydutiestothecorporation.DeFacto:youareimmunefromattack(exceptfromthestate)CASE:Cantorv.SunshineGreeneryp.89•CertificatewasmailedbutdidnotreachtheSecretaryofStateuntillater•AleasewassignedbythePromoterbeforeitreachedtheSecretary•ThelessorsaidthatthePromoterwasliable(leasewascancelled)butthePromotersaidthathewasn'tbecausethecorporationhadalreadybeenformed.•Question:wasthecorporationestablishedbeforetheleasewassigned?•Yes,theywereaDeFactoCorporationCorporationbyEstoppel(Becausesomebodydidsomethingthey2kindsofcases

191:Plaintiffdealswithentityasifitwereacorporation.Itisn'tandhedoesn'tfindout.•Oftenariseswhenpaperworkisn'tdone•Dealgoesbadandtheywanttobringalawsuitandtherearenotenoughassetsinthecorporationsotheywanttogoaftertheshareholderspersonally.•Courtsaysyoucan'toTheareestoppedtoassertbecausetheydealtwiththemthatwayCASE:Cransonv.IBMp.902.Plaintiffwantstosuethecorp,(eventhough•EstoppedtodenythattheyarecorporateassetsLookatnumber4onpage91•Estoppelcanneverworkinyoufavorifyouknowthatyouaren'tincorporated.•ComparePiercingtheCorporateVeiloSimilarholding,personwhoareabusingthecorporationtogetoutofpersonaldebt.READNoteon92p.88-89BLAW53302-13-07AbsentBLAW53302-20-07LimitedLiability(Piercingthecorporateveil)(note:oneoftheadvantagedofformingacorporationislimitedliability.Howevercanthisbetakenadvantageof?)Threescenarioswhenpiercingthecorporateveilisapplied:•AlterEgo(Dr.JekyllandMr.Hide,SupermanandClarkKent)oCharacterizeitbyignoringcorporategoalsandformalitiesoManifestedby■individualshareholder(asalterego)■parentsubsidiary

20■Affiliatedcorporations•Undercapitalization(youformacorporationthathasnomoney)•AvoidexistingobligationsorfraudCASE:Fletcherv.Atex,Incp.171•Problem:KeyboardswheremadebyAtexandtheindividualsgotarepetitivestressinjuries.LawsuitagainstAtex(andKodakunderthealteregotheory)•Atexsellsitsassetstoathirdpartypurchaser.ThenAtextakescashandchangesitsnametoMiddlesexCorp.•CanSupremeCourtofDelawarelawmakeadecisiononthis?Believethatlowercourtshavesomeexamples.•Page174•ExampleofPiercingtheCorporateVeiltoavoidexistingobligations(fromthelawsuit)•Courts:WhenAtexwassold,AtexnegotiatedwithKodaktopayapromissorynote.CASE:Walkovszkyv.Carltonp.178•Tencompanies-eachhastwocabs.•Hadtohavea$10,000liabilityinsurancepercompany•Oneofthecabshitaperson•Lawyeroftheplainti仔findsoutthatMr.Carltonhas10companies.Sotheywanttopiercethroughhimandgetallofthecompanies.CalledReversePiercing.•CourtswouldliketoallowitbutallthattheyhavesaidisthatitisonlyallegedthatMr.Carltonownsallofthembuttheyarestillseparatecompaniesanditisnotenoughtosaythattheyhavegonefarenoughexcepttoshowthatoneofthecabsownedbyoneofthecorps,ownedbyMr.Carltonhityou.Whatishedoing?Ishetakingmoneyoutofthecompany?•(standardinNYismustshowanticipationoffraud)•Compareittoacase•Famouscasedealingwithalteregoandaffiliatedcorporations.CASE:Mintonv.Cavaneyp.183•AlterEgo-individualshareholders•UndercapitalizationCASERadaszewkiv.TelecomCorp

21p.185•Contruxdoesn'thaveanymoneybuttheyhave$11,000,000ofinsurance.•Problem:moneyisowedbacktoTelecom;insurancecompanywentbustbeforethecasewenttotrial.•Courtsconclude:doyouhavethemoneyorwherewithaltocovertorts?Yestheydidatthetimebut•AlterEgo-undercapitalizedCASESea-LandServices,Inc.v.PepperSourcep.186•FraudCASEBerkeyv.Thirdp.190•FamousquoteaboutparentandsubsidiariesCASEUSv.Bestfoodsp.191•ComprehensiveEnvironmentalResponse,CompensationandLiabilityActof1980(gov.canlooktoanypollutersforreimbursement-canbesomeonewhoownedthepropertywhilethepollutionwasthereorownsomethingonit)•LooktoOTTII-whodoesn'thavemuchmoney.Sowhatdoyoudo?Looktopiercingthecorporateveiltodetermineiftheyreallyareaseparatecompany(fromCPC),weretheyundercapitalized•Notreallypiercingthecorporateveilbutithasthateffect.DeepRockDoctrine(p.193)Parent:StandardGasandelectricSub:DeepRock(mostmoneycameintheformofloansfromtheparentcompany)FraudulentTransfersAct(p.194)UniformFraudsandTransfersAct(p.•Example-bigbonusesorsalariespaidtoexecutivesleavingthecompanyinsoluble.i.e.Law:Noredhairedpersonsshallmakeandsellwidgets.Soscenario:Widgetcorporationformed.Coulditbeownedbyredhairedshareholders?CASE:

22USv.MilwaukeeRefrigeratorTransitCo.p.195Andersonv.Abbottp.195PossibleExamquestions:disregardingtheCorporateEntity(involvesDeepRockDoctrinetoAndersonv.Abbott)Chapter5ShareholderInformationalRightsandProxyVotingWhatisitthatshareholdersareallowedtosee.Theyhavearighttomakeaclaimthatyoucanlookatcorporaterecordsorlookatshareholderlists.Donothavearighttolookatproprietaryinformation.Tohavetheserightsyoumustbeashareholderandholdthemforatleast6months(differsperstate)andgivereasonforlookingatcorporaterecordsforproperpurpose.Ifyouownfivepercentyoucanlookatthemimmediately.OrifyoucangettogetherwithothershareholdersandgettheirpermissiontolookatthebooksontheirbehalfMinutesofboardmeetings,booksandrecordsofaccounts,shareholderlistsProperpurpose:almostapurposewillbeproperifyouwanttocommunicatewithshareholdersorlookatyourinvestment.Improperpurposewillbetostartacompetingcompany.Burdenofproofwhetherornotthepurposeisproperisuptothecompanytodetermine.CASE:Saitov.McKessonHBOC,Incp.196•HBOCandMcKessonmergedandchangedtheirnametoMcKessonHBOCandHBOCbecomeasubsidiaryofMcKesson.•Complainingshareholders•Theydecidedthattheyneededtogobackandrestatetheirearnings.oMadethevalueofthesharesgodown.•Mr.Saitowasnothappyaboutthat-theythoughtthatsomebodywasatfaultforacquiringacompanythatwasinfinancialdistress.•FileaderivateactionlawsuitagainsttheDirectorsofMcKesson•Courtsthroughthelawsuitouttellingthemthattheyhavetododiscoveryfirst.TheyshoulduseDelawarelaw.•Mr.Saitoistheonlyonewhogoesforwardwiththis.Soheaskstoseedocumentsandhewantstoseedocumentsfrombeforehewasashareholder.Healsowantstoseethirdpartyreports(fromArthurAnderson,etc.).

23•Lowercourtssaidthattheywerenotgoingtogivehimdocumentsbeforehebecameashareholder(forobviousreasons).Nothirdpartydocumentsbecauseyoudon'thaverightstothosedocumentsatall.WearenotgoingtogiveyouanHBOCdocsbecauseyou•Onappeal:SupremeCourt-itistruethatyoucannotgetdocumentsforthepurposeofaderivativelawsuitofinformationpriortoyouowningstock.Butyoumightgetitapartfromaderivativelawsuit.Buteveninastockholderderivatesuithemaybeabletoget.Canalsogetthethirdpartyinformation-becausehecannotdetermineiftheywerenegligentunlesshecanseethematerialhimself.•RULE(p.201):stockholdersinaparentorganizationarenotallowedtoseethebooksofasubsidiary.•However,hewasallowedtoseeDerivativeActionLawsuit：Acompanycansueathirdpartyundersomepremisebuttheydon'twantto.However,shareholderscangototheboardandmakeademandthattheysue.Iftheboarddisagreestheshareholderscansue(inthenameofthecompany).Anymoneytheygetgoestothecompany.Ironyisthatveryoftentheperson(s)thattheshareholderswanttosueistheboard.LookatStockholderListsp.202•Tenderoffers-Apublicoffertopurchasestockataspecifiedpricepershare,usuallydonetogainacontrollinginterestinacorporation.RecordDatep.203-4Problemthatcompanieshaveinthe1980s(p.205)•HardtoknowwhoactuallyholdsthesharesbecausemanycompaniesareholdingthemCompaniestellingtheirshareholdershowtheyaredoing(p.206)•Ifyouhavemorethan500sharesor$10,000,000inassetsyouhavetosendoutinformationannually.•Ifyounotthatbig一manystatessayyesbutDelawaresaysno.•WhataboutTexas(TCo2.44(p.44)oF(p.45)uponrequest,thecorporationwillmailthestatements.Youhaveanabsoluterighttorequestthismaterialasashareholder.FinancialMarkets(readsectionfordefinitions)•Primarymarkets:whenstockisissuedyoucanbuyitthroughabroker,investmentbank,orfromthecompany•Secondarymarket:buyitfromanindividual•Overthecountermarkets:Dealerswhoholdstock.Youbuystockfromdealerswhoalreadyownit.

24•AuctionMarkets:NYSEPROXIES•Shareholdergivestherighttosomeoneelsetoact/voteonyourbehalf.•Texas-lastsfor11months•Revocable(unlessstatedotherwise)•Eachstateregulates.Overridingfederallaw:(1934act)sectionregulates•P.212talksaboutwhyashareholderwouldwanttogiveaproxyp.213section14.aCoverage.Knowthissection.Aproxyandasolicitationofaproxyisbroadlyinterpreted.Ifyouareaskingtodosomethingonbehalfofashareholderorcommunicate(onlyifultimatelyyouintendtoaskfortheirproxy)withashareholdercanbeinterpretedasaproxy,(lookattheStudebakerCorp.v.Gittlinforsolicitingproxies)BLAW53302-27-07ProxyRulesContinuedp.214•Whatactionsrequireshareholderapproval?oMergersoDissolutionsoAmendingthebylawsorarticlesofcorporationsoSellingcorporateassets•Whenwouldacompanynothavetosolicitedproxies?oWhenashareholderorgroupofshareholdershavethevotingstrengthandcontrol(ofthetypethatneedapproval).•Rule14a-protectsminorityshareholdersoIfsomethingisbeneficialtothecontrolshareholdersmaybedetrimentaltominorityshareholderthecompanywillatleastberequiredtonotifythem.•AnnualReport(p.215)oMustbesenttoshareholdersCASE:(canbringprivateactionagainstcompanyforfailuretodisclose)J.I.CaseCo.v.Borakp.216

25•PriortothiscasetheSECwastheonlyonewhocouldenforcerule14a•Borakfeltthattheywerenotbeinggivencompleteinformation•Isitpossibletouseastatutebyprivatecitizens?oRicostatute(establishedmainlyforthemob)oHasbeenusedprivatelytosuecreditcardcompanies•CourtssaythatprivatecitizenscanbringactionsagainstcompaniesoNecessarysupplementtoSECenforcementoTheproxymaterialfailedtodisclosetheunlawfulmanipulationCASE:Wyandottiev.U.S.p.216CASE:Cortv.Ashp.217CASE:Millsv.ElectricAuto-liteCo.p.217•Misstatementoromissioninaproxystateismaterial•Youdonothavetoshowanyrelationshipbetweenthematerialandthedamagethattheshareholdermayhaveincurred,(helpsplainti仔scase)CASE:TSCIndustriesv.Northway,Inc.p.218•Standardfordisclosurewillbethis:oAnomittedfactismaterialifthereisasubstantiallikelihoodthatareasonableshareholderwouldconsideritimportantindecidinghowtovoteoStandarddoescontemplateisashowingofaoTheremustbeasubstantiallikelihoodthatthedisclosureoftheomittedfactwouldhavebeenviewedbythereasonableinvestorashavingsignificantlyalteredthetotalmixofinformationmadeavailable•Thisisnowthedefinition.p.227Doyouneedtohaveintentorcanyousimplybenegligence?•Negligenceisstillenoughtoevokeliabilityforomissionsinproxiesp.228•Eightcircuit.oRequiredscienter:

26Basically-eitheronewillprovokeliability.Couldbetooneshareholderormany.Plaintiffmuststillshowdamagebutdoesnotneedtoshowadirectlinebetweenthetwo.Supremecourthasdeclinedtohearappealsoftwocasesbasedonnegligencesotheymustbelievethatitisenough.NoActionLettersp.229•Shareholderscanproposetohavethingsvotedonatannualmeetings.oButsometimestheyproposesomethingthatmightbeseenasamajor/ordinarybusinessoperationsdecisionofthecompanydirectors.•IfthecompanyfeelsthatitthisdecisionneedstobemadebythemanagementtheycanrequestaletterfromtheSECtooTheyasktheSECtosendanoactionletter•AlettercanbesenttoeithertheshareholderorthemanagementCASE:Rooseveltv.E.LDuPontdeNemours&Co.p.229•Shewantsthecompanytogetoutofthebusinessofproducingthisproductthatdamagestheozone.oItwillphaseoutofproductionbyendof1995oDuPontneedstopresenttoshareholdersaplanforsubstituterevenueproducer.•DuPontwritestotheSCCoSECsaysthatitisordinarybusinessoperationsanddoesnotneedtobeputontheballot•ShetakesittocourtandrequestthattheSECbeoverruled.•Courtsaysno•Shethenappeals.•P.231-bothsidesagreethisisacaseabouttiming.•DuPontmovestotheendof1995-sothecourtsruleinfavorofthemeventhoughshemadethemchangetheirtimetableoCourtsrealizethatitmighttakesometimetophaseitoutbecauseitisinvolvedinsomeotherprocesslikefoodstorage,medicalproductsp.233-whatwouldnotfallundernormalbusinessoperations?•Nuclearpowerplant•ThePhaseOutTargetDate:tomanufacturetobaccoproductsp.236-whataretheitemsthathaveattractedthemostshareholderresolutions?•Socialissues•Corporate-governanceissues

27ProxyContests(p.238)•Thereareprofessionalfirmsthatmanagethose.Shareholdersocial-policyproposal(p.238)•ReadCASE:Rosenfeldv.FairchildEngineandAirplaneCorp.p.238•Proxycontesttoelectanewboardofdirectors.•BothsidesincurredexpensesoWhatexpensesdidtheyincur?■Mailingexpensesandprinting■p.241totalexpenses:$261,522othe•Shareholderbringsaderivateactions(companytosuedirectors)toreturnthemoneybacktothecorporation.Complaintagainstoldboardandnewboard•Majorityopinion(4to3)oTheoldboard-noproblemreimbursingtheirexpenses.Theyweretryingtoconvincethemthattheywereright.Thatisreimbursable.oFortheinsurgentgroup:theyvoted16to1soalloftheseexpensesarepermissible.oIfanyexpensescanbeshownthattheywerenotforeducatingpurposes(maybebribesorlavishentertainment).■Shareholdersdidn'tdifferentiateoP.240thetestisclearoP.241oConcurrence(JudgeDesmond)■HestateswhattheexpensesoDissent:(JudgeVanVoorhis)■Burdenshouldshifttotheboardofdirectorstoshowwhichmonieswasspentforwhatpurposes■Hethinksthatitwouldhavetobeanunanimousvote(not16-1)■P.244Chapter8DutyofCareandtheDutytoactingoodfaithCanbesuedfornegligenceifyoudonotactuptogoodstandards.•Enron,WorldCom,TycoWhatistheDuty?Directorsareheldtothestandardofgoodfaithandtoexerciseprudence.

28CASE:Francisv.UnitedJerseyBankp.383CedingCompanyfReinsurer■•Givingpartofinsurancerisktoothercompaniesandtheothercompaniesaregivingthempartofthepremiums.•Reinsurancebrokerbringsthesecompaniestogether.Theyaresoinvolved,theyfacilitatethemoveofthemoney(losspaymentsandpremiumpayments).•CedingCo.hasInsuredsandpayingpremiumstothem,paysthebrokerwhopaysparttothereinsurer,thenthereinsurerpayssomeofthelossestothebrokerandthentotheCedingCo.•Pritchard&Baird-startedasapartnership.Theyarethebroker.•P.387financialoutline•Companywentintobankruptcy•Mrs.Pritchard-becameadrunk•BankruptcyTrusteeissuingtheestateofMrs.Pritchard(derivateaction)•Question?Dowecutabreaktopoorunfortunatewidowswhotakenopartinthisaction.•Adirectorisliableforwhattheboarddoesevenifthedirectorisnotthere.Ifhedoesnotagreeheshouldfileadissentwhichmightprotecthim/her.Alsoappliestoadirectorwhoistherebutvotesagainsttheaction.•Inpubliccorporationsthedutyofthedirectorisgreaterbecauseitaffectsmorepeople.Thisisalsotrueforclosecorporations(i.e.banks),becauseofhowmanypeopleitcanaffect.•Thistypeofcompanyisanalogisttothatofabank-soherdutyofstandardcareisevenhigherthanaclosecorp.oThesefundswereheldintrustformanypartiesandtheyweremisused.oShefailedandthoseconsequencesaregreatanddamagingtomanypeople.•Theonlypeoplewhowerereallyhurtinthiscasearethirdparties.Theshareholderswheretheonlyoneswhowerenothurt.•Nextquestion:washernotdoingherduty-canyouholdherliableforhernonfisensoSheresignedbutwearenotgoingtoletheroff.oWhatshewasrequiredtodoistogetanattorneyandthreatenhersons.Shehadtobeproactiveinstoppingthem[favoritequoteinthebook:MINORvs.SALMON]•Secondfavoritequoteinbook:p.394oHersonsknewthatshe,theonlyotherdirector,wasnotreviewingtheirconduct;theyspawnedtheirfraudinthebackwaterofherneglect.p.385WhatisthedifferencebetweenGrossNegligenceandnegligence?•GrossNegligence:BODislookingtoexpandinaforeigncountry-theyselectacountrywherein

29previouscasesallassetshavebeenseizedbycountry.Yettheyproceed.Shareholderscansuethem.•GrossNegligenceisequatedtoanirrationaldecision.CASE:Karninv.AmericanExpressCo.p.396•BoardofDirectorswerenegligent-seep.398•Thecourtswillnotsecondguessyourdecisionsaslongasyouhavethisprocessinplace,(p.402)CASE:Smithv.VanGorkomp.402•TransUnionaregoingtomergewithNewT.•Minorityshareholderswillcashout.•Inorderforthistohappen-heisgoingtohavetogetamajorityofsharesinTransUnion•FixwasinbecauseofVanGorkomandtheBoardbecausetheydidn'tevenreadtheagreement.•Dotheyknowifanyonereadit?•Nowtheyhavelawsuitsagainstthecompanyforsellingthemtoocheap.•Standard:oCourtquote:p.410grosslynegligent•P.414:instructivecommentmadebydirector:oIfwegotabetterdeal,wehadtherighttotakeit...oIdon'tknowiftheydiditornot.oWherewastheoversight?•P.412paragraph2•Courtssay:Youguyshaveshownbyyouractionsthatyouarehugescrewups.•GREATEXAMPLEOFGROSSNEGLIGENCE!CASE:CaremarkInternationalInc.DerivativeLitigation•Givingbribestomedicalproviderssothattheywouldrecommendthattheyusethem•Againstafederallaw•Companypaid$250million•Shareholdersaremad!•Courtisdecidingwhetherthecourtcandismissthelawsuit.oIfthecourtacceptsthelawsuit,theshareholdercannotsettleitwithouttheapprovalofthecourt.TheWaltDisneyCompanyDerivative

30p.436•InsurancecompaniesarenotgoingtoinsurecompanieswhoareincorporatedinDelaware-soDelawarechangedthelaw.•YoucannotbeheldliableinthestateofDelawareevenifyouaregrosslynegligent.•P.436analysis:oBreachofdutyofloyaltyoCanbeliableforactsofomissionnotingoodfaithoGuiltyofactsforintentionalmisconduct(againstthelaw)oOrwereyoudosomethingforpersonalbenefit.•Theyrecommendthatyouaddthattothecorporatecharterandnobodywillbeliableforgrossnegligence.Read:finishnegligence:readallofchapter9.BLAW53303-6-07AbsentBLAW53303-20-07NeedDisneyCasehandout-Talbotv.JamesGolfcoursecaseEbay(p.487):investmentbankerwashandlingstock-takingacorporateopportunityfromEbayCASE:Sinclairv.Levienp.489•Sinclairowns97%ofLevien(minorityshareholder)oPaidout$108millionindividends(morethantheymake)•SinclairinternationaloilcompanyoTheybyoilfromallo•AllegationisthatSinclairneededthemoneysotheyweresuckingthemoneyoutofLevien.oLeviensaidthattheycouldhaveexpanded-capitalequipment,oYoutookawaydrillingopportunitiesinothercountriesthatyoucouldhavegiventous.oSinclairisnotoverseeingitssubsidiary.Theyarerequiredtobuyxamountmonthly(contractminimums)plustheyarepayinglate.•Sinclair-saysitispurelyabusinessjudgmentrule

31•Courtsstate:theyhavetoovercomethathurdle.AretheyreallytakenoP.492giveexampleofhowtodothis•Parentcompanywithsub,subhasxstockandystock,•Ifparentowns100ofxstock,ystockisheldbyminority•Ifparentweretocausedividendstoonlybepaidonxstock-thatisacasewherethemajorityshareholderwouldbedoingsomethingthatisunfairtotheminorityoSoeventhoughSinclairisgetting97%paidout-theminoritiesarealsogettingequaltreatment.oSiteGettyOilv.Skelly(p.490)oOnDutyofLoyalty:theyarenotbreaching•PutunderBusinessofJudgmentRule:havingdiscretiontopaywhateverdividendsthattheywant,(andeventhoughtheyexceededearnings,theypaidthemfromtheproperaccounts,notcapitalaccounts)oExpansion•FallsunderdutyofloyaltyoThecourtssayyesonthethirdissue-thatthemajorityshareholderisgettingsomethingtothedetrimentoftheminority.Sotheygetafavorablerulinginthisone.•CaseisdifferentbecausethiswearelookingatParentCompanyandSubsidiaryCompanyandthedutiesthattheparentcompanyowestotheminority.CASERipleyRailwayCasep.494•SubwasshippingtheparentsproductbuttheParentwaspayingbelowfairmarketrates.•VerymuchlikeLoisv.SL(findthepagenumber?)CASEDunhillInternationalP-•DunhillistheparentcompanyoOwn83%ofSpaldingoChildGuidanceToys•Spaldinghasasmalldivisionthatsalestoys,resultingin4%ofsales.•CourtssaythatthisopportunityshouldhavebeenofferedfirsttoSpaldingbecausetheywerealreadyinthebusinessoIthinkitwasastretch,itwasonly4%ofthesales.Dunhillsaid,thisiswhatwedoweareadiversifiedcompany.CASEZeppelinv.HansonHoldingsp.510

32•MajorityshareholderofGableIndustrysoldtoa3rdpartybuyerwhichwasmorethandoubletheprice(listedstock)-atapremium.•Minorityshareholdersfeellikethatpremiumshouldbesharedwiththethem.•Asageneralruleyoudonothavetoshare.Itisthereasonwhygainingcontrol.Butyoudonothavetoown51%tohavecontrol-itcouldbeevenlowerespeciallyifthecompanyisapubliclytraded-maybe•Arethereanyexceptions?P.510olootingthecorporateassetsoConversionofacorporateopportunityoFraudorotheractsofbadfaithFAMOUSCASEPearlmanv.Feldmanp.514•NewportStealCompany(publiclytraded)-locatedinIN•Casewasin1950-greatdemandforsteal-especiallybecauseoftheKoreanWar•ProtagonistshereareRussellFeldmanandfamilyoThey,asagroup,ownedabout37%(believethatitwouldqualifyascontrol)oHeorchestratedthesaleofthis37%totheWilportCompany(itwasasyndicateofothercompaniesthatneededsteal)•ForNewportStealExpansion-theyhadbeenexpanding•P.517FeldmanPlan:wayoftakingadvantageofascaresupplyofsteal.Userswouldpayinadvancewithoutinterestfee-thenhewouldusetheupfrontmoneytoexpandfacilities.NewportSteal'sbusinesswasgoodandexpanding(dividendpaymentswereincreasing)•Afteritwassolditbecameacaptivecompany.Thestealproductionthenbecameattheneedofthesyndicate-anditsquelchedthegrowth)•Feldmanswerepaidapremiumfortheirshares-oYourano仔withacorporateasset-thefuturegrowthofourcompany•Minoritieswantthemtoputthemoney(premium)backtobesplit•FeldmanarrangedfortheexistingboardtoresignandbereplacedwithpeoplefromWilportCompany.•RESULT:oCourtagreeswithshareholdersop.515bothasadirectoranddominatestockholderoUnderIndianaLawafiduciaryowestrust,honestytohiscorporationandshareholders.Hisdutyappliedtohimasamajorityshareholderaswellaschairmanoftheboard,presentdirectorofthecompany.op.516-JudgeCardozoFAMOUSQUOTE-INSERTHEREop.517-discusshowNewporthasbeendamaged.oHispremiumrepresentedacorporateasset(whichwascorporategrowth).63%ofthatwillbesharedbyremainingshareholders.

33CASEMoviecompanies•28.3%wasgoingtobesoldtoanothercompanyforapremiumbecauseitwouldrepresentvotingcontrol-anditwillalsoinclude•Thepartywhowasgoingtobuywantsoutofthecontract.oThecatchwasthathewasgoingtoalsobebuyingtheboardimmediatelyoHeishurtingtheremainingshareholdersbydoingthis.•Doesitviolatepublicpolicy.•TheNYcourtdoesnotknowwhattodo.Therehavenotbeenmanycaseslikethis.Referenceacasein1880(Barnesv.Brown)andtheythoughtthatitwouldbeok.•Whatthecourtfinaldecides-oMentionhowlongwouldittakethebuyertoelectit'srepinthenormalcourseofbusiness(18months)oGoodfortheeconomyforcompaniestobeacquired-wedon'twanttoputanyroadblocksintheway.(don'twanttoretardthattransaction)oJudicialNotice-p.523,28.3%amountseffectivelytocontrol.Wethinkthatasapracticalmater,thebuyercouldhaveelectedpeoplethathe/sheoWethinkthatitouttocomedowntoatestofpracticalcertainty.■Ifonthetrailitcanbeshownthatthereispracticalcertaintythattheybuyercanelectthepeopleover•Concurrence:p.524-hethinksthatithasadecidedbias-becauseoftheword:henchmano3rdparagraph:butthestockholdersareentitled.TheremainingdiroHethinksthatifsuchacauseshouldbeallowedhethinksthatitshouldonlybeallowedwhereheissellingcontrolinfact(51%)oIfthebuyercandoitimmediatelythanIwillallowthisprovision.op.524Ifwearegoingtoallowtheseclauses,strongermedicinesareneeded...makethedirectorswhoresignresponsibleforanynegligenceofthenewdirectors.oHedoesnotthinkthatthelawhadbeendevelopedenough.•Thispracticecontinuestothisday.•Theysiteanothercase-whereamajorityownercouldcontrolCHAPTER6CloseCorporationsp.246•Notpubliclytraded•Limitedtrading•Small,fewshareholders•Family•Oftenrelatedtothefounder•Difficulttosalestockexcepttoothershareholdersbecausethestockisrestricted.Theydon'twantjustanyonetogettheshares.

34•RelationshipisoftentreatedaspartnershipsoFiduciarydutiesexistamongpartnersandpartnership■Nottotakeawayopportunitiesthatbelongtootherpartners■FulldisclosureoRuleonbecomingpartner-allcurrentpartnersmustvoteforthenewpartnerCASERodv.Donahue•Foundersofcompanyandovertimeeachofthembegantolookforwaystogetoutofthecompany•Mr.Rod-wassellingsharesandgivingsomeaway.Whenhewasreadytoretireheonlyhave83sharesleft.Hemadeanarrangementthathissonsweregoingtobytheremaining45sharesfor$800each•BythistimeMr.Donahuedied.Hisshareswenttohiswidow.Sheowned45sharesandshewantedtobeboughtout.oTheysaidnowandsaidthattheywouldpayupto$200ashare.•ShewasupsetandsaidthattheyneedtogiveherthesamedealastheydidMr.Rod•p.250-amajorityofinterestinacloselyheldcompanycanmakelifehareosqueezersmayrefusetopaydividendso•Inapubliclyheldcompany,ifyoudon'tlikewhatisgoingonyoucansellyoursharesorifyouareinapartnershipyoucancausedissolution.Whatcanyoudoifyouareaminorityshareholderinaclosecorporation?•P.251-Holdings:oWeholdthatstockholdersinclosecorporation...oWeholdthatdenyminorityequalopportunity(denyingcorporateassets•Wearegoingtogiveyouachoice,Mr.Rodcaneitherputthemoneybackinthecompanyoryouhavetoofferthesameamount•Shareholdersinacloselyheldcorporation,regardthemselvesaspartnersandtheymajoritycannotdepresstheminority.•YouknowthatyouareintroublewhenyoubringoutJudgeCardozaSuigaris-latintermp.105StatuesTexasClosecorporationlaw•Lookatpage106article1211-•Putinyourarticlesofcorporation-simple•Shouldputitonyourcertificatesofstock•Donotneedtoadoptbylawsifthethingsthatarerequiredinthebylawsareinashareholders

35agreement.•Donothavetohaveaboardofdirectors(ifyoudecidedtohaveittheycanhavelimitedpowers)•HavetofileastatementofoperationwiththeSOS•ShareholdersAgreementoStocktransferprovisionsoDividendsoVotingagreements-canputthatallshareholdersmustoProvideforterminationofcorporationafteracertaindateorwhensomethinghappens•Article12.36-ifyouarethebuyerofsharesinacloselyheldcorporationanditisrequiredthatitisstampedontheshares-butifitisnotstampedonthesharesyouarestillbondbyshareholdersagreement.•Provisionsfordissolution■Advantageofqualifying•Givetheauthoritytooperateasapartnership•Gettodoawaywithmanyofthestandardcorporaterequirementsp.256-258Howotherstatestreatcloselyheldcorporations.•Makesurethatyouunderstandthepointsmadeher.•ButnoteverystatedoesnotrecognizethesameVotingArrangements•Shareholderscanvoteasablock•Whatarethetechniquesinwhichyoucandothat?oVotingtrust(trusteeholdslegaltitletoasset/sandhasalegalobligationtooverseethemforthebeneficiaries)■Groupofshareholdersgivestothetrusteelegaltitleoftheirsharessothathe/sheisshownonthebooksasthelegalowner.Shareholdersretaintherighttodividendsandallmoniesreceived(beneficialownership).■TexasStatutes2.30a-ifyouhaveavotingtrusttheagreementmustbefiledwiththecorporationandithastobeavailableforinspectionoPoolingAgreement:reallyacontractinwhichseveralshareholdersjointogetherandagreetovotetheirsharespursuanttothecontract.■Termsusuallyareisthatalltheshareswillvoteinaccordancewiththemajority■StockcertificatesmustnotethattheyarepartofapoolingagreementoShareholderagreement■Candoevenifyouarenotastatutorycloselyheldcorporation(aregularclosely

36heldcorporationcandothisaswell)•Article12talksaboutastatutoryclosecorporations-advantagesisthatyoucanrunlikeapartnership.•Onethatisnotstatutory-youstillneedBoardofDirectors,bylaws,annualmeetings.■Thereareavarietyofwaysinwhichtheymaketheirdecisions.Thisagreementjustdecideshowtheshareholderswillbevoted.CASERinglyBrothersp.216•Enteredintoacontract:oIfanyonewantedtosaletheresharestheywouldoffertotheotheroInvoting-theywoulddiscussfirstsothattheycouldvotethesamewayoEnteredintoanagreementonhowtheirshareswouldbevoted•Latestelection-formersisters-in-lawwereinadispute•AtelectionofdirectorsMrs.HaileydidnotwanttovotewithMrs.RinglingoMr.Lucewasanarbitrator-pursuanttotheagreementIwantyoutovotetoadjournthemeetingoMrs.Haileyrefused-andvotedin5thdirector•Mr.Ringlingwasmade•Didtheyhaveanenforceableagreementabouthowthesharesshouldbevoted?oWasthisavotingtrust?No,becausethereisnotrustee.Itwasmorelikeapoolingagreement(contract)■p.264-poolingagreementshavebeenupheldoMrs.Haileyviolatedthecontractthereforehervotewasnotcountedandthedirectorthatshewantedwasnotelected.BLAW53305-1-07CHAPTER12:StructuralChanges:CorporateCombinationsandTenderOffersp.727-735,736-737,739-746,749-771,775-801,813-815,850-853•AmendmentofArticles•ReductionsofcapitalooReducetonoparshares(allocatelesscapital)•Merger,ShareExchangeorConversionoConversion:Decidetobecomeadifferenttypeoforganization(5.17)twocompaniescome

37togetheroConsolidation:A+B=CoMerger:whollynewcorporation,A+B=AoShareExchange:A-B-sharesgotoAanddissolvesorBbecomesasubsidiaryofA•VoluntaryDissolution(if100%oftheshareholderswanthisthentheyboarddoesnotneedtoapprove)•InvoluntaryDissolution•SaleortransferofsubstantiallyallassetsotherthantheregularcourseofbusinessoCompanywhomakesthingssalesallofthemachinesusedtomakethemBasically,itisatwostepprocess.Youneedtheboardofdirectorstoproposeandvoteonit(accordingtothenormalmajorityforum)Secondlytheshareholdersmustpassit(ifthe)2/3ofthequorumisstandardbutwiththesefundamentalthingstheshareholdervoteisrequiredtobe(inTexas)2/3ofoutstandingshareswhichismuchmore.AppraisalRemedy(typicallycomesupwithmergers)•Youwereashareholderinaparticularcompanyandyourcompanywasboughtout•ShareholdersinbothAandBcompanieshavetheserights•Alsocalledthecentersrights.Procedure:•Fileanobjection•Mustnotvoteforamerger•DemandfairvalueforyoursharesoCanbeadifferentopinionaboutwhatthatis•Onceyoudecidetotakethisrouteyouarenolongerashareholderandcannotvote.Youcansellyoursharesbutthatpersongetsyourrightsasis.DEFACTOMERGERS•UCorp,entersintoatransactionwithICorp,(soles/h)•Uisgoingtogive40%ofstocktoIinexchangeforallofYsstockgoingtoU.oTheonlysurvivorisUcorp.

38•Wouldthatgiverisetoappraisalrights?oTechnicallyitisnotamergerorconsolidationbutactuallyinarealcasethiswasconsideredamergerandthesurvivingcorporationisI(eventhoughithasadifferentname)soshareholdersofUCorpareentitledtoappraisalremedy.SmallScaleMergersp.733-734Texas5.03g:Lessthan20%oftheShort-FormMerger:p.734(TX-74)•Youhaveaparentcorporationandtheyownatleast90%ofthesubandtheparentwantstoacquirethesub.•Onlytheboardofdirectorsneedtovoteonthis(nottheshareholders)•Shareholdersofthesubaretheonlyonesentitledtoappraisalrights.Merger?Theywillhaveappraisalrights.ThecourtswilldeterminewhetherornottheyareactuallymergersExample1•AgivesstocktoB,BsalesassetsinreturntoA.•AstockisthendistributedtoBshareholders•ThenBisdissolvedExample2•AstockgoestoB•BshareholderssalestocktoA•BbecomesasubsidiaryofACASEFarrisv.GlenAldenCorp.p.739•GlenAlden(coalmining)一incorporatedinPAoLawstatesthatnowdissentersrightsincompanypurchasingassetsoShareswentfrom$38to$21afterrestructure•ListIndustriesCorporation(diversifiedholdingcompany)-DelawareLawoLawstatesnoappraisalrightsforshareholdersofcompanysellingsubstantiallyallofitsassets.oShareswentfrom$7.50to$21•ListI-transfersassetsandstockstoGlenAlden•GlenA-transfersstocktoList(3,621,703)

39•TheGlenAldenshareholdersdidnothavepreemptiverights•AfterthathappenedListIndustriesdissolvedandtheydistributedGlenAldenstocktotheshareholdersoItwasbasedon5sharesofGAstockforeach6sharesofliststock.•Newname:/zListAldenCorporation”•QuestionoIsthisamerger?oWouldtheyhaveappraisalrights?■Itappears•ShareholdersofGlenAldenobjectedtothisandthinkthattheyhadamerger.oTheyshouldhavehadappraisalrights•Thecourtssaythatthetestofamergeris-hasthecorporationlostitsessentialnatureandalteredtheoriginalrelationshipoftheshareholderstothecorp,changed.Istheplaintiffforcedtogiveupsharesinonecorp,fortheexchangeoftheother?oCourtsdeterminethatthiswasamergeroShareholdersshouldhavebeennotifiedandgivenappraisalrights•Page745tellyouwhytheymighthavestructuredthe"merger"thiswayoTopreventshareholdersfromhavingappraisalrightsoGAhadataxlosscarryoversotheyhadtosurvivesothetaxlawscouldgoforwardoChiefassetsofGAwerecoalreservesandthatwouldhaveresultedinalargetaxiftheywerejusttosalethemtoListFreezeoutsp.749•DissolutionFreezeout:Example1(mergerbetweenC&S)oCsalesassetstoS(ownerofCowns100%ofS)oCdissolvesoShareholdersown70%o$ornotestominS/Hs(ofC)oCanhedothis?YestechnicallyExample2(saleofassets)oCcompanysellsassetstoT(owns100%ofC)oTgivesnotestoCExample3oCcompany-mergeswithToTgivesCshorttermdebenturesorredeemablestocktoCoTcashedoutwhendebenturematuresorpref,stockredeemedExample4oTgives$toC

40oCmergerswithTo$tominS/HofCCASEWeinbergerv.UOP,Inc.p.750•SignalCooAcquired50%ofUOPs,Inc.•NowtheywanttobuyoutUOPandtheywanttheshareholderstoacceptthisbuyoutandtheprice.•SignalneedstheBoardtoagreeoTheboardisconflictedo6outof13directorswereelectedbySignaloPresidentofUOPwasadirectorofSignalbeforeoSomedirectorssatonbothboardsoWhatsomeofthedirectorsdidn'tknowwasthattheytherewasastudythatstatedthattheycouldpay$24ashare(gooddeal)buttheylowballedthemandstatedthattheycouldonlypay$21•Differenceof$17million•Returnontheirpurchasewouldhaveonlygonedown2%points(insignificantdifferencetosignal)•CourtssaythatthiswasnotfairbecauseSignalwasnotbeingfairandgivingthefulltruth.Theyhidfactsfromtheentireboard.•Doestheshareholderwhowantstocashouttheminorityhavetohaveabusinesspurposeforthis?Delawarecourtssaythatnotheydonot,theycansimplycashthemout.CASECogginsv.NewEnglandPatriotsFootballClubp.765•Heretheydemandedthatthereisabusinesspurpose-notjustbecausesomeshareholdersaregivingyouahardtime•SoinMAyouhavetohaveabusinesspurposeforcashingoutminorityshareholdersCASEGlassmanv.UnocalExplorationCorp.p.766Short-FormMerger•Unocalowns96%ofUXC•Unocalgaveallrequiredinfotoshareholdersasrequiredbylaw(valuation,financials,etc)•Someminorityshareholderssaidno,inthiscasetheparentisheldtoahigherstandardoffulldisclosure•Courtssaynozthatisingeneralmergersbutinshort-formmergers

41oWholepurposeistomakeiteasyandwithjustthevoteofthedirectors.oOnlyshareholdersofsubsidiaryhaveappraisalrightsoAslongastheygaveyouallthefinancialinfoandhowtheyvaluedthesharestheywereintherightpositionoDoesnotgivetheparenttherighttoengageinfraudorillegalitybutthatisaboutit.•RemedyisthattheyeitheracceptthepriceofferedordeclareappraisalrightsTenderOffers:bypasstheboardandtrytakeoverthecompanybyathirdpartyp.774Makeapitchtoshareholdersandacquirethecompanythatwayinsteadofgoingthroughamerger.ResponsethattheBoardofDirectorscanhavetoatenderoffer-towardo仔atakeoverKnowtheterminology•Raider•Whiteknight•Lockup

42・Poisonpill(p.777):boardvotestogiveexistingshareholderstherightstobuyadditionalsharesatalowprice.Tomakethetakeoverharderandhopefullymaketheraidergoaway.WilliamsActp.779•federallawtotryandregulatetenderoffers•ifyouareacquiringatleast5%ofthecorp,youmustgiveyourpurposetotheSEC(intentionsofacquiringcompany)•Newlaw:Hart-ScottRodinoAntitrustImprovementsAct(p.779)•P.782#5-Obligationsofthetarget'smanagementCASEUnocalCorp.MesaPetroleumCo.p.783•Mesaistheraidercompany•Mesahadalreadyacquired13%ofUnocal-andreportedtheirintentionstotheSEC•MesamadeatenderoffertotheshareholdersofUnocalo1sttier:$54pershareuntiltheyget37%o2ndtier:giveshareholdersofUnocalhighlysubordinated(risky)junkbonds一waydownthelistofcreditorrights.oTryingtocauseastampedeforshareholderstosaletheirshares.•UnocalBoardmeetsandtheydecidedthattheyaregoingtohaveadefensivestrategyoMakeaselftenderofferat$72ashareoIfMesaacquires37%Unocalwillbuyremaining49%fordebtsecuritieswithavalueof$72ashare(givebetterdebtsecurity)•Additionalfactorthattheythrewin:oTheysaidthattheywouldnotmaketheofferwithMesa•MesasaidthatUnocalhavetohavefiduciarydutiestothemaswell.•ThecourtagreeswithMesathatheydoduecareandloyaltybutapartfromthistransaction!oMesasaysthatweshouldnotbepenalizedforusingcorporatedemocracyoUnocalboardwasnotdoingthistoperpetualthemselvesinoffice.oTherewasnolackoffailoTheCourtsrejectMesa!•Mesasaysthatyoucan'tdiscriminate•DelawareLawsaysthatyoucanselectivelyrepurchasesharesoGreenMailexample(p.790)Isthisstillthelawtoday(undertheWilliam'sAct)?Answerisno一p.781All-holdersRule

43p.794OthertypesofdefensivemeasuresCASEUnitrin,Inc.v.AmericanGeneralCorp.p.794•Weretheygettingintotheareaofentrenchment•Orweretheytryingtoprotecttheshareholders•Wasdefensedraconian?oIfitisnot,wasitinarangeofreasonableresponse•Courtsconcludethatitwas,theyweredoingthisingoodfaithanddidnotfeellikeitwasgoodforshareholderssotheywerepurchasingsharestoprotectthemBlessedPoisonPillsp.797p.798Carmodyv.TollBrothers,Inc.•DeadHandPoisonPills•Courtsdonotfavorthesebecausetheyaredraconian.oLookateternalstrugglebetweenboardandshareholdersoThisinterfereswithshareholdervotingrights-becauseanynewdirectorselecteddonothavethepowertoredeemthepillsandthereforetheshareholderscannotelectanydirectorsthattheywant.•Onlytheboardthatadopteditcanredeemit.p.813•WhenitbecomesclearthatthecompanyisgoingtobeacquiredthenperhapstheBoardofDirectorsshouldbecomeauctioneersandlookforthebestdeal.Thisbecomestheirdutytotheshareholders-notnormalbusinessp.850•Therearestatelawsthatgoverntakeovers•Question-youcanhavestatelawsbutthecannotinterferewithfederallaws•TheylookatstatelawstoseeiftheyviolatetheWilliamsActorothers-•Edgarv.MITECorp.oExampleofalawthatwasheldtobeunconstitutional-itviolatedtheWilliamsActVoluntaryDissolution

44InvoluntaryDissolution:(TEXAS)•StateoAttorneygeneral■Ifthecorp,failedtocomply■Committedfraudwhensecuringarticlesofincorporation■Doingbusinessbeyondthescope■LyingintheirdocumentsandreportsoSecretaryofstate■Issueanadministrativeorderafterhegivesthecorp.90daystocorrecttheiractions:doingsomethingsimilartowhattheAGthinks•Ifcorp,isdissolvedandpayfeetheycanbereinstated•Officers,directors,andagentsareliableoController■Forfeitcorporateprivilegesforfailuretopayfranchisetax■Meansthatyoucannotusethecourtsandeachofficers,director,andagentsareliablepersonallyfordebts•Shareholders(7.05a-p.84)oTheyhavepowertobegintheprocessofdissolution•CreditorsoCanbringanactionforinvoluntarydissolutioniftheyarenotgettingpaidoThehavetogotocourtAfterthereisdissolutionthereisaperiodoftimeforwhichthecompanycanstillbesuedorbringanactionforward:3years.Itisneveragoodideatosimplywalkawayfromacompanyandnottakeformalstepstodissolvebecausefranchisetaxescontinuetoaccrueandyoucouldfaceinvoluntarilydissolutionandyouwillbepersonallyliablefordebtsofthecompanyforaccruingtaxes!CHAPTER13:LegalCapitalandDistributionp.854-875Distributions:dividendsorrepurchasingsharesFromwhatsourcescanthecompanydothat?Dividends•Shouldnotcomefromstatedcapitalaccounts(thereforcreditors)oThereisanexception:•Eliminatefracturalshares•Tocollectorcompromiseindebtedness•Topayshareholdersappraisalrights

45•Toeffectthepurchaseorredeemableshares•Shouldonlybepaidfromsurplusaccounts•Shareholdersdonothavea“right"toadividend•Righttodividendwhensharesaresolddependonthecircumstance•Companymustbesolventwhenyoumakethepaymentsandaftertheyarepaid•Paymentscannotviolatearticlesofincorporation•Directorsthatvoteforanillegalpaymentcanbesuedbythecorp,andthoseshareholderscanbemadetogivethatback•Cashdividendscannotberevokedunlesstheywereillegalorwouldmakethecompanyinsolvent•Commonshare:entitledtodividends•Preferredshareholders:entitledtosetpaymentandsometimestheycangetadividendoPaymentscanbecumulativeornoncumulativeCASEKlangv.Smith'sFood&DrugCenters,Inc.p.863•CompanycreatedsurplusaccountsbyrevaluingassetsandpumpedthecompanyuptolooklikecanpayadividendoTrueaboutabalancesheet:itishistoric?•Delawarecase-courtssaidyesyoucandoit.Ithastobeingoodfaithandyoumusthavesomevalidbasisforit.oNoteverystatedoesthisNimbleDividends：read：P.869•Havenosurplusbutyoudohaveacurrentprofit,canyouusethismoneytopaydividends•Answerisyes!Butnoteverystateagrees.•Why?oTheyhavepreferredshareholdersmightneedpaidoAttractionofnewshareholders,mightaffectthemarketvalueofyourcompanyWhenacompanywantstorepurchaseitsownstockp.875•READ•Exception:whereyouarebuyingthesharesforacertainspecifiedtargetpurpose!oListedonp.875

46FINALINFORMATIONGoodnews-nobluebooks!Butneedtobringscantron(longone)12%ofthegradeEither:Thetest-True/False(nobluebooks)Chapters10-13(40-50questions)OrIfnot,aneasycomprehensivetestwillbegiven.(60questions)•p.266-IrrevocableProxies:generallyproxiesarerevocable.Theycanbeirrevocableiftheyareapowercoupledwithaninterest,(talkedaboutthiswithagency-aowesb,agivespoatosellland).Relatestogivingvotingpower-likeusingcreditatabankorgiveittoastockholder(doublecheckthislastpart).Howlongtheylastdependsonstatelaw.•p.269-doesinvestmentincompanyhavetomatchvotingpower?oExample:twoclassesofstock,ClassA(investment$1000)theycanvote3directors■ClassB(investment$100,000)theyhave2directors■(likeclassifiedstock-waytogivevotingpower)oVerylittleinvestmentbutlargevotingpower-thisispermissible.Aslongaspurchaserknowsaboutit.•p.270Isitpossibletohaveagreementsthatcontrolthecompany?oWithstatutoryclosedcorporationsitis.Theagreementcantaketheplaceofaboardofdirectors(stocktransferrestrictions,dividends,dissolutions,etc)o(2.301a)Closecorporations-McQuadev.Stoneham1933P•Shareholdersagreement(butnotwithallshareholders)op.271-tellsyou■officersaretobe■salariesaretobe-■thereshallbenochangeinsalaries,saidcapital,whowillbeanofficer/director■takingawaythedecisionoftheboardofdirector•soindirectlyyouareviolatingtheshareholderpowersoMr.McQuadespositionwenttohishead-hestartedcriticizingMr.Stoneham.TheDirectorsdecidednottohirehimasandirector.oMcQuadebringsalawsuit-hesawsthatthisisacontract

47•Courtsaysthatthesearemattersthatshouldbedecidedbythedirectors.Itisagainstpublicpolicytohavetheshareholdersagreementtaketheplaceoftheboard'sdecision.•p272-itmustbeequallytrue...op.271-inpursuanttothatcontract...Stonehamhadcompletecontroloverthem,(counterswhattheyaresayingaboutdirectorsindependence)op.273-wedonotcloseoureyes...trustworthydirectors•Directorsarenotalwayscompletelyindependent.CASEClarkv.Dodgep.274•Shareholderagreement-eachwouldvotefortheotherasdirector•Oneofthepartiesdidnotwanttoliveuptoit•Courtsays,exceptforthebroaddictaintheMcQuadeoItislegalandthiscanoverruletheshareholdersagreementHowdoesthiscasedifferfromMcQuadev.Stoneham?p.270•Alltheshareholdersofthetwocompanieshavesignedtheagreementinthiscase.Intheballcase,notallshareholderswereinvolvedintheagreement•CourtsareoverrulingMcQuadev.Stoneham?Theywilltakeamoreliberalview.•Therewereminorityshareholderswhowerenotpartoftheagreement.QuickOverview:Small,nottraded,underTexaslaw,youcanelectthatstatusinthearticles.Givesyoutheabilitytooperateinalessformalway.Courtslookatfiduciarydutiesofthe“partners"andtheymusttreateachotherBLAW53303-27-07CASEGallerv.Gallerp.274•LikeClarkv.Dodgeinthatitonlyaffectsthepartnershoweveritwaslaterintimesothecourtshadsetsomerules•P.276-Twobrotherswereworriedaboutwhowouldtakestockiftheshareholderdied,oListofconditions

48•Benjaminpassedawayfirstsotheotherbrother,Isadore,oThewifewasnotbeingconsultedfordirectorandwasnotgettinganyofthesalarycontinuation(pertheagreement).•Defense:theagreementviolatespublicpolicy.Becauseitistryingtosterilizethedirectors(refertoMcQuadev.Stoneham)•CourtsdefinecloselyheldcorporationsP.•Inapubliclyheldcompany-ifyoudon'tlikewhatisgoingonyousellyourshares.Inacloselyheldcorporationyoufeelthesameway,youareoutofluckpertheshareholdersagreement.•p.278pointoutthatitisnotavotingtrustandthattheendoftheagreementiswhenbothbrotherspassaway.•Isadore'ssaidthatthegivingoftwicethesalaryisultravirus-thecourtsdisagree-theybelievethatitisanemployeebenefit.oAgreementwasonlyifthispaymentwasincometaxdeductible-whichmeansthatitisnotagiftbutanecessaryexpenseofthecompanytodobusiness.•SUMMARY:thisisacontract.Itisbetweenthebrothersandtheirfamiliesandnotthirdparties.Courtsupholdthisinthecontentofacloselyheldcompany.CASEAlderv.Svingosp.281•Can'tdoanythingwithoutunanimousapproval•Howevertwooftheguysdecidedthattheywantedtosell.Svingosobjectedrelyinguponthestockholdersagreement.•NYlawstatesthataunanimitydecisionhastobeinthecertificateo£incorporationsoyoudon'thaveanygrounds.•Hesaidwait,thisisacloselyheldcompanysocanIamendthecertificateofincorporation?Theyupheldthemotiontoamend.•Happensbecauseitisacloselyheldcompanyandcourtsarewillingtoprotecttheminoritythatisbeinggangedupupon.CASESuttonv.Suttonp.282•100%ofsharesareownedbyAbrahamo70%transferredtoYvette&Solomano30%transferredtoDavid•NYchangedthataunanimityprovisioncanbeamendedbya2/3voteunlessthecertificateofincorporationdeterminedotherwise.•Wentallofthewaytothecourtofappealseventthoughitwasdeclaredinthecertificateofincorporationthatallpartiesmustadoptanychanges.

49FiduciaryObligationsCASERosenthalv.Rosenthalp.286•Objectedtolanguageinnumber2bylosingpartyoShareholdersdonothavethatkindofrelationshiptoeachother,thatismorelikeapartnership.•TheyagreedthatitwaslikeapartnershipsoitwasupheldCASEWilkesv.SpringsideNursingHome,Inc.p.287•Pooledinterestedandexpertisetooperateanursinghome.•Decidingwhatformofbusinesstheyshouldtake.oAttorneysaidthattheyshouldnotbeapartnership(becauseofthepersonalliabilityofthepartners)oCorporationwasrecommended•Eachofthembecameanofficer•Quinnwantedtobuysomeofthelandandopenaresthome.oTheyallagreedthatitwouldbeok.oHewantedtobuytheproperty-maybeatbelowfairvalue•Wilkessaidnottosellforthelowerprice(itwasn'tfair)•QuinnwentafterWilkes-andtheywantedtofreezehimout.•P.292(footnote14)•SiteDonahueCaseoCoulddenythemincomeandabilitytomakecorp,decisions•Courtsemphasizethatthisshouldbelookedatlikeapartnership-andtheysaidthatitisnotpermittedtogangupononepartner.•P.291-Eventhoughhemajorityowesfiduciarydecisionstotheminoritytheystillmustletthecompanydobusiness-evenifthatmeansgettingridofacorporatepartner.oDothis,theyshouldhaveofferedareasonableprice.CASESmithv.AtlanticPropertiesp.293•OppositecasetoWilkesv.Springside•Weareseeingthattheminorityoppressingthemajority•Dr.Wolfsonisbeingunreasonable.Hisvoteregardingdividendsisunreasonableandhehastoreimbursethecompanyforcumulativeearningstax.

50CASEMerolav.ExergenCorp.p.294•Thecollusionoftheatwillemploymentdoctrinewiththefiduciarydutiesowedtoaminorityshareholder.oCanthecompanystillgetridofyouifyouareaminorityshareholder?•Facts:oMr.MerolawenttoworkforExergenCorp.Hewassolicitedbytheownerofthecompany.Youwillhavetheopportunitytomoveupandpurchasesharesandbecomeamajorshareholder.oThissettheemployeesexpectationsp.295•Shareswerepurchasedat$2.25(4100)then(1200)thenthingswentbad,hewasterminatedandtheyboughthissharesbackfor$17ashare.•Hefeelsthathehasbeentreatedbadlyasaminorityshareholderandthathisexpectationswerenotmet.•Employerwasundertheopinionthathecanhimwhenhewantsbecauseoftheemployeeatwill•P.296gobacktoWilkes:terminatingemploymentofaminoritycanbreechfiduciarydutiesbutitisdifferentbecausestockownershipcamefirstandinthiscaseemploymentcamefirstandstockwasanemployeeperk.•Thisisareiterationofwhatweknowthatthecontrollinggroupmusthaveroomtomaneuver.Ifheisatroublemakertheyshouldbeabletogetridofhim.•Therewasnolegitimatereasontofirehim(althoughitwasnotneeded)buttheydidn'tbenefitfromthat,theywerejustgettingridofanemployeethatdidn'tfit.•ItisnotaWilkescase.•Summary:inthecollusionoftheat-will-employmentandfiduciarydutiesValuation:HoldingCompanyp.299Dependsonwhatthecompanydoes:•HoldingCompany(land,cash,companies,stock,options,inventory,equipment)todeterminethevalueoftheholdingcompany,youwouldhavetolookatthevalueofallofthesethings.Thiscouldbeverydifficult.Fairmarketvalue.•OperatingCompany:companiesthatthrowoffmoneyorholdsincomegeneratedassets.Theyarevaluedonsomemethodofusingtheearningstogenerateavalueoftheshare.oPEratio=Price/EPS(36/6=6).TakeEPSofsubjectcompanysay$5andtimesthetwo.That

51willgiveyouapricepershareofyourcompany.$30oCapitalizeearnings:■2007T2017willearn$7,500,000■Howmuchisitworthnow?Youneedtodiscounttheincomestream.■Keyisthediscountrate(asdeterminedbythemarket)■Inthisexamplesaythatweuse5%■Valuein2007ata5%discountrateis$2,000,000.CASEF.B.IFarms,Inc.v.Moorep.310•RequirementsinTX-therestrictionstodon'thinder,mustbebroughttoattentionofanyonewhowantstopurchase,andrestrictionsaresetforthinbyanydocuments.•Lindagot2,508shares•Moorehadalienonthesharesof$155,889.80•Companywentintobankruptcyandhewasnotgettinghismoneyfromhersohesoughtaridofexecution(hewasgoingtoputhissharesupforsale)•Theysaidthathecoulddothatbutthathehadtopayfortheshares.Hesaidheckwiththatandputthesharesupforsale.Heboughtthemfor$290,450.67atasheri仔'ssale.•Companycancelledthesesharesbecausetheywerenottransferredcorrectly•Courtsdeterminedthatthetermsz/bloodmembers"ismanifestlyunreasonable•Uponappeal,•Indianalawsaysthatsharetransferrestrictionsareok-seerequirementsonp.313•TherestrictionswerenotlistedonthestockcertificatesbutthisdoesnotmatterbecauseMoorenewabouttheminadvance.•Companywasnotgiventherightoffirstrefusal.•Theothermembersofthecorporationknewthattheforeclosuresalewasgoingonandtheydidnottaketheopportunitytostopthatsotheywavedtheright.•Nofraud,nobreachoffiduciaryduty(p.316)•Theprovisionofkeepingitinthefamilywillbeupheldbecauseitwasunderstandable•Restrictionsoftransfers:shouldwills,divorce,creditorslawstrumptransferrestrictions?oCourtsstatedthatthisagreementmaybetoobroadbecauseitcoveredalltransfers.CASEEvangelistav.Hollandp.318•Saleagreement-shareholderhastosellsharesbacktocompany.•Isbuysaleagreementgoingtosupersedethecurrentstockprice?•No,itisacontract.Atthetimethatitwasenteredintonobodynewwhowasgoingtodiefirstandthecontractstated$75not$191k•Wouldthereeverbealimit?Probably-ifanextensiveperiodoftimehaspassed.Thereshouldbe

52reasonableupdatesorassessmentsofvalue.p.319•Courtswillupholdcontractsp.320CASEGallagherv.Lambertp.323•Mandatorybuybackcase•Heisallegingthattheywerekeepingtrackofhistimeandthattheywantedhimoutbeforehistime.•Dotheyowehimanydutiestonotfirehimarbitrary?Andthemajoritysaysno,hesignedacontract.Heknewtherisksgoinginandhedidn'tmakeit.Theymayhavefiredhimforareasonthathedoesn'tagreewithbutaslongastheydon'tviolatethelaw.•Dissent:isbetterDissolutionforDeadlock:CASEWollmanv.Littmanp.327•LouisNierenbergInc.•LittmanandNierenbergsistersownanothercompany-theywereinvolvedindistributingfabrictocustomersoLittmans-establishedthemarket(foundthecustomers)oNierenbergsisters-procuredthefabric•NierenbergsistersbringthisactionagainsttheLittmanstodissolvethiscompany•Arewegoingtoallowthistohappen?•Thecourtssayno,oThecompanydoesnotneedtobedissolved.TheycaneachdotheirjobsindependentlyoItwouldstoptheothercourtactionbecausethecompanywon'texistanymoreoNierenbergwouldthenbetheonlypeoplewhobenefitandallowthemtobuyouttheLittmansinterestatanunfaircost.•Thiscaseisgoodbecauseitistherightofashareholderwhofeelsthatthecompanyisnotoperatingefficiently.Butsometimesthepartywhowantsthedissolutionislookingtobetterthemselves.

53Insidertradingnext...•Dissolutionwasdenied.BLAW53304-3-07DissolutionforDeadlock:CASEWollmanv.Littmanp.327•LouisNierenbergInc.•Actionfordissolution•LittmansandNierenbergsistersownanothercompany-theywereinvolvedindistributingfabrictocustomersoLittmans-establishedthemarket(foundthecustomers)oNierenbergsisters-procuredthefabric•NierenbergsistersbringthisactionagainsttheLittmanstodissolvethiscompany•Arewegoingtoallowthistohappen?•Thecourtssayno,oThecompanydoesnotneedtobedissolved.TheycaneachdotheirjobsindependentlyoItwouldstoptheothercourtactionbecausethecompanywon'texistanymoreoNierenbergwouldthenbetheonlypeoplewhobenefitandallowthemtobuyouttheLittmansinterestatanunfaircost.•Thiscaseisgoodbecauseitistherightofashareholderwhofeelsthatthecompanyisnotoperatingefficiently.Butsometimesthepartywhowantsthedissolutionislookingtobetterthemselves.Insidertradingnext...•Dissolutionwasdenied.•s7.05A:Whenshareholderscan'tagree-thedisaffectedshareholderscanaskthecourtstoappointareceiveroInsolvencyoDeadlock-andfailuretoresolveoDeadlockandfailuretoelectoOppressionoWaste•s.7.06A3oIftheycan'tresolveitwithinoneyearfromtheappointmentofareceiverthentheydissolve

54•StatutoryCloselyHeldCorporationsoPage:113S12.53■Ifyouhavethesametypeofsituation,couldbeoppression,wasteofassets,thecourtscanappointaprovisionaldirectororsomeonetobreaktiesamongsttheshareholders.■Doesnotsaywhathappensiftheprovisionaldirectorisunsuccessful.Butonewouldthinkthatafterayearthatyoucouldaskthecourtstogoinanddissolvethecompany.•Basically,inTexas,youcanaskthecourtstoappointareceiverorprovisionaldirectortohelp.p.328-329-talkaboutthesamethinkLetterp.329•Courthadgranteddissolutioninafairnumberofcasesbutitonlyoccurredin9outof54cases.•MaybeagoodthinkCASEMatterofKempandBeatleyp.331•Measureofparticipationofownershipwasbasedonstock•Wentfromgettingpaidbystock(similartonursinghomecase)tonothing•BringactionfordissolutionoTopof332一""involuntarydissolutionstatute”•Whatisoppressive:itiswhenyoudefeatthereasonableexpectationsofastockholderinacloselyheldcorporation.oExpectstobeactivelyinvolvedinmanagementoTheyoftendependontheirstocktoprovidethememploymentandincome•P.334-Courtsdefineoppressiveconduct•Dissolutionisnotourfavoritething-oIstheresomeotherwaytoresolvetheproblem-ifthisisa(〃〃)theoppressingmajoritymustcomeforwardwithasolution(p.335)Meiselmanv.Meiselman•RightsorinterestsincludereasonableexpectationsoThoseexpectationscanchangeovertime.Dependonadvanceinthecompany•DidthepersonwiththeexpectationscommunicatethosetotheothershareholdersCASEChestertonp.338p.339-DefinitionsofOppression

55p.340-Insomeofthesecasesthedutyofcareandloyaltyaswehaveunderstooditaswehaveunderstoodithave•i.e.Donahuev.Rod(oneshareholderboughtoutbycompany)CASEMcCallumv.Rosen'sDiversifiedp.340•questionaboutbuyingminorityshareholderinterestsatafairprice•p.342attop-MNstatute•Hisargumentisthathissharesweretiedtohisperformance•RecallMorallav.Exertain•Differencehere:Muellenbergv.BikonCorpp.343•HewasminorityshareholderbutthebusinesswaslocatedonhislandKellyv.Axelsonp.344•OppressiveactionEffectivenessofInvoluntaryDissolutionp.344•Courtsaremovingtowardsmakingtheoppressingmajoritybuyoutminority•Isthatagoodresult?Yes,itmightbedestructivetohaveagreatbusinessbeforcedtodissolve.Soitwouldbeseenasapositiveresult.*p.346•Saymajorityhasbeensuccessfulwiththeiroppressing.•Howshouldthosesharesbevalued?Shouldmarketfactorsbeappliedorshouldotherfactorsbeconsideredtodiscounttheprice-likeaminorityholding,marketabilitydiscount,•i.e.:100,000-20%ox.80(minoritycontroldiscount)o=80,000ox.80(marketabilitydiscount)o=$64,000•Shouldthemajoritybeabletodothis?•Whatistheargumentagainstbytheoppressingmajority:oTheoppressingmajorityhasanincentivetooppress-theyaregainingfromdoingthis.•MostcourtsagreethattheyshouldtakeawaytheabilitytodiscountCHAPTER7

56AlternativeFormsofBusiness•ManycompaniesareregisteringasLPbecauseoftheeaseassociatedwithit.•MustfileaL.P.withthestate.Itisapartnershipwithatleastonegeneralpartner(whoisliableanddoeseverything)andthenthelimitedpartner(whoisafinancialpartneranddoesnothaveanyliabilityLimitedPartnerscancontribute:cash,capital,services-andareliableonlyfortheircontributions.Canonlybeliableiftheyarealsothegeneralpartnerorhavecontrol(makedailydecisions)5.p.271RevisedUniformPartnershipAct•Section3.03dp.291oYoucandothesethingsandnotbeconsideredageneralpartner.oStatutorysafeharbors(greatwording)•Haverighttosigninterest•Checkcertificatetomakesurethatyouarecorrectlyshown•Dissolution:allgeneralpartnersneedtoagreetodissolve.•Creditorsarepaidfirst,thenthepartnersarepaid.Basicallyisapartnershipbutthewaythatitisdesignedtorunthereareinvestorswhohavelimitedliabilityandthereforecontrol(thinkofsafeharbors).Thegeneralpartnerishoweveronhookforeverything.CASEGatewayPotatoSalesv.G.B.InvestmentCo.p.352•SunworthPackingCompanyLtd.oGeneralPartner:SunworthCorp(Ellsworth)oLimitedPartner:G.B.InvestmentCompany(McHolm&Anderson)•EnteredintoacontractwithGateway(Pribula)tosellpotatoes•Gatewaywantstorecoverandtheonlypartythathasmoneyisthelimitedpartner•Caseofwhetherornotthelimitedpartnerwasexertingcontrol•WhenPribulawasdealingwiththem-hethoughtthathewasdealingwithapartnershipbecauseEllsworthalludedtothatfact.•Ellsworthalleges•P.353-cincliffnoteone

57oAllbusinessdecisionsweremadebyMcHolmorAnderson•P.354-i-oAtleastontwoseparateoccasions-Andersonwithdrewmoneyoutofthebankandthiswithdrawalsleftthepartnershipwithinsufficientfundso(haveweseenthisbefore?•ArizonaStatuteshowsthatyouareactinglikeageneralpartnerdayinanddayoutthenyouwillbeconsideredageneralpartnerbutifyouareonlydoingitonspecificcontractstheywillonlybeconsideredgeneralpartnersatthatspecifictime.oDependsonthecorrectreadingofthestatute•Canalimitedpartnereverbeliableformorethanhehasputin-YESoIfheisparticipatingincontrolCanaCorporationbeageneralpartnerp.360-YESTaxationofLimitedPartnership-flowthroughtaxation-onelevel.FiduciaryObligationsCASEGothamPartnersLPv.HallwoodRealtyPartnersLPp.362•HallwoodRealtyPartners•LimitedPartnershipInterests:14.8%GothamPartners•GeneralPartners:HallwoodRealtyCorporationoGumbinir-director&CEOoGuzzetti-director&President•HallwoodGroup,Inc.(Owns5.1%oflimitedpartnership)oGumbinir-o仔icerinthiscompanyoGuzzetti-ExecutiveVicePresident•LimitedPartnershipwantedtobuybacksharesfromLimitedPartnershipInterests(14.8%)-sometookitupandsoldthemback.•ThoseinterestswerethenresoldtoHallwoodgroup.oWasthisanissuanceorresale?oIfitwasissuance-thentheycouldissueittothemforanypriceoIfitwasaresale-thenthepartnershiprequiredthatitwasappraisedandsoldatfairmarketvalue•Theyconsidereditanissuanceandsolditatacheapprice.•GPdidnotfollowagreementandLPcomplainedthattheGPhadbreachedfiduciaryduties.•P.371-DelawareCourtscommentoTheydonotagreethattheLPcaneliminatefiduciaryorotherduties

58•FiduciarydutyofgoodfaithandloyaltyoAfterthathappenedDelawarepassedalawcontradictingwhattheysaid.LimitedLiabilityCompaniesp.372•FastestgrowingtypeofentityanywhereoBestattributesofpartnershipsandcorporationsoCouldberanpursuanttoanagreementoOneleveloftaxationoEasiertoform•ToformoMusthaveorganizersoOwnersareknownasmembersoFilearticlesoforganizationoMusthaveLLCintitleoCanexistforeveroMusthaveapurpose(legal)oCanhaveprofessionalmanagersormanagerswhoaremembersoOnceyoufileeverythingyouareissuedacertificateoforganizationoInternaldocumentthatgovern-referredtoastheRegulations(TX)moststatescalledOperatingAgreementoWhoeverisinchargeistheonlyonewithauthority.■Tosomeonewhoisamanager■OreverymemberisamanageroProfitsandLossesarebasedoncontributions-yourliabilityoCanyoutransferyourinterests?Yes,dotheyneedtobeamember-NObuttheycouldbecomeamemberifallmembersagreeoFilepartnershipreturn1065oCanyouhaveaonememberLLC-yes,butyouwouldreportyourinterestonyourowntaxdocuments.oDissolution:sameaspartnerships-membersofLLCcandissolve■Cangotocourt■Anythingthatwouldcauseorterminatethemembershipofamember(dying,bankruptcy)cancausedissolution(similartoUniformPartnershipAct)oritcanbecontinuediftheystilldobusiness.p.373-376READ•P.378-talkaboutdevelopingconceptaboutpiercingtheveiloYesyoucan-especiallyifyouareusingtheLLPasashieldoHoweverwouldseemharderwithLLC-especiallywithonememberLLPoLLPsaredesignedtobemoreinformalso

59LimitedLiabilityPartnershipP-•Ageneralpartnershipinwhichallpartnershaveliability•PersonalnegligencedoesnotaffectthepartnershipasawholeoEachpartnerisliableforownnegligenceandcontributionsoNewthattheyactwasoccurringandfailedtotakestepstostopitoOrweresupervisingsomeonewhowasnegligentoTheyarepersonallynotliableforrentandgeneralcontractualthings•FilewithSOS•Namemustindicatewhatyouare•IfyouaregoingtohavethisbenefitthenyoumusthaveanindependentfundavailableforcreditorsoroInsurancepolicyfor$100,000•Somestatesonlylet“professionals"becomeLLPs•Otherstates(TX)anyorganizationcanbeanLLP•OneleveloftaxationCASEMegadyneCorporationp.382•MegadyneenteredintoacontractwithOrangeCountyTransportationAuthorityon1fl-95•On11-95theylearnedaboutsomemisinformation•Megadynecontactedalawfirm12-95(Irell&Manella)•OneyearstatueoflimitationstosueonacontractofthiskindoStatueofLimitationshadexpiredon11-96•Thenin11-97Megadynecontactedanotherlawfirm(RosnerLawfirm)andtheywanttosueeveryonenow.•RosnerfiledaclaimagainstOrangeCountyandstartnegotiatingandbillingMegadyneforallofthiswork.oMegadynerealizesthattheyarebeingbilledfortheirpursuitofaclaimthattheyhavenohopeinwinning.•SotheybringalawsuitagainstRosnertoooTheysuethethreepartners(Owens,Nunziato,Rosner)oTheysaywait-weareanLLPandOwensistheonlyguyworkingsoheistheonlyoneliable.•HowevertherewasevidenceofaconversationinwhichallpartnersknowabouttheArell&Manellasuit.•ThepartnersnewthattherewasfraudulentbillingofMegadynegoingon.BLAW5330

604-10-07CHAPTER10:InsiderTradingCASEGoodwinv.Agassizp.528•Decidedin1933-tookplacein20s•Mr.Goodwinfindsoutthatthedirectorandofficerwerebuyingshareswhenotherswereselling.oHebroughtalawsuitforbreachofduty•Courtsdecided:oDirectorsoweadutyoftrusttothecorporationbuttheydonotoweasimilardutytoshareholders.Theycouldiftheyweredealingwiththemonafacetofacebasis.Butonimpersonaltransactionstheydon't.Ifwehadaruledifferentthenthisqualifiedpeoplemaynotwanttobedirectors.oCliffminingcompanywasnotharmedoPlaintiffwasamemberoftheBostonStockExchangeandcouldhavefoundoutelsewhere.oInsidersinacompanydonotoweadutytotheshareholdersthattheyaredealingwithespeciallyifitisimpersonal.Havinginsideinformationandbeingabletotradeonitwasaperk.Nofiduciarydutyrequired•Exceptiononp.528(Strongv.Repide)oCEOownedlandandwasamajorityshareholderoAndwasinchargeofthegovernmentinthePhilippinesoHewasnegotiatingwiththeUSoverthesaleoflandtothecompanytotheUSoUSwasgoingtopaybigbucks-andheknewoCompanyhadminorityshareholders(anumber)andhewasbuyingsharesasanundisclosedagent.oHesoldthelandtothegovernmentandmadealotofmoneyoTheshareholdersfoundoutandbroughtasuitagainsthimsayingthatheviolatedhisloyaltyoException:Thespecialfactsexceptions:ifthefactsaresoegregiousandthepartyistakingadvantageoftheothershareholdersthecourtswillWas"cured"bythecrashof19291934Act-SEEHANDOUTS

61CASE:TheWharfHoldingsLimitedv.UnitedInternationalHoldingsp.529•TheWharfofferedUnitedtheoptiontobuy10%ofthestockinthecablesysteminreturnforexpertiseingettingthewholethingsetup.oItwasacontract•Problemwasthatuniteddidn'tsignandtheyonlygavetheman“oraloffer”•DuringthetrialitwasdiscoveredthatWharfneverintendedtofollowthrough.Itlooksliketheywereplanningtostiffthemallalong•LowercourtsfoundinfavorofUnitedsonowtheyare•Doessection10Bcovertheoralcontractandoption(whichislaterdeterminedasecurity)•Tooccurunder10Btherearethingsthatmustoccur(p.531)oUseinterstatecommerce•Courtsstatethatanoptioncanbeasecurity.•10B-5canbeanycontract•Secretdidaffectthevalueofsecurity.•WharfsaysthisisaboutwhoownstheoptionandnotaviolationoftheSEClaws.oCourtsaysnoitisaboutstatingthatyouwillsellanoptionwithoutintent•CASEdoesviolate10b-5CASEBlueChipStampsv.ManorDrugStoresp.533•Hedidnothingbecauseofthemisrepresentationbut10b-5requiresaction•Thepartysuingmustbeabuyerorsellerbutthepartybeingsueddoesnotneedtobeabuyerorseller.•Partymakingmisrepresentationmusthavescientero〃youknowthatyouarelyingorhavetheintenttolie”oYouhaveknowledgeofthefactthatyouaretellingitfalsely.oMerelybeingmistakendoesnotmakeyouliableoWhataboutgrossnegligence-ifyouaregrosslynegligentinsayingsomething(K.Layexample)thenyoucouldstillfallunder10b-5.CASESantaFev.GreenShortFormMerger•Ifparentownsatleast90%ofthestockofasubsidiaryandtheywanttomerge•Thereisonlycertaininformationthatyouarerequiredtogivetotheshareholders-theycaneitheraccepttheofferorrequestadifferentprice(Appraisalrights).•Courtssaidno-whenaminorityshareholderswantedtosuetheparentcompanyoBecausethey

62gavethenecessaryinformationmandatedbylawCASEShoenbaumv.Firstbrookp.534•Parent:Aquitaine•Sub:BanffOilLtd.•Aquitaineappointed3of8directors•BanffsoldsharestoAquitaine•Can10b-5beusedbecauseoffraud•Courtssaidyesthattheminoritysharescansue.•Notincontextofshortformmerger.CASEGoldbergv.Meridorp.535•Parent:MaritimeFruitoMaritimecor■UGO•MinorityshareholdersbringactionsuingMaritimecorandMaritimeFruit•Courtsaidthatthatactioncouldgoforward•ViolatedCASECady,Roberts&Co.p.535•SECproceeding•Violated10b-5•Ifyouknowsomethingthatothersdon'tthenrefrainfromtrading.CASESecuritiesandExchangeCommissionv.TexasGulfSulphurCo.p.536•1960'stechnology•Companyhitamajorstrikeoforeandtriedtokeepalidonit.Theyalsostatedinpublicthattheyinfactdidnot•Theinsidersweretrading-otheyshutdowndrillingandbuyingallsurroundingland.•BoardwantedtooffertheexecutivesmorestockoptionsoExecutivesdidn'ttellthemanythingandacceptedtheoptions.•Thecontinuedtodrillwithsuccessandrumorsgotoutthattheymighthaveamajorstrike.

63•Issuedapressrelease-lying(p.539-540)•Pg543-testofmaterialitywhetherareasonablepersonwouldattachmaterialitytoit.•Pg544-courtsaysthatthediscoveryholetheyfindmeetsthismaterialitystandard,inothercircumstancesthismaterialraisedstockprices.Articlep.551Discussionaboutwhyweneedrule10b-5.CASESECv.Zandfordp.553•Hesoldstockandkeptmoneyandalsowrotechecksagainstbrokerageaccounts(whichcouldn'tbecovered)andthensoldstockstocoverit.•Courts-isthisinviolationof10b-5basedonbeingconnectedtothebuyingandsellingofsecurities•Yeshisfraudviolates10b•Appealscourtsaysno-theythinkthathestolemoney•SupremeCourtstatesonp.555-CASEBasicInc.v.Levinsonp.558•1977&1978therewerethreestatementsmadebyBasicdenyingmergernegotiations.•12-18-78:BasicaskedNYSEtosuspendtrading•12-19-78:Basicboardapproved$46offerfromcombustion•12-20-78:Basic'sboardmakespublicannouncementofapprovaloftenderoffer•Broughtbyplaintiffswhosoldsharesbetween1977and12-18-1978•Canthesestatementsbefalseormisleadingandinviolationof10b-5?•Courtssaidnobecausethestatementsare•FraudoftheMarketTheory-youbuyorsellsharesbasedonamarketpricethatisquotedisdecidedbythemarketpricewhichreactstodeceptiveinformation?•SupremeCourtwillhearthecaseandwilldecideonstandardofmateriality.•P.560S.C.states:adoptaproxystandard•Itisacasebycasebasiswhetheror•FraudoftheMarketpricetheory一oRelianceisanelementof10bbutthereareothersubstitutes(p.563)

64•Needtoreadandunderstandbecausehecoveredittoofasttotakenotes.•Summary:oInfoaboutmerger-thosebecomematerialonacasebycasebasisoFraudofthemarkettheoryisnowthelaw•Dissent:oDoesnotunderstandintegrityofthemarketpriceCASEVerifoneSecuritiesLitigationp.567•Verifyingthatfraudofthemarketisagoodtheory.p.576-Doctrineofforwardlookingstatements•Section21E(c)(l)-oExampleaboutwidgets-nextyearyouwillhave$10minsalesoWhatyoudon'tdiscloseisthatyouaresellingyourmachines-thiswouldbeaviolationof10b-5oButyoucannotsuebecauseofapositivelookingprediction.CASEChiarellav.UnitedStatesp.580•Chiarellaprintedannouncementsofcorporatetakeoverbid.•Heworkedoutasystemtofindoutwhothecompanythatwasbeingtakenoverwasandhewentandboughtshares.•SECfiguredoutwhathewasdoingandmadehimgivebackthemoney.•Thenhewasindictedon17countsofviolatingsection10band10b-5•Wehavetolookatwhathereallydid.Hejustkeptquiet.o10bdoesnotreallyaddressthesilencequestion.oCourtgoestogenerallaw-itisfraudtofailtodisclosematerialinformationwhenyouhaveadutytodoso.Butwhendoyouhaveadutytodoso-ifyouareafiduciaryorinapositionoftrustandconfidence.oInorderforthistoapplyyoumustbeanemployee.oSilenceviolates10bifitoThedefendantwasnotaninsiderandreceivednoconfidentialinformationfromthecompany.oViolatinginformationaboutthecompanytotheacquired•Theyhold-thedutytodiscloseunder10bdoesnotariseundermerepositionofnotpublicinformation.

65RULE14e-3handout•Chiarellaviolated14e-3Abuttheydidn'teventrytogoafterhiminthisway.CASEDirksv.SecuritiesandExchangeCommissionp.588•DefendantisanofficerinabrokerdealoHewritesaboutinsurancecompaniesforinvestors.•Theysaidthatheviolatedrule10band10b-5-byrepeatingtheinformationtoinvestors•Itdoesn'tmatterhowthetippeegottheinformation.•Hedidn'treallyprofit(manipulationordeception)•Theremustbeabreachofthefiduciarydutybeforetheinformationisreceived.CASEUnitedStatesv.O'Haganp.598•DiffersfromChiarella-becausethisisviolatinginformationaboutthecompanyacquiring.•SupremeCourtoP.600Handout10b5-2:•Whowouldbeatippee?BLAW53304-17-07CHAPTER10:InsiderTradingHandout10b5-2:•Whowouldbeatippee?10(b)⑸:ListHEREIntentmatterswith10(b)5!Scientermatters.10(b)(5)-isviolatedwithinsidertrading-Ithink.Section16(b)HANDOUTSECof1934Directors,officersandprincipalstockholders.(a)requiresonlycertainpeople(officers,directors,morethan10%ownersofshareholders)mustfile

66withSECandeverymonthmustfilechanges.(a)Thissectionactsoninformationgivenin16(a)a.Ifyouareoneofthesepeopleinacompanythatisrequiredtogivemonthlyreportsthenwithin6monthsofeachotherifyouhaveanysalematchedupwithapurchasethatamountsinagainthenyouhavetogivethatmoneybacktothecompany.Article-reportingrequirements(p.613)Whydowehavethisrule?1st,itwastoremovethetemptationofthemtoprofit,andtopenalizethosewhouseitinsuchaway.Anduseinsiderinformation.Andsothattheywilltakeactionbasedonthelongtermhealthofthecompany.Thissectionisanadjuncttotheprincipleofinsidertrading.EXAMPLEof16(b)•2003purchase1000sharesfor$100/share•Jan2007sell600sharesfor$80/share•April2007purchase500sharesfor$70/shareWould16(b)operatehere?•Thesharesdonothavetobethesamesharesthatatpurchasedandsold•6monthseithersideofthesale•16(b)wouldoperate-becauseofthetimeframeandtheprice-youneedtogive$10asharefor500shares($5000wouldhavetobegivenbacktothecompany)EXAMPLEof16(b)•1-1-06purchase1000sharesfor$100/share•4-15-06sell600sharesfor$125/share(gain600shares@$25)•6-20-06sell400sharesfor$90/share•9-10-06purchase700shares@$75Point:•Possibletofindmorethanonepurchasein6monthtimeframeoYoumatchthosesellsandpurchasethatwillachievethegreatestamountofprofit•Inthisexamplematch4-15-06salewith9-10-06purchaseo600sharesat$50=$30,000ofprofitthatwouldhavetogobacktothecompany.•Next:matchup100share(leftover)from9-10-06purchaseto6-20-06sello100sharesat$15=$1500ofprofitthatwouldhavetogobacktothecompany.Theruleisbroadbutthecourtssaythatitneedstobethatwaytohelpcatch.CASE

67Gratzv.Claughton(1951)p.614•challengeconstitutionalityof16(b)•whendirectorsorofficersarepurchasingorsellingsharestheyviolatetheruleoftrust•haveafiduciarydutytobuyersbecausetheywillbecomeshareholders•Thiswholecasejustifiestherule16(b)oKEY-intentdoesn'tmatter•Ifthereisuncertaintyaboutextendofthemater-thewrongdoerisliable•Ifyouhaveasale-gobackandforwardforsixmonthsandseeifyoupurchasedforless一therulehasbeenviolatedaslongasathepersonfitsthecriteriaidentifiedaboveKernCountyLandCo.v.OccidentalPetroleumCorpp.621Exceptionthatdevelopedinthelaw•DidthisruleapplytoOccidental•Nobecausethistransactionwasunorthodoxbecauseitwasatenderoffer•Thereforerule16(b)doesnotapply.CASEDiamondv.Oreamuno(1969)p.624•Officersanddirectorssoldsharesbeforeothersbasedonsomenews(costsincrease,netearningswentdown)oChairmanOreamunoandGonzalessold56,500atmarketpriceof$28oWhennewscameoutpricewentto$11-thenewpurchaserswerescrewed•Didtheyoweanydutiesofloyaltytotheshareholders?•Caseunderstatelawbecauseo16(b)didworkbecausetherewasnopurchase.•Lowercourtsheldinfavorofdefendants•Appealsforplaintiffs•NowatAppealsCourt•DefendantsworryaboutdoubleliabilityoCourtssaytoughoYouneedtointerplead-haveallshareholdersinwhoaregoingtocomein•P.629quote:oRealizethatitisaviolationof10(b)(5)buttheydidn'tknowwhatwouldhappenwiththatbecauseitjusthappenedoSotheywentunderstatelawoNoteafterthistheystartedprosecutingcriminally(chiarella),FraudonMarketTheory.•P.630-usestate

68•Bottomline:statelawheldtheseofficersanddirectorsliableforbreachoffiduciarydutytothecompanyandtheshareholders.(Federallawsaysthattheydonotoweanydutytoloyalty)CASEMalonev.Brincat(1998)p.631•Classactionsuite•Billionsofdollarslostandcompanywaslyingaboutit-FraudofMarketandinvolve10(b)(5)•BringingunderstatelawofDelaware.•Shareholderssaythatcompanyisvirtuallyinsolventnow•Lowercourtssaidnofiduciaryduty•NowSupremecourtp.633oKey:ThedirectorsofDelawarecorporationsstandinafiduciaryrelationnotonlytothestockholdersbutalsotothecorporationsuponwhoseboardtheyserve.Complete360degreechangeofwhatweencounteredatthebeginning.Statelawsaysthatyouareliableunderfederalandstatelawifyoudon'ttellthetruthtoshareholders.CHAPTER14ThePublicDistributionofSecuritiesp.876Whyisitthatwehavethesesecuritieslaw?•LackofinformationaswellFederallawwasenactedtohelpcurepartofthelaw.Havetofilearegistrationstatementthatincludesthefollowing:p.877WhatcanyoudowhileyouarewaitingfortheSECtotellyouthateverythingisok?RegistrationofSecuritiesasfollows:•PrefilingPeriod(donothingperiod)-beforeyoufileoCannotsellsecuritiesoCannotofferoCannotconditionthemarket(withPRoradvertisingwhichwillcreateafavorablefeelingaboutyourcompany)oCanreleasetrue,factualinformationthatisnewsworthy-newdiscoveries,changesinofficers.•WaitingPeriod(doalittleperiod)betweenfilingand20dayoCanmakeoralofferstoselloDistributeapreliminaryprospectus(excludingprice).Nicknameofredherring

69oIssueasummaryprospectusoCanplacetombstoneads-theannounceacomingstockofferingwhichdescribesthesecurities•PosteffectivePeriod(doeverythingperiod)-after20daysoClosesalesoCansolicitednewoffersandsalesoMustgiveafinalprospectusWhatisitthatqualifiesasbeingasecurity?P.882•Investmentismadeandtheinvestordoesnotneedtodoanythingelse.Youdependonotherstodothework.oStockisaclassicexample(dividendsandreturns)•Whatare?Stocks,Interestsinoilandgas,L.P.,oAnywherewhereaninvestorplaysapassiveroleandletsothersmakethemoneyforthem.oHowiecase-orangegrove.HedidnotregisterhisparticipationinSE•Whataren't?GeneralpartnershipsCASERevesv.Ernst&Youngp.883•Wheretheinstrumentsofferedbytheco-opconsideredsecurities?•Theyofferednotestorepayafteraperiodoftime.•Offeredto23,000membersandalsotogeneralpublic•Noteswereuncollateralizedanduninsured•TheybelievethatE&YfacilitatedthisofferingoCantheybeheldliable?•Important-notesofferedtononmembersandmembers•BroughtagainstArthurYoung-antifraudprovisionsofSEA•Theirdefenseisthattheywerenotsecurities•p.884Familyresemblancetest-SupremeCourtadoptsthis•Notesthatarenot-p.885canthisnotehavea/zfamilyresemblancetothose?•P.885-examinationoWasthesellertryingtoraisemoneyforbusinessoWasthebuyertryingtomakeaprofitoCouldtherebetrading(yestherecould)oDoesthepublicconsideritasecurity?oIstheinstrumentregulated(no)•Courtsconcludethatitwasasecurityp.886oSoldnotestoraisecapitalCASESecuritiesandExchangeCommissionv.Edwards

70p.886•Investmentopportunitytobuyapayphoneandthenleaseitbacktotheoperatorandthentheoperatorwouldoperateitandguaranteea14%return,(interestrateswerealotlowerthan14%)•WasthisasecuritythatneededtoberegisteredundertheSEact?•Doesitmakeadifferencethattherewasaguaranteedrateofreturn?•P.887-violatedtheregistrationrequirementof5(a)(c)-•Appealscourtoverturnedit.oItwasnotduesolelytotheeffortsofothersbecausetherewasacontractualrighttothereturn.o(seemsillogical-14%doesn'tjustfall)•AppealedtoSupremeCourtp.887oDefinitionofsecurityisbroadbutitskeyisInvestmentKey-lookingtootherstogeneratetheprofitsp.888•/zthereisnoreasontodistinguishbetweenpromiseoffixedreturnsandpromisesofvariablereturnsforpurposeofthetest,sounderstood”p.889-Howeycaseagain-regardingfixedrateofreturns-FixedrateofreturnhasalwaysbeunderstoodthatitcouldbeasecurityHerethereturnwastocomesolelyfromtheeffortsofotherssoitshouldhavebeenregisteredwiththeSEC!Section5page891Ifyouaregoingtomakeandofferinganduseinterstatecommerce-thenifitisasecuritythenitmustberegistered.Broadrule.Cometoquestion-Couldtherebeexceptions?Registrationsthatwerenotfullblownorexemption-YESThisisasimplifiedoffering:•RegulationAoQualifyifyouhavenomorethan$5MannuallyofsecuritiesoMustfileofferingstatementoGiveinvestorsanofferingcircularExempttransactions:•Rule147(SECrule)-intrastateofferingexemptionoIssuermustbeincorporatedinaparticular

71stateo80%ofrevenuesmustcomefromthatstateo80%ofproceedsmustbeusedinthestateo80%ofpurchasersmustbearesidentofthatstate•RegulationDoRule504-canissueupto$lm,notimelimitoRule505-canissueupto$5mtounlimitednumberofinvestors(ceilingonamount).Plus35orfewernon-accreditedinvestors.•Whoisanon-accreditedinvestor?•Accreditedinvestorsare(moneyorknowledge)•Naturalpersonswithanetworthofatleast$1million(nocorps)•Naturalpersonsearning$200kperyear,haveearnedthatforthelasttwoyearsandwilldoitagain.Ifmarried$300k•Anycorporationorpartnershiportrustof$5mormore•Insiders•Institutionalinvestor•Largemutualfunds,etc•Proposalforthesenumberstobeincreased.oRule506-anyamounttounlimitednumberofaccreditedinvestors+35orfewernonaccreditedinvestorswhohavefinancialexpertise.(Privateplaceexemption)•Becauseweraisedthestakes-mainlysellingittopeoplewhoknowwhattheyaredoing.•CanbeaprofessororemployanaccreditedinvestorwhodoesitforyouInthebroadschemeofthingsyouhavetoregisterbutthereareexceptions!Arethereanysecuritiesthatdonothavetoregistered?Yes,•Governmentissuedsecurities-savingsbonds,countybonds,shorttermnotes(lessthan9months)•SecuritiesissuedbyNonprofits•Securitiesissuedbyfinancialinstitutions•Bycommoncarriers(RR)•Stockdividendsandstocksplits•Insurance•SecuritiesissuedinexchangeofacorporatereorganizationThereareresalerestrictions.Themaximumis2years(505&506)sothatyoucan'tmakeaquickprofit.Thesecuritiesaremarkedasrestrictedandtheywon'tberecorded.Othersdon'thavethesamewaitingperiod.Ifyouhavemultipleofferingsthatcanaddthemtogetherandyoumightexceedyourlimit.notrequireintent-justnegligence)Section11ofthe33act(does•Ifyouparticipateintheissuanceofsecuritiesandyoucauseamisstatementyouareliablefor

72damagesthataninvestorsuffers-•Theplaintiff(whosuffers)onlyhastoshowthatthereisamisstatementormaterialomission.Hedoesnotneedtoshowacauseandeffectbetweenthetwo.(alsotheruleforproxystatements).Adoptedthesametest-substantiallikelihoodthattheinvestmentwouldharmthein•Liableanyonewhosignsregistrationstatement!•DEFENSE-duediligencedefense-thatyouhadreasonablegroundstobelievethatthestatementsweretrue.Theburdenisonthedefendanttoprove.•DEFENSE-canshowthatthestatementsdidnotcausetheloss.TheburdenisonthedefendanttoproveCASESECv.RalstonPurinaCo.(1953)p.892•Privateplacementcase•Soldtoavarietyofemployees•Thecompaniesbelievethattheyareentitledtoanexemption.•Courtstates:oPublicofferingdoesnotneedtobemadetowholeworldoApublicofferingcanbetofewormanyoThey"people“needtheact.oIn1934whentheprivateplacementexemptionwasenactedapossibleexceptionwasputforwardtotheexemptemployeeofferings-itwasrejected.oBurdenofproofisonissueroKey-theneedoftheoffersfortheprotectionofregistrationCASEDoranv.PetroleumManagementCorpp.896•Thego。仔theideathatthelargerthenumberofoffereestheprobabilitythatitneedstoberegistered.•TheemployeemayhavesophisticationbutifhedoesnothavetheinformationtogooffofthenheisnobetterthanotherpeopleSomakingstockofferingstoemployeesisstillbeingdeterminedbutyoushouldgivethemtheinfo.Page935-section11actCanbeapurchaserfromthemarket-hecansuetheofficersanddirectors

73BlueSkylawsP.936•StatelawsonregistrationpriortotheSEC•UsedtobeaduallawbutnowFederallawtakesprecedent•Somefeeforstateregistration(whichisalltheyreallywant)•Canrequireregistrationforsecuritiesthatarenotcoveredinsection18Discussionaboutunderwritingprocess-involvesbanksandinvestmentbanks.The1934act(covers10b-insidertrading-16b)•Reportingrequirements•MustregularlyreporttoSEC•Appliestocompanieswithassetsofmorethan$10mand500shareholdersoriftheequitysecuritiesaretradedontheexchange•Mustfileanannualreport(10K)•Quarterlyreport(10Q)•Monthlyreport-whensomethingmajoroccurs(8Q)CHAPTER11DerivativelawsuitsanddirectsuitsDerivative:companywon'tactsoyousue•Youmustownshareswhenwrongoccurred,•Youhavetogototheboardfirsttoseeiftheywillbringthelawsuit.Theyhaveaperiodoftimetorespond.Theyoftengotocourttoaskyoutogoaway.Youcanalwaysappealthat•Iftheboarddoesnotdoanythingthenyougoaheadinthenameofthecompany-proceedsgotothecompany.•Ifyoucanshowthatthebadguysarethedirectorsthanyoudon'thavetoasktheboardtosuethem.(Caremarkcase-whetheraderivativelawsuitshouldbesettled)Ifthecorporationiscloselyheld(fewerthan35shareholdersandnottraded)Thejudgecantreatthederivativeactionasanindividualoneandtheprofitswillgototheindividual.Ifitisnotaderivativelawsuit-itisadirectsuit•Maybebecauseheisnotgettingdividends

74•Youaren'tallowingmetolookatthecorporatebooksandrecords•Heisbeingbroughtout.•Heclaimsthatheisbeingdirectlydamagedbythecompany•HeisnotabletovoteBLAW53305-1-07(noclasson4-24-07)CHAPTER12:StructuralChanges:CorporateCombinationsandTenderOffersp.727-735,736-737,739-746,749-771,775-801,813-815,850-853•AmendmentofArticles•ReductionsofcapitalooReducetonoparshares(allocatelesscapital)•Merger,ShareExchangeorConversionoConversion:Decidetobecomeadifferenttypeoforganization(5.17)twocompaniescometogetheroConsolidation:A+B=CoMerger:whollynewcorporation,A+B=AoShareExchange:A-B-sharesgotoAanddissolvesorBbecomesasubsidiaryofA•VoluntaryDissolution(if100%oftheshareholderswanthisthentheyboarddoesnotneedtoapprove)•InvoluntaryDissolution•SaleortransferofsubstantiallyallassetsotherthantheregularcourseofbusinessoCompanywhomakesthingssalesallofthemachinesusedtomakethemBasically,itisatwostepprocess.Youneedtheboardofdirectorstoproposeandvoteonit(accordingtothenormalmajorityforum)Secondlytheshareholdersmustpassit(ifthe)2/3ofthequorumisstandardbutwiththesefundamentalthingstheshareholdervoteisrequiredtobe(inTexas)2/3ofoutstandingshareswhichismuchmore.AppraisalRemedy(typicallycomesupwithmergers)•Youwereashareholderinaparticularcompanyandyourcompanywasboughtout•ShareholdersinbothAandBcompanieshavetheserights•Alsocalledthecentersrights.

75Procedure:•Fileanobjection•Mustnotvoteforamerger•DemandfairvalueforyoursharesoCanbeadifferentopinionaboutwhatthatis•Onceyoudecidetotakethisrouteyouarenolongerashareholderandcannotvote.Youcansellyoursharesbutthatpersongetsyourrightsasis.DEFACTOMERGERS•UCorp.entersintoatransactionwithICorp,(soles/h)•Uisgoingtogive40%ofstocktoIinexchangeforallofI'sstockgoingtoU.oTheonlysurvivorisUcorp.•Wouldthatgiverisetoappraisalrights?oTechnicallyitisnotamergerorconsolidationbutactuallyinarealcasethiswasconsideredamergerandthesurvivingcorporationisI(eventhoughithasadifferentname)soshareholdersofUCorpareentitledtoappraisalremedy.SmallScaleMergersp.733-734Texas5.03g:Lessthan20%oftheShort-FormMerger:p.734(TX-74)•Youhaveaparentcorporationandtheyownatleast90%ofthesubandtheparentwantstoacquirethesub.•Onlytheboardofdirectorsneedtovoteonthis(nottheshareholders)•Shareholdersofthesubaretheonlyonesentitledtoappraisalrights.Merger?Theywillhaveappraisalrights.ThecourtswilldeterminewhetherornottheyareactuallymergersExample1•AgivesstocktoB,BsalesassetsinreturntoA.•AstockisthendistributedtoBshareholders•ThenBisdissolvedExample2

76•AstockgoestoB•BshareholderssalestocktoA•BbecomesasubsidiaryofACASEFarrisv.GlenAldenCorp.p.739•GlenAlden(coalmining)-incorporatedinPAoLawstatesthatnowdissentersrightsincompanypurchasingassetsoShareswentfrom$38to$21afterrestructure•ListIndustriesCorporation(diversifiedholdingcompany)-DelawareLawoLawstatesnoappraisalrightsforshareholdersofcompanysellingsubstantiallyallofitsassets.oShareswentfrom$7.50to$21•ListI-transfersassetsandstockstoGlenAlden•GlenA-transfersstocktoList(3,621,703)•TheGlenAldenshareholdersdidnothavepreemptiverights•AfterthathappenedListIndustriesdissolvedandtheydistributedGlenAldenstocktotheshareholdersoItwasbasedon5sharesofGAstockforeach6sharesofliststock.•Newname:ListAldenCorporation''•QuestionoIsthisamerger?oWouldtheyhaveappraisalrights?■Itappears•ShareholdersofGlenAldenobjectedtothisandthinkthattheyhadamerger.oTheyshouldhavehadappraisalrights•Thecourtssaythatthetestofamergeris-hasthecorporationlostitsessentialnatureandalteredtheoriginalrelationshipoftheshareholderstothecorp,changed.Istheplaintiffforcedtogiveupsharesinonecorp,fortheexchangeoftheother?oCourtsdeterminethatthiswasamergeroShareholdersshouldhavebeennotifiedandgivenappraisalrights•Page745tellyouwhytheymighthavestructuredthe"merger"thiswayoTopreventshareholdersfromhavingappraisalrightsoGAhadataxlosscarryoversotheyhadtosurvivesothetaxlawscouldgoforwardoChiefassetsofGAwerecoalreservesandthatwouldhaveresultedinalargetaxiftheywerejusttosalethemtoListFreezeoutsp.749DissolutionFreezeout:Example1(mergerbetweenC&S)

77oCsalesassetstoS(ownerofCowns100%ofS)oCdissolvesoShareholdersown70%o$ornotestominS/Hs(ofC)oCanhedothis?YestechnicallyExample1(saleofassets)oCcompanysellsassetstoT(owns100%ofC)oTgivesnotestoCExample2oCcompany-mergeswithToTgivesCshorttermdebenturesorredeemablestocktoCoTcashedoutwhendebenturematuresorpref,stockredeemedExample3oTgives$toCoCmergerswithTo$tominS/HofCCASEWeinbergerv.UOP,Inc.p.750•SignalCooAcquired50%ofUOPs,Inc.•NowtheywanttobuyoutUOPandtheywanttheshareholderstoacceptthisbuyoutandtheprice.•SignalneedstheBoardtoagreeoTheboardisconflictedo6outof13directorswereelectedbySignaloPresidentofUOPwasadirectorofSignalbeforeoSomedirectorssatonbothboardsoWhatsomeofthedirectorsdidn'tknowwasthattheytherewasastudythatstatedthattheycouldpay$24ashare(gooddeal)buttheylowballedthemandstatedthattheycouldonlypay$21•Differenceof$17million•Returnontheirpurchasewouldhaveonlygonedown2%points(insignificantdifferencetosignal)•CourtssaythatthiswasnotfairbecauseSignalwasnotbeingfairandgivingthefulltruth.Theyhidfactsfromtheentireboard.

78•Doestheshareholderwhowantstocashouttheminorityhavetohaveabusinesspurposeforthis?Delawarecourtssaythatnotheydonot,theycansimplycashthemout.CASECogginsv.NewEnglandPatriotsFootballClubp.765•Heretheydemandedthatthereisabusinesspurpose-notjustbecausesomeshareholdersaregivingyouahardtime•SoinMAyouhavetohaveabusinesspurposeforcashingoutminorityshareholdersCASEGlassmanv.UnocalExplorationCorp.p.766Short-FormMerger•Unocalowns96%ofUXC•Unocalgaveallrequiredinfotoshareholdersasrequiredbylaw(valuation,financials,etc)•Someminorityshareholderssaidno,inthiscasetheparentisheldtoahigherstandardoffulldisclosure•Courtssayno,thatisingeneralmergersbutinshort-formmergersoWholepurposeistomakeiteasyandwithjustthevoteofthedirectors.oOnlyshareholdersofsubsidiaryhaveappraisalrightsoAslongastheygaveyouallthefinancialinfoandhowtheyvaluedthesharestheywereintherightpositionoDoesnotgivetheparenttherighttoengageinfraudorillegalitybutthatisaboutit.•Remedyisthattheyeitheracceptthepriceofferedordeclareappraisalrightsp.774TenderOffen:bypasstheboardandtrytakeoverthecompanybyathirdpartyMakeapitchtoshareholdersandacquirethecompanythatwayinsteadofgoingthroughamerger.ResponsethattheBoardofDirectorscanhavetoatenderoffer-towardo仔atakeoverKnowtheterminology•Raider•Whiteknight

79•Lockup・Poisonpill(p.777):boardvotestogiveexistingshareholderstherightstobuyadditionalsharesatalowprice.Tomakethetakeoverharderandhopefullymaketheraidergoaway.WilliamsActp.779•federallawtotryandregulatetenderoffers•ifyouareacquiringatleast5%ofthecorp,youmustgiveyourpurposetotheSEC(intentionsofacquiringcompany)•Newlaw:Hart-ScottRodinoAntitrustImprovementsAct(p.779)•P.782#5-Obligationsofthetarget'smanagementCASEUnocalCorp.MesaPetroleumCo.p.783•Mesaistheraidercompany•Mesahadalreadyacquired13%ofUnocal-andreportedtheirintentionstotheSEC•MesamadeatenderoffertotheshareholdersofUnocalo1sttier:$54pershareuntiltheyget37%o2ndtier:giveshareholdersofUnocalhighlysubordinated(risky)junkbonds-waydownthelistofcreditorrights.oTryingtocauseastampedeforshareholderstosaletheirshares.•UnocalBoardmeetsandtheydecidedthattheyaregoingtohaveadefensivestrategyoMakeaselftenderofferat$72ashareoIfMesaacquires37%Unocalwillbuyremaining49%fordebtsecuritieswithavalueof$72ashare(givebetterdebtsecurity)•Additionalfactorthattheythrewin:oTheysaidthattheywouldnotmaketheofferwithMesa•MesasaidthatUnocalhavetohavefiduciarydutiestothemaswell.•ThecourtagreeswithMesathatheydoduecareandloyaltybutapartfromthistransaction!oMesasaysthatweshouldnotbepenalizedforusingcorporatedemocracyoUnocalboardwasnotdoingthistoperpetualthemselvesinoffice.oTherewasnolackoffailoTheCourtsrejectMesa!•Mesasaysthatyoucan'tdiscriminate•DelawareLawsaysthatyoucanselectivelyrepurchasesharesoGreenMailexample(p.790)Isthisstillthelawtoday(undertheWilliam'sAct)?Answerisno-

80p.781All-holdersRulep.794OthertypesofdefensivemeasuresCASEUnitrin,Inc.v.AmericanGeneralCorp.p.794•Weretheygettingintotheareaofentrenchment•Orweretheytryingtoprotecttheshareholders•Wasdefensedraconian?oIfitisnot,wasitinarangeofreasonableresponse•Courtsconcludethatitwas,theyweredoingthisingoodfaithanddidnotfeellikeitwasgoodforshareholderssotheywerepurchasingsharestoprotectthemBlessedPoisonPillsp.797p.798Carmodyv.TollBrothers,Inc.•DeadHandPoisonPills•Courtsdonotfavorthesebecausetheyaredraconian.oLookateternalstrugglebetweenboardandshareholdersoThisinterfereswithshareholdervotingrights-becauseanynewdirectorselecteddonothavethepowertoredeemthepillsandthereforetheshareholderscannotelectanydirectorsthattheywant.•Onlytheboardthatadopteditcanredeemit.p.813•WhenitbecomesclearthatthecompanyisgoingtobeacquiredthenperhapstheBoardofDirectorsshouldbecomeauctioneersandlookforthebestdeal.Thisbecomestheirdutytotheshareholders-notnormalbusinessp.850•Therearestatelawsthatgoverntakeovers•Question-youcanhavestatelawsbutthecannotinterferewithfederallaws•TheylookatstatelawstoseeiftheyviolatetheWilliamsActorothers-•Edgarv.MITECorp.oExampleofalawthatwasheldtobeunconstitutional-itviolatedtheWilliamsAct

81VoluntaryDissolutionInvoluntaryDissolution:(TEXAS)•StateoAttorneygeneral■Ifthecorp,failedtocomply■Committedfraudwhensecuringarticlesofincorporation■Doingbusinessbeyondthescope■LyingintheirdocumentsandreportsoSecretaryofstate■Issueanadministrativeorderafterhegivesthecorp.90daystocorrecttheiractions:doingsomethingsimilartowhattheAGthinks•Ifcorp,isdissolvedandpayfeetheycanbereinstated•Officers,directors,andagentsareliableoController■Forfeitcorporateprivilegesforfailuretopayfranchisetax■Meansthatyoucannotusethecourtsandeachofficers,director,andagentsareliablepersonallyfordebts•Shareholders(7.05a-p.84)oTheyhavepowertobegintheprocessofdissolution•CreditorsoCanbringanactionforinvoluntarydissolutioniftheyarenotgettingpaidoThehavetogotocourtAfterthereisdissolutionthereisaperiodoftimeforwhichthecompanycanstillbesuedorbringanactionforward:3years.Itisneveragoodideatosimplywalkawayfromacompanyandnottakeformalstepstodissolvebecausefranchisetaxescontinuetoaccrueandyoucouldfaceinvoluntarilydissolutionandyouwillbepersonallyliablefordebtsofthecompanyforaccruingtaxes!CHAPTER13:LegalCapitalandDistributionp.854-875Distributions:dividendsorrepurchasingsharesFromwhatsourcescanthecompanydothat?Dividends•Shouldnotcomefromstatedcapitalaccounts(thereforcreditors)oThereisanexception:•Eliminatefracturalshares

82•Tocollectorcompromiseindebtedness•Topayshareholdersappraisalrights•Toeffectthepurchaseorredeemableshares•Shouldonlybepaidfromsurplusaccounts•Shareholdersdonothavea“right"toadividend•Righttodividendwhensharesaresolddependonthecircumstance•Companymustbesolventwhenyoumakethepaymentsandaftertheyarepaid•Paymentscannotviolatearticlesofincorporation•Directorsthatvoteforanillegalpaymentcanbesuedbythecorp,andthoseshareholderscanbemadetogivethatback•Cashdividendscannotberevokedunlesstheywereillegalorwouldmakethecompanyinsolvent•Commonshare:entitledtodividends•Preferredshareholders:entitledtosetpaymentandsometimestheycangetadividendoPaymentscanbecumulativeornoncumulativeCASEKlangv.Smith'sFood&DrugCenters,Inc.p.863•CompanycreatedsurplusaccountsbyrevaluingassetsandpumpedthecompanyuptolooklikecanpayadividendoTrueaboutabalancesheet:itishistoric?•Delawarecase-courtssaidyesyoucandoit.Ithastobeingoodfaithandyoumusthavesomevalidbasisforit.oNoteverystatedoesthisNimbleDividends：read：P.869•Havenosurplusbutyoudohaveacurrentprofit,canyouusethismoneytopaydividends•Answerisyes!Butnoteverystateagrees.•Why?oTheyhavepreferredshareholdersmightneedpaidoAttractionofnewshareholders,mightaffectthemarketvalueofyourcompanyWhenacompanywantstorepurchaseitsownstockp.875•READ•Exception:whereyouarebuyingthesharesforacertainspecifiedtargetpurpose!oListedonp.875

83•Insidertradingforward•10-b-5•Hongkongcompany-oralsale•Isitaperkofyourpositiontouseinsiderinfo•Levinsonvs.basic•Tipee•Goodwinvs.agassee•Securitydefinition.•Mechanicallywhenyousellasecuritydoyouhavetogiveaprospectustoabuyer•Section11•1933securitiesact•Blueskylaws•Recentchangein1996regardingstocksales•Testforbringingderivativeactions•Oncethederivativeactionisfiled....canitbesettledbytheparties•KnowthebasicthingsforwhichyouhavetohaveboardapprovalandshareholderapprovaloWhatisthetestforthesefundamentalchanges...•Defineamergerandconsolidation•Mergers—rememberthatbothshareholdershavetoapprove•Appraisalrights...whendoyouhavethemornot....havethemwithmergers/consolidations/saleortransfer•Fairvalueforappraisalrights---isthevaluebeforetheannouncementofthemerger.•KnowdefactomergeroWhoarethepartiesthatcanbringaboutthevoluntarydissolutionintexas•Atleast90%threshold•Tenderoffer—mergeroOutsidepartygivingtoshareholders•Allholdersrule•Poisonpill—legalornot•Statescanhavelawsthatregulatecorporatetakeovers...williamsact•Shareholderreceivingillegaldividendhastogiveitback•Nimbledividends-permittedbysomestates•Createsurplusbyreducingcapitaladpaydividendsoutofthat•Reacquiringyourownshares-rules•875#2-YEScertaincategorieswhereyoucandoit