111 summary slides from prof

8/8/2019 111 Summary Slides From Prof

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Agency Law

Core of All Business Entity Law

People Act on Behalf of the

Business to Bind the Business inRelationships with Third Parties

Course Starts with Simple AgencyRelationships

Separate Contract and Tort Cases


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Creation of an AgencyRelationship

Consensual (Contract)

Oral or Written (manifestation of consent ofone and consent by the other)

Express or Implied Ex Ante (Before the Act) or Ex Post

(Ratification; After the Act; relates back)

By Matter of Law (Equity)

Apparent Authority (Constructive)

Authority by Estoppel (Cannot Deny)


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Termination: General Rules

Default Terms: Terminable At Will of Either Party

Otherwise End of Reasonable Term or When SpecificAct Performed (or on Violation of Duty)

If Parties Stipulate a Set Term (by Time or byTask)

Either can Breach (Principal Revokes; Agent Renounces)

Remedy Limited to Damages (No specific enforcementby injunction) Policy??


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Agents Liability on Contract

General Rule: Agent not liable oncontract executed on behalf ofprincipal

Exceptions: Partially Disclosed (UnlessOtherwise Agreed) or UndisclosedPrincipal.

Atlantic Salmon v Curran: Agentliable when no disclosure of specificidentity of principal.


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Agents Fiduciary Duties

Supplement Express or Implied Contractual Terms of theAgency. Default Terms or Gap Fillers Rest. (2nd) 376.Agent is a Fiduciary. Rest. (2nd) 13.

Duty of Care. Rest. (2nd) 379 Standard (reasonable) Care and Skill for Task and Profession

Obey Directions; Act only as Authorized

Duty of Loyalty. Rest. (2nd) 387 No Conflicts of Interest. Rest. (2nd) 388-395

Account for Profits

Duty of Candor. Rest. (2nd) 381 Duty to Give Information, Keep and Render Accounts. Rest.

381-382


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Effect of Termination on Agents Duties

Duties of Confidentiality & Loyalty SurvivesTermination. Rest. 396. [written lists/memorydistinction]

Town& County House & Home v Newbery: Ex-employees solicitation of employers customers,

obtained at considerable cost, was a breach of a duty ofloyalty.

[Note Appellate Courts conspiracy theory; en massedeparture]

Partnership Cases: Meehan v Shaughnessy(nextChapter)


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Plaintiffs Problem: Lack of AgentsExpress Authority to Contract.

Principal Bound Anyway.. General Direction Only: Specific Power

Implied in Fact (Hogan). Actual Authority.

Explicit Reservation of Authority Disregarded(Cannot use Implied Authority): Apparent orInherent Authority Explicit Reservation of Authority Disregarded;

Undisclosed Principal: Inherent Authority(Watteau)

Contract Formalities Fail (Authorized AgentDoes Not Sign; Cannot use Actual Authority):Apparent Authority of Employee (Ampex)


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Vicarious Liability (RespondeatSuperior)

Principal Liable for Acts of Employees(Servants)Within the Scope of Employment[Letthe master answer] Even If Principal Does Not

Specifically Order, Direct or Intend Employees Tortious Act

Nor Breach a Personal Duty to the Victim

Limits Distinguish Non-agents/Agents Rest. 1

Distinguish Agent Independent Contractors/ServantsEmployees [Control or Right to Control] Rest. 2, 220

Distinguish Inside/Outside Scope of Employment[Kind,Time, Space, Motive] Rest. 219, 228-32


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PartnershipNot Created by the State (Privately

Created)

Distinguish Sole Proprietorship (one

owner) from Partnership &JointVenture (multiple owners)

Created by State Certificate

Limited Partnership/Limited LiabilityCompany/Corporations


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Joint Ownership: DefaultRules

All Owners (Partners)

Are Liable as Principals RUPA 305 & 6

Are Jointly and Severally Liable for Debts of

the Business

Are General Agents of Partnership(Meinhardcase) RUPA 301

Share Equally in Control RUPA401 (f) &(j)


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Partnership Formation Actual (Real; By Consent): RUPA 201

Affirmative: co-owners of a business for a profit

Negative: Not a tenancy in common,employer/employee relationship (soleproprietorship), lender/debtor relationship

Factors: sharing of profits (notgross returns)[Proxy for control??]

By Law (Implied in Law; Equity: Partnership by

Estoppel (Holding Out) RUPA 308


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Partnership Governance

Default Rule: UPA 401(j). Majority ofpartners have the power to make allbusiness decisions within the ordinarycourse of partnership business.

Minority, dissenting partner cannot opt out,even by informing third party of her dissent

Third party cannot rely on authority ofminority, dissenting partner to bind partnership

[problem: apparent authority]


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Partnership Property

Default Rules: Partnership Holds Property as an Entity Separate from

Partners. RUPA 203

Partners Property Rights. RUPA 501: (1) right to use specific partnership property (RUPA

401(g), tenancy in partnership ?),

(2) owns a partnership interest (RUPA 502, personalproperty)

(3) right to participate in management

Case: Putnam v Shoaf. Legal Claim for

embezzled funds. Did exiting partner have aninterest in the claim?? Held: No. Partner can onlyconvey interest; legal claim a partnership asset.


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Partnership Dissociation,Dissolution, and Liquidation

RUPA Terms: Dissociation/Dissolution/WindingUp/Liquidation

Default Rule for At Will Partnership RUPA801(1): Any partner can walk and force

liquidation absent other circumstances(partnership agreement/ bad behavior). Duty of Confidentiality; Duty to Account Survive

Default Rules a Problem for Modern Business (too easyto leave (no capital lock up). Remaining equity owners

must reconstitute business.


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Distribution Problems: DefaultRules (UPA)

Marshall Cash. Pay Cash in Order, UPA40(b) to

(1) Creditors

(2) Partners on Loans

(3) Partners for Capital Contributions

Partners Equally for Split of Profits

What if there is a deficiency in 1,2, or 3?UPA 18(a) & 40(d) Each Partner Pays(Suffers Losses) in Same Proportion asSplit of Profits (Default: Equal Payments).


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Dissociation Wrongful?

Dissociation Wrongful? Not Wrongful: At Will Partnership RUPA 601(1)(no term or

task); Death (7); Bankruptcy (6): Court Order (5) Wrongful:

Breach of Partnership Agreement (even if partnership at will) or Short of Agreed Term or Task

Effect of Wrongful/Not Wrongful Distinction: Can Remaining Partners Continue Partnership?? Or Must

Partnership Dissolve?? RUPA 801. At Will Partnership. Dissociation=Liquidation

Unless wrongful or plus: expulsion on proper grounds by unanimousvote or, on more general grounds, by court order; bankruptcy ofpartner; death or incapacity of individual partner

Special Rules for Term or Task partnership Does Dissociating Partner Pay Damages


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Partners Fiduciary Duties

RUPA 404 only but see RUPA 403 on old Duty of Candor

(Information)

Duty of Care: BJR (gross negligence)

Duty of Loyalty: account; conflict of interest; compete

Adds Duty of Good Faith and Fair Dealing

But RUPA 103. Agreement may not Unreasonably restrict 403(b)(information)

Eliminate Duty of Loyalty except for 1) categories of acts ifnot manifestly unreasonable or 2) cleansing vote

Unreasonably reduce Duty of Care

Eliminate DGFFD but may prescribestandards if notmanifestly unreasonable


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Expulsion of a Partner

RUPA Rules: Partners Want to Expel a Partner,Continue Business No Express Term In Partnership Agreement

By Decree of Court RUPA 601 (5)

Very Limited Circumstances: Unanimous Vote RUPA 601(4) Under Procedure Specified in Agreement. RUPA 601(3).

Note change from UPA 31(6)[bona fide], 38(1), &41(6). But DGFFD in RUPA 103(5) & 404(d).

Case: Lawlis v Kightlinger & Gray. Bona Fide in

UPA?Held: No cause guillotine procedure isbona fide if no wrongful withholding of moneyor property legally due the expelled partner atthe time he is expelled


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Partnership Tort Liability

General Rule: Partnership Liable forPartners wrongful act in ordinarycourse of business or with

authority of co-partners RUPA 305. Indemnification against partner

causing injury? Moren v Jax. DefaultRule. No. Distinguish Agency Law(indemnification against agentcausing injury is default rule).


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Limited Partnerships

New Act: ULPA (RULPA) overlays UPA.UPA applies unless a ULPA provisionchanges the rule.

Holzman v De Excamilla: Limited Partnerscan be recast as general partners if theytake part in the control of the businessof the firm. Note Change from ULPA toRULPA.

Modern Uses: Private Equity Funds(Hedge Funds; Venture Capital Funds)


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What Entity to Use? Small Businesses (Number of Investors is Under 35):

Presumption in favor of an LLC (with a Written OperatingAgreement). If business grows, convert to a C Corporation.Rebutted

by industry specific common practice (VCs as LPs)

if Net Profits are Zero (use a C Corporation)

If heavy retained earnings

Medium to Large Businesses (Likely to be Publicly Held): CCorporation.

Factors, in order: Tax (Double Tax); Attraction to Investors(Limited Liability, et al.); Operating Structure (MandatoryRules do not get in the way; Default Rules require the

least amount of tinkering in written agreement)


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The Double Tax

Firm earns $1.00, tax 35%, keeps$.65

Note: effective rate is around 18%

Firm distributes cash to investors,tax 15%, investors receive $.55.

Note: The Bush tax cut lowered the

tax from 39% (investors receive $.40)


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The Corporate Form Legal Person (Entity) with Indefinite

Life

Limited Liability of Investors

Free Transferability of Ownership(equity, stock or shares) Interests

Centralized, Specialized Management Oversight Board Elected by Equity

Investors


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Creation of a Corporation

Incorporator files an Articles of Incorporation(RMBCA; Ohio) or a Certificate of Incorporation(Del)

Secretary of State Records the Filing; Effective on

Filing Date (unless explicitly delayed) New Corp. Holds an Organizational Meeting to

Adopt Bylaws (Regulations in Ohio) thatEmpower Agents

Analogy: Certificate and By-Laws (const.documents) board resolutions (leg.) exec.decisions (Pres., agency orders)


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Corporate Charter(Articles/Certificate)

Mandatory Provisions Name; registered agent; purpose; authorized

amount of common (voting) stock; Del & Ohio,par value

Discretionary (Customized Optional)Provisions Complex capital structure: Preferred Stock;

Two-Tier Voting Stock Complex Governance Provisions: Board Terms

of up to 3 years, Staggered; Class Voting;Bylaw Amendments by Board or Lower Majority


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Promoter, Pre-IncorporationContracts

Promoter Signs Agreement with Third Party Before CorporationExists (Pre-Incorporation Contracts). Effect? Agency Law Controls: Rest.Ag. 320 & 326

Promoter Liable? No: contract; unilateral offer to corporation Yes: Contract with promoter

For good faith efforts to get corporate adoption Until corporation affirms (promoter then released) Survives corporate affirmation (promoter bound; secondary liability)

But Novation: New contract with corporation replaces old deal(promoter usually released)

Can Unincorporated (Defectively Incorporated) Firm Sue onContract?

Yes: De Facto Corporation (Close Enough) Yes: Corporation by Estoppel ( Third Party Thought It Was Corp)

Southern-Gulf Marine v Camcraft


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Terms for Shares Types: Preferred/Common; Classes;

Convertible

Authorized/Issued/Outstanding.Treasury shares

Primary/Secondary Market Sales


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Shareholder PersonalExposure

Equitable Subordination: Ifshareholder is an 1) officer and 2)a creditor of firm and misbehaves,

debts subordinated to those of allother creditors

Disregard the Registered LegalEntity (becomes a General

Partnership or Sole Proprietorship)


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Disregard the Entity

Shareholder (s) 1) dominates firmand 2) acts unjustly towardscreditors Evidence of domination is commingling of corporate and

personal funds, lack of observance of necessary entityformalities (board and shareholder meetings)(Note Ohio,lack of meetings not a factor)

Courts vary on what is unfairness or unjustness

Also Known as Piercing theCorporate Veil (or Piercing for short)


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Parent / Sub

Is shareholder control or dominationenough for disregard of entity? No, US v. Bestfoods (EPA)

Distinguish from Disregard of EntityOther Theories of Shareholder Liability Direct Liability: Direct intervention or

participation (In re Silicone, second theory)

Indirect Liability: Corp is agent ofshareholder (respondeat superior)


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Shareholder Lawsuits Distinguish: Derivative Actions/Direct Actions

(Class Actions) To Whom is Duty Owed? Cohen &Eisenberg & Grimes cases Classic Breach of Fiduciary Duty by Board,

Derivative. Cohen facts (personal enrichment). Direct:

Classic: Violation of Federal Securities Laws. State Law Voting Rights Violation. Eisenberg

facts. Problem for Plaintiffs, no cash.

Effect Procedural Hurdles, FRCP Rule 23 or Rule 23.1 Who Collects Damages?

ea arty n nterest:


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ea arty n nterest:Standing in Derivative

Actions Fed. R. Civ. P. 23.1 (Ohio Same): Plaintiff Must Have Been a Shareholder

at Time of Wrong

Plaintiff Must be Shareholder ForDuration of Action

Plaintiff Must Fairly and Adequately

Represent the Other Shareholders


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The Demand Requirement

Shareholders Must Make a Demand on the Boardto Sue (Majority of Board Disinterested) Boards Choices: It Agrees to Sue, Refuses to Sue, or

Defers to Shareholder Suit. If Refuses: Shareholder Suit Dismissed; Sue Board,

Wrongful Refusal? Grimes: BJR unless conflict or lack ofdue care

Demand on Board Excused

Board Creates a Special Litigation Subcommittee (SLC):SLC Defers or Files a Motion to Dismiss

On Motion to Dismiss, Court Review on NY or Del test(BJR/compelling interest)


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Demand Excused: Special LitigationCommittees

Form a Standing Subcommittee of DisinterestedDirectors, Delegates Absolute Discretion

Subcommittee Hires a Top Law Firm, Not onRetainer, to Investigate the Allegations

Subcommittee Determines Suit is Not in Best Interests of Corporation Argue

Legal Merits and Economic Value (Damage toReputation)

Files a Motion to Dismiss

Court Review: Independence of SLC

Merits of Decision?? Distinguish Del. (de novo) N.Y. (nooversight), & N.C. (normal BJR, presumption).


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Primary Dutyof Board of Directors(and Appointed Officers) ??

To Whom??? Firm Collectively, Firm Health. NotIndividual Shareholders or IndividualConstituencies.

How is Firm Health Measured Legally(to

evaluate performance of fiduciary agents)?? Shareholder Value (Maximize Residual Profits)

Long Term/ Short Term

Stock Market Price Inaccuracies

Total Firm Capital Value: Shareholders Returns Plus Bondholder Returns

Total Firm Value: Return to Investors Plus Income Value to Workers

Total Social Value of Firm??? Firm is better off in the long run ifsociety healthy


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When Can a Board Favor Non-Shareholder Constituencies??

Fact Patterns: Gifts to Charities,AP Smith

Distributions of Extra Cash: Higher Wages Or Dividends,Dodge v Ford

Community (Culture, Tradition) Over Profits, Shlensky vWrigley

Possible Answers: Never: Tie All Decisions to Shareholder Welfare or Do

Not Do It [Milton Freidman: Corporations Social Duty isto Generate Profits for Shareholders.]

Yes But Only If Amount is Small and Promotes The Good(Ethical): ALI

Yes, Full Board Discretion to Act in SociallyResponsible Manner: Ohio 1701.59(E).


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Fiduciary Duties of Members

Member-Managed : Owed Each Other(Partners)

Manager-Managed: Only Managers owefiduciary duties (Corporate Boards)

Ohio except to the extentthe operating

agreement provides otherwise (.29(A)) Compare (B) to (C) & (D). Duty; Action for

Equitable (Injunctive Relief; Action forDamages (But compare to corp 1701.51)

Corp. Style Provisions: Reliance on Reports(.30); Conflicts (.31); Indemnification (.32)

P Li i D i i


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Power to Limit Duties inOAs?

What Can the Members Waive??All Duty of Care Claims Other Than Willful Acts

Types of Duty of Loyalty Claims

Duty not to competeCourt Refusals to Respect WaiversBasic Contract Theory:

Strict Construction of Language

Mistake; Fraud; Contract of Adhesion etcNon-waivable Fiduciary Rights?


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LLC Formalities

Many LLCs Operate without AnyFormalities

File One Page Article of Association

Oral Implied Agreements; Custom & Course ofPractice Evidence.

Usually Member Managed But Can Be ManagerManaged (mutual unwritten understanding that onlyBeth runs the business)

Effect on Integrity of the Entity?

Court Interprets Any Implied Agreement andOtherwise Applies Default Rules


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Summary of Ohio ch. 1705

Corp. Code Model (Derivative Actions; Mergers;Dissolutions)

No Constructive Notice on Filing No Freedom of Contract Language Default Rules:

Profits Divided By Capital Contributions No Automatic Capital Calls (Feature of Limited Liability) New Members On Unanimous Vote Lock In: Members May Not Withdraw But Can Assign

Membership Interest (Assignee Becomes Member Only onUnanimous Vote of Remaining Members); Ceases to Be aMember on Death or Insolvency

Member Authority Depends on Member-Managed/Manager-Managed Distinction

Duties of Managers: Corp. Model.

f


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Common Duty of Care FactPatterns

Takeovers Board Sold for Too Little or the Board Refused a Good

Offer (Van Gorkom, Millan and Cede cases)

Shareholder Dividend Cases

Board Should (Not) Have Paid a Dividend (AmericanExpress case)

Duty to Monitor Cases Inattention (Francis andAllis-Chalmers cases)

Lack of Legal Compliance Programs (Caremarkcase,pp. 396,398)

Illegal Act Cases (AT&Tcase, not in book)

D t f C B h


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Duty of Care: Brehm case,n.66

Directors Decisions Respected (Presumption)Unless

Directors are Interested

Lack Independence Relative to the Decision

Do Not Act in Good Faith

Act Without a Rational (distinguish reasonable)Business Purpose

Use Grossly Negligent Process (includes failureto consider all material facts reasonablyavailable)


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The Business Judgment Rule

What is it? Basic Standard with Thresholds??(If good faith, Gross Negligence) AffirmativeDefense?? (Good Faith as a Defense toNegligence)

What are the Thresholds (or Elements of theDefense)??

Financially Disinterested (no conflicts of interest)

Reasonably Informed

Acting in Good Faith (in the firms interests)


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Liability Waivers: Delaware

Waiver Does Not Apply to Injunctions (Only To Claims for Damages)

to Allegations of Bad Faith or Personal

Benefit Does Apply to Damage Claims

Against Disinterested Directors Unless the Entire Fairness Test Applies

(Controlling Shareholder Transactions)Emerald Partners case.


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Ohio Liability Waiver is the Default Rule

Tighter than Delawares: Clear and Convincing Standard of Proof

Best Interests of Corporation includes otherConstituencies

No Improper Personal Benefit Exclusion

No Unocal Rule

Loser than Delaware

s Culpability includes or Reckless Disregard forBest Interests of Corporation


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Duty of Loyalty Distinguish From Duty of Care

Allegations of Sloth, Inattention or Stupidity

Disloyalty, Betrayal, Personal Benefit at FirmExpense, Selfishness

Care: plaintiffs lose; Loyalty: plaintiffs win Alternate Terms for Breach of a Duty of Loyalty

Bad Faith; Self-Interested,Self-Dealing,Conflicted,Interested, or Related-PartyTransactions; Conflicts of Interest

D t f L lt /C fli t f


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Duty of Loyalty/Conflict ofInterest Classic Cases

Director/Officer (or Controlling Shareholder, CS) on OneFirm Inks (or Causes) a Deal With a Second Firm that

Is Owned by the Director/Officer (or CS)(orFamily)(Corp. Codes) Bayer v Beran (wife of

Pres.); BOT v Benihanna (board memberbought convertible perferred stock)

Has Independently Paid (a Bribe??) theDirector/Officer (or CS)(Agency Law)

If so, Standard of Review: Entire Fairness, Burden of

Proof on the Conflicted Board. Lewis; Bayer(carefulscrutiny). Met burden in Bayerand BOT.

S f H b St t St t t


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Safe Harbor State Statutes:Introduction

DGCL 144; RMBCA 8.60 63;Ohio GCL 1701.60

Transaction Not Voidable if

Details Fully Disclosed and

Ratified by

Disinterested Directors or

Disinterested Shareholders

Fair


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144 Issues Are Ratification and Fairness Alternative Tests??

Majority: no (is or conjunctive or disjunctive?)

If no, does ratification affect fairnesstest? Split: No v Yes, use weaker test.

If yes, does ratification end inquiry? No,BJR on ratification decision by Board, butShareholders?? BJR

Is Full Disclosure Required by the Fairness Test

(as well as the Ratification Test)?? Fair Procedureand Fair Price?? Majority: Yes (Hayes Oyster,Wash.)


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Shareholder Ratification Stronger than Board Ratification ??

Shareholder Ratification of Director/Officer RelatedParty Transactions. BJR but Court usually defers.

But if waste, unanimity required Lewis v Vogelstein.

But Transaction between corporation and acontrolling shareholder, still entire fairness test,with burden shifted. In re WheelabratorTechnologies (Del.)


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The Duty to Monitor Distinguish a Breach by Commission from One by Omission.

Dumb decision/Inattention Distinguish Excusable Ignorance from Breach

Director must: understand business; keep informed ofoperations; be familiar with financial status; inquire onred flags

One Standard? Or Standards that Depend on DirectorsSophistication? Statutory Defense: Reasonable Reliance on Experts

Caselaw Old Rule: Graham: The red flag rule: Grounds for

Suspicion? If so Board must check it out. If not, no liability Caremark: Requirement of Audit or Compliance Monitoring

Systems No system is lack of good faith Stone v Ritter: breach of duty of loyalty because it is reckless

Fits more easily under breach of a duty of care (no conflicts) but nomatter as reckless conduct it is outside the BJR and 102(b)(7)under either theory.

Duty to Put in Place Monitoring
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Duty to Put in Place MonitoringSystems

CaremarkDuty Adopted by Stone vRittercourt

SOXDuties

302 Executive Certifications: internalcontrols for financial data

404 Annual Report: Management

Assessment of Internal Controls Audited


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Corporate Opportunity:

Issues What Are They? Brozcase Distinguish Related Party Transactions In re E-Bay: Bribes Not COs

Standard: Interest or Expectancy Test (ALI) (Stronger:Line of Business Test: Guth case)

Can Firm/Officer Stipulate Expectations Ex Ante??

When Can Officers/Directors/ControllingShareholders Take COs Personally?? Disinterested Board Approves in Good Faith No Approval but firm financially unable??

Old: No Irving Trustcase New: Heavy Burden of Justification


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Compensation Problems

Is There Excessive Pay for Corporate Executives?Pro/Con. Law:

State Law: Disney Case; Ohio .60. Federal Law:

Tax: Limit Cost Deductions to $1M Cash. ExemptPerformance Pay Bonuses. Fed. Sec. Law:

Rule 16 b-3 (Vote on Stock Bonuses) Dodd-Frank: Advisory Vote (Say-on-Pay) every 3 yrs.

New Rule 14a-21. SOX (2002): Claw Back Rule TARP (2009): Pay Czar for Bailout Fund Recipients

Exchange Rules: NYSE Compensation Committee

Internal Firm Limits: Say on Pay By-Laws.

Sources of Corporate


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Sources of CorporateCapital

Borrow Money (Cash for promises to repay principle plus interest) Bonds, Debentures, Notes Lines of credit, Commercial paper

Sell Stock (Cash for a % of the equity) Preferred Common

Retain Earnings Hybrids

Convertible Bonds (option to exchange bond for stock) Convertible Preferred Stock (option to exchange preferred for

common) Options in Stock (Warrants) Redeemable Bonds/Stock (option to repurchase)


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Debt Covenants

Self-Help: Collateral Financial and Operational Commitments

Limits on dividends Limits on new senior debt Veto on Major Business Decisions

Repayment Terms Periodic Payments

Guarantees (Secondary Liability) Default Conditions

Broad definition Acceleration of repayment obligation


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Stock

Type Preferred (Participating / Nonparticipating)

Common (Voting / Nonvoting) Redeemable?

Dilution Control (effect on existing shareholders) Pre-emptive rights

Rules that prohibit watered stock; stock issued for lessthat fair market value (See also bonus stock ordiscount stock)

Private / Public Private: Private Offerings; i.e., Venture Capital

Public: Public Offerings


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Definition of a Security

Statutory Definition 33 Act 2(1); 34 Act 3(10). Ohio 1707.01 (title interests!!!)

Specific Instruments: Stock, Notes, Bonds

Catch-Alls: evidence of indebtedness,

investment contracts, and any instrumentcommonly known as a security .

Surprises: worm farming; condos; strips of orangegrove; oil drilling rights; pyramids sales schemes.

Scams.


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The Howey Four Part Test

Test: Investment of value In a Common Enterprise With an Expectation of Profits Solely (Now Largely) from the Efforts of Others

Application: LLC Memberships?? Robinson v Glynn(4th Cir.) Member-Managed: Presumption, Not aSecurity. Manager-Managed: Presumption,Security (Overcome on Facts) [Note problem ofcausal language shares & securities in

Operating Agreement.]


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Public Offering: 33 Act Registration

First Time? IPO (Initial Public Offering)

SH FirmUnder-writer

Public

(Dealer)

$$ $$

SharesShares

$$

Shares (Secondary Offering)


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Underwriters

Type of Offering: Firm Commitment, Normal (Dealer; Spread)

Best Efforts, Shaky (Broker; Commission)

Negotiate Offering Price(Firm/Underwriter)

Due Diligence (Gatekeeper Role)

Do Not Like Piggyback Sales

Use Contractual Lock-ups: Stop InsiderSales for 90 days after IPO


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Public Offering Process

Decision to Go Public Pre-Filing Period (no offers, no sales)

Negotiate with Underwriter; Prepare Filings

File Registration Statement with SEC Waiting Period (limited offers, no sales)

Road Shows

SEC: Effective Distribution Period (offers, sales with delivery of

prospectus)

Liability of Participants (Offering Firm


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Liability of Participants (Offering Firm,Underwriter, and Individuals)

Defective Public Offering (12, 33 Act)

No registration, not exempt (InvalidPrivate Placement)

Defective Offering Process Fraud (Material Misrepresentations or

Omissions)

Sections 11, 12 & 17 of 33 Act Rule 10b-5 (10(b) of the 34 Act)

Section 12(a)(2) Misstatements


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Section 12(a)(2) MisstatementsC/L 10(b) 11 12(a)

(1)

12(a)(2)

Materiality

State ofMind

Reliance

Causation

Damages

yes

yes

scienter

yes

yes

unlimited

yes

yes

scienter

transactioncausationlosscausation

unlimited

yes

yes

strictliability

tracingrequirement(losscausation)

offeringprice

no

no

strictliability

no

no

rescission

yes

yes

(negligence)

no

(losscausation)

rescission

Misstat.orOmission

Section 11 Liability


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Non

-

Exper

ts

yDue Diligence Defense

Expertised

reasonableinvestigation

reasonable and actualbelief in statements

11(b)(3)(B)

Non-Expertised

Exp

er

ts

no investigation

no reason to believeuntrue

11(b)(3)(C)

not applicable

11(a)(4)

reasonableinvestigation

reasonable andactual belief instatements

11(b)(3)(A)

Duty of the Company to Inform the


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Duty of the Company to Inform theMarket: Mandatory Disclosure Rules

State Law (All Companies Incorporated in State) None Unless Shareholder Vote Needed (In Notice,

Malone) Duty to inform shareholders at annual meeting? See

Ohio .38 State Blue Sky Law (Exempted Primary Offerings;

Intrastate Exemption)

Federal Law (Publicly-Traded, WhereverIncorporated) Mandatory Disclosure Rules Periodic Filings (10-K, 10-Q) Episodic Filings (Events: 8-K; Form S-1; 14d-1)

Voluntary Disclosures (CEO Statements): Duty toBe Accurate


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Rule 10b-5 Face-to-Face Fraud in Securities Transactions

(brother buys sibling's stock in a familycorporation)

Fraud in the Primary Trading Market: Firm/Shareholder Transactions (Primary Market Sales

(Placements or Distributions); Security Repurchases(Negotiated; Self-Tender Offers)

Fraud in the Secondary Trading Markets

Market Manipulation (i.e., Go short, start bad rumors,close position; Go long, falsely tout, close position)

Insider Trading/Misappropriation


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Elements of Rule 10b-5 Action

False or Misleading Statement or Omission When is Failure to Disclose Actionable? Must Be Under a

Duty to Speak Basic

SEC Filings, Mandatory Duty to Disclose Voluntary Statements, Duty to be Accurate Insider Trading, Duty to Disclose or Abstain from Trading

Materiality: Basic (probability x magnitude test) Scienter: Ernst & Ernst Standing: Blue Chip Stamps (Purchasers or Sellers of a

Security) Reliance/Causation: Basic (presumption of reliance on

the integrity of the market price in a liquid market) Injury/Damage: Ligget & Myers (disgorgement as well as

damages)


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Omission Cases: When is


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Omission Cases: When isThere a Duty to Disclose?

The Problem: Defining Actionable Omissions Common Law Fraud: Very rare; Is Insider Trading Such a

case?? (GR, no, unless special facts)

Possible Theories of Rule 10b-5:

Possession of Material, Nonpublic Information by Insiders:Duty to Disclose (or Abstain) Texas Gulf Sulphur(NowRejected)

Duty to Speak Required. Triggered by: Required SEC (Public) Reports

Voluntary Statements to Public

Trading in Shares by Fiduciaries Violating a Duty (to firm)Chiarella or (to another firm misappropriation) OHagan

Insider Trading: Potential


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Insider Trading: PotentialDefendants

Defendants: Insiders: Senior Executives, Directors,

Controlling Shareholders

Quasi-Insiders (Temporary Insiders):Professionals (underwriters (investmentbankers), accountants, lawyers, consultants)who get information with an obligation ofconfidentiality

Tippees of Insiders or Quasi-Insiders (or otherTippees)


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SEC Safe Harbor: Rule 10b5-1 Plans

Not Trading On the Basis of InsideInfo if

Insider Has Adopted a Written Plan

Before Becoming Aware of Info Specifies Mechanics for PeriodicTransactions

No Subsequent Influence Good Faith and not Scheme to Evade

Sh S i fi S


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Short Swing Profits Statute

34 Act 16(b): Congresss Definition ofInsider Trading. A Very Early Strict LiabilityProvision (Neutral of Intent)

Elements: Officers, Directors, & 10% Shareholders: Who

Must File Public Reports of All Trades (2 days) inFirm Shares [Form 4] 16(a)

Profits on Any Two Trades in Any Six Month

Period (Match Buys/Sells (Long) or Sells/Buys(Shorts))

Shareholder May Sue (Statutory DerivativeAction), Firm Gets Profits

Exception for Employee Benefit


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Exception for Employee BenefitPlans: Rule 16b-3

Tax Qualified Plans

Others:

If Ratified by

Non-Executive Directors and

Majority of Voting Shareholders and

Recipients Hold Shares Six Months

Indemnification and Insurance:


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Indemnification and Insurance:Terms

Indemnification: Firm PaysJudgments and Damages LeviedAgainst Members of the Board

D&O Insurance: Firm Pays Premiumsto Insurance Company; InsuranceCompany Pays Judgments and

Damages Levied Against Members ofthe Board

I d ifi ti


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Indemnification Mandatory Versus Optional (Discretionary)

Statutory: Mandatory: Successful Defense, DGCL 145(c) Waltuch v

Conticommodity Services:Technical Victories Count

Optional (Ex post): Amounts Paid: DGCL 145(a)&(b)

Advances: DGCL 145(e) (unsecured promise to repay) CitadelHolding Corp v Roven: reasonableness requirement

Contractual (Optional ex ante; Optional ex postbecomes Owed): Ex Ante Agreement that Firm WillIndemnify to the Full Extent Allowed Ex Post, DGCL145(f). But Some Requirements Remain -- Waltuch vConticommodity Services: Good Faith Finding forIndemnification; Citadel Holding: Reasonableness for

Advances.

E P t I d ifi ti


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Ex Post Indemnification

Ex Post: DGCL 145(a)&(b) Must Have Acted in Good Faith

Distinguish Direct/Derivative (a) v (b) (a): Limits on criminal actions

(b): Limits on Judgments (judicial out for expenses ona judgment); settlement amounts (and expenses onsettled cases) included [huge incentive to settle]

Procedure: Decision by Independent Directors (Majority or

Subcommittee),

Independent Legal Counsel, or

Shareholders

Ohi 1701 13(E)


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Ohio: 1701.13(E)

Direct/Derivative Distinction Modeled on Del. 145 Adds Court of Common Pleas to Procedure

Adds Court review to Decision by Board or IndependentCounsel

Advance for Expenses Mandatory (opt out) onpromise to repay unless court finds, under C & Cstandard, that director had deliberate intent toinjury corporation or acted with reckless disregardfor interests of corporation

B i f Sh h ld V i P


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Basics of a Shareholder Voting Proxy

Record owner (writer) grants proxy to proxy holder to voteshares at a physical meeting

Proxy is an Agency (creature of state law) Ohio .48; Del. 212(b) Proxy Holder (Agent) Proxy Grantor (Principal)

Not a written or absentee ballot Distinguish written consent procedure (MBCA 7.04)

Terms Revocable at will unless

coupled with an interest (e.g., sale of stock after record date butbefore meeting)

Supplemented by federal law if a publicly traded company


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Federal Proxy Rules What is a Proxy?

Grant of Agency

Distinguish a Written Ballot: Written Consent Procedure.

Why Are They Needed? Low Attendance at Shareholder Meetings.

What Law Controls?

State Law: Enables the Use of a Proxy. (Ohio Oddities)

Federal Law: Regulates the Proxy for Publicly-Traded FirmsOnly

34 Act 14(a)-(c)

SEC, Regulation 14A: Contains Rules 14a-1 to 14a-15 &

Schedule 14A.


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How Is a Ballot Slate


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o s a a o S a eSelected??

Board or Nominating Sub-Committee Selects Managements Slate Special Rules for Companies Listed on Stock Exchanges:

Nominating Sub-Committee Required and Must Consist ofIndependent directors. NYSE Listing Req. (Majority on theNASDAQ)

Role of CEO? GR: One Candidate Per Seat. All Seats In Play

Exceptions:

Cumulative Voting. (Ohio Default Rule .55)

Staggered Board

GR: Opponents Do Not Have Access to the Managements Proxy. But New 14a-11: 3% if held for 3 years; 25% of seats or min. one seat. (Currently

stayed by litigation in DC Cir.)

S t V ti Odditi


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Seat Voting Oddities

Choice is Yes or Abstain on Each Seat as Long as There is aQuorum Quorum: Usually 50%, can reduce to 25% in articles; Ohio .51, 1 will

do Hypos (Assume 50,000 shareholders):

1 Yes; 49,999 abstain. Director Elected 1 Yes; No-one else shows up at meeting. Elected in Ohio. Other

states fails for lack of quorum. Assume Quorum of 25%: 6,251 yes; 6,249 no. Director Elected

with 12.5% favorable. Effect of Majority Vote Bylaws

Power of ISS in Publicly-Traded Company Elections:Institutional Shareholder Service

Proxy Contest for Publicly-


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y yTraded Firm

Fed General Rule: Insurgents (to DefeatManagement Slate) Must Create Their Own Proxy Statement and Card with an

alternative slate of candidates File Materials with the SEC and

Pay to Have the Firm Mail the Material to allShareholders (or, if the Firm Elects, Mail the MaterialThemselves)

Who pays costs?? Of Incumbents: Firm pays all expenses (Levin v Metro-

Goldwyn-Mayer), no shareholder ratification necessary

Of Insurgents: Firm pays only on victory (Rosenfeld vFairchild Engine & Airplane) if ratified by shareholdervote and if on policy dispute.

Options for Thrifty


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Options for ThriftyChallengers

Ask Shareholders to Vote Abstain on theManagements Proxy The Disney Election of 2004: Eisner, the CEO, running for the

board had a 45% abstention vote. Stripped of Chairman title.He resigned in 2006.

SEC Rule 14a-11 (stayed). Major Shareholders (3%) can nominate

candidates for the Firms Proxy; 25% seats (min. of one seat). Enact Firm Specific Bylaw Changes:

Historical Note: Shareholder Resolutions on Management Proxy (Rule 14a-8(i)(8)) that AmendBylaws, Creates Procedure to Allow Shareholders to Nominate Candidates for Board. AFSCME vAIG (2nd Cir) case. Rule Change by SEC (currently stayed) Agrees.

Convince Board to Adopt Majority Vote Bylaws: Director Must Get Majority Affirmative Vote ofThose Voting to Be Seated. If lose

Hold-Over Directors or

Bylaw Stipulates: Must Submit Resignation; Other Board Members Can Chose to Accept or Reject It. Ifresignation accepted, seat vacant; board can fill it by appointment.

Rule 14a-8: Shareholder


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Proposals The Town Meeting Rule: Qualifying

Shareholders May Include SomeKinds of Proposals for a Shareholder

Vote in the Companys ProxySolicitation Material


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Types of Proposals 13 Types of Proposals are NotProper. Most

Important: Personal Grievance or Personal Interest Ordinary Business Operations (Dole proposal, study on

health care; Con Ed proposal on retirement age)

Election for a Board Seat (e.g.,AIG case) Materiality (Relevance): less than 5% of Total assets or net earning and gross sales Exception for otherwise significantly related to business

(Iroquois Brands proposal on pate)

Resubmission in five years: Less than 3% vote once;

Less than 6% twice.

Shareholder Power??


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Shareholder Power??

Are Rule 14a-8 Resolutions Binding on the Board? No!!: Corp. Codes State that Board Has Power to

Manage. Resolution must be proper subject for actionby shareholders. Rule 14a-8 (i)(1)

Possible Exception: Shareholder Power to Amend Bylaws

Solution: Make Resolutions Precatory : Recommend orRequest the Board Act

Board May or May Not Comply.

Boards Often Fail to Comply.

If they do not? Option is to vote them out.

Special Case: Bylaw


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p yAmendments

Common Practice: Shareholders Amend and Boards AmendBylaws, Unless Charter Reserves Power to Shareholders.MBCA 10.20 (Opt-Out). But Del. 109(a) & Ohio .11 (Regulations): Board Power to Amend

Must Be in Charter (Opt-In). Good Practice is to Include the Power inOhio.

Can Shareholders Therefore Amend Bylaws with a Rule 14a-

8 Resolution, Making It Binding? In Delaware issue is scope of shareholder power. Shareholders do not

have power to manage; directors do. Shareholders can change votingor decision procedures however. See CA v AFSCME (Del. 2008). Seealso Del. 112,113, & 216 (Access to Firm Proxy; Proxy ExpenseReimbursement; Majority Vote). Answer: Depends on the ByLaw.

Note Special Limits on Shareholder Votes to Eliminate a Staggered

Board in Ohio. .11(A)(2) (Double Majority Vote Requirement thatinclude a Maj. Of Disinterested).

Shareholder Inspection


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pRights

New York Statute (1315): Crane Co. v Anaconda Co.. Improper Purpose Test

Applied in Takeover exchange offer. Inspectioncompelled.

Sadler v NCR Corp. (NY Law Applies to Maryland Corp.)Tender Offer/Proxy Contest. Bidder can Demand a Cedeand NOBO list. But N.Y. Leg. Changed Law.

Delaware Statute (220): Honeywell. Shareholder Wants to Convince Company Not

to Make Bombs. Inspection denied. More carefulargument by shareholder needed and available.

Gillette (Del.Ch. 1988). Does Not Require a NOBO list.

Total Effect


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Total Effect

Management Controls Proxy Materials

Controls Nominations to Board

Plurality Rule for Elections

Controls Ballot Issue Initiation Brokers Vote for Managers If Clients Default

Institutional Investors Usually Go with Managers[Except Public and Union Pension Funds;

Universities??]

Variations on Straight


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gVoting

Vote Count: Straight v Cumulative

Class Voting (By Seat)

Dual Class Common Shares (Divided by Voting

Power) Shareholder Meeting Mechanics

Proxy (meeting) v Written Consents (nomeeting)

Record Dates; Notice Rules; Open CommentRules; Adjournments

Terms


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Terms

Distinguish Close Corporations (or Ohio: Corporation Formed with a

Close Corporation Agreement) General Corporations, Privately-Held & Controlled

Shareholders in Small Firms Want to Limit General Powers.Options

Register Register a Close Corporation: The Default Rules Include Shareholder

Restrictions on General Powers. Other Options: Use an LLC [open tocontract] orLLP, or LP (LLLP or GP as Corp.) [default rules different].

Voting Trusts (Must Also Register; Limited Time)

Unregistered (Private) Shareholder (Vote Pooling) Agreements: Shareholders Can Contract to

Affect Voting and Alienation Powers

Employment Contracts


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Shareholder Agreements v

Trusts

Shareholders Contract Among Themselves to Vote as a Unit Based on Majority View (Block Voting) Buy/Sell Agreements (Redemption Rights) Restraints on Sale (Right of First Refusal in Firm; Other

Shareholders) Elect Stipulated Officers and Payment of Stipulated Salary and

Dividends (only if all shareholders sign) See Ohio 1701.591(Close Corporation Agreement).

Compare with a Voting Trust Agreement Shareholders Transfer Legal Ownership to Trust But Retain

Beneficial Ownership Trustee Controls Shares for Benefit of Contributing Investors Public Suspicion (Use by Turn of the Century Monopolists):

Statutes Require Disclosure to Public; Limits on Terms

Ohio


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Ohio

Default: Cumulative voting ( .55) But: Notice 48 hours before meeting!!

Amendment of Articles ( .69 & .71) toEliminate Cumulative Voting. Shareholder vote

required Private Company: Veto by Shares Sufficient to Elect One

Director (Depends on size of board)

Public Company: 2/3 (or less, to an absolute majority, ifin the articles)

No dissenters rights on vote

Compare Ohio Close Corporation


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Agreement

Review Ohio .591 Unanimity Requirement

Filed with state (Open to Public Inspection)

Del. Not more than 30 shareholders

Can Restrict Discretion of Board or Even

Eliminate Board (Shareholder Managed) Court Can Appoint Provisional Director

Buy/Sell Agreement


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Buy/Sell Agreement

Who Holds the Option? Pro-Investor: Option to Sell (Put) Interest to Firm (Usually with

Heavy Conditions)

Pro-Firm: Option to Buy (Call) Interest from Investor onConditions (Common/Best Practice)

Death, Bankruptcy, Withdrawal (Attempted Transfer) or Expulsion

Exercise Price? Book Value Penalty.

Liquidation Value (Asset Sale; Neutral of Good Will)

Fair Vale or Going Concern Value Without Retiring Investor(Sale of Business; Includes Good Will)

Determination? Appraiser; If Disputed: Arbitration.

Buy Sell Agreements: Issues


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Buy-Sell Agreements: Issues

Type Put: Right of shareholder to sell (crosspurchaseor redemption agreement)

Call: Right of firm (other shareholders)to buy (one-wayand wait and seeagreements) Duff & Phelps

Trigger (Contingent on)

Purchase Price (Disputes?) Source of Funds

Courts: Fiduciary Duty in Close


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Corporations

Problem: Minority Shareholders Are MoreVulnerable in Closely Held Corporations Thanin Publicly Held Corporations Freeze-In: Take Minority Investors Money and Return Cash

Only to Majority Shareholders

Pay No Dividends Salary Only to Insiders: Family on Payroll (Exclude or Fire

Minority Investor)

Repurchase only Family Stock

Sweetheart Deals with Family (Suppliers/Customers)

Freeze-Out: There is no Market in Stock, Make an Offer at aDistress Price, No Notice of Good News. Often follows a Period

of Freeze-In Practices


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Judicial Protections Compare Massachusetts Practice with

Delaware Practice

Mass: Fashion Minority ShareholderProtections Based on an Equal Treatment

Rule. High Water Mark: Donahue v RoddElectrotype (Mass. 75). Modified in Wilkesv Springside, one year later.

Del: Minority Shareholder Gets What it

Bargained For on Purchase: Nixon vBlackwell (Del. 93)

Fundamental Changes


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Fundamental Changes

Amend the Charter (Certificate ofIncorporation)

Dissolve the Corporation

Acquisitions Merger the Corporation With Another

Survives/Does not Survive

Sell Substantially All the Assets

New: Domestication andConversion

Definition


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Definition

Change (or Potential Change) in the Charter Direct: Amendment Procedure

Ancillary: Merger Statute

Require Shareholder Ratification (Review)

State Law on Voting: Notice; Record Date

Federal Law on Proxy Solicitation

If Publicly Traded: Proxy Statement; Proxy Card

Direct Amendments to the


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Charter

Examples: Trivial: Name, Registered Agent Significant: Stock Designations; Stock Authorization;

Staggered Board; Right to Amend By-Laws; Right to UseConsent Solicitation Procedure; Liability Waiver; EliminateCumulative Voting

Procedure: Ohio 1701.69 to 74 (.71 on Amendments byShareholders) 2/3rds default (opt in: absolute maj.) Note Class Voting Eliminate Staggered Bd.: Two maj. (open maj. plus maj. of

disinterested shareholders) Eliminate Cumulative Voting: Supermaj. Limited Dissenters Appraisal Rights Under .74 (excludes

cumulative voting amendments)

Dissolution


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Dissolution

Procedure Ohio 1701.86 to 91 Voluntary: Shareholder Ratification Procedure, 2/3rds (opt in, less than

maj.vote) Judicial: Grounds , .91, oppression missing in Ohio

Problem: Effect on Unpaid Creditors .87 & Known: Notice, Right to Sue Remains

For Two Years: Directors personally liable to firm for distributions to

shareholders without payment ofknown obligations (.95(A)(1)(b)) andshareholders are liable to firm for restitution of illegal distributions (.95(D)) Creditors Can Chase Distributions In Hands of Shareholders.95(G)

UnKnown: Notice by Publication, Claim Existing?? Follow distributed assets into hands of shareholders (all shareholders are

necessary parties).

Safe Harbor in .89: Judicial winding up.

Judicial Dissolution


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Judicial Dissolution

Private Suits to Dissolve Company. Use by MinorityShareholders to Stop Abuse. Freeze-In; Freeze-Out

Grounds? Ohio .91 Narrow. Term Expired; Insolvent; Objects Failed

Abandoned or Impracticable [No Close Corp. Prov.] Maj. Shareholder (opt in, less) : Beneficial to Shareholders

Maj. Board : Deadlocked Directors or Shareholders

Compare with Alaska: When acts of those in control are illegal, oppressive, or

fraudulent Coppuck(also N.Y. Va etc)

North Carolina and California: reasonably necessary for theprotection of complaining shareholder Meiselman (N.C.) and

Stuparich (Cal.) Close Corp. Statute Cal 1800 (35 or less)

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