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Chapter 1. Agency

Defined: relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and is subject to his control, and consent by the other so to act.

Principal/Agent Master/Servant Employer/Employee

I. Who is an Agent?

LAF Section 1 of RESTATEMENT OF AGENCY1. Manifestation by the principal that the agent will act for him2. Subject to his control (acceptance by the agent of the undertaking); and3. Consent by the other so to act (an understanding between the parties that the principal will be in

control of the undertaking)

Context Matters: must look to the totality of the circumstanceso A. Gay Jenson Farms Co.: “very strong paternal guidance.” Obvious that Cargill had a lot of

influence and control over Warren. Banks shouldn’t get involved with their lenders to such a degree (wanted to make him profitable) or they will become vicariously liable through their exercise of control

Labels do not matter: doesn’t matter if you are called an agent or an employeeo Circumstantial evidence: the principal must be shown to have consented to the relationship

Example: Franchise has in written contract that it is not entering into agency relationship, but then tells the franchise what to wear, when to open, what to buy, etc. Circumstantially, the evidence points towards agency

o Gorton v. Doty: Doesn’t matter that one was not the employer; agency relationship existed because she said “Only you,” giving only the coach control over the situation. This case turned on mutual understanding

Scope of the agency: critical determination More than just a debtor/creditor relationship (Cargill)

ISSUE OF CONTROL Consequence of Agency:

o Vicarious/Imputative Liability: §7.03(2): Acts of agents within the scope of authority is imputed to the principal

o Principal is liable for the conduct of the agento Principal held liable even if they had no part in the conduct

Why do we have vicarious liability?o Between two innocent parties, who should bear the burden of the injury? The victim? Of

the non-acting principal who had control over the agent and chose the agent to act on his/her behalf.

o Spreads the risk wider to include those who exercise control over agents; everyone is responsible for part of the damage

o Encourages careful training and careful supervision so that irresponsible people are not hired

DEFENSES to Vicarious Liabilty1. No agency relationship exists – perhaps it was an independent contractor or a gratuitous

bailment instead2. Complained of acts are outside the scope of agency

SCOPE OF AUTHORITYAssuming there is an agent, did the agent have authority to bind the principal?

1. Actual Authority (Restatement Third 3.01): Expressly granted authority either orally or in writing

2. Implied Authority (Restatement Third 3.02): Authority to do things that are incidental, usually accompany, or are reasonably necessary to accomplish actual authority:

a. Derivation of actual authority and often means actual authority either to:i. Do what is necessary, usual, and proper to accomplish or perform an agent’s express

responsibilitiesii. Act in a manner in which an agent believes the principal wishes the agent to act

based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent

3. Apparent Authority (Restatement Third 3.03): Principal holding the person out as its agent to a third party: Want to show that (1) the principal held the person out as his agent, and (2) the third party reasonably believed that the person had the authority to do something.

a. An agent has apparent authority sufficient to bind the principal when the principal acts in such a manner as would lead a reasonably prudent person to suppose that the agent has the authority he purports to exercise

i. Apparent principal makes a manifestation of something;ii. Manifestation reaches a third party

iii. Third party reasonably relies on manifestation4. Inherent Authority (Restatement Second §8a): If an agent is put in a position to deal with a third

party and given specific details and parameters, but the third party does not know about the principal, there is apparently authority to do things outside of those parameters

a. Power of agent is NOT derived from authority but solely from the agency relationshipb. Situation when applied:

i. Agent does something similar to what he is authorized to do, but in violation of orders

ii. Agent acts purely for his own purposes in entering into a transaction which would be authorized if he were actuated by a proper motive

Watteau v. Fenwick: Dealing with an undisclosed principal – Humble was acting with an authority that was inherently reasonable for an agent in that position (not apparent authority here because in apparent authority cases the principal is known)

When one holds out another as an agent, the agent can bind the principal on matters normally incident to such agency, even if he was not authorized for a particular type of transaction

RATIFICATION (§82) When no agency exists

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A principal can still be bound by acts of an agent if the principal ratifies what the agent did or said. The ratification will make the act valid as of the moment during which the act was done

o Example: Minor makes a contract and when they reach adulthood, they ratify it How to ratify: Principal needs to have the INTENT to ratify and then they need to know what it is

that they are ratifying; must be known, voluntary, and intentionalo Intento Knowledge of material facts

Mill Street Church of Christ v. Hogan: Bill, an agent of the church, had been given authority in the past to hire painters to help him paint so when he hired his brother without getting actual permission to do so, he was still acting with implied authority as an agent of the Church. Thus, Sam was an employee of the church and an agent of the church when he fell and broke his leg. Additionally, the church treasurer cut checks for Bill AND Sam – can say that this is ratification

ESTOPPEL (Restatement Third 2.05) Similar to apparent authority Kind of like a negligence theory Carelessness in supervising the circumstances that the party is estopped from claiming that they

are not bound A principal is liable if a third person changes their position because of their belief that the

transaction was entered into if:o The principal intentionally or carelessly caused the belief ofo Did not take reasonably steps to notify the person of knowledge that they mistakenly

changed their belief Hoddeson v. Koos Brothers: an imposter salesman sold furniture to Hoddeson and took the money.

Koos Brothers was liable because they had an obligation to make sure the store didn’t have imposters in it selling furniture. The store was estopped from denying what he did because they weren’t properly monitoring what was going on in their store.

AGENT LIABLITY ON THE CONTRACT Fiduciary Duties Vicarious Liability (impute liability to the principal) Catch all: things that the principal must now provide for the agent (health care, workers comp.

etc.)

DEFENSE This person is not my agent. Even if they were my agent, they were not acting within the scope of

my authority as their principal

II. Liability of Principal to Third Party in Tort 2 Concepts: (1) Control and (2) Right to Control Master/Servant relationship is in the doctrine of respondeat superior: let the master respond

o Who is a servant? Employed to perform services in the affairs of another Subject to the physical control of another

o Test:

Did the master control the servant? Did the master have the right to control the servant?

If yes, the actor becomes the servant and whatever he did will become binding on the master

o Outside Employment: you cannot impute liability if the servant is outside the scope of his employment

o Actions of Independent Contractors are not imputed to anyone else Factors:

Extent of Control:o Day to day control of details: hours/policies/uniform, preparation of

food, promotional program, consequence of non-compliance Details of work Distinction occupation or business (specialized work?) Skill required Who is supplying equipment Length of time occupied

Humble Oil & Refining Co. v. Martin: (car rolled off lot and struck Martin) Court looking for signs of control. Methods and details are control. Court found sufficient evidence of control and allowed for the doctrine of respondeat superior to apply. A party may be liable for a contractor’s torts if he exercises substantial control over the contractors operations.

Hoover v. Sun Oil Company: (car on fire when being services) The day to day operations were left up to Barone, an independent contractor. A franchisee is considered an independent contractor if the franchisee retains control of inventory and its operation, and this demonstrated that the agency relationship did not exist

Murphy v. Holiday Inn: (trips and falls on water dropping from a/c unit): In the franchise agreement, it needs to show that Holiday Inn had right control over its franchise. The franchiser needs to control the method and detail of day to day operations. Since there has been sufficient evidence produced to show that the franchisee exercised control over the details of the operation, this demonstrated that an agency didn’t exist.

III. Scope of Employment *You cannot impute to the master if it is not within the scope of the person’s employment* Restatement Second 228 – General Statement of Scope of Employment Doctrine

1. Conduct of a servant is within the scope of employment if, but only if:a. It is of the kind he is employed to performb. It occurs substantially within the authorized time and space limitsc. It is actuated, at least in part, by a purpose to serve the masterd. If force is intentionally used by the servant against another, the use of force is

not unexpectable by the master2. Conduct of a servant is not within the scope of employment if it is different in kind from

the authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master

Restatement Second 229 – Kind of Conduct within Scope of Employment

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1. To be within the scope of the employment, conduct must be of the same general nature as that authorized, or incidental to the conduct authorized

2. In determining whether or not the conduct, although not authorized, is nevertheless so similar or incidental to the conduct authorized as to be within the scope of employment, the following matters are to be considered:

a. Whether or not the act is one commonly done by such servants;b. The time, place and purpose of the act;c. The previous relations between the master and servantd. The extent to which the business of the master is apportioned between different

servants;e. Whether or not the act is outside the enterprise of the master or, if within the

enterprise, has not been entrusted to any servant;f. Whether or not the master has reason to expect that such an act will be done;g. The similarity in quality of the act done to the act authorized;h. Whether or not the instrumentality by which the harm is done has been furnished

by the master to the servant;i. The extent of departure from the normal method of accomplishing an authorized

result; andj. Whether or not the act is seriously criminal

Motive/Business Furtherance : Action must be motivated in part to serve the master by doing the thing that is the cause of the lawsuit; if not, some courts will say that it was outside the scope of employment

Foreseeability Test : Action is not far from where ones job activities take them: Master is not subject to liability for the torts of his servants acting outside the scope of the employment unless:

o Master intended the conduct or consequences, oro The master was negligent or reckless, oro The conduct violated a non-delegable duty of the master, oro Servant purported to act on behalf of the principal and there was reliance upon apparent

authority *As a general proposition, it is a lot easier to fit within the foreseeability standard so the plaintiff

would most likely argue it

DETERMINING WHETHER IN SCOPE OF EMPLOYMENT Conduct must be of the same general nature as that authorized or incidental to the conduct

authorized. Facts to be considered:o Whether or no the act is one done by such servants;o The time, place, and purpose of the act;o The previous relations between the master and servant;o Whether or not the master had reason to expect that such an act will be done;o Whether or not the instrumentality by which the harm is done has been furnished by the

master to the servant Ira S. Bushey v. U.S.: Question is not whether he is subject to control of the Coast Guard because he

is in the Navy so that is clear. Issue is whether what he did was within the scope of his employment in the Navy. This particular incident was foreseeable because he was authorized to

walk along the dock to the shop. If he had burned down a bar instead of sunk a ship, it would be less foreseeable.

Manning v. Grimsley: Baseball game at Fenway Park. People are heckling; player gets annoyed and throws a ball at a fan. Court says that this act was foreseeable within the scope of employment

Arguello v. Conoco, Inc.: (clerk with discriminatory insults) 4 Factors to consider:1. Time, place, purpose2. Similarity to act which servant is authorized to perform3. Extent of departure from normal method4. Whether master could have reasonably expected action (in that manner?)

*WAYS TO PROTECT YOURSELF FROM VICARIOUS LIABILITY1. Indemnity Clause2. Bond/insurance3. Use contract to get rid of imputed liability this is a good clause to have in the contract but it is

not absolute. Actions may still reveal control, even if there is language against imputed liability.

IV. Liability of Torts for Independent Contractors Two types of Independent Contractors:

1. Agent-Type Independent Contractors: one who has agreed to act on behalf of another, the principal, but not subject to the principal’s control over how the result is accomplished

2. Non-Agent Independent Contractors: one who operates independently and simply enters into arms-length transactions with others

L.A.F. For Independent Contractor Liability General Rule: There is no vicarious liability for an independent contractor There are three exceptions:

1. Where the landowner retains control of the manner and means of the doing of the work which is the subject of the contract

2. Where the landowner engages an incompetent contractor3. Where, as not in the statement of the general rule, the activity contracted for constitutes a

nuisance per se (is inherently dangerous)i. Not skillful at the job being performed

ii. Financially irresponsible Majestic Realty Associates, Inc. v. Toti Contracting Co.: The landowners/person who contracted for

the action may be in a better position than plaintiff to ensure that safe measures are used; it minimizes the loss for third parties.

DiCosala: Looking at how a person can be liable for the actions of another if there is no master/servant relationship or if the actions were outside the scope of employment. – the injured plaintiff can still recover if the person who did the hiring was negligent in hiring or retaining the person

V. Fiduciary Obligations of Agents and Principals Principal to Agent – implied covenant of good faith and fair dealing that flows from the

employment relationshipo Principal owes the general statutory protections: no discrimination on race gender etc.

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Agent to Principal (most of our focus was here): § 387 – Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with agency

PROCESS1. Identify the sources of obligations inter se (between agent and principal)

a. Employment Contractb. Law (statutes, regulations, common law)c. Implied covenant of good faith and fair dealing

2. Is there a fiduciary relationship between the parties?a. Trust/loyaltyb. Confidentialityc. Reliance on good faith and expertised. Superior Knowledge/training/experience

3. Determine what fiduciary duties flow from the fiduciary relationshipa. Duty of CARE – If careless in performing function, then negligent and in breach of fiduciary

dutyb. Duty of LOYALTY – higher duty to be loyal to the other party in a fiduciary duty

i. Duty of GOOD FAITH

THE TIME FRAMES OF A PRINCIPAL/AGENT FIDUCUARY RELATIONSHIP1. During Agency

Duty not to acquire material benefit from a third party Key to this is disclosure (tell the employer/principal/person who you owe the fiduciary

duty to)o General Automotive v. Singer: Singer secretly concealed profits earned by accepting

personal orders from his employer’s customers. He violated the duty to not compete and was thus liable to his employer for those profits from his undisclosed competing business

Duty of care and adequate skill Duty to obey employer Cannot use confidential information

o Reading v. Regem: Soldier who violated fiduciary duty by using uniform to participate in a scam – he was using his position in the army to make money so the money was awarded to the Crown.

2. Planning to Leave (Tab 4) Cannot:

o Contact customerso Take information belonging to employero Badmouth employero Seek to induce co-employees to leave with you

Can:o Search for officeo Sign a leaseo Pick out business cardso Get the phone hooked up

o Talk to co-workers3. Post-Employment/Agency (Tab 6 ¶6)

Contract: Post employment restrictive covenanto If you leave your employment, you cannot pursue your employment in the area for a

certain amount of time etc.o *Restrictive covenants will not be enforceable if they are too broad in geographical

scope or too long in duration Duty not to steal confidential and proprietary information

o Cannot steal customer lists and solicit new customer’s from that list Cannot try to take employees away from their former employer (pirating)

o Cant talk to people about leaving; but cannot do it if you are looking to harm your former employer

CHAPTER 2. PARTNERSHIPS

Defined: The creation and co-ownership of a business by two or more persons in which each person is joint and severally liable for any causes of action against themselves, their partner, or the business

I. Is the relationship a partnership?L.A.F. Determining if an Entity is a Partnership

1. Two or more parties2. Co-owners (Key element)3. Operating a business for profit

PARTNERSHIP ELEMENTS/INDICATORSFact intensive analysis Look to the totality of the circumstances

The intention of the partieso Is the agreement called a partnership agreement? (though this isn’t determinative, it still

matters) The right to share in profits

o Also not a conclusive point, but still important The obligation to share in losses The ownership and control of the partnership property and business

o Money, sweat, capital contribution Community of the power in administration

o Who has control of the business? The conduct of the parties towards third persons The rights of the parties on dissolution/termination

o Is it the same for one partner as if just a regular employee? Fenwick v. Unemployment - Beauty Parlor Situation: labels are not determinative. Even though

receptionist was called a partner, she was really an employee. She did not share in the profits, had no power in administration, and didn’t have any control of the beauty shop.

II. Consequences of Being in a Partnership: Why it matters if there is a partnership

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Legal consequences that flow from partnership situationo Uniform Partnership Acto Mutual Agencyo Joint and Several Liabilityo Inter se Fiduciary Dutieso Equal Rights in Managemento Rights on Terminationo Flow through tax treatment

III. What do partnerships do? Through the partnership agreement, the partnership can alter the default statutory rules. Can pretty much change mutual agency, inter se fiduciary duties, exit rights, rights in management

o Cannot change the obligations of the partnership towards third parties

PARTNERSHIP AGREEMENTS Modify what the statute requires with the partnership agreement Uniform Partnership Act has DEFAULT rules, but the partnership agreement can provide

otherwiseo If the agreement do not provide otherwise on a specific issue, the default rules will kick in

Unalterable Ruleso Obligation of partners to third parties

If we all agree that can do whatever we want to third parties, it would be unfair to them

This is a fact intensive analysis

PARTNERSHIP BY ESTOPPEL Similar to apparent agent held that person out as a partner to a third party who reasonably

relied on o Contexts: (1) Personal liability of a non-partner; (2) personality liability of a partnero Young v. Jones: Price Waterhouse-Bahamas holding themselves out as the same entity as

PW-US. Could not have shown reliance, but if there was, would have been a partnership by estoppel

IV. The Fiduciary Obligations of Partners Duties and obligations between and among the members of a partnership Under § 404, partners owe each other fiduciary duties of LOYALTY and CARE

o Duty of Undivided Loyalty No competition Dsiclosure Good faith and fair dealing Misappropriated a partnership opportunity to one person

o Duty of Care Regaining from engaging in grossly negligent or reckless conduct Intentional misconduct, or

A knowing violation of the law Meinhard v. Salmon: Salmon terminate a lease belonging to his joint venture with Meinhard to

enter into a new lease on behalf of his solely owned business. A joint adventurer’s seizure of a joint venture’s opportunity breaches his duty of loyalty to the other joint adventurers – the obligation of Salmon was not just punctilio – he is the managing partner of the enterprise

Meehan v. Shaughnessy: When Meehan and Boyle decided to leave their firm all their actions were ok until they were confronted on several occasions and asked if they were leaving the firm and they denied it. This was a breach of fiduciary duty – a partner must render on demand true and full information all things affecting the partnership to any partner

Lawlis v. Knightlinger & Gray: Lawyer who fell victim to alcoholism is expelled – but the court found that involuntary expulsion from a partnership without bad faith does not give rise to damages for wrongful dissolution

L.A.F. Inter Se Fiduciary Duties1. What are they?

a. Loyalty, care, good faith2. Scope of Loyalty

a. Punctilio Standard – Owe to one another the duty of the finest loyalty. Many forms of conduct are permissible in a workday world for those acting at arms length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior

b. Partners owe each other a fiduciary duty of the utmost good faith and loyalty. As a fiduciary, a partner must consider his or her partner’s welfare, and refrain from acting for purely private gain

c. Managing partner’s heightened duty3. Scope of Loss4. Scope of Good Faith

V. Managing the Partnership Default: Majority rules and everyone is an equal partner

o However, this virtually never happens in the real worldo Partnership agreements generally dispense management authority very unequally

Anything outside the ordinary course of business must be decided by consent of all of the partners

L.A.F. Rights of Partners in Management1. Default Rule: Uniform Partnership Act 404(f) & (j)

(f) Each partner has equal rights in the management and conduct of the partnership business

(j) A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all partners

2. Partnership agreement can alter default rules

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3. Case Examples: Sidley, Stroud, Summers Day v. Sidley Austin: Managing partners have no fiduciary duty to disclose changes in the

partnership’s internal structure if the changes do not generate a profit or loss for the partnership

National Biscuit v. Stroud: Every partner is an agent of the partnership for the purpose of its business, and every partner’s acts for apparently carrying on in the usual way binds the partnership unless the acting partner has in fact no authority to act for the partnership and the third party knows that he has no such authority

Summers v. Dooley: Absent a contrary agreement, each partner possesses equal rights to manage the partnership’s affairs, and no partner is responsible for expenses incurred without majority approval

VI. Dissolution of the Partnership Breaking up is hard to do Defined: change in the relations of the partner caused by any partner ceasing to be associated in

the carrying on as opposed to the winding up of the business

THREE STAGES OF BREAKING UP1. Dissolution – First Step in the process

o Grounds for Dissolutioni. Will of Partners : if the partnership is a partnership at will and the partners get

together and say lets end it, then it gets doneii. Term Expired : partnership for a limited term and the term expires – the partnership

gets dissolved, the business is wound up and the money gets split between the creditors

iii. Undertaking Completed : Whatever the undertaking was, it was completediv. Pre-Determined Event Occurs : something that the parties agreed to at the time of the

partnership agreement as “the event” that terminates the partnership – when that happens, the business is dissolved

v. Judicial Determination : Economic purpose frustrated Not reasonably practical to stay together Equitable to dissolve Partnership has been of unsound mind Partners become incapable of performing Partner is guilty of such conduct that prejudices the business Willfully or persistently commits a breach of the partnership agreement Business can only be carried out by a loss If the court deems it fair *Going to court should be the last resort when you are breaking up because

you have no control over the outcome, it costs a lot of money, it takes a lot of time, and it can become public

o So, should put planning devices in effect – have arbitration and mediation clauses in the agreement

o Automatic Dissolution

Termination of term or undertaking By the express will of any partner Expulsion of any partner/event making business illegal

2. Winding up – Second Stepo Partnership fiduciary duties extend to the winding up of business and carry forward up to

the point of terminationo Distributing assets, telling third parties, letting people go, cleaning up accounts (can be a

lengthy process)o After dissolution but before winding up, all partners may waive the right to have the

business would up and the partnership terminated. In that event, the partnership resumes carrying on its business as if dissolution had never occurred

3. Termination/Liquidation o Should put this into partnership agreement:o BUY-SELL Agreement

o Agreement that allows a partner to end her or his relationship with the other partners and receive a cash payout, series of payments, or some assets of the firm in return for his or her interest in the firm

o This should be in the partnership agreement to avoid a mess if the business needs to dissolve

o Partnership will continue even though someone has left

LIMITED PARTNERSHIPS Some partners may want to be passive investors and not be involved in the running of the

business In a limited partnership you get the benefit of a partnership, but your personal and vicarious

liability is limited to the amount of your investmento If you invest $10,000 and the partnership incurs $1M in liability, your obligation is only up

to your $10,000 investmento Rationale: Partner is passive and not running the business, so they should not be

responsible for the actions of the firm beyond their investment Limited partners do not incur general liability for limited partnership’s obligations simply because

they are officers, directors or shareholders of the corporate general partnero Unless commingling with personal affairs, fraud, or injustice, corporate entities should be

kept separate

Chapter 3. THE NATURE OF THE CORPORATION

Defined: A corporation is any business entity that is recognized as distinct from the people who own it (i.e., is not a sole proprietorship or a partnership). This generic label includes entities that are known by such legal labels as ‘association’, ‘organization’ and ‘limited liability company’, as well as corporations proper

As a fictional person, a corporation has the ability to make contracts, to own property, buy and sell property, to sue and be sued, and has constitutional rights

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I. Business Forms and Factors in Choosing OneBUSINESS FORMS/ENTITIES

General Partnership Limited Partnership Corporation Limited Liability Partnership Limited Liability Corporation (most popular form)

TWO KINDS OF CORPORATIONS Public corporations Closely-held corporations

FORMATION RITUALS Articles of Incorporation Bylaws Clearing the name

FACTORS IN CHOOSING A BUSINESS FORM/ENTITY Entity on sole proprietorship – Principal/Agents Government/Management Risk – Limited/General; Joint/Several; Vicarious Formation – Fees/Forms/Agreements Raising Capital – Capital Calls Taxes Exit Strategy/Cashing out

II. Personal Liability How do we avoid/limit personal liability?

o Corporation Guaranteed to provide you with a limitation of personal liability to amount of

investment provided that you don’t give the other side a reason to pierce the veilo LLP

If you are a general partner, then you will have personal liabilityo LLC

Guaranteed to provide you with a limitation of personal liability to amount of investment providing that you do not give the other side a reason to pierce the veil

GENERAL RULE OF BUSINESS FORMS Owners (shareholders) of a corporation; members of an LLC; and limited partners of a limited

partnership are not personally liable for the debts of the entity (Corp./LLC/LLP)o This rule stimulates investments and allows people to take risks where if they didn’t have

this protection, they might not take this risk

o Downside: Someone who enters into a contract with the entity and is then harmed by the entity (the entity doesn’t honor its contractual obligations) gets stuck and loses out when they can’t pierce the corporate veil

EXCEPTION TO THE GENERAL RULE: Piercing the Corporate Veil This is allowed to prevent fraud, promote equity, avoid injustice, avoid harming innocent

individuals

III. Piercing the Corporate VeilL.A.F. Piercing the Veil – depends on jurisdiction, there is no ‘bright line’ LAF

Why do you pierce? o Because you want to prevent fraud or injustice of some kind

When do you pierce? o Varies based on jurisdictiono Generally, if the entity is your:

Dummy, plaything, alter-ego, funds are co-mingled, shell, mere instrumentalityo In these situations, the court might come along and pierce the veil

Where do you pierce?o Usually only occurs in closely held corporations or LLCso Usually cannot pierce in a public corporation because they usually maintain formalities, etc.

because they are public and not dummy/shamso Sometimes it is easier to pierce in tort cases than contract cases

Tort Case – Don’t know that you are dealing with a corporation Contract Case – generally know that you are dealing with a corporation – you are

expected to suffer the consequences of your contractual decisions

TEST1. There must be such unity of interest and ownership that the separate personalities of the

corporation and the individual (or other corporation) no longer exist; and Unity of Interest: defined

o Failure to maintain adequate corporate records or comply with corporate formalities

o Commingling of funds or assetso Undercapitalizationo One corporation treating the assets of another corporation as its own

Sham, dummy, alter egoo Where their corporation is so controlled as to be the alter ego or mere

instrumentality of the stockholder, the corporate form may be disregarded in the interest of justice

2. Circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or work an injustice

Fraud/Inequitable/Unjust not to Pierce: Definedo Adherence to the fiction of separate corporation existence would sanction fraud

or promote injustice

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o Unjust enrichmento Sanctioning of fraud or intentional wrongdoingo A wrong beyond the inability to collect money owed

In re Silicone Gel Breast Implants Products Liability Corporation: If a parent corporation uses a subsidiary as its alter ego, as demonstrated by shared common directors or business departments, consolidated financial statements and tax returns, and an inadequately capitalized subsidiary, a plaintiff may assert its claims against the parent

ONLY HAPPENS IN PRIVATE CORPORATIONS With a public corporation, cannot have unity of interests because there are way too many owners In some jurisdictions, need to show both; in others, only need to show unity of interest or

inequitable conduct Have a claim against corporation and shareholder, claiming shareholder’s assets should be used to

collect corporation’s debt Shareholder liability: some shareholder actions are not protected by the veil Even if you cannot pierce the corporate veil, you can still directly sue the shareholders or directors

if there was some type of negligence or breach by the shareholder/director themselves

Sea-Land Services v. Pepper: In order to pierce the corporation veil and import individual liability the creditor must show (1) that there was such a unity of interest between the individual and the corporate entity that separate identities no longer existed, and (2) that a failure to do so would promote “injustice” in some way beyond simply leaving a creditor unable to satisfy its judgment

Frigidaire Sales Corp. v. Union Prop.: Limited partners are not liable for the debts of a limited partnership simply by their status as officers, directors, or stockholders of the corporate general partner as long as they conscientiously keep the corporate matters separate from their personal business and no fraud or manifest injustice results

IV. Shareholder Derivative Actions (Do not confuse with piercing the veil) Shareholder suits will involve 2 types of claims: (1) Direct Claims, and (2) Derivative Claims

o Derivative suits give the shareholder the right to sue the board of directors on behalf of the corporation because the directors will not authorize a lawsuit since they (the D&Os) that are committing the wrongful conduct (there has been harm to the corporation but the board has not taken action against the wrongdoers)

TEST1. Direct or Derivative? To Decide, ask who is getting hurt:

If individual is getting hurt – it is a direct action Direct actions brought by shareholders are suits relating to contractual or statutory

rights of the shareholders, that shares themselves, or rights relating to the owners of shares

If the corporation is getting hurt – it is a derivative action2. Typical Shareholder Derivative Claim

Shareholder sues director/officer for:i. Breach of duty of care

ii. Breach of loyaltyiii. Breach of good faith

3. If Derivative: Eligible shareholders must file a demand on the board – the biggest obstacle that gets put

in the way of the shareholder that wants to bring a derivative action The board may reject, accept, or not act upon the demand; varies by jurisdiction

THE DEMAND REQUIREMENT This is a screening mechanism. If the shareholder thinks the corporation is doing something

wrong, the officers and directors should be the first ones to avenge that wrong. If the shareholder thinks that the officers and directors are running the corporation badly, then the shareholder should demand that the board do something. Courts are reluctant to micromanage the corporation. Three demand jurisdictions:

1. Universal Demand Jurisdiction: Before you bring a lawsuit, it is absolutely required that a plaintiff/shareholder

first make a written demand on the board2. Demand Excused Jurisdiction

Futility: Grimes standard If you are in a jurisdiction where demand can be excused, you can avoid making

a demand by alleging that making the demand would be futile Basis for claiming excusal:

o A majority of the board has a material financial or familial interesto A majority of the board is incapable of acting independently for some

other reason, such as dominated control;o The underlying transaction is not the product of a valid exercise of

business judgment “It is a waste of time to go to the board because they aren’t

independent and won’t actually listen to my concerns”3. Demand Made, But Wrongfully Excused

When you make a demand, the board must respond. It is difficult for a plaintiff to show wrongful refusal because the court will often defer to the board via the BJR

If a demand is made and rejected, the stockholder can allege facts with particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption

Grimes Test for Demand Requirement If you make a demand, you waive the right to say that the demand was excused; however,

you do not waive the right to claim that the demand was wrongfully refused Board rejected his demand and the board is entitled to have its decisions analyzed

under the BJR unless the presumption can be rebutted

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Grimes would have to please with particularity why the board’s refusal to act was wrongful; needs to raise a reasonable doubt that the board’s decision was the product of a valid BJR defense.

Eisenberg v. Flying Tiger Line: Hard to prove that voting rights were being diluted If you don’t want to be in a ‘derivative world’ and go direct, analyze what you are

complainting about HIS voting rights were diminished Lawyers need to find a director claim to the corporation

If you have a direct claim, go CLASS ACTION direct action—will get the corporation to pay more attention to you

Potential damages are HUGE for corporation: Recover significant fee for the action

PURPOSE OF THE DEMAND REQUIREMENT Relieves courts from deciding matters of internal corporate governance by providing corporate

directors with opportunities to correct alleged abuses; Provides corporate boards with reasonable protection from harassment by litigation on matters

clearly within their discretion; Discourages ‘strike’ suits

SPECIAL LITIGATION COMMITTEES Once the shareholder makes the demand, the board may reject, accept, or not act upon the

demand. If after 90 days the demand has been rejected or has not been acted upon, shareholders may file

suit If the board accepts the demand, the corporation itself will file the suit. If rejected, or not acted upon, the shareholder must still meet additional pleading requirements On the requirements being met by the shareholder, the board may appoint a “special litigation

committee” which may move to dismiss.

If the special litigation committee makes a required showing, the case will be dismissed. If the committee fails to make a showing, the shareholder suit may proceed.[4]

Investigate Demand/Determine whether lawsuit should be accepted as legitimate complaint or

should contest it Who is an independent director?

o Usually, to get onto the board, you know someoneo Will communicate with directors and corporation – not corrupt but there is some

relationship (kind of hard to find against them)o Independent really does mean independent – MUST PROVE THIS

Zapata 2 Step Analysiso Balancing of shareholder in getting relief and corporations trying to get rid of it:

1. Look to independent of committee2. Court should determine, applying its own independent business judgment,

whether motion should be granted

**Can only attack the SLC report if it is tainted in some way but it is hard to even know if it was without discovery, so will have to beg the judge to give you limited discovery such as:

o Depositions of the committee, depositions of people appointed to the committee, lawyers hired in course of preparation, etc.**

V. The Business Judgment RulePURPOSE & STRUCTURE OF THE CORPORATION

Make money for the shareholders; maximize profit potential for its shareholders Directors of Corporation/Officers of Corporation (CEO, CFO, etc.)

1. Inside directors (employees of companies-board members)2. Outside directors (not employed board members)

a. Directors – periodic basisb. Officers – day-to-day operations/business decisions

i. Business decisions: dividends, expansion, marketing, research, investment, mergers, financing, hiring/firing, etc.

BUSINESS JUDGMENT RULEDefined: concept in corporations law whereby the "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge

The BJR is the defense for the claims listed above There is a tension between a director’s duty of due care and a director’s obligation to maximize

wealth for the shareholdersL.A.F. Business Judgment Rule

1. There must be a business decision2. This defense is a rebuttable presumption in favor of the directors and officers that:

a. Directors and officers were informed before they made the decisionb. Directors and officers acted in good faithc. Directors and officers had honest belief that the decision was in the best interest of the

corporation

POLICY REASONS FOR THE BJR Don’t want to tie the hands of the directors and officers in trying to make money for their

shareholders – to do so, you might have to take some risks and the risks might fail Expertise – business people know better than the court who doesn’t have the same business

expertise – the shareholders put the directors and officers in these positions because they had confidence in their ability to make decisions – they know that this carries risks and they want the directors and officers to take risks and make decisions without being afraid of being sued

Risk-decreased innovation; risk-taking, entrepreneurialism: People don’t want to take risks because they are scared of being personally accountable for bad decisions

o Would be hard to find people to serve on the board or as directors if they had no protection

REBUTTING THE BJR1. Fraud2. Illegality

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3. Conflict of interest4. The decision wasn’t a business decision5. The decision was not informed6. The decision wasn’t in good faith7. There was not an honest belief

EXAMPLES OF BUSINESS DECISIONS1. Mergers2. Hiring and Firing3. Employment Agreements4. How much money to borrow5. New business direction/venture6. Advertising policies7. Buying and selling assets8. Upgrading the machinery that is used

SUBSTANCE V. PROCESS DISTINCTION If you are going to try and rebut the business judgment rule by arguing that it was a dumb

decision, you are probably making a dumb argument The court has taken the position that they aren’t the business experts so they will be very

deferential to the men and women who make these decisions So, the substance allegation is usually a bad one

o As crazy as the substance of the business decision seems, it will probably be seen by the court in favor of the directors and the board

The substance part needs to be combined with the process part (make sure that the I’s are dotted and the T’s are crossed) – the board must take the steps to make sure that the decision is procedurally appropriate:

o Make sure that there are minutes for the board meetingso Make sure they get different and informed opinions about their decisionso Planningo Financial analysis from outside sourceso Expert assistance/consulting with counsel

Shlensky v. Wrigley: Even though Wrigley’s decision to not have lights on the field might not be the smartest idea, the process that he went through to arrive at that decision was sound and therefore the court deferred to the BJR and didn’t interfere with his decision

o This was a shareholder derivative suit alleging negligence and mismanagement for failing to put lights up in order to play night games

Wrigley defense the suit with the BJR Court Agrees with Wrigley

The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve

In a purely economic corporation, the authority of the directors in the conduct of the business must be regarded as absolute when they act within

the law, and the court is without the authority to substitute its judgment for that of the directors

HOW CAN THE D&Os PREVENT THE BJR FROM BEING REBUTTED? Good Faith – make sure you don’t get mixed up with family or friends Board must be informed

o Example: Vote on something in 10 minutes. Need to be making decisions on an informed basis. If the board was informed, and made a decision, the presumption of the BJR will not be rebutted

Dodge v. Ford Motor Company: Henry Ford owned the majority of the stock in Ford Corporation. Dodge owed 10%. Ford decided to stop paying dividends and reinvest the money into the company; raising salaries and benefits

o Dodge brings suit saying that they are not maximizing the profits of the shareholders; second guessing Ford’s decision

o Court’s saying that not paying special dividends was wasting profits; ordered the distribution of special dividends

Riccio believes that this judgment was on the merits but not the courts decisions to decide the merits

LESSONS: (1) Primary interest in making money; (2) Pure business decisions are within the scope of the BJR. Now, most decisions relating to dividends will also be within BJR protection

Anyone who is going to pursue this has a tough job to prove. Must show something more than bad business judgment. Good reason to rebut the presumption

CHAPTER 4. THE LIMITED LIABILITY COMPANY (TAB 7)

Defined/Overview: A little big like a partnership and a little bit like a corporation. An LLC is an alternative form of business that combines certain features of the corporate form with others more closely resembling general partnerships

In an LLC, investors are called members and the LLC provides a liability shield for its members LLC may be managed by all of its members (as in a partnership) or by managers, who may or may

not be members (as in a corporation) Investors in an LLC are taxed, like partners, only once on its profits as those profits are earned

o Investors can also take account, on their individual tax returns, of any losses of the LLC are incurred; the losses are said to ‘pass through’

The LLC offers greater freedom than a corporation in allocating profit and loss for tax purposes Formation:

o Requires paperwork and filing with a state agencyo Some states impose fees and taxes on LLCs that are not imposed on partnership

LIMITED LIABILITY COMPANYTrying to take the very best of everything. LLC gets pass through tax treatment and avoids the corporate double tax. The LCC also avoids unlimited personal liability:

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Agency: There is, to a certain extent, an attribution of vicarious liability between and among the members of the LLC. If it is imputed, it is still imputed to the amount of their investment and beyond.Management: Like a partnership, §404 of the Uniform Limited Liability Company Act, absent an agreement to the contrary, each member of the LCC has a voice in management.Operating Agreement: Can make it anything you want without losing taxes and liability. Some things provided for are: name of entity, purpose of the entity, duration of the LLC, your registered agent, spelling out of the contributions made by the members.FIDUCIARY DUTIES: As a general proposition members of an LLC owe fiduciary duties to one another. Like a partnership in that respect. §409: Duty of loyalty and duty of care.Exit/Break-up: Not going to get money unless provided for mechanism in operating agreement. Usually, put a mediation or arbitration agreement in the operating agreement.

1. Formation Documentsa. Certificate of Formationb. Articles of Organizationc. Operating Agreement

2. Personal Liability Shielda. Members get the benefit – they are like shareholders in a corporationb. §303(a) of the Uniform LLC Act – provides that debts, obligations, and liabilities of an LLC

are solely the debts, obligations, and liabilities of the companyc. Piercing the Veil – does a person have the ability to pierce the LLC shield and get into the

pockets of the members of the LLC? – YESd. Kaycee Land and Livestock v. Flahive: The common law doctrine of piercing the corporate

veil is not abrogated by the limited liability company act and may be used against LLC members in appropriate cases

3. Managementa. Member Managedb. Manager Managed

4. Tax Treatment – LLC doesn’t pay taxes on income or take benefit of losses5. Agency

a. §301(a) – if it is member managed, all the members have the authority to bind the LLCb. If it is manager-managed, the manager has the authority to bind the LLC

6. Powers7. Inter se Fiduciary Duties

a. §409 – If manager-managed, the manager owes the fiduciary duties to the members of the LLC just like a director/officer of a corporation owes to a shareholder

i. If member-managed, members owe the manager and each other fiduciary duties8. Exit – same as corporations and private companies9. Raising money

LIMITED LIABILITY PARTNERSHIP Achieved by filing a document with a state official Most LLP statutes provide limited liability only for partnership debts arising negligence and

similar misconduct – not for contractual obligations

Not a taxable entity – when the partnership gets income, they file an information tax return which will list the distributions to the partners. The partners will then file their own tax returns on what they received – Pass through tax treatment

o Agency: Partners are liable for action of other partners done within the scope of the partnership

o Management: Absent an agreement to the contrary, everyone has an equal sayo Operating Agreement: Partnership Agreement

CORPORATIONS Corporations pay double tax. A taxable unit and is treated separate and apart from its

shareholders. When income comes in, the corporation pays corporate income tax. Corporation then divides money out as dividends to shareholders. Shareholders then get taxed on those dividends. Way round this would be to form a sub-chapter 5 corporation which gets taxed like a partnership. Problem with subchapter 5 is that it is limited to small business (75 shareholders or less)

o Agency: Shareholders are not vicariously liable for the actions of the officers and directors or other shareholders

o Management: the day-to-day decisions are made by the managers and the board. Owners have practically no say.

o Operating Agreement: corporate charters

PERSONAL LIABILITY No limited personal liability; injured party can take everything. In partnership, you also have unlimited personality liability; no shield to your assets. The corporation on the other hand is separate and distinct entity; only at risk to the extent of your

investment.

THE OPERATING AGREEMENTElf v. Jaffari

2 entities formed an LLC. They put together an operating agreement. Elf sues Jaffari individually and Malek, LLC.

Freedom on contract: You can make the terms you want and the court is going to enforce them. PROCESS of Jaffari’s Lawyer:

o Gather Facts: Who is Elf ? What did they offer? What kind of control do you want?o Vet the Deal: examine the transaction (do their due diligence). o Money: how should Jaffari take the money?o Controlo Personal Liabilityo Taxeso Protecting his ideaso Inter se fiduciary relationshipo Dispute resolutiono Exit/Break-up

3 Types: 1) Employment Agreement (as an employee) 2) Operating Agreement (LLC); 3)Distribution Agreement (as a distributor)

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PIERCING THE LLC VEILKaycee Land and Livestock v. Flahive: Flahive, through Flahive Oil and Gas, LLC, leased undeveloped property from Kaycee Land and contaminated the property. Kaycee did not allege that Flahive acted fraudulently, but wanted to pierce Flahice Oil’s LLC veil to reach Roger Flahive’s personal assets to satisfy the LLC’s debt for cleaning up the property. The common law doctrine of piercing the corporate veil is not abrogated by the limited liability company act and may be used against LLC members in appropriate cases.

CHAPTER 5. THE DUTIES OF OFFICERS, DIRECTORS, AND OTHER INSIDERS

Defined: Fiduciary duties are owed to shareholders of corporations and to the corporation itselfI. The Duty of Care

Burden on PlaintiffStandard: Directors and officers owe the corporation a duty of care. She must do what a reasonably prudent person would do with regard to her own business.

The BJR presumes that directors and officers carry out their functions in good faith, after sufficient investigation, and for acceptable reasons

L.A.F. Duty of CareOccurs in two kinds of cases:

1. Inattention (Nonfeasance) cases: BJR not a defense (Francis)a. Where the directors and officers are not attentive – they do nothingb. Asleep at the switch cases, failure to monitor, abdication of responsibility, ignoring red

flagsc. The directors and officers are just not paying attention to their businessd. BJR not a defense because the directors and officers are not making business decisionse. *Hard to win these cases because it is tough to show that the inattention caused harm to

the corporation; especially since the corporation would probably have been harmed regardless of the actions of the directors

2. Business Decision (Misfeasance) cases: BJR may be a defense but it depends on the jurisdictiona. Here, the board does something, but it hurts the corporation (causation is clear)b. If the director meets the BJR, then he/she is not liablec. There are 4 Standards:

i. BJR not a defenseii. BJR absolute defense (Kamin standard)

Seems that duty of care disappears under this standard because the court takes a dogmatic view of its power

Essentially, there is no duty of care that can be breached when a director or officer makes a business decision – it seems that the duty of care can only be breached if there is an indication of fraud, gross negligence, or irrationality

iii. BJR causes duty of care to get enhanced to gross negligence (Van Gorkom standard)

Where you are alleging that the board was careless – the Van Gorkom court doesn’t apply the Kamin standard, instead, the plaintiff will have to prove a higher degree of negligence that the court calls gross negligence

iv. Process v. Substance – BJR will protect the substance absolutely, and BJR will not protect the process by which the decision was made

SHOWING A BREACH OF DUTY OF CARE Officers and directors must be careful when they make business decisions In order to show that directors breached their duty of care by failing adequately to control

employees, plaintiff must show either:i. That the directors knew or

ii. Should have known that violations of law were occurring and, in either event,iii. That the directors took no steps in a good faith effort to prevent or remedy that situation,

andiv. That such failure proximately resulted in the losses complained of

Officers and directors can avoid liability by: ethics committee, guidelines, employee signoffs, a compliance department, training sessions, etc.

All standards of care are subject to business judgment rule defense the business judgment rule is pretty inconsistent

If directors are careful and informed without self-interest; then a bad business decision won’t be actionable

o Substantive decisions – deference from the courto PROCESS that matters: Transparency, Prepared, Informed, Experts, Records, do not be

rushed, Be reflective, etc. (Kamin, Van Gorkom = business decisions)

Kamin v. American Express Companyo Had many route it could have taken after loss of investments

Sell some/hold some Sell all Give to stockholders Average down

o No one decision is correct – just need to follow a reasonable process; then, any decision will be insulated from personal liability

Smith v. Van Gorkom: PROCESS was bad – substantive decision wasn’t the problem, but the process/way they went about

o Board had 2 hour meeting, having not seen the agreement and getting this oral presentation from VG: they vote and approve it

o Court finds that the board did not reach an informed business judgment and therefore breached their fiduciary duty by their failure to inform themselves of all information reasonably available to them and relevant to their decisions to recommend the Pritzker merger

o NEED TO MAKE DECISIONS ON AN INFORMED BASIS

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The determination of whether a decision was informed turns on whether the directors have informed themselves prior to making a business decision, of all material information reasonably available to them

DUTY TO MONITORMore rooted in the duty of care (though it falls in both care and loyalty)

1. Standard of Care: Usually pretty deferential to the corporate directors2. Procedural Prudent (Process)

a. If procedurally prudent, the court will normally say no breach of fiduciary duty of careb. Crucial

3. Duty to Monitora. Directors are under a continuing obligation to keep informed about the activities of the

corporationb. Directors may not shut their eyes to corporate misconductc. General monitoring of corporate affairs and policiesd. Should maintain familiarity with the financial status of the corporation with a regular

review of financial statements4. Generally, directors are immune from liability, if in good faith they:

a. Rely upon the opinion of counsel for the corporationb. Rely upon written reports setting forth financial data concerning the corporation and

prepared by an independent public accountant or certified public accountants or firm accountants, etc.

c. Not a substitute for an informed, deliberate process blatantly rushed through and uninformed decisions lead to liability

II. The Duty of Loyalty Burden on the defendant because BJR does not apply in cases involving conflict of interest

Standard: Directors and officers owe the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest

Duty of loyalty ‘kicks in’ whenever the D&O has a personal interest or relationship in a transaction that involves the corporation

L.A.F. Duty of Loyalty1. Strict Judicial Scrutiny : No business judgment rule presumption

The court is going to treat the transaction that has allegedly breach the duty of loyalty with strict scrutiny

2. Burden Shifting : Obligation on the directors and officers to show (1) Good faith and (2) Fairness of the challenged act

Needs to be affirmatively demonstrate this3. Related/interested transactions are not per se invalid – they are voidable, not void

Even if the transaction looked like it may have been a breach, it will be allowed to go forward if it was FAIR

If the director doesn’t vote If the disclosure is helpful If the shareholders approve after disclosure

If the transaction is vetted out

VOIDABLE NOT VOID Transactions that breach the duty are voidable not void. If directors/officers are going to engage

in self-interested action/related party transactions they should take certain steps to insulate loyalty questions:

o DISCLOSUREo Abstain from participatingo Get shareholder approvalo Create a Related Party Committeeo Get a fairness opinion from a neutral party

Bayer v. Beran:o Million dollar advertising campaign of wife of president/director/largest shareholder

singing on the radio Shareholder thinks: (1) advertising is a bad idea (2) breach of duty of loyalty

because they hired the wife to sing on the showo Just because she got hired doesn’t mean that the contract is voido No BJR presumption = rigorous scrutiny (taking about every detail to see if its smart

because wife is in the picture)o Burden shifts to directors/officers to challenge the transactiono Good faith/fairness – a director doesn’t breach his fiduciary duty by approving a radio

advertising program in which the wife of the corporate president, who is also a shareholder, was one of the featured performers – she was paid the same as the other performers and wasn’t given any unfair advantage

USURPATION OF CORPORATE OPPORTUNITIES Subset of Duty of Loyalty Officers and directors have a duty not to usurp a corporate opportunity – cannot exploit for their

personal gain an idea presented to them or developed by them in their corporate capacitieso They had a fiduciary obligation to share the opportunities with the company they work for,

rather than using the opportunity to enrich themselves A corporate opportunity is generally considered to be any advantage the exploitation of which by

an officer/director would be unfair to the corporationo Factors to consider include: whether the opportunity was discovered by an officer or

director when they were acting in his/her corporate capacity, whether the corporation can actually take advantage of the opportunity, whether any corporate funds were used to acquire the opportunity

o To avoid liability for usurping a corporate opportunity, the officer/director should immediately offer it to the corporation and only act on it after the corporate has rejected it

L.A.F. Usurpation of Corporate Opportunities (Fact Intensive)1. Capacity

o How did the opportunity get to the director? Capacity as director? (Meinhard)2. Capability

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o Does the entity have the capability to capitalize on the opportunity?3. Corporation’s Line of Business

o Is the opportunity something that is within the general nature or scope of the type of business the entity is engaged in?

4. Resulting Conflict of Interesto If the person exercises the opportunity, will it put them in a conflict with the entity?

5. Processo When the opportunity was presented, how did the person react? Were they sneaky?

Surreptitious? Open? Was there disclosure? Did they offer the transaction to the entity?

Broz v. Cellular Information Systems, Inc.o Broz can buy RFBC because there wasn’t a conflict of interest

Didn’t come to him in his capacity as director of CIS Didn’t have enough money to buy it and didn’t want it Broz disclosed his plan to the board of his corp. No longer in the same line of business No resulting conflict

III. Care v. Loyalty Big difference between care and loyalty Defendant will want to try to spring it as care to take advantage of the BJR defense Plaintiff will want the breach to be loyalty because the director will then not be able to use the

presumption of BJR How do you decide if it is a care or loyalty case?

o Does the director have an ulterior motive? More likely to be loyaltyo Does the action serve some outside purpose of the director? Loyalty

Sinclair Oil Corp. v. Levino Alleged excessive dividend (3% shareholder was claiming loyalty breach but no outside

motive – didn’t get any more (care)o Didn’t enforce rights with another subsidiary (who weren’t paying)

Ulterior motive? YES – 97% shareholders owned subsidiary (loyalty) Unsafe harbor – big problem

IV. Fiduciary Duties to Creditors If corporation is in zone of insolvency, directors of a corporation need to make sure creditors of

the corporation are not getting mistreatedo Preferring ourselves over creditors?

Fiduciary duties still owed to them even though they are not an owner

V. Fiduciary Duty of Dominant Shareholders If a person is a dominant shareholder, they have exact same duty as directors and officers:

1. What is dominance?a. 50% or more? (NO, just need to have most)

b. Even if 25%, you might still have controli. Influence

ii. Group of others who vote with you1. “Puppets” of the dominant shareholder

iii. De Facto control2. Dominant shareholder controls board and therefore owes the same duty of care and loyalty

a. The dominant has the right to control; but when it does, it occupies a fiduciary relation toward minority, as much as the corporation itself and its officers and directors

b. The amount of shares is no dispositive Zahn v. Transamerica Corporation

o If a stockholder who is also a director is voting as a director, he or she represents all stockholders in the capacity of a trustee and cannot use the director’s position for his or her personal benefit to the stockholders’ detriment

VI. The Obligation of Good Faith Subset of loyalty Standard somewhere between care and loyalty Scope will depend on the nature of the relationship of the parties Fiduciary relationship will dictate parameters – NOT THE SAME EVERY TIME Rooted in the Duty of Loyalty – Involves the intentional dereliction of a duty/conscious disregard

of responsibilities/blatant disregard of a duty to be informed (Francis)

A failure to act in good faith may be shown:1. Where the fiduciary intentionally acts with a purpose other than that of advancing the best

interests of the corporation2. Where the fiduciary acts with the intent to violate applicable positive law; or3. Where the fiduciary intentionally fails to act in the face of a known duty to act,

demonstrating a conscious disregard for his duties

DUTY OF OVERSIGHT Part of good faith and loyalty Directors and officers have an oversight responsibility to make sure that the corporation and its

employees are not breaking the lawL.A.F. Duty of Oversight

1. Make sure information gathering and reporting systems exist that are designed to allow senior management and directors to make informed judgments concerning corporate law compliance and business performance

2. Monitor the information gathered3. Depth of information system is a matter of business judgment

Stone v. Ritter: leading case of Delawareo Rudimentary understanding of firm’s business and how it workso Informed about firm’s activitieso Attend board meetingso Routinely review financial statements

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RITTER/CAREMARK STANDARD1. Implement compliance with law procedures2. Periodically assess system put in place3. Investigate possible misconduct brought to director’s attention4. Resolve actual instances of misconduct5. Institute measures

VII. Federal Securities LawsDefined: A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (banknotes, bonds, debentures) and equity securities (common stocks, derivative contracts like forwards, futures, options and swaps)

MEANING OF A SECURITY1. Traditional: Notes, Stocks, Bonds, Debentures2. Non-Traditional: Investment Contrac3. Any other instrument commonly known as a security4. Escape Hatch/Catch-Alls: Commonly known as a security “unless the context otherwise requires”

THE SECURITIES ACTS 1933: DISCLOSURE – Before someone buys security, material information is disclosed with

connection to the security. When selling, should give enough information to the buyer so that they are informed

1934: MARKET INTEGRITY – Market is manipulated; deceiving people into believing that money is making a lot but they are just pocketing it (pump and dump)

MARKETS Primary Market – issuer (company issuing stock and offering to the public); sells them to investors

directorso After market trading = secondary market

Secondary Market – issuer doesn’t get money, investors are making the profits Issue: Stay private or go public?

o Public: Give up some control, responsibilities to shareholders, liquidity; but will have resources to grow as large as it can grow and establish a market value for the sahres

TRADITIONAL STOCK (Forman Test)Five most common features of a stock:

1. The right to receive dividends contingent upon an apportionment of profits2. Negotiability3. The ability to be pledged or hypothecated4. Voting rights in proportion to the number of shares owned; and5. The ability to appreciate in value

NON-TRADITIONAL INVESTMENT CONTRACT: Howey TestThree requirements for establishing an investment contract

1. An investment of money2. In a common enterprise3. With profits to come solely from the efforts of others

COMMON ENTERPRISE Courts look to whether there is horizontal commonality between investors or vertical

commonality between a promoter and an investoro Horizontal Commonality: requires a pooling of investors’ contributions and distribution of

profits and losses on a pro-rata basis among investorso Vertical Commonality: less stringent requires that an investor and promoter be engaged in

common enterprise with the fortunes of the investors linked with those of the promoters

IX. Registration Process/Statements Tab 9 Registration is required when selling a security It is a document that gets prepared for the issuer (the company whose shares of stock are being

issued for the public for purchase1. § 5 – Any person selling/offering to sell a security must provide a registration

statement2. § 4 – Exceptions from § 5

a. § 5 only applies to an issuer, underwriter, or dealer (not average Joe/Jane)b. Private Placement Exemption (not involving any public offering) – Don’t need to

file a registration statement if certain prerequisites are meti. Regulation D of SEC: If an issuer raises no more than $1M, it generally

may sell them to unlimited number of buyers; if raises no more than $5M, may sell to 35 buyers w/o registration statement

ii. Ralston Purina Test: Doran Case1. Number of offerees and relationship to each other and issuer2. Number of units offered3. Size of the offering4. Manner of the offering

a. People who are buy these securities are in the same place If they would have a registration statement so they don’t need a registration statement and it shouldn’t be required

ALLEGING A SECTION 5 VIOLATION1. I bought the security and you didn’t file a registration statement

Remedy: I want to rescind2. Registration statement is materially false and misleading (not intentionally) (Section 11 – Intent

doesn’t matter)

Dorano The offering should be deemed private if, and only if, it can be shown that each offeree had

been furnished, or had access to, such information that a registration statement would have disclosed

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o The relationship between the company and the investors and the access to this kind of information becomes highly relevant

o Private placements do not need registration statements – so, you must determine if it is a private placement

SECTION 11 OF THE SECURITIES ACTSPurpose: Section 11 makes issuers liable for registration statements that contain "an untrue statement of a material fact or omit to state a material fact required...to make the statements therein not misleading”

Do not need a registration statement every single time. Generally, the smaller the number of offerees and the less the amount of money being received, the more likely it will be considered a private placement

L.A.F. Section 111. Conduct Covered: claims based on materially untrue registration statements

a. Statements are inaccurate because you affirmatively made inaccurate statements or you failed to include something that should have been included

b. Basically, there are mistakes in there2. Personals Liable: all signers of the registration statement officers, directors, underwriters,

dealers, insurers, experts (ex. Accountants)3. Material affirmative misrepresentations or omissions

a. Material: facts that an average, prudent investor ought reasonably to be informed before purchasing the security

b. Defendant must believe after a reasonable investigation that the alleged misstatements are correct and there was no material omission

4. Intent to defraud NOT NEEDED

L.A.F. Section 11 Defenses1. Issuer Defense: only defense is that the registration is not materially incorrect

a. No defense if registration statement is materially falsei. Do not need to show intent strict liability

b. Materiality: always a defense. What you are saying is fraud or not true is NOT a material fact or statement

2. Non-Expert Defensea. Due diligence was exercised; andb. Reliance on expert sections of registration statement

3. Expert Defensea. Reasonable due diligenceb. Made reasonable investigationc. We don’t hold you liable if you made you due diligence

4. Safe Harbors: 15 U.S.C. § 77Z-2(c)a. Forward looking statements – projections of the future, “I wasn’t making a statement of

fact”b. Puffery – bragging about the quality of the product have to be careful with this because

the line between puffery and an omission and an affirmative statement can be blurred

c. “Bespeaks Caution Doctrine” – cautionary language estops you from going forward with the lawsuit Registration statement in essence warns the reader of the risks involved

X. Rule 10b-5Defined: The rule prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any securtity

NOT the same as Section 11 10b-5 does not create a private right of action. There is an implied private right of action

Who Uses 10b-5?: Private plaintiffs who want money; SEC who wants an injunction, who wants to invoke a license, or who wants money; US Attorneys who want to indict people for abusing 10b-5

ESTABLISHING A 10b-5 CLAIMIn order to establish a claim under Rule 10b-5, plaintiffs (including the SEC) must show:

1. Manipulation or deception2. Materiality3. ‘in connection with’ the purchase or sale of securities; and4. Scienter (intent or knowledge of wrongdoing)

Private plaintiffs have the additional burden of establishing:1. Standing – purchaser/seller requirement2. Reliance3. Loss causation; and4. Damages

*In cases for insider trading, anyone who uses insider information can be held liable. The tippee can be liable if tipper breached the duty and the tippee knew that the tipper was breaching the duty

L.A.F. (Extended Version) for Rule 10b-51. Jurisdiction

a. Must be an instrumentality of interstate commerce (almost always is)2. In connection with purchase or sale of security

a. Defining the security becomes an important factor. You also have to prove that the statement or disclosure you are complaining about is in connection with the purchase or sale

b. In Zandford – big issue here was the meaning of ‘in connection with’3. Standing

a. Need to be an actual buyer or actual seller of securities – Can’t hold on to stock and then sue “Blue Chip Doctrine” (p 456)

4. Deceptive/Manipulativea. Subsection (a), (c), or (b)

i. (a), (c) = scheme liability no requirement of affirmative misrepresentation or omission; manipulation/deception is needed

ii. (b) = material affirmative misrepresentation or omissions to disclosure a material fact is required

1. Omission – must show a DUTY to speak, silence where there is no duty to speak is not actionable

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2. Northwood Standard – substantial likelihood that disclosure of omitted fact would’ve been viewed by a reasonable investors as having significantly altered the ‘total mix’ of information made available

5. Materialitya. Test: Whether there is a substantial likelihood that a reasonable investor would have

considered the true information to be important in making their decision6. Scienter (exacting pleading requirement)

a. Actual knowledgeb. Intent to defraudc. Reckless and conscious disregard of the obvious

i. Less than intent but MORE than mere negligence (negligence is not enough)ii. If you didn’t know, you should have known

d. *Some circuits will decide this issue differently – some will say that recklessness is not enough and others will say that it is

7. Reliance/Causationa. Direct/Face to Faceb. Presumed – Rebuttable presumption of reliance is an omission case

i. Unrealistic evidentiary burden to prove – so presumption of reliance1. Fraud on the Market Theory – efficient capital market theory: In an open and

developed securities market, the prices of a company’s stock is determined by the available material information regarding the company and its business

a. The theory assumes that misleading information or statements will defraud stock purchasers even if they do not rely on the misstatements

b. A corporation can rebut this assumption by showing that the plaintiff did not rely on the market price

ii. If defendant owed a duty to SPEAK8. Damages – just keep it simple and know that there are damages to be had

IN PRACTICEBasic v. Levinson

1. Jurisdiction because on interstate commerce market2. Securities were stocks and fraud is in connection with stock3. Standing: yes, were actual sellers of their stocks4. (a),(c) or (b)

a. Probably no schemeb. Fraudulent misrepresentation or omission

5. Materiality: under fairway standard – probably would have been significant for a reasonable investor (wouldn’t sell later)

6. Scienter: Nobody cashed in on anything here (didn’t help the officers)a. Reckless act in allowing 3 press releases to avoid the obvious?b. Didn’t intent to defraud but consciously ignored that what you were saying is less than true

7. Actual Reliance: Fraud on the Market Theorya. Need to show:

i. Materially false information disseminated in an impersonal, well-developed market for securities

1. Then presumption is reliance on the false statement/omissionii. Rebuttal: Truth on the market

1. Market price was not affected by public informationThis is very hard to prove!

SCHEME LIABILITY CASE(a)(c) Scheme Case

A claim of fraud and breach of fiduciary duty can only be cause of action under 10b-5 if the conduct alleged can be fairly viewed as manipulative or deceptive

XI. Insider TradingDefined: The use of MATERIAL, NON-PUBLIC INFORMATION about a company whose securities are being bought and sold on an exchange

The trading of a corporation’s stock or other securities (bonds/stock options) by individuals with potential access to non-public information about the company

Insider Information: Not accessible to the public; status of the person allowed him/her to access the information that not matter how hard the public worked, couldn’t get it

Look to the totality of the circumstances Also look to the purpose of the disclosure – insider will benefit directly or indirectly from his

disclosure. o Absent personal gain, no breach to stockholders and absent breach to stockholders, there is

no derivative breach

L.A.F. Insider Trading1. Information Gathering v. Access Disparity

a. Information Gathering through effort, research, luck – this just comes to you by accident or by research or creative analysis – this is not a problem, it is legal

b. Access Disparity – some people by virtue of their status or job are able to gain information that is non-public and material getting information that other people have no way to get; this is a problem and illegal

2. The Playersa. Permanent Insiders

i. Directors, officers, dominant shareholders that obtain information that is not public. Must keep their mouths shut. Can’t go on to buy/sell or tell others to do it

b. Temporary Insidersi. Role established as special confidential relationship in the conduct of the business of

the enterprisec. Tippee Liability

i. Insider/misappropriator (tippers) must breach duty owed to shareholder/sources; AND

ii. Tippee must know or should have known that tipper (insider/misappropriator) provided tip (information) in violation of duty to shareholder/sources

iii. Classic: Friend or family member of an insider

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1. May not act on it themselves but pass it on to someone

*Only violation is known or should have known insider is breaching a duty to someone else by telling the tippee (or by talking to the public)

INSIDER TRADING L.A.F. CONDENSED1. Material non-public information2. Status of trader

a. Permanentb. Temporaryc. Tippee

3. Insider’s Duty Breacha. In disclosing non-public informationb. Knowledge

4. Tippee’s Knowledge (If there is a Tippee)a. Breached duty by disclosureb. Tippee knew or should have known that there was a breach

CLASSICAL THEORY The act of engaging in insider trading is deceptive or manipulative device or scheme; therefore,

unfair to have market transaction where people are trading on access disparityo Corporate insider uses material non-public information to his/her benefit in breach of

fiduciary duty of loyalty owed by the officer or director

MISAPPROPRIATION THEORY Deceptive to trade on information that is a breach of a duty to someone else

o When anybody breached a duty to the source from who that people got the information

CASES Martha Stewart Case: Waschel – knew cancer drug not being approved. Assumed broker called

Martha and tells her that the cancer drug was going to fail. Waschel was the insider, passed on to the broker, who passed it on to Martha. Martha is the tippee.

Dirks: Tipper – Dirks received information about fraud from an insider in the company. Assests were overstated (material, not-public fact). Dirks further investigated. Dirks owed a duty to the source of the information, but there was no direct or indirect benefit. Prime motivation was to expose fraud, not to personally gain

O’Hagan: O’Hagan at a law firm, not working with client, but purchased stock and made money. He was treated as an insider because he had a duty to the source of the information. Duty was present and he breached the duty by buying direct shares of stock and making $4M

XII. Control Person Liability Section 20(a) Control Person (Vicarious Liability Under Control Liability)

L.A.F. Control Person Liability1. Primary violation of SEA 19342. Control Person (plaintiff burden)

a. No statutory definitionb. SEC definition – possession of power to direct or cause the direction of the management

and policies of anotherc. Power to control the specific transaction upon which primary violation was basedd. Practical ability to direct businesse. High level positionf. Participated-in

3. Good Faith/Did not directly or indirectly cause violation (non-inducement)a. Burden shift to defendant to prove it; affirmative defense

4. Culpable Participation – distinguish 20(A0 from respondeat superior in certain circuitsa. Needed to prove it, but not to plead it – prudent lawyer will want to plead with

particularity

CONTROL PERSON LIABILITY DEFENSES1. No primary violation2. I am not a control person3. I acted in good faith and didn’t induce/cause violation4. I wasn’t culpable (almost a co-conspirator)

CHAPTER 6. PROBLEMS OF CONTROL

I. Overview Public Corporation

1. Write Letters2. Proxy Fight (very expensive)3. Shareholder proposal (very attractive/inexpensive/puts corporate boards on defense)4. Statutory Rights: (1) Inspection of Corporate Records; (2) Assert that you are being

oppressed5. Attend Annual Meetings6. Try to get cumulative voting7. Lawsuit (breach of duty of care and loyalty)

i. Class Actionii. Direct

iii. Derivative Closely Held Corporation (Most Problems of Control are Here)

1. Before the Facta. Classes of shares of stockb. Cumulative votingc. Supermajorityd. Employment Agreemente. Shareholder Agreement/Partnership Agreement/Operating Agreement

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i. Provisions that protect you!2. After the Fact

a. Common law claimsb. Oppressed minority shareholder statutesc. Mediation/Arbitration

II. Control in Public CorporationsPROXY FIGHTS

Shareholders typically do not attend the annual shareholder meetings. A proxy is an absentee ballot if a shareholder cannot attend the meeting. The corporation will ask them for a proxy, which will allow them to vote. The ballot contains a proxy statement from the corporation that has relevant information; they cannot expect you to vote without letting you know what is going on

Proxy forms are important because most shareholder meetings involve different votes; such as elections, mergers, proposals and compensation for directors

o Incumbents: Sometimes, incumbents will create a proxy fight by contacting the undecided shareholders and trying to win them over. The incumbents won’t tell you who the shareholders are, but they will instead mail your proxy statements for you – expensively.

PROXY FRAUDDefined: Section 14(a) of the 1934 Exchange Act and Rule 14a-9 are designed to protect investors

Rule 14a-9o Prohibits solicitation of a proxy by a statement containing either (1) a false or misleading

declaration of material fact, or (2) an omission of material fact that makes any portion of the statement false or misleading

*Not the same as Section 11 because the elements are different and this is not a security

L.A.F. Proxy Fraud/False or Misleading Proxy Statements1. Jurisdiction

a. Interstate commerce involvement if you are dealing with a proxy statement there is likely interstate commerce

2. Proxy Statement (Tab 11)a. Detailed document containing information about the corporation matters to be voted on,

etc. b. It is similar in disclosure to a registration statement but it is not the same thing

3. Standinga. Any shareholder who can voteb. Anyone who gets the statement or should have gotten the statement

4. Materialitya. Substantial likelihood a reasonable investor would consider it important in deciding how to

votei. Affirmative Omission – must have a materially false, affirmative statement or

omission in proxy statementii. No intent (scienter) is required

iii. Definition of Material – something is material if it is important; if it is going to make a difference to someone

5. Causationa. Minority votes needed to pass measure essential linkb. Minority voted not needed to pass the measure

i. There are some lower court cases that in certain extraordinary circumstances even if the minority shareholders’ votes were not needed to pass the measure, they would still be able to bring a 14a-9 claim

c. Defense – “it wouldn’t have changed the outcome”d. Mills – Look to the process; if corrupted, then there is a remedy under 14a-9e. If the owns enough shares to produce the outcome anyway, then it doesn’t really matter if

the minority shareholders would have voted differently6. Remedy (Depends on when you go to court)

a. Pre-vote – correct the mistakes; ask for a TRO to postpone the meeting and allow the mistakes to be corrected

b. Post-vote – discretionary money damages, counsel fees, corporate therapeutics (replacing board members etc – seems like you are doing something but you really aren’t)

Seinfeld v. Bartzo Materially misleading?o Material: Sufficient to establish substantial likelihood that “under all the circumstances, the

omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder”

Mills v. Electric Auto-Lite Co.o Crucial Issue is materialityo The court is going to superimpose itself into the shoes of the reasonable investor and see if

this proxy statement does or does not contain information which a reasonable investor would find important

Proxy solicitation itself, rather than the particular defect, was an essential link in the accomplishment of the transaction regardless of whether plaintiff’s votes were needed

III. Shareholder ProposalsDefined: Extraordinarily valuable device by which a shareholder (even a small %) who wants to have something included in the proxy statement can put it up for can get it put up for vote by getting it into the proxy

This is a forum by which to reach other shareholders (easier than a shareholder trying to figure out who all the other shareholders are)

o Usually, if a shareholder is making a proposal, it might run contrary to managemento It could undermine authority or interfere with managemento The shareholder proposal is sort of like a letter of demand before derivative action is

brought, the corporation must decide whether or not the proposal should be included in the proxy statement

L.A.F. Shareholder Proposals (17 CFR § 240; 14a-8) Generally : If a shareholder makes a proposal, it has to go into the proxy statement unless there is a

reason for excluding it

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Exemptions/Exclusions : grounds upon which management may refuse to include shareholders’ proposal in proxy statement

o Corporation can send a letter to the SEC and explain why they don’t want to include the proposal in the proxy statement

The SEC can then send a ‘no action letter’ saying that they don’t think that they will bring an action against the corporation if they don’t include the proposal

o There are also 13 situations in 14a-8(i) that note valid reasons for a corporation to exclude a shareholder proposal

1. Improper under state law2. Violation of law3. Violation of proxy rules4. Personal grievance/special interest5. Relevance to the company’s business6. Absence of power/authority7. Management functions8. Relates to election/nomination9. Conflicts with company’s proposal10. Substantially implemented already by the company11. Duplication12. Resubmissions 13. Specific amounts of dividends

Shareholder : 1. Admit defeat2. Lawsuit to get the proposal included in the statement

i. This is hard because of the SEC no action letter – deference will be given to the SEC in court. Most of the time, if there was a no action letter, the plaintiff will not pursue the case

Types of Things Shareholders Often Propose/Bring Up o Executive compensationo Accounting practiceso Governanceo Term limits for directorso Type of labor used

AFSCME v. AIGo Wanted amendment to the voting rules placed upon a ballot to change the way they voted;

need enough shareholders to get the bylaw amendedo Wanted to alter how to put people on the ballot to get voted on by shareholders in the

proxy statemento AIG became concerned that they (incumbents) could be kicked out through the processo SEC gave a no action letter based on the 8th criteria (elections)

Decided to go to court anyway to challenge the no action letter and the company No reason to give deference to the SEC

An election vs. ANY election – AIG had to include it because the court interpreted it different than the SEC

Lovenheimo The meaning of “significantly related” is not limited to the economic significance. This

proposal is significant To prevail on an injunction the plaintiff has to show a likelihood of success on the

merits, whether the plaintiff will suffer an irreparable injury without relief and whether the issuance of the relief will harm the other parties or the public interest

IV. Shareholder Inspection RightsDefined: State statutes spell out the rules for which a shareholder can get access to the corporate books and records: articles, bylaws, public filings, minutes, names, and addresses

Need proper purpose/bona fide investment purpose in doing so Just because you are a shareholder of a corporation doesn’t mean that you can look at whatever

corporate documents you want whenever you want to look at them Shareholders can get some document with no problem at all, but of other documents they need to

make a showing of proper purpose/good cause

NON-CONTROVERSIAL V. CONTROVERSIAL DOCUMENTS1. Non-controversial Documents (should be able to be seen without a hassle)

a. Financial documentsb. Publicly filed documents

2. Controversial Documents (need a proper showing)a. Board Minutes This is tricky because the minutes account for everything discussed; it’s

ideas floating around and not concrete decisions and the shareholders might be influenced by the minutes and private decisions within so – generally board minutes will not be turned over absent a good showing

b. List of stockholders

Varies from State to State: Ideas that Overarch1. A stockholder with a bona fide investment interest2. Holding period3. Number of shares4. Proper Purpose: germane to economic interest of a shareholder

i. Whether or not the reason for asking is germane to an economic interest of shareholder

ii. Why person wants inspection rightsiii. FLEXIBLE: Economic interest can be construed in many different ways

5. Judicial remedies if corporation says noi. Especially when asking for shareholder list

ii. Statute will tell you where to go6. Burden on corporation when it says no

i. Must show why shareholder’s request is defective in some way

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Sadler v. NCR Corporationo A state may require a foreign corporation with substantial ties to its forum to provide

resident shareholders access to its shareholder list and to compile a NOBO list in a situation whether the shareholder could not obtain such documents in the company’s own state of incorporation

o Through compilation, may not be required in every case – here, shareholder access was particularly crucial due to NCR’s policy of treating nonvoting shares as voting in favor of management

----------------------------------------------V. Control in Closely Held Corporations

Closely held corporations are usually LLCs If you want to give the shareholders some way of protecting their minority interest so they don’t

get frozen out, there are devices to do that In this small setting, shareholder agreements as a practical consideration are quite necessary for

the protection of those financially interested Problems: Fights become personal because that is where you go to work and depend on the LLC

for your salaryo Everything might seem ok in the beginning, but then there is a fight and things get uglyo Messiest disputes between shareholders usually occur in the context of the closely held

corporation because the shareholders usually rely upon the business to provide them with their sustenance

Unlike a public corporation where the shareholders are typically passive and just in it for the investment – the business for the shareholders of the closely held corporations is usually their lifeblood and the shareholders are usually family members or friends which leads to flare ups and arguments