fall 2012 corporation outline (1)

7/25/2019 Fall 2012 Corporation Outline (1)

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CORP FALL 2012 ZACKS 1

FALL 2012 CORPORATION OUTLINE

PROFESSOR ZACKS

1) The Practice of Bui!e La" #$%&$)

a' Practici!( Cororate La"

i' A *iffere!t Para+i(, fro, Liti(ator

1' Corp lawyers deal w prospective matter than retrospective matter

2' oal! varie"ated than vindication #arms$len"th v adversarial%$' Lawyer client is in char"e o& the 'i( proposal) liti"ator in char"e o& liti"ation

ii' The T-ica. Ro.e of the Cororate La"-er

1' Co*nselor + advice clients2' Conciliator + resolve con&lict 'twn client and another, o&ten re"ardin" a potential transaction$' Facilitator + lawyer as ne"otiator, applica'le re"*lations, dra&ter&' *ardian + protect client and p*'lic a"ainst some contemplated actions 'y persons actin" on the

client-s 'ehal&) con&identialityiii' Profeio!a. Co!+uct of Cor La"-er

1' O'li"ation to report .*p the ladder/ i& &ra*d, sec*rities violation etc2' Can reveal to people o*tside the 'i(

a' i& a&ter reportin" *p the ladder no action is taen and i& lawyer reasona'ly 'elieves that the

violation is reasona'ly certain to res*lt in s*'stantial in*ry to the or"ani(ation/' Reveal in&ormation to the etend the lawyer reasona'ly 'elieves necessary to #1% prevent death3

'odily harm #2% prevent client &rom committin" a crime or &ra*d that will in*re or"ani(ation #4%i

client *sin" lawyer and his wor to cover a crime that will s*'stantially h*rt the &inances o&

some'ody elsei' hat +o Cor .a"-er !ee+ to !o"3

1' Law o& 'i( entities! Corp law o& the state as well as 5elaware2' A"ency law$' Contracts

&' 6a4' Sec*rities Re"*lation5' Secondary areas o& nowled"e! 7mployment and la'or law) Sec*red transaction *nder the 8CC)

'i(, economics and acco*ntin"' Fe+ Securitie Re(u.atio! #FSR)

1' 2002 Con"ress passed Sar'anes$Oley Act + in response to 7nron and 9orldcom corp "ovt scandal

+ implemented *p the ladder reportin" + s:40;a' o to CFO or chie& le"al co*nsel/'


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1' Chandler, @ana"erial Revol*tion! 6ransportation, comm*nication, distri'*tion and prod*ction

revol*tion) trans&ormation in the si(e and activities o& 'i( enterprises + once this hierarchy o&

mana"ers were in place, the desire o& the mana"ers to ass*re the s*ccess o& their enterprise as a

pro&it main" instit*tion created stron" press*res &or its contin*in" "rowtha' Created middle mana"ers + who s*pervised mana"ers 'elow and reported to mana"ers a'ove +

s*pervised the &actory &loor and reported to the ownersi' @iddle mana"ers! more power and nowled"e) the owners have red*ced power

ii' Corp law! when 'i( are held 'y a lar"e n*m'er o& widely scattered owners, p*'licly held corppower over the 'i( resides entirely with the mana"ers) '*t traditionally owners #S>% had

power: ow mana"ers had more power/' $ Cate(orie of Caita.i,

i' Family! &amily owned 'i( + decisions are made 'y the &amily mem'ersii' Financial! a lender provides capital to do 'i( and p*ts its mem'ers on the =O5 #how BBB in

'i( is spent%iii' @ana"erial! mana"ers mae the decision o& how to r*n the company + who to hire, &ire etciv:

' For, fo..o"i!( Fu!ctio!8 Fro, Part!erhi to Cor

1' Corporate &orm! a'ility to amass lar"e amo*nts o& capital, limited lia'ility and the centrali(ation o&

control, the a'ility to commit capital, once amassed &or etended periods o& time2' Corp means that it was entity *nder the law and incorp re*ired "overnance r*les that le"ally

separated 'i( decision main" &rom contri'*tions o& &inancial capital$' As a separate le"al entity, separate &rom mana"ers and investors, allows 'i( or"ani(ers to partition

the assets *sed in the 'i(: Partitionin" has 2 aspectsa' + e"! Sin"er + owner in

partnership dies, heirs will want it distri'*ted to them, the sol*tion was to &orm a corporation,

chan"e the ownership and tr*st &rom partnership and iss*e stocs + so the corp wo*ld remain and

it wo*ld not 'e a&&ected 'y owner-s deathi' hich State La"3 9 The Rie of *e.a"are

1'


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/' Moral Hazard (MH):occ*rs a&ter a"ency a"reement is made + the ris that a party with

discretion to act will choose an action that decreases the epected val*e o& the transaction to the

other party in way y that the pother party cannot e&&ectively prohi'iti' A-s PO?! @ain @> +Ratcheting P increasin" the tass that A has to do witho*t increasin"

recompenseii' P-s PO?!Shirking: A chooses to per&orm less well than the parties anticipated + *sin"

s*'optimal sill

iii' P-s PO?!Private benefits: A will try to "et these &rom P + and will 'ear only part, or none o&the costs + can 'e nonmonetary as well

c' A-s tend to 'e more risk averse: this is 'eca*se even i& P and A share the "ain, the A never

receives the entire "ain: And i& there is a loss, A does not share in it, '*t P mi"ht not 'e a'le to

pay the a"reed rem*neration+' 6hese costs to P can 'e ameliorated #'*t never eliminated%

i' Incentive compensationprofit sharing:parties can a"ree that A- s compensation will depend

in whole or in part on the de"ree to which the A acts in the P-s 'est interestii' Monitor:simply watchin" the A wor, contract*al limitations on the A-s discretion s*ch as

'*d"et or other operational limitations

e' 9hat A-s can doHi' !onding: epend reso*rces to ass*re P that they will not shir or 'ehave opport*nistically +

o'tainin" an ins*rance policy or a"reein" to a &inancial penalty cla*se in the a"ency a"reemenii' "ote:P can also tae 'ondin" actions to ass*re a"ents that they will not ratchet

ii' here +o A(e!c- =uetio! Arie3

1' 7ees with s*pervisory powers are 'oth A #o& the mana"ers to whom they report% and P #to the 7ees

who report to them%2' eneral Partnership! each partner is 'oth an owner #P% and an A$' Corp and =O5! to the etent that directors are also mana"ers + they are people "iven discretion to

act in another-s 'est interesta' =eca*se all corp power is vested in the =O5 #*nder corp law%, the =O5 is not s*'ect to the corp

control/' 6h*s it does not meet the le"al de&n o& a"ent and is not "enerally held to 'e s*'ect to the ri"hts

and o'li"ations o& a"ents *nder CLc'


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CORP FALL 2012 ZACKS G

/' 5irectors o& a corp are not a"ents + party 'c they cannot act alone '*t can only act as a 'oard and

party 'eca*se the directors "overn the corp and th*s are not s*'ect to the corp-s controlc' en partners in "en or limited partnership are a"ents even tho*"ht, lie corp directors, they m*st

act as a 'ody and are not s*'ect to the partnership-s controlii' Creatio! of the A(e!c- Re.atio!hi

1' Bai.e > ? R B.oc

a' =asile had "one to > I R =loc &or ta preparation p*rposes and elected to receive a re&*nd

anticipation loan: 6hese loans were o&&ered 'y > I R =loc, alon" with other options o&receivin" yo*r re&*nd, sent to @ellon =an &or approval and i& approved, a re&*nd chec was sen

in a &ew days:/' 6he Co*rt &o*nd that there was no showin" =asile intended =loc to act on their 'ehal& in

sec*rin" loans: =loc act*ally o&&ered three options, only one o& which involved loans: =loc

simply &acilitated the loan process 'y presentin" =asile to @ellon =an as via'le candidates:c' Standard! 1% the mani&estation 'y P that A will act &or him 2% 6he A- acceptance o& the

*ndertain" 4% *nderstandin" o& the parties that the P is to 'e in control o& the *ndertain":+' Critica. fact8 action m*st 'e a matter o& conse*ence or tr*st s*ch as the a'ility to act*ally 'ind

the P or alter the P-s le"al reln #a&&ect the le"al reln 'etween c*stomer and 'an%: =eca*se there

was no power to chan"e the reln 'etween the c*stomer and 'an, co*rt said not an a"ent:e' ot the law in a"ency reln + other *risdictions comes o*t the other wayf' One way to thin a'o*t A law control + i& no control, then can 'e said to 'e A

iii' Re.atio! of the Pri!ci.e to the $r+P

1' A principle can 'ecome lia'le to a 4rdP &or the actions o& the a"enta' Act*al a*thority

i' P 'o*nd to 4rdp 'y anythin" the a"ent does that is in accordance with the P-s mani&estation to

the a"entii' P-s mani&estation! determined 'y A-s reasona'le interpretation in li"ht o& all the circ*mstances

iii' @ani&estation! epress or impliedi' A"ent has act*al a*thority to do collateral acts that are incidental that *s* accompany or are

*s*ally done in the 'i(, or that are reasona'le necessary to accomplish the acts that the P hasepressly a*thori(ed

/' Apparent A*thorityi' Stems &rom a 4rdp 'elie&, 'ased on P-s mani&estation, that the A #or non a"ent% is a*thori(ed to

act &or the Pii' P is 'o*nd 'y A-s actions within the scope o& the A-s apparent a*thority

iii' A has apparent a*thority to do collateral acts that are incidental to accomplishin" the acts

a*thori(ed 'y epress a*thorityi' 9here mani&estation that PA J what P4rdp: 6he A-s act*al a*thority and apparent

a*thority are coetensive

' 9hat happens when mani&estation to A and 4rd

P are di&&erentH1' U+a.. T* Ecro"a' Apparent a*thority may eist in a"ents who act 'eyond the scope o& their act*al

a*thority/' Appropriate analysis! will &oc*s on whether 8dall 'elieved, 'ased on 65-s

mani&estations, that A=C had a*thority to act &or 65 to sell the property on 65-s 'ehal&

and whether that 'elie& was o'ectively reasona'lec' A P may mae a mani&estation 'y placin" an a"ent in char"e o& a transaction or sit*ation+' =*yer had reason to 'elieve 'ased on =an-s mani&estation, that a*ction company had

a*thority act &or the =an and sell the homee' =*yer-s 'elie& was considered to 'e o'ectively reasona'le


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CORP FALL 2012 ZACKS

f' Co*rt said that a "rossly inade*ate p*rchase price co*pled with *n&air circ*mstances

may have chan"ed thin"s here(' Said that only 4 o& the intended openin" 'id was not "rossly inade*ate:

2' CS@ Tra! I!c Recoer- E


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CORP FALL 2012 ZACKS E

f' Restit*tioni' 6he P is lia'le to mae restit*tion to 4rdp where the P is *n*stly enriched 'y the A-s actions

that are not within the A-s act*al or app a*thority(' P-s Lia' &or A-s 6orts

i' >olds a P lia'le &or an A-s tortsii' P lia'lewhere P a*thori(ed the A to en"a"e in cond*ct that is tortio*s, even tho*"h the P

may not have intended the cond*ct to 'e tortio*s

iii' P also lia'le &or torts committed 'y an A actin" with app a*thority where a'ility to commit thetort is s*&&iciently related to the A relationship + misrep, de&amation or conversion

i' 6orts that case P< to persons or to propertyH A rarely has act*al a*thority to do these actions:1' S*ch in*ries are *s*ally too remote &rom the A-s app a*thority to render P lia'le2' Some instances, P may still 'e lia'le &or the A-s torts that res*lt in Pi.. Cou!t- Co!crete Co

F8 > I tried to incorporate *nder the name C I @ '*ilders:

6heir attorney told them the name was oay '*t it was not

#already in *se% > I 'o*"ht letterhead, opened a 'anacco*nt, and painted wor tr*cs: Later, they had to chan"e theiname to > I Constr*ction: > I properly incorporate thisCORP: CCC "ets an order *nder name C I @ I '3c he now >personally he did the deal: > I paid on C I @ checs I senletters on C I @ letterhead: Later > I de&a*lt:

R85e Facto


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CCC the chance to do their d*e dili"ence and research the propecorporation

C8CCC wins and > I have to pay all the costs

i' >arri Loo!e-

1' All persons p*rportin" to act on 'ehal& o& a corp nowin" there is no corporation are ointly

and severally lia'le &or all lia'ilities created while so actin": +yo* act*ally acted and yo*

new there was no corp, then yo* will 'e held lia'le

2'


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CORP FALL 2012 ZACKS 1G

D*st 'eca*se the a"reement reads e*ally does not mean that the e&&ects o& it will 'e e*al on the

shareholders

Corporate contet is messy 'eca*se o& m*ltiple parties

@ae s*re yo* "et waivers

Relationship can eist + yo* have a d*ty to in&orm them when their interest is adverse + the other iss*e that

may come *p + those sort o& conversations mi"ht not 'e privile"ed

6ypes o& 9aivers + when people thin there was a relationship3K

o 6here m*st 'e a provision statin" that yo* are not their lawyer, the lawyer represents the corp and

have 'een "iven opport*nity to "et representation &rom another lawyer

8nder the 8tah R*le! can rep m*ltiple parties even i& di&&erences eist $ even i& permitted *nder r*les, yo*

have to chec i& lon" term it is a "ood thin"

7n"a"ement letter + eliminate scope o& responsi'ility + what yo* are act*ally responsi'le &or + limits what

they can hold yo* to later on1' *etter Schrei/er

5 I S &ormed a corp and in connection with, S eec*ted two promissory notes totalin" B1M,000

S retained the services o& o*n", an atty, to dra&t the S> a"reement

S &ailed to pay the notes 5 s*ed &or the en&orcement o& the promissory notes + S was rep 'y o*n" and 5 moved to have

o*n" removed &or con&lict

6rial co*rt &o*nd o*n" had a con&lict o& interest and s*stained 5-s motion

6rial co*rt errH o

6he co*rt &o*nd that preparation o& the S> a"reement wo*ld re*ire o*n" to wor with 'oth 5

and S and to ascertain their &inancial personal interests

6h*s it co*ld 'e reasona'ly in&erred o*n" had nowled"e o& the two promissory notes which

are s*'ect to the co*nterclaim

A&&irmed trial co*rt-s *d"ment

/' The Cororatio! a!+ it Fi!a!ce8 Caita. For,atio! #14;%& 1;%21$)i' Fi!a!ci!(8 etti!( GG i!to Bi6

1' 9hen 'i( 'ein" &ormed, its owners have two so*rces o& BB! owners can contri'*te the BB themselves

or they can 'orrow it:2' A&ter 'i( starts! third so*rces + etra cash "enerated 'y the 'i( itsel&$'


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' 8s*: Common stocsynonym &or stoc

c' Preferre+ Stoc

i' 8sed when s*ppliers o& BB to a corp does not want to 'e rewarded proportionately to their

investment:ii' Occ*rspartic*lar investor or "ro*p o& investors is s*pplyin" so m*ch BB that the s*ccess or

&ail*re o& the 'i( depends *pon their investmentiii'


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CORP FALL 2012 ZACKS 1E

2' Converti'le + variation o& redeema'le stoc + when stoc is converti'le, the holder has the

option o& echan"in" the shares &or a &ied amo*nt o& another sec*rity o& the corp #e"!

conversion availa'le &rom more senior shares to *nior shares $$H PS to CS or &rom de't to

PS or CS% + '*t stat*tes permit any sort o& conversion a"reed to 'y corp and S>a' =ene&its to corp! may pre&er a conversion to a redemption 'eca*se it will not have to

ret*rn money to its investors + it *st chan"es ri"ht amon" S>/' S>! mi"ht also pre&er conversion! 'eca*se it provides a ready made power to "et a

di&&erent sec*rity + '*t wo*ld pre&er stoc to 'e 'oth converti'le and redeema'lec' S> o& a class or series into which another class or series is converti'le may'e *nhappy

'eca*se they perceive the converti'ility ratio to 'e *n&avora'le to them+' Sometimes conversion may'e at the option o& corp rather than S> + 57 11#e%e' >owever, corp may ne"otiate &or the power to re*ire S> to ret*rn the Shares to the cor

in ret*rn &or a predetermined price + this protects the corp &rom havin" stoc o*tstandin"

in perpet*ity that has provisions s*ch as hei"htened votin" power or lar"e dividends tha

may 'ecome partic*larly onero*s over time$ stoc with this ind o& provision + Calla'le

+ 57 11#'%$' Kaier A.u,i!u, Cor atheo!

6he company wanted to recapitali(e their stocs Pre&erred Redeema'le


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CORP FALL 2012 ZACKS 1;

i' *e/t +iffere!t fro, Stoc

1' Loantemporary

2' themselves that are corp #Corp A owns stoc in Corp =N can, s*'ect to restrictions

ecl*de ;0 o& the dividends paid to them &rom their own incomec'


18/55


11'5e&eased! de't is said to 'e de&eased, when 'orrower wants to terminate the loan #i&

economically sensi'le% '*t can-t 'eca*se it is not calla'le + they can p*t the money aside in

a tr*st and interest and payments will 'e made &rom that tr*st :f' ore e


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CORP FALL 2012 ZACKS 1M

i' Salaries to 7ees + who are S> o& company &or their livin" epenses + are ded*cti'le &rom

corp-s income *st as interest payments are ded*cti'le' 7*ity + mana"ement power, de't does not

+' Chooi!( a Caita. Structure for the Startu Cor

i' 6he investor-s relative claims on the 'i(-s income #and assets on dissol*tion%ii' 6he investor-s relative mana"ement power and

iii' 6he dan"ers that concern capital str*ct*res with ecessive de't

e' Bac(rou!+ a!+ Co!te


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21/55


A technical de&ect in the a*thori(ation o& a corp-s stoc can 'e c*red 'y a later, rati&yin" vote o& a

maority o& the corp-s directors there'y resolvin" a disp*te over who constit*tes the law&*l =O5 and

o&&icers o& the corp&' Su/critio! A(ree,e!t #SA)

a' K to p*rchase shares/' pay

more per share or allowin" the a""rieved S> to recover the s they paid *pon a showin"

o& disparate share price:2' The Pro/.e, of E!uri!( that the Cor Receie the Co!i+eratio!

a' 5an"er! &*t*re considerations will not 'e received/' >arms! S> who have already paid &or their shares and creditors o& corpc' So r*le! promissory notes and K &or &*t*re services were invalid considerations &or

shares even tho*"h, as an economic matter, s*ch considerations may well have 'een o&

s*&&icient val*e:+' 6his was deemed too harsh + today any ind o& property is valid consideration + 57 12e' F*rther preca*tions corps may tae

i' Shares iss*ed &or &*t*re consideration may 'e placed in escrow #held% *ntil all the

consideration is received + prevents trans&er to a 'ona &ide p*rchaser &or val*e

witho*t notice that the shares are not &*lly paid &or + stoc certi&icates are ne"otia'le


22/55


instr*ments + s*ch a p*rchaser wo*ld own the shares &ree &rom the o'li"ation to

repay, '*t trans&eror wo*ld still 'e lia'leii' to challen"e the consideration at

which the new shares were iss*ed+' Corp stoc is p*'licly traded! maret price is pres*ma'ly the price at which new stoc

sho*ld 'e iss*ed:e' Privately held corp! there is no relia'le o'ective re&erence to determine the val*e o&

c*rrently o*tstandin" sharesf' CL! directors were lia'le to laws*its 'y eistin" S> claimin" that a s*'se*ent stoc

iss*ance was too low a price + to answer this stat*te provides that the =O5-s *d"ment

that the consideration &or newly iss*es shares is ade*ate is concl*sive + 57 12 +director-s *d"ment concl*sive in the a'sence o& act*al &ra*d #@< 141G%

&' The ro/.e, of No!cah Co!i+eratio!

a' 9hen other than cash, consideration may 'e overval*ed 'y the 'oard/' 5an"er hei"htened! when the shares are to 'e iss*ed to investors connected in some way

to the corp-s mana"ement mana"ement has concrete incentive to overval*e the

consideration + called watered stocc' ! need not 'e the ori"inal S> + shares are still o*tstandin" the hands o& a trans&eree as

lon" as the trans&eree is not the iss*in" corp$' : >owH

2' 7"! =e&ore new investment! two shares! each is worth B100 #0 o& B200 company val*e%A&ter new investment! three shares, each is worth IM0 #44:44 o& B2;0 company val*e%

$' 6wo types o& dil*tion! economic and controla' 6he price at which the new shares are iss*ed, altho*"h le"ally *nassaila'le 'y c*rrent

S>, may not in reality 'e the hi"hest price availa'le + so val*e o& the c*rrently

o*tstandin" shares will 'e dil*ted 'y the iss*ance o& other shares/' C*rrent Sh will have to share all &*t*re increases in val*e and &*t*re dividends with the

new S> and wo*ld not have had to do so i& the corp had taen on de't rather than sold

e*ity


23/55


24/55


i'


25/55


+' Boar+ Po"er to oer! the Cororatio!8 >o" Cor Tae Actio! #$24%$5;)

i' The BO*

1' The Ro.e of BO*

a' Stat*tory provision! 57 1G1#a%! the 'i( and a&&airs o& every corp or"ani(ed *nder this chapter

shall 'e mana"ed 'y or *nder the direction o& a =O5/' @< 101! =i( and a&&airs shall 'e mana"ed 'y 'oardc' @eans that S> who are the corp-s owners do not possess the *ltimate mana"ement power

+' 5e 1G1#a% and 41 + allows a corp str*ct*re witho*t a =O5, however it anticipates that theperson3persons eercisin" traditional 'oard power will 'e treated analo"o*sly to the 'oard

e' o& 5SC is s*in" the CORP '3c he is *pset a'o*t the COPR K w3C7O 5onald6he K stated that 5onald co*ld *nilaterally determine in F that the 'oard had *nreasona'lyinter&ered w3his mana"ement o& the CORP I terminate his employ J 5onald "ets a E@severance: rimes is seein" a *dicial declaration that the K is invalid '3c it res*lts in ana'dication o& 'oard a*thority I responsi'ility

ii' >86he K 'etween 5onald I 5SC doesn-t &ormally precl*de the 'oard &rom eercisin" itsd*ties I &*l&illin" its &id*ciary roles '3c the 'oard co*ld &ire 5onald I pay the &ine: 6ho*"hthe &ee was E@ over E years, the CORP was worth 2= J the &ee wo*ld not so "reatly precl*dethe directors &rom &reely eercisin" their proper '*siness *d"ment

iii' A/+icate ta!+ar+8"ive *p all power and have no control over the corp + i& 'oard retainssome control that is pro'a'ly not a'dication or deletion

iv: 6here has to 'e a'dication in order to &ind improper dele"ationv: ote! corp stat*tes epressly allows 'oard to appoint committees o& directors + where these

committees simply investi"ate or recommend action to the &*ll 'oard, their eistence presentsno real iss*e o& corp law

vi: 57 1G1#e%! permits the &*ll 'oard to rely on s*ch committees in the ordinary co*rse

vii: 6o the etent that the committee is dele"ated power to act &or the &*ll 'oard, however, theiss*es raised in rimes come to the &oreviii: 7ceptions to dele"atin" to committee

1: Stat*te prohi'its a committee &rom chan"in" the corp-s 'ylaws2: Prohi'its committee &rom approvin" &*ndamental actions #s*ch as mer"ers, dissol*tion, or

sale o& all the corp-s assets% that also re*ire S> approval4: @odel Stat*te! prohi'its a 'oard committee &rom declarin" dividends ecept p*rs*ant to a

&orm*la approved 'y the &*ll 'oardG: Prohi'its a committee &rom &ilin" 'oard vacancies + 57 1G1

2' Nu,/er Se.ectio! E.ectio! Ter, a!+ Re,oa. of *irector

a' Nu,/er a!+ Se.ectio! of I!itia. *irector

i' A =oard m*st consist o& one or more individ*als + 57 1G1#'%ii' One corp can own shares in another and may 'e a'le to elect directors to the 'oard, '*t cannot

'e directoriii' *m'er! m*st 'e stated in A< or 'ylaws + they *s* set min and ma and lets 'oard determine

the eact n*m'eri'


26/55


ii' 9hen chosen in or" meetin"! there is always a time la" d*rin" which the incorp-or has corp

power + 57 10;iii' meetin"ii' 5e&a*lt r*le! all directors are elected ann*ally 'y all S> + 57 211#'%: Can 'e varied

1' Create a classi&ied 'oard + the power to elect at least one director is vested in, or denied to,

at least one class or series o& stoc + corp planners *se this when the S>s anticipate stron"disa"reements in &*t*re) approach also *se&*l when the planners desire to "ive one set o&

S> power disproportionate to their capital contri'*tion + 57 1G1#'%a' =y creatin" a classi&ied 'oard, the di&&erent &actions o& S> can receive sec*rities that are

identical in all respects ecept that one &action has the power to select more directors

than another &action2' 5ivide the directors into 2 or 4 classes with each class holdin" sta""ered terms o& 2 or 4

years: 6he nearly *niversal approach is to divide the 'oard into thirds so that each director

has a three year term + 57 1G1 #d%: #@ost 57 corp p*'lic has sta""ered terms%iii' 7piration o& a director-s term + does not o*st the director &rom o&&ice + '*t directors remains

in o&&ice *ntil he is reelected, another person is elected to &ill slot, the 'oard is red*ced inn*m'er at the end o& the director-s term or the slot 'ecomes vacant: + 57 1G1#'%

i' Ann*al meetin" re*irement &or election o& 'oard + not always done + 5-ors who contin*e in

o&&ice a&ter the epiration o& their term 'eca*se no election has 'een held are called holdover

5-ors + 57 211#'%' ?acancy! occ*rs thro*"h resi"nation, death or removal o& an inc*m'ent + stat*te does not

re*ire &illin" o& vacancy, '*t most corp stat*te provide methods o& selectin" replacement1' 57 de&a*lt r*le! vacancies can only 'e &illed 'y the remainin" 'oard mem'ers + 224#a%#1%2' =oard can &ill the vacancy i& it chooses to do so 'eca*se it is *s*ally a'le to act more

*icly than the S>c' Re,oa. of *irector

i' Amotion! S> power to remove directors d*rin" their termii' 5e&a*lt r*le! directors may 'e removed with or witho*t ca*se + 57 1G1#%

iii' =*t i& 5-or elected to classi&ied 'oard + can only 'e removed 'y the same set o& S> that

elected them + 1G1#%#2%i' @< 1G1G + removin" 53or witho*t ca*se is allowed, as lon" as yo* have the re*isite vote yo*

can vote them o*t *nder @< s:111' Also i& corp permits c*m*lative votin", *nder which a minority S> has the power to elect at

least some 5-or, the *ant*m o& votes re*ired to amote m*st 'e "reater than the *ant*m

re*ired to elect 5or + 57 1G1#%#2%i' ote! =oard itsel& has not power to remove a 5-or or to limit the ri"ht o& a 5or to o'tain corp

in&oii' Sta((ere+ /oar+8 can only remove 5-ors &or ca*se + so even i& yo* own 1, yo* are still

st*c with the old =O5, *ntil their term is done i& there is no ca*seiii'


27/55


a' Speci&ic char"es &or his removal/' Ade*ate notice andc' A &*ll opport*nity to meet the acc*sation:

+' 9hat happens i& a corp &ails to hold an ann*al meetin" + 57 211#c% + net case disc*sses pro'lem

in electin" 5-ors and deals with the power o& S> to act 'y consent in lie* o& holdin" ann*al

meetin"

i' >ochett TSI I!tD. Soft"are F8 owns 1200 shares o& a small closely held CORP 6S86hey did not have *nanimo*s written consent =86 the elected directors can serve *ntil

net ann*al meetin": CR6 ordered the CORP to hold an ann*al meetin" *sin" its e*ita'lepowers

ote! *nless directors are elected 'y written consent in lie* o& an ann*al meetin"ann*al

meetin" has to 'e held &or 5-or election

S>can act 'y written consent to elect 5)or

=*t i& the consent is not *nanimo*s + then s*ch action 'y written consent can 'e in lie* o&

ann*al meetin" only i& all the directorships to which directors co*ld 'e elected at an ann*almeetin" are vacant, and the written consent is &or &illin" it:

O67 election o& directors 'y consent is

ALLO975 in lie* o& an ann*al meetin" OL when approved 'y the c*rrent 'oard + 211#'% +'eca*se that is the only settin" where it is liely that 5-or whose terms are epirin" will resi"n'e&ore the written consent is 'e"*n

$' The echa!ic of Boar+ Actio! #BA)a'


28/55


+'


29/55


5' 8 KP is lia'le to '3c Kim'all was actin" w3in the co*rse I scope o& his employmen

when he made his &alse representation to : F*rther, Kim'all is personally lia'le &or h&ra*d*lent misrepresentation that the irri"ation was worin" when he new it was not:#O67>o''le was not lia'le to '3c Kim'all was not actin" w3in the co*rse Iscope o& his employment at the time he made the &alse representations a'o*t the

irri"ation: >o''le only had to do with the land% Fact atter i,.icati!( E!terrie Lia/i.it-Same > 'y the CR6 '*t Kim'all I

KP have no assets: o''le:

/' A P is ordinarily 'o*nd the A-s tortio*s actions that ca*se P< i&i' 6he a"ent is an 7ee a term o& art meanin" that the P has the ri"ht to control the physical

per&ormance o& the a"ent-s tas andii' 6he A was actin" within the scope o& employment + meanin" the act "ivin" rise to lia'ility wa

close in time, space and manner to those the A was employed to per&orm and *ndertaen at

least in part &or the P-s 'ene&it:

c' Once corp =O5 has a*thori(ed an act, the person who act*ally e&&ect the act &or the corp is thecorp-s a"ent

+' All corp 7eesA"ents

e' =*t there may 'e other A"ents who are not 7ees$ s:a o*tside acco*ntants and lawyersf' Corp may mae *se o& people to per&orm services &or it '*t who are not a"entsthey are non$

a"ent independent K-ors + e"! people who s*pply component parts(' Corp 53orsnot a"ents + this is so 'eca*se the 'oard m*st act collectively rather than

individ*ally and also 'eca*se the 'oard is not *nder the control o& the corp #an A m*st 'e s*'ect

to the P-s control%h' O&&icer! person who holds an o&&ice, which, in t*rn, is apposition to which partic*lar inds o&

d*ties or powers are attachedi' =y contrast, an A, who is not an o&&icer wo*ld have powers and d*ties de&ined in a more eplicit

and ad hoc manner! 'y 'oard resol*tion or 'y "rant &rom another A' Stat*tes! corp has whatever o&&icers it 'ylaws and 'oard determines and those o&&icers have

whatever powers are speci&ically "ranted to them + 57 1G2#a%' 5e&n o& O3er narrower than 5e&n o& A!

i' O-ers are eplicitly held to 5S compara'le to those o& Corp 5-ors: A are held to a less eplicit

and less strin"ent standardii' O-ers may 'e stat*torily entitled to indemnity and the corp may 'e a'le to p*rchase ins*rance

&or o&&icer mal&easance: A are sometimes entitled to indemnity, '*t s*ch protection is

amorpho*s


30/55


iii' O-ers sometimes epressly eposed to lia'ility *nder certain stat*tes whereas ordinary are noti' Stat*te o&ten provide that service o& process on a corp may 'e e&&ected 'y service on any #or

certain named% o&&icers) Ains*&&icient to 'rin" a'o*t PD over the corp

' O-ers are *s*ally re*ired to 'e named in the corp-s ann*al report &iled with the SOS which

means that the names and titles held are a matter o& p*'lic recordi' An O-er may have power to 'ind the corp #called the power o& position% that comprise 'oth

act*al a*thority and apparent a*thority

.' Corp cannot decide to have only A and not o&&icers + 57 stat*te re*ires at least two o&&icers +1G2#a%, 104#a%#2%, 1 + secretary and a chairperson o& the =O5, vice chair person, pre( or vice

pre(,'@< 141! re*ires more than one!' 57 1G2#a%, #d%! also says + de&a*lt r*le! any n*m'er o& o&&icers may'e held 'y the same person

and that the corp-s &ail*re to elect o&&icers shall have no e&&ect on the corpo' O&&icers are appointed 'y the =O5 + 1G2#a%' 6he =O5 is an eec*tive Principal, however P does not owe d*ties to itsel&H' O&&icers needed 'eca*se corp cannot act witho*t themr' A!+re" South"et -o,i!( Reha/ Ce!ter8 does 'ein" an o&&icer "ive one a hei"htened

epectation or ri"ht to remain in o&&ice + or can an o&&icer 'e dismissed at will, *st lie an A 'y

the PH

1' F8 was hired 'y S9R I later promoted to vice president: >e held that position *ntil his'oss Kathy terminated him: alle"es that Kathy &ired him '3c he tried to in&orm the S9C'oard that Kathy was mishandlin" CORP assets I ca*sin" employee moral pro'lems:6h*s, S9C 'reach its d*ty o& F I F5

2' R8 6he 'oard may remove o&&icers at any time with OR witho*t ca*se$' >! 6he 'oard had a ri"ht to remove when they &elt lie it: S*mmary *d"ment n &avor o&

S9Cii' @< 14! O-er can 'e removed 'y 'oard w3wo*t case

iii' D*st 'eca*se O-er has 'een &ired, the O-er can still s*e to en&orce the K-t*al severance claims

'*t not to "et o' 'ac:2' Po"er of Officer

a' Sn*al v Fli"htways @&" #addresses the pro'lem o& how a 4rdp may 'e certain that a corp is

'o*nd 'y a h*man-s actions where the h*man p*rports to 'e actin" &or the corp J app a*thority%

Stat*tes create pres*mptions a'o*t who has a*thority

F8Sn*al leased a @ali'* apartment he owned to Fli"htways &or 2 years: Kir Lyle,

the Pres, Sec, I CFO o& Fli"htways was to live there: Kir eec*ted the a"reementalone desi"natin" his title as president: Fli"htways did not pay: Sn*al s*edFli"htways: 6he company claims that they did not now Kir si"ned the lease on thecompany-s 'ehal& I that Kir was not a*thori(ed to have done so: 6h*s, they claim

that Kir sho*ld 'e personal lia'ility I Fli"htways sho*ld not 'e lia'le: R8 A person can hold more than one o&&ice at a time

9ay to si"n to prevent personal lia'ility

o Acme ads

o President

>8 =3c Kir was 'oth Fli"htways President I CFO, I '3c did not now Kir

laced act*al a*thority the lease a"reement is not invalidated 'y Kir-s act*al lac o&a*thority I Fli"htway is lia'le to :

i'


31/55


1' Act*al limits on 'oard-s powera' Stat*te + le"islation/' Concept o& &id*ciary d*ty #F5% + 'ased on Common Law


32/55


e' Retrictio! o! the Boar+D Po"er #$%$;2 $1%$5)

i' Le(i.atio! that Retrict Boar+D Po"er

1' 5i&&erent le"islations s*ch as OS>A and other environmental re*irements restrict the 'oard powerii' U.tra 7ire

1' P*rpose cla*ses + 57 102#a%#4%, @=CA 4:01#a%2' 9hen speci&ic p*rpose cla*se was re*ired, the doctrine o& *ltra vires arose and had some potency +

the intention o& the 8? doctrine was to create an aven*e to en&orce the speci&ic p*rpose cla*ses 'y

"rantin" relie& when a corp too actions that were not related to its p*rposes + which were 'eyond itpowers

$' @ain reason why this doctrine demised + is 'eca*se o& the demise o& the limited p*rpose cla*se

once corp co*ld 'e incorp &or any law&*l 'i(, nearly nothin" co*ld 'e 8? in the precise sense&' A'o*t the only act that is 'eyond the power o& corpwaste an echan"e o& corp assets &or

consideration so disproportionately small as to lie 'eyond the ran"e at which any reasona'le person

mi"ht 'e willin" to trademost o&ten the claim is associated with a trans&er o& corp assets that

serves no corp p*rpose or &or which no consideration is received at allin e&&ect a "i&t

4' >owever, i& there is any s*'stantial consideration received 'y corp, and i& there is a "ood &aith

*d"ment that in the circ*mstances the transaction is worthwhile, there sho*ld 'e no &indin" o& wast

5' 8? today

corp actions that are permissi'le '*t that have not 'een properly a*thori(ed 'y the'oard

' >ar/or Fi!a!ce Part!er >ui6e!(a #deals with the distinction 'etween actions that the corp

cannot tae #p*re 8?% and those that it co*ld tae were they to have 'een properly approved%

6he directors o& a corporation called Rep*'lic solicited aproxy statementto shareholders in order to "et

approval to ac*ire a corporation called A*toation: 6he shareholders approved:

6he directors *st also *st happened to own a s*'stantial amo*nt o& stoc in A*toation and made a lot o&

money &rom the ac*isition:

Shareholders 'ro*"ht a derivative lawsuita"ainst the directors &or breach of fiduciary duty:

6he directors ar"*ed that since the ac*isition had 'een approved 'y shareholders, it co*ld not have 'een

*n&air:

6he shareholders ar"*ed that theproxy solicitationwas materially misleadin", and so the vote sho*ldnTt

imm*ni(e the directors:

6he 6rial Co*rt &o*nd &or the directors and dismissed the claim:

6he 6rial Co*rt &o*nd that the vote on the ac*isition was in&ormed and *n$coerced and the disinterested

shares voted overwhelmin" &or the ac*isition:

6he Co*rt noted that *nder the c*rrent law, the shareholders co*ld still potentially prevail 'y showin" that

the ac*isition was s*ch a 'ad deal that it constit*ted corporate waste:o Corporate wastecan 'e de&ined as Uan echan"e o& corporate assets &or consideration so small as to

lie 'eyond the ran"e at which a reasona'le person mi"ht 'e willin" to trade:

>owever, the Co*rt looed at the &acts and &o*nd that the ac*isition was not s*ch a 'ad deal that it rose to

the level o& corporate waste: 6he Co*rt reasoned that the law sho*ld 'e reeamined to decide i& there was even a need &or the corporate

wasteUsa&ety valve:Uo


33/55


2' 6here&ore =O5 and other corp mana"ers shold 'e prevented &rom tain" actoins that deviate &rom

that end$' Potentially, identi&yin" the *ltimate 'ene&iciaries is a power&*l constraint on 'oard actions:&' Shareholder primacy r*le! theory that S> interests sho*ld 'e assi"ned &irst priority4' =O5 as ne*s o& Contracts3K-t*al theory! each constit*ency or S> "ro*p 'ar"ains with the &irm

over a set o& ri"hts that will protect the &irm$speci&ic assets that it maes availa'le &or prod*ction +

the d*ty o& mana"ers is to serve the interest o& S> alone

5' 53ors primacy model! the corp is a vehicle 'y which the =O5 hires vario*s &actors o& prod*ction +hence the =O5 is not a mere a"ent o& the S>, as standard K-rian theory claims, '*t rather a s*i

"eneris 'ody, servin" as the ne*s &or the vario*s K main" *p the corp: 6he 'oard-s powers &low

&rom that set o& K in its totality and not *st &rom S>i' Fe+era. Securitie Re(u.atio!

1: Forei"n Corr*pt Practice s Act + constrains American corp that do 'i( in other co*ntries + no p*'lic

company may pay anythin" o& val*e ot any &orei"n o&&icial or &orei"n political parties &or the

p*rpose o& in&l*encin" a decision, ind*cin" an action or ind*cin" an o&&icial to *se his3her in&l*ence

to o'tain or retain 'i(


34/55


f' Cahi!( Out8 *itri/uti!( o!e- to Shareho.+er #214%2$$)

i' >ow to "et BB o*t o& the 'i(ii' S> "ain whenever val*e o& 'i( increases and vice versa

iii' 6wo ways to convert corp increase into S> money1' Corp can distri'*te the increased val*e or part o& it to S> + dividends2' A S> can sell some or all o& shares &or more than they paid them &or

i' ai!( a Profit Part 18 *ii+e!+

1' Boar+ *icretio!

a' Corp 'oard may a*thori(e the corp to pay dividends s*'ect to certain restrictions + 57 1;0#a%,

@=CA E:G0/' 6his means that *nder the stat*tes, corp cannot pay dividends *nless =O5 approves it $ when

=O5 a*thori(es dividends + they are said to have 'een declaredc' 7ven i& there is increase why wo*ldn-t =O5 declare a dividendH

i' =O5 *d"ment that the corp needs to retain the increased wealth to epand the 'i( or to ens*r

that the corp can meet &*t*re o'li"ations1' ew 'i( almost always need to retain all the wealth they can + so dividends in s*ch corp ar

rareii' Corp S> may not need dividends to meet their ordinary livin" epenses + S> will 'e taed on

dividends '*t not on the increased '*t *ndistri'*ted val*e o& the corp + so =O5 mi"ht decidethat S> are 'etter served 'y retainin" the increase in the corp rather than distri'*tion

iii' 8s*ally conservative in payin" dividends to ens*re that they can contin*e to pay in the &*t*re

'eca*se tellin" p*'lic and 9all Street that 'i( is doin" "ood i& dividends are increased and

vice versai' Strate"y + controllin" S> mi"ht have employed their &actions so don-t need dividends to live

and they will re&*se to pay dividends to p*nish non$controllin" S> J the only way the latter

"ro*p can "et BB is to sell their shares + this mi"ht 'e a way to "et rid o& the *nwanted S>+' Can S> ever compel the =O5 to declare dividendsH Case law shows a near *ni&orm re&*sal to

compel dividends in the p*'licly held corp settin": oppression

2' Statutor- Retrictio!

a' =oard-s declaration re*ired, '*t not s*&&icient/' Corp stat*te! restricts a'ility o& corp to pay a dividend even when its 'oard wishes to declare onec' P*'lic policy! S> are not the only ones who are interested in "ettin" BB &rom corp+' 6hese stat*tes are not waivea'le and 5-ors are personally lia'le &or nowin" 'reach o& these

provisions + 57 1;G, @=CA :44 + 5ors &or nowin" or ne"li"ent violationse'


35/55


i' Another aven*e &or payin" dividends in 57! i& a corp has no s*rpl*s it may nonetheless pay

dividends *p to the amo*nt o& its net pro&its &or the c*rrent and precedin" &iscal year + 57

1;0#a%#2% + 'asically means i& they had a s*rpl*s this year or the year 'e&ore they are allowed

to pay dividends + only availa'le i& no s*rpl*s and leaves the de&inition o& net pro&it to 'oard

F *d"ment$' The echa!ic of Pa-i!( *ii+e!+

a' Once declared, S> 'ecome creditors as to that dividend

/' entitled to a

dividendc' =*t *nder corp stat*te, 'oard has power to set a di&&erent record date + this is to "ive notice to

&*t*re and c*rrent S> that an important event will soon occ*r #@=CA E:G0#'%, 57 214#c%%&' Stoc S.it

a' Simply division o& o*tstand shares into more shares $ corp receives nothin" in a stoc split #SS%,

S> do not chan"e their relative ownership interests + a stoc split simply means that those

ownership interests are represented 'y more shares +

/' othin" is created and no assets are trans&erred:c' 7! 10 million o& Stoc A sold &or BG03share J total val*e BG00 million: SS occ*rs, total val*e

still remains BG00 million) '*t amo*nt o& stoc increase to 20 million at a price o& B203share: 6he

proportion o& stoc to investors remain the same as well, they *st split their already eistin"

shares+' Reason why =O5 want to SSH

i' Permit trans&er o& smaller a"es o& each S>-s ownership + private companiesii' P*'lic companies! stocs are more pop*lar when they trade 'etween B10 and B100 + i& a corp

has s*ccess&*lly increased its val*e, the price o& its stoc may approach or eceed the

B1003share level + at that point =O5 may e&&ect a split to red*ce the price per share

e' @ost SS + e&&ected thro*"h a stoc dividend o& a*thori(ed '*t *niss*ed shares to the eistin" S>+ 57 1;43 @=CA E:24f' owever, when a"reement was entered into wi&e new a'o*t stoc split $ 2 &or 1 split

iii' 9i&e trans&erred 1E,0EE shares to h*s'and, '*t instead o& "ettin" 134, 'eca*se o& the split, he

only received 13 + so s*ed to en&orce the 'ene&its o& the stoc spliti' >*s'and co*ld not claim the SS &or himsel& &rom the corp 'eca*se he had not 'een an on the

record S> at the time the SS was anno*nced


36/55


' Co*rt! 'eca*se the entitlement to the SS vested 'e&ore the parties si"ned the stip*lation and

'e&ore the divorce was &inal, the 1E,0EE shares awarded to h*s'and in the stip*lation carried

with them the entitlement to the SS once it occ*rred + so addn shares o& 044 was awarded to

the h*s'and4' Reere Stoc S.it

a' =O5 may decide that it is in the 'est interest o& the corp &or &ewer '*t correspondin"ly more

val*a'le shares to 'e o*tstandin"

/' 6his may happen when a p*'lic company-s stoc trades 'elow B103sharec' 6o red*ce the n*m'er o& shares o*tstandin", the corp may e&&ect a reverse stoc split + it is not a

split at all, '*t an amal"amation+' A 1$&or$2 reverse split means that each S> will have one share a&ter the split &or each two shares

he owned 'e&ore + each remainin" share wo*ld 'e twice as val*a'le as 'e&oree' =eca*se Shares cannot 'e taen away &rom S> wo*t their consent, a reverse stoc split re*ires

an amendment to the articles o& incorp which m*st 'e approved 'y the 'oard and S> + @=CA

10:04 and 57 2G2#a%#4%, 2G2#'%f' Rei Fi!a!cia. Perfor,a!ce Cor 9 effect of SS 9 "hat hae! if 100 hare are ue+ a

co..atera. a!+ toc .it hae! a!+ S> +efau.t i .e!+er e!tit.e+ to ei6e 100 or 200

hare3i' 9arrants to Re'ot and Reiss to p*rchase shares o& stoc &or 10 cents per share, etendin" &or

&ive yearsii' 4 years later =O5 + 1 &or reverse stoc split #RSS%

iii' RIR so*"ht to eercise their warrants within the &ive, ar"*in" that they were not s*'ect to th

split:i' 6he co*rt &o*nd that in the a'sence o& evidence the parties contemplated otherwise, the

warrant holder is limited to the proportional n*m'er o& shares: D*st as P sho*ld not s*&&er &rom

the possi'ility dil*tion o& their warrants, Financial sho*ld not s*&&er &rom the consolidation o&

its shares res*ltin" &rom a reverse stoc split

' 8pper co*rt! the plain meanin" is "oin" to r*le + the Financial had the ri"ht to protect itsel&'*t didn-t $ there&ore reversedHH(' A!ti+i.utio! roiio!8 a provision that ad*sts an option to p*rchase stoc in the event o& an

increase or decrease in o*tstandin" shares:


37/55


(' Fi+uciar- *utie of *irector #Officer) #$;$%&$5)

i' arris wants to

develop "ol& co*rse '*t 'oard does not: >arris is approached 'y 'roer to '*y land '3c she i

the pres: >arris '*y the land: =oard does not act when it &inds o*t: Laws*it was 'ro*"hta&ter a chan"e in composition o& the 'oard

NoteA d*ty o& loyalty is owed 'y all a"ents to the CORP: >owever, the scope o& the

loyalty o& the President o& the CORP is di&&erent than that o& a caddy: =*t, neither can tae&rom the CORP:

*iffere!t Tet A.ie+ /- the 7ariou CRTS

6he Line o& =*siness 6est #57%owever, the cl*' had interest indevelopin" the property to ens*re "ood 'i( and with re"ards to the &inancial aspect, itis *n&air &or insider 5ors to now the &inancial state o& the 'i( and then decide on theoppty &or themselves

6he Fairness 6est9as it *n&air &or the director in his role as a &id*ciary to the CORP to

tae advanta"e o& the opport*nity &or her own pro&it while the interest o& the CORP call &or


38/55


protectionH # and the reection is not e*ivalent toa waste o& Corp assets

Cor Ot- *efi!itio!

o 1% Any oppty to en"a"e in a 'i( activity o& which a 53or or O3or 'ecome

aware either


39/55


1' 6he oppty is presented to the 53O in his individ*al and not his corp capacity2' 6he oppty is not essential to the corp$' 6he corp holds no interest or epectancy in the oppty&' 6he 53O has not wron"&*lly employed the reso*rces o& the corp in p*rs*in" or eploitin"

the opptyiii' *E 122#1)8permits corp to decline corp oppty in advancei' BCA8 does not permit corp to decline corp oppty in advance '*t does provide an optional

sa&e har'or process &or 5ors + @=CA :;0' I8 14&4#a)8 &orm*lates it opposite to AL< + won-t 'e lia'le i& yo* had interest in transaction

i& yo* can esta'lish any o& the &ollowin"1' 86he mar$*p on the price o& the tans &rom 1B to BK is not so shocin" '3c it was less

than maret val*e &or what CO paid &or other ac*isitions

POINTA con&lict o& interest that is not a pro'lem now may present a pro'lem down the

road;' Fai.ure to o!itor

a' Sto!e Ritter #eplores possi'ility o& violatin" 5OL when they do not act all + instances when

the 'oard-s &ail*re to consider any action may 'e seen as violatin" the re*irement that each

mem'er o& the 'oard shall act in a manner the 5or reasona'ly 'elieves to 'e in the 'est interest o

the corp

>amric and ance were operatin" a &ra*d*lent TPon(i schemeT: 6hey did this with the help o& a 'an called

AmSo*th, who provided >amric and ance with acco*nts and distri'*ted interest payments: >ad 'an employees 'een payin" attention they wo*ld have easily *ncovered >amric and anceTs scheme:

A&ter the scheme &ell apart, AmSo*th was &orced to pay B0@ in &ines and penalties &or helpin" the scam:

AmSo*thTs shareholders instit*ted a derivative lawsuita"ainst the directors &or wastin" corporate money:

6he shareholders ar"*ed that AmSo*thTs compliance pro"ram laced ade*ate 'oard and mana"ement

oversi"ht, and that reportin" to mana"ement &or the p*rposes o& monitorin" and oversi"ht o& complianceactivities was materially de&icient:

o =asically, since the directors werenTt doin" their o' and investi"atin" what the employees were

doin", the shareholders were o*t B0@:

6he 6rial Co*rt &o*nd &or AmSo*th and the directors: 6he shareholders appealed:


40/55

CORP FALL 2012 ZACKS G0

6he 6rial Co*rt looed to I! re Care,ar I!ter!atio!a. I!c' *eriatie Liti(atio!#EM A:2d MM #5el:

Ch: 1MME%%, and &o*nd that when shareholders claim that the directors were i"norant to lia'ilities, theshareholder can only win i& they show that there was a Us*stained or systemic &ail*re o& the 'oard toesta'lish oversi"ht:U

6he 5elaware S*preme Co*rt a&&irmed:

6he 5elaware S*preme Co*rt &o*nd that the standard &or determinin" whether directors can 'e lia'le &or

&ail*re to eercise oversi"ht o& employees who &ail to comply with their d*ties was a Ulac o& "ood &aith as

evidenced 'y a s*stained or systematic &ail*re o& a director to eercise reasona'le oversi"ht:U 6hatTs thesame standard that was "iven in Care,ar:

o 6he Co*rt noted that this was a very hi"h standard to meet:

See ATR%Ki, E!( Fi!a!cia. Cor' ' Ara!eta#200E 9L 4;420 #5el: Ch: 5ec: 21

200E%% &or a case that met this standard:

6he Co*rt &o*nd that there are two conditions necessary &or lia'ility *nder the standard set 'y Care,ar!

o 6he directors *tterly &ailed to implement any reportin" or in&ormation system or controls) or

o >avin" implemented s*ch a system or controls, conscio*sly &ailed to monitor or oversee its

operations th*s disa'lin" themselves &rom 'ein" in&ormed o& riss or pro'lems re*irin" theirattention:

o


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a' 5irectors *tterly &ailed to implement any reportin" or in&ormation system or controls) or/' >avin" implemented s*ch a system, conscio*sly &ailed to monitor or oversee its operation:c' or 'oard%

O675irectors can set their own I the o&&icers compensation =86 it m*st 'e

reasona'le:


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O67!


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o 6ension eists here '3c *nlie normal harms, which can *s*ally 'e traced 'ac to an act or

ne"li"ence, 'ad '*siness res*lts #harms% may occ*r &or eternal reasons that are no oneTs &a*lt: Fairto say directorTs violated d*ty o& careH

a"i!

o Parties

>awins $ on 'oard and ran wareho*se

=lass $ on 'oard) not involved in daily operations) s*it a"ainst him dismissed

*n"ester $ de&endant) lawyer) on 'orad, not involved in daily operations

5OA $ 5ept o& A"ric*lt*re

6he rowers $ "ro*ps o& 'ean "rowers that dealt with wareho*se

o Overview

Corp is a wareho*se that stores and 'roers 'eans 'etween "rowers and '*yers:

>awins was committin" many ille"al acts while he ran the wareho*se incl*din" Chec

Kitin", simmin", and others: =lass may also 'een involved:

*n"ester 'ecame aware on chec itin" and too action: >e also learned o& other

discrepancies in acco*ntin": For each discrepancy, he tals to >awins and acco*ntants: =*tdoes not investi"ate &*rther:


44/55

CORP FALL 2012 ZACKS GG

o Co*nsel, p*'lic acco*ntants or other persons as to matters which the director

reasona'le 'elieves to 'e within s*ch personTs pro&ession or epertcompetence:

o >oldin"

*n"ter relied on re"*latory eperts and acco*ntants so no 'reach

o notes


45/55


h' Sta!+ar+ of Reie" of Boar+ Actio! #&$%41:)

i' =DR creates a pres*mption that in main" a 'i( decision, the 5or o& a corp acted on an in&ormed 'asis

#w: d*e care% in "ood &aith and in the honest 'elie& that the action taen was in the 'est interest o& the

companyii' Pres*mption initially attaches to a 5OR approved transaction within a 'oard-s con&erred or apparent

a*thority in the a'sence o& any evidence o& &ra*d, 'ad &aith or sel&$dealin" in the *s*al sense o& persona

pro&it or 'etterment

iii' Pres*mption in &avor o& actions taen 'y loyal and in&ormed 'oarddecision will not 'e overt*rned'y the co*rts *nless it cannot 'e attri'*ted to any rational 'asis p*rpose

i' S>! challen"in" a =O5 decision has the '*rden to re'*t the pres*mption' Re'*t the pres*mption! S> P ass*mes the '*rden o& providin" evidence that 5OR in reachin" their

challen"ed decision 'reached any one o& the triads o& their &id*ciary d*ty +1' ood Faith #F%2' Loyalty #5OL%$' 5*e care #5OC%

i' P &ails to meet this evidentiary '*rden, the =DR r*le attaches to protect corp O35 and the decisions

they mae and o*r co*rts will not second "*ess these '*siness *d"ments'


46/55

CORP FALL 2012 ZACKS GE

&' that 'ene&it3detriment is o& s*ch s*'ective material si"ni&icance to that partic*lar director

that it is reasona'le to *estion whether the director o'ectively considered the advisa'ility

o& the challen"ed transaction to the corporation and its shareholders:4' 9hen a director stands on 'oth sides o& the challen"ed transaction:

f' 7sta'lishin" Lac o& 5irector O86! Fact pattern O35 on one$side o& the transaction I CORP on the other side

J con&lict o& interest% F8X-s F I , partner in AF entered into a transaction w3 >@ to '*y some property: At

the time, 'oth F I were mem'ers o& >@-S 'oard: F made &*ll I ade*ate disclos*re o&his '*y$side interests '*t did not: Rather, too the lead in &acilitatin" the sale o& theproperty to AF on 'ehal& o& >@: >@ did not &ind o*t a'o*t -s '*y$side interest #sel&dealin"% &or 10 years:I89as the transaction 'etween AF I >@ &airH

R8 6he transaction is ?O


47/55

CORP FALL 2012 ZACKS G;

i' the directors *tterly &ailed to implement any reportin" or in&ormation system or controls) orii' havin" implemented s*ch a system or controls, conscio*sly &ailed to monitor or oversee its

operations th*s disa'lin" themselves &rom 'ein" in&ormed o& riss or pro'lems re*irin" their

attention:/'


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c' Co*rt said that they were not "rossly ne"li"ent + they deli'erated and wei"hed the riss on 'oth

sides 'e&ore "oin" into it+' And they "athered &acts + was materially in&ormede' So no 5OC violationf' 6his was case was overt*rned on a 5OL violation + co*rt said that the CS directors have

violated 5OL 'y a"reein" to provision that prevented CS &rom a'andonin" the enesis

a"reement i& a s*perior transaction presented itsel&

4' 9here P can at some point show ca*sation 'etween the 5ors lac o& care and dama"e to the corp, aremedy is compensatory

5' >owever, where a 5OC violation leads to rescission, then no dama"e lin has 'een shown! award is

simply to p*nish the 5ORii' ro Ne(.i(e!ce a!+ Ba+ Faith

1' is the std o& review, at least in 57Y &or a 5OC claim2' Actin" in =F is a 5OL violation$' 57 + etremely di&&erent concepts&' alone cannot constit*te =F + th*s a 'oard may act ne"li"ently w3o actin" in =F4' Articles may contain ec*lpatory provision to limit personal lia'ility o& 5ors &or certain cond*ct

a' =F actions cannot 'e ec*lpated #ec*sed%

/' acts can 'e ec*lpatedc' =asically means care claims can 'e ec*lpated, loyalty claims cannot + 57 102#'%#;% and 2:02#'

#G%5' Sectru,

a' One end! intent to harm company,+ 5OL + not ec*lpatory/' @iddle! intentional dereliction o& d*ty + 5OL, not ec*lpatory or conscio*s disre"ard &or

responsi'ilities is in the middle #5OL3not ec*lpatory%c' At the other end! 5*ty o& care iss*es + lac o& intent + ec*lpatory $ ! recless indi&&erence o

actions that are witho*t the 'o*nds o& reason' Re/utti!( the BR for +ut- of care iue

a' ross e"li"enceHi' Fail*re to 'ecome in&ormedii' Aware o& all material &actsH

':


49/55

CORP FALL 2012 ZACKS GM

2' 6o alle"e that a corp has s*&&ered a loss as a res*lt o& a law&*l transaction, within the corp powers,

a*thori(ed 'y a corp Fid actin" in a F p*rs*it o& corp p*rposes, does not state a claim &or relie&

a"ainst the F


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/' 6he director nows at the time that he or a related person is a party to or has a 'ene&icial

interest in a transaction or is closely lined to the transaction Oc' 6he transaction is 'ro*"ht 'e&ore the 'oard o& directors &or action, and the director

nows o& a relationship, 'ene&icial interest in the transaction, or a close lin to the

transaction with respect to!i' another entity o& which he is a director, "eneral partner, a"ent, or employee

ii' a person who controls one or more o& the a'ove$listed entities, or is controlled 'y, or

is *nder common control with, s*ch entity or entities ORiii' an individ*al who is a "eneral partner, principal, or employer o& the directori' Stat*tes provide that an interested director transaction is not void or voida'le solely

'3c o& the Con&lict o& ar'or &or certain transactions:' 8nder the stat*te, an interested director co*ld in&orm the shareholders3directors o& hi

con&lictin" interests and "ive them an opport*nity to approve or rati&y the transactioni' ondisclosed transactions may 'e valid i& it is &o*nd to 'e &air and reasona'le to the

corporation:+' Shairo ree!fie.+

F8 Colle"e par owns a shoppin" pla(a that is not main" any BB I is only 0 leased: 6he

'oard wants to redevelop: A possi'ility arises in the &orm o& creatin" limited partnership witanother company who wo*ld then have [ interest in the newly redeveloped pla(a: =oardcalls a special meetin" o& the S>: All '*t 2 show *p #the minority shares%: 6here is a*nanimo*s vote to "rant the partnership

R8 A K is not void or voida'le solely '3c o& a con&lict o& interest ar/or

a' Compliance with 57 1GG#a% shi&ts the '*rden to the P to show that the transaction was

not entirely &air


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/' @=CA! m*ch more eplicit $ :E1#'% provides that a complyin" transaction may not 'e

enoyed set aside or "ive rise to an award o& dama"es or other sanctions ina proceedin"

'y a S> or 'y or in the ri"ht o& the corp, 'eca*se the 5OR or any person with whom or

which he has a personal, economic or other association with has an interest in the

transactioniii' Bac(rou!+

1' A Note o! S> Ratificatio!

a' @ethods &or protectin" a Co< transaction! have the transaction rati&ied 'y a &*llyin&ormed vote o& S> *na&&iliated with the con&licted 5ors

/' =C S> are the *ltimate owners and 'ene&iciaries o& the 5Ors actions, S> rati&ication

c*ts o&& all *dicial power to redress a &indin" o& 'reach o& F5c' 6he 535or have the '*rden o& showin" that &*ll disclos*re was made to the S>, that S>

were not coerced and that approval was "iven 'y a maority o& shares not controlled 'y

the 'oardc' *OC8 Li,itatio! Co!tai!e+ i! the AI

i' 5CL W102#'%#;% permits a corp: to add a provision to its certi&icate o& incorporation that cap

or eliminates monetary lia'ility o& directors &or 'reach o& their &id*ciary d*ties:

ii' 6he @=CA and nearly every state have adopted similar stat*tes: W2:02#'%#G%iii' @

1' An ec*lpatory provision was the nat*re o& an a&&irmative de&ense, and that 5 seein"

ec*lpation *nder s*ch a provision wo*ld normally 'ear the '*rden o& esta'lishin" its

elements: 9here the &act*al 'asis &or a claim solely implicates a violation o& 5OC, this

co*rt has indicated that the protections o& s*ch a certi&icate provision may properly 'e

invoed and applied+' I!+e,!ificatio! /- the Cor

i' Occ*rs o&ten: 57 1G, @=CA :0$:Mii' @

iii' Curre!t

1' A+a!ce,e!t of E


52/55


/' 5CL W1G#d% + 8n$con&licted directors or, i& there are none, the shareholders m*st

mae the &indin"s:c' @=CA W: $ 5isinterest directors, disinterested shareholders, or special le"al co*nsel

appointed 'y the corporation may mae the &indin":e' I!ura!ce

i' ?irt*ally every corporations stat*te permits corporations to p*rchase ins*rance coverin"

lia'ility inc*rred 'y directors and o&&icers: BCA :'4 *CL 1&4#()

i' Lot o& the ins*rance policy does not cover once the directors leave the corpii' Lia'ility a&ter the &act is somethin" they sho*ld 'e concerned a'o*t +

iii' R and

=loc case% and did they have a"ency power + i& yo* cannot modi&y a"ency relationship, then not

a"ent: 6he epert *st provided the report + asin" some'ody to provide a report &or yo* is not asin"

them to modi&y le"al relationship + no chan"e in relationship 'etween the corp' 5isney-s death policy! i& yo* have a heart attac or medical condition, they will "et yo* o*t 'e&ore yo* die

'eca*se they don-t want the lia'ility + ass*me this is tr*e + some'ody dies 'eca*se they did not administe

care on the "ro*nds + can yo* s*e the =O5H @edically *nso*nd to have this policy + @ay'e "rossly

ne"li"ent as to the cost o& the policy: 6hey did their d*e dili"ence so their decision was made on all the


53/55


in&ormation that was availa'le to them + it means that they made a deli'erate decision + they had people

come in and doctor came in and said deaths o& the time + it does not matter i& doc is wron", it does not

matter &or 5OC + may'e need an o*tside doc + "ather in&o, then Cost 'ene&it analysis then tal a'o*t it +

importance o& deli'erationH' A&ter policy is adopted yo* can ar"*e that yo* are monitorin" the sit*ation + care mar claim o& 5OC at

least in 5elawarer' Criminal act that ca*sed company to enter into it and &ail*re to monitor and there was nowled"e $ i& yo*

now somethin" was a criminal act and ca*sed company to do it + then it is 'ad + corpo does not have &id

d*ty to the people who come into its par + intentionally ca*sin" corp to commit a criminal act' >ow else can it 'e an intentional 'ad actH ow can we ec*se lac o& additional deli'erationH


54/55


11'Fairness opinion12' Co*nter ar"*ment &or not 'ein" 'eca*se we are a'le to accept 'etter o&&ers + they weren

allowed to solicit1$' Characteristics o& 'oard! i& they are well in&ormed #7d*cated% and &inancially sophisticated +

then they pass the deal + then can *se =DR + eperts so pres*ma'ly they can mae these decisions

and not 'e $ they are *p to speed with these inds o& in&ormation + so no need &or in&ormation

"atherin"

1&' Relyin" on the lawyer! 1% Lawyer provided advice that may or may not protect the lawyer +the &act that he co*ld 'e s*ed is not *ni*e to this action + 5OL claim a"ainst the 'oard! no evidenc

o& &inancial interest or lac o& NNNNNN14' >ow do we now that they cannot act in the 'est interest o& corpH they were &oreclosin" the

possi'ility o& "ettin" 'etter o&&ers &rom others + they a"reed to "o ecl*sive and wo*ldn-t solicit

o&&ers + so prevented 'oard &rom determinin" i& there are 'etter o&&ers o*t there + so nowin"ly

preventin" 'oard &rom &indin"3determinin" 'etter o&&ers

a' 5o the Restrictions 9orH #1M$;%a' Str*ct*ral Constraintsi' =O5

ii'


55/55

CORP FALL 2012 ZACKS

&) S> Po"er i! Pu/.ic a!+ Priate Cor #44%

a' S> oer!a!ce Po"er8 Para+i(, a!+ Pu/.ic Co,a!ie

i' S> o"er to tae actio!

1' Actio! that S> ,a- tae a a rou

2' >o" S> Tae Actio! i! a rou

a' Ca..

/' Notice

i' cKeo! Cor *er+i(er

c' =uoru,

+' Sufficie!t 7ote

e' The i,.e aorit- 7ote oe,e!t

f' The I,orta!ce of Bei!( Pree!t

$' >o" S> tae actio! /- Co!e!t i! Lieu of a eeti!(

ii'

/'

4)

6)

fall 2012 corporation outline (1)

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