Business Association Outline

I. performance (Chapter 1) A. Who is an promoter i. theatrical performance rendering Agency is a fiducial descent which results from the manifestation of consent by wholeness somebody to an separatewise that the other sh add uply hazard on his behalf and example to his withstand and consent by the other to so identification number. 1. Contractual similitudeship is non requirement, nor do either indispensability to receive compensation 2. Agent the superstar to act 3. Principal the superstar for whom pull through is eat upn 4. Agency authority more than than mere passive permission it involves request, instruction, or oertop 5.Agency crapper non exist when it is against human sweet policy or il juristic 6. Agency is wish well an enforce able attempt (offer + acceptance) but when does non invite consideration 7. 3 Different forms of dominance (1) Principal-Agent (2) Master- consideration (3) Employee-Employer or sovereign contractor 8. Principal p otentiometer non deputize a non-delegable act ii. Allocation of risk and employment ground on heads of execution 1. A way to shit someone to act on behalf of a nonher(prenominal) 2.Agency pull up s nominatess things to get done in a way that differently is non possible 3. Agents be force multipliers which allows a concentration of resources tail assembly a collective purpose Principal-Agent-Third troupe (PAT) Triangle 1. Principal is typically the lowest cost avoider and in the best ready to mitigate indemnity 2. Agent one authorized to act for another(prenominal)(prenominal) 3. Third Party what does this society see? would a rational soul debate that the ingredient had pronouncement to bind the adept Gorton v. DotyFacts Gorton wound in an automobile contingency by and by Doty loaned her vehicle to coach to transport Gorton and others to football game ROL An mission relationship results from one someones consent that another allow for act on his behalf and subject to his bedevil back and the other persons consent so to act joyous Jenson Farms Co. v. Cargill, Inc Facts complainants entered into grain contracts with Warren Grain & Seed Co. , which was financed and dictationled by Cargill, Inc. , a recess entity ROL A creditor who assumes control of his debtors profession whitethorn become nonimmune as cover(prenominal) for the acts of the debtor in radio link with the telephone line 1.One who contracts to acquire proportion from a thirdly person and convey it to another is the promoter of the other only if it is agree that he is to act primarily for the well-being of the other and not for himself 3 Factors indicating that one is a supplier, rather than an actor (1) that he is to authoritative a fixed intelligent injury for the fitty irrespective of the legal injury paid by him more or less important featureor (2) that acts in his substantiate got name and receives the title to the straitlacedty, which he is to transfer (3) that he has an independent line of products in defileing and selling similar congruousty Existence of authorisation may be proved by minute evidence which shows a racetrack of dealingsss between cardinal wear come forthies Criticism and recommendations could be viewed as control B. Liability of Principal to Third Parties in Contract 1. stiff spot ( utter & Implied) existent Authority Agent moldiness(prenominal) believe in that location is delegacy to act for the drumhead, moldiness musical note finished the eye of the cistronive role using well-founded person (RPP) standard Express Authority Express Authority af homeative put upment of office staff to act, given over either viva voce or in writing.Principal merchant ship misinterpretedly grant express, actual authority, however authority moldinessiness be given either orally or in writing Implied Authority implied authority is actual authority by chance be which the pass actu ally intended the ingredient to posses and includes much(prenominal) powers as ar practically necessary to operate expose the duties actually delegated. expression through the movers eyes- does the broker reasonably believe she is acting at heart the background knowledge of the authority 3 ways implied actual authority can rig out 1. Incidental absent a clear, contrary instruction by the lead story, the gene can use all reasonable means necessary to carry out the goals of the save 2.Custom if it is traditionary in an industry for an agent to contrive certain authority, simply the agent cannot unilaterally expand the agents authority 3. practice of extradite between principal and agent- if principal fails to object to kn aver motions of agent Mill Street Church of Christ v. Hogan Facts Hogan was injured afterwards he was chartered by church employee to paint the inside of the church ROL Actual authority exits until it is revokes, i. e. moldiness be communica ted. Implied authority is actual authority that is proven circumstantially to indicate that the principal intended to delegate powers to the agent that be necessary for carrying out the agents duties, and one major circumstantial factor is anterior fix performed by agent for principal. 2. App bent AuthorityApp bent authority is authority the agent is held out by the principal as possessing. It is a matter of give inings on which a third eccentricy comes to desire soul alleging agency and resulting authority has the centre of proving that it exist base on the sum of money of the percentage (TOC) a mere domainment cannot prove agency, but it can be established by circumstantial evidence including the acts and take over of the parties such as the continuous course of conduct of the parties covering a subprogram of successive feats 3 Ways to Create App arnt Authority 1. Direct communication (or conduct) by the principal to the 3rd party that the agent has actual autho rity, correct though the agent does not. 2.In action by the Principal principal must deny the authority, when he does not, then app arnt authority is bring into beingd 3. custom certain positions involve normally recognized duties that include certain authority. 2 ways to create (1) 3rd par has to know that the principal move the agent in a particular position or (2) must be customary for an agent in that position to enter into the face of capital letter of New Hamps subscribe in question. Three-Seventy Leasing Corporation v. Ampex Corporation Facts 370 Leasing executed a record provided by an Ampex Corp representative for the purchase of computer leasing equipment, but Ampex neer executed the document ROL an agent has app arent authority to bind the principal when the principal acts in such a manner as would superstar a easonably prudent person to suppose the agent had the authority he purports to exercise Absent knowledge on the part of the 3rd parties to the contrary, an agent has apparent authority to do those things, which are coarse and proper (custom) to the conduct of the occupation that he is employed to conduct Principal can nurture itself from agents action by hiring well, training agents, communicating to kn take 3rd parties, natural endowment accurate titles to agents 3. Inherent Authority Inherent Authority power of agent which is not derived from authority (actual or apparent), but touch only from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent PAT Triangle 1. Looking through the eyes of the agent agent did not apply actual authority. Agent dimension out not inevitable. 2. Looking through the eyes of the 3rd party the 3rd party did not know the agent was put to working for the principal therefore, no apparent authority 3. rd party can avoid the concomitant, although economically inefficient, the principal is in a better position to avoid the appearance of auth ority Holding out where the principal check outs out the agent to the open as one having authority to act for the principal. 3rd party must hold knowledge of both the principal, the agent, and the P-A relationship in articulate to pitch a holding out. Inherent authority is slightly economic efficiency- who should bear the emergency? the lowest cost avoider the party who could have near beared the cost. an covert principal is subject to obligation to a 3rd party who is justifiably generate to take a leak a prejudicious transpose in position by an agent on the principals behalf without actual authority Watteau v. Fenwick Facts Humble operated Fenwicks tap house under Humbles name and credit.Humble purchased replete(p)s from Watteau without Fenwicks express authority ROL When a principal is unrevealed to 3rd parties, the actions taken by an agent in furtherance of the principals usual and ordinary business binds the principal. Risk of loss in on the principal Restateme nts a. becomes the enunciation of the overtops and if adopted by statues, they form a standardized or form contract and applies by operation of practice of practice of law rules and the parties can transmute rule through own agreements b. 3 Transactional costs (1) the cost to get the job done, what does it cost to complete the entire execution (2) the cost higher up and beyond the returns/ smashings one is seeking (3) the restatements provide certainty and disbelief results in severe transactional cost c. principals of economic maximization get the most out of it Agency a. most common business association is agency b. person includes natural persons, but also includes legal persons such as deals, accessoryships, non-natural people, NGO, legal personage c. An agents consent can be inferred from conduct d. agitate of substantiation (by mere preponderance of the evidence) falls on the party claiming that an agency relationship exists. (i) consideration is not needed (ii) d oes not need to be formal or in writing, can be established through conduct (iii) legal capacity is not necessary to form an agency relationship i. e. , minor, as an agent, can enter into a contract on the principals behalf to bind the principal e. an agency relationship can exist even where the parties did not want, nor intend, that such a relationship to exist f.On behalf of the principal (i) agent must act primarily for the benefit of the principal (ii) must be the expectation that the acts of the agent are on behalf of the principal (iii) must be the expectation that the acts of the agent are on behalf of the principal (iv) Can have an agency even where the agent is not producing a benefit for the principalno particular result is require g. Control if the principal specifies the undertaking the agent performs that is equal for control to be present very bantam control is needed. C. Liability of Principal to Third Parties in Tort 1. Servant Versus Independent Contractor ROL A master is liable(p) for the torts of its servants under the principle of respondent superior. A master servant relationship exists when the servant has agreed to work on behalf of the mater and subject to the masters control or adept to control the physical conduct of the servant 3 Important actors of business relationships (1) duration (2) control (more controlless indebtedness protection) (3) risk of loss and return (existence of independent contract reduces risk) The foot race of an independent contractor applies to whether the troupe has retained the right to control the day to day operations of the service station control or influence over results alone existence viewed as depleted Humble Oil & Refining Co. v. Martin Facts Martin was injured by a vehicle that rolled out-of-door from the service station owned by Humble Oil & Refining Co, but operated by another under contract ROL Deter minelaying whether a master-servant relationship exists, rather than an independent c ontractor relationship, is a question of fact that pass on be answered in the af dissoluteative when the master exerts a considerable amount of control over the responsibilities of the servant Hoover v. Sun Oil Comp whatever Facts Hoover was injured when his car caught fire while a service station employee was fuel it.ROL A master-servant relationship does not exist when an independent contractor controls the casual operations of the entity that is responsible for damages suffered by a plaintiff. Restatement of Law (Second) Agency 220, Definition of Servant The principal is only liable for the actions of servant/employee in the lead assigning liability to the master must determine if the servants conduct is within the employment range of a function. In determining whether one acting for another is servant or independent contract, the hobby 10 matters of fact, among others are considered 1. the consummation of control which, by agreement, the master may exercise over the deta ils of the work 2. whether or not the one employed is booked in a distinct occupation or business 3. he kind of occupation, with informant to whether, in the locality, the work is ordinarily done under the direction of the employer or by a specialist without supervision 4. the skill take in the particular occupation 5. whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work 6. the distance of time for which the person is employed 7. the method of commitment, whether by time or by job 8. whether or not the work is part of the regular business of the employer 9. whether or not the parties believe they are creating the relation of master and servant 10. whether the principal is or is not a business 2. Scope of Employment servants acts may be within the ambit of employment although consciously criminal or tortious, but serious crimes are outside the scope. a servants use of force against another is within the scope of employment if the use of force is not unexpected by the master such as a bouncer a single colour by a customer does not justify imposition of liability on the employer Manning v. Grimsley Facts Grimsley threw a baseball at Manning in response to Mannings comb at a baseball game ROL to recover damages from an employer for injuries from an employees assault, the plaintiff must establish that the assault was in response to the plaintiffs conduct that was at once interfering with the employees ability to perform his duties success amply. investly interfering test the impedence may be in the form of an affirmative attempt to prevent an employee from carrying out his assignments D. Fiduciary Obligation of Agents (Duties During Agency) Under an agents fiducial work to the principal, the agent is shore to the exercise of the utmost good cartel and loyalty so that the agent did not act adversely to the interests of the principal by serving or acquiring either(prenominal) secret interest of the agent or a third party from which the agent gets a benefit, i. e. , kickback Agent is bound to act for the furtherance and advancement of the interest of the principal General Automotive Manufacturing v. singer Facts Singer while employed by General Automotive Mfg, Co. on the QT concealed profits earned by accepting individualised orders from the plaintiffs customers ROL An employee entrust be held to his or her contractual occupation of loyalty, and their fiducial business would foresee them from engaging in activities that are competitive with their employer. Agent is only assuage to received what the agent agreed to receive from the principal, secret profits are illegal If the principal knows and acquiesces to the agents act of acquiring and furthering private interests of the agent that are similar to or the same as the principals interests, then the agent exit not be found to have br man-to-manlyed the agents fiducial traffic to the principal II. Partnerships (Chapter 2) A. What is a supplyship? And Who are Partners? 1. Partners compared with EmployeesPartnership is an association of devil or more persons to carry on as co-owners of a business for profit weight to establish federation is upon the one upon who alleges the coalition exists Totality of the Circumstances To constitute a Partnerships Court Looks at 8 Elements 1. intention of the parties, agreement is evidential, but not conclusive 2. Right to constituent profits, evidential, but not conclusive. powerfully indicative of a partnership. No inference of partnership shall be inferred where received in pay backment as wages of an employee 3. obligation to packet in losses 4. ownership and control of the partnership property and business 5. lodge of power in administration Control is strongly indicative of a partnership 6. Language in the agreement, either including or excluding one from the benefits or obligations of the partnership 7.Conduct of the par ties toward the third person 8. Rights of the parties on dissolution Fenwick v. Unemployment Compensation counsel Facts Cheshire and Fenwick entered into a partnership agreement regarding salon, pursuant to which Fenwick contributed all capital investment, possess exclusive control over the management of the business, and bore the risk of all business losses. ROL the sharing of profits does not alone create a partnership, despite the parties intentions 2. Partners versus Contract Southex Exhibitions, Inc. v. Rhode Island Builders Assoc. , Inc. Facts Rhode Island Builders replaced Southex Exhibitions as the promoter of its home how after issue a contract it had entered into with the plaintiffs predecessor ROL Profit sharing alone insufficient to establish a partnership, rather the royal approach must assess the kernel of the circumstancesmutual control, contributions of valuable property by both parties, shared profits B. The Fiduciary Obligations of Partners Mein lumbering v. Salomon Facts Salmon terminated a lease be great to his joint venture with Meinhard to enter into a new lease on behalf of his solely owned business. ROL partners owe one another (1) the highest fiduciary tariff of loyalty while the enterprise is ongoing, including as well (2) the duty of good trustfulness and (3) duty to uncover. this ROL begins transaction costs A trustee is held to something stricter than the ethical motive of the merchandise place- at a minimum there must be revelation Meehan v. Shaughnessy Facts Plaintiffs, James Meehan and Leo Boyle, left the law firm of the suspects, Maurice Shaughnessy et al. Plaintiffs cherished money they believed was owed to them under their partnership agreement, and defendants countered that Plaintiffs violated their fiduciary duty and meddled with Defendants business ROL a partner has an obligation to provide true and full knowledge of all things light uponing the partnership to each partner ROL Partners owe each other a fi duciary duty of the utmost good faith and loyalty. As a fiduciary, a partner must consider his or her partners welfare, and finish from acting for purely private gain-the partners cannot improperly lure away clients from the partnership ROL fiduciaries may plan to compete with the entity to which they owe allegiance, provided that in the course of such arrangements they do not otherwise act in rapine of their fiduciary duty Constructive trust created by operation of law as a result of open frame of a fiduciary duty by a partner, what money the partner received by the hard acts is held in trust for the partnership Fiduciary duties can be varied by the parties by contract Lawyers Departing from a partnership may (1) take travel to locate office space, secure financing, and alternative affiliations (2) inform clients active departure from the partnership and the new practice but cannot solicity clients (3) lawyer can remind client to retain counsel of the clients choice (4) le ave off from competing in the beginning disassociation 603(b)(3) 403(c)(2) 404(b)(3) 603(b)(2) C. The Rights of Partners in Management 1. All partners are jointly and one by one liable for the acts and obligations of the partnership. 2.Creditors can collect full amount of sound shrewdness against any individual partner. However if one partner pays more than his fair share, the partner can seek contribution from the other partners National Biscuit sens v. Stroud Facts Freeman purchased refined sugar from National Biscuit Co. , although his partner, Stroud, had advised Freeman and the plaintiff that he would not protracted be responsible for additional bread purchases ROL the acts of a partner, if performed on behalf of the partnership and within the scope of its business, are cover upon all co-partners ROL every(prenominal) partner is an agent for the partnership with actual authority by the agent to bind the principal, i. e. the partnership.A partner cannot restrict the pow er and authority of a partner from pursing a going concern for the partnership, if such purchases are an ordinary matter connected with the partnership business unless there is a mass consent by the partners-50% is not enough In the absence seizure of a partnership agreement, partners will have an equal select in the management of the partnership Difficult for partnerships to remove apparent authority be commence it is hard to find all creditors to put them on notice that a partner does not have the authority to bind the partnership D. Partnership annihilation The Right to Dissolve Owen v. Cohen Facts responder Russ Owen and Appellant Israel Cohen entered a partnership agreement to run a bowling alley. Within a few months Respondent moved for a dissolution of the business once the partners relationship morose sour. ROL Courts of faithfulness may order the dissolution of partnership where the quarrels and disagreements are of such a nature and to such an extent that all confi dence and cooperation between the parties has been destroyed or if a partners misbehavior clobberly hinders the proper conduct of the partnerships business. E. Limited PartnershipLimited Partnership a voluntary agreement entered into by dickens or more parties where one or more general partners are responsible for the enterprises liabilities and management and the other partners are only liable to the extent of their investments General Partnership a voluntary agreement entered into by two or more parties to engage in business whereby each of the parties share in any profits and losses every bit and each participates equally in the management of the enterprise A peculiar(a) partner shall not become liable as a general partner unless in addition to the exercise of his rights and powers as a limited partner, he takes control of the business. Limited partner investment is passive General Partner tell management and control of firm If a limited partner takes part in the control of the business and is not a general partner, the limited partner is only liable to persons who transact business with the limited partnership and who reasonably believed base on their conduct, that the limited partner is a general partner. Holzman v. DeEscamilla Facts The apportioned trustee of a bankrupt estate, Plaintiff Lawrence Holzman, brought this action to hold Defendants, Ricardo de Escamilla et al. liable as general partners of the business at issue ROL if a limited partner exercises control over the business he becomes a general partner and loses any limited partnership protection III. Corporations (Chapter 3) A. The character of the Corporation a. stock carriers are the owners of the confederations with 2 fundamental rights (1) residual observe of the firm and (2) elect the ingredient of the calling card of film managing coachs b. Directors are (1) elected by stockholders based on the shareholders percentage of ownership (proportional) (2) have a fiduciary dut y to manage the firm on behalf of the shareholders and (3) may have a responsibility to 3rd party by statute c.Officers (CEO, CFO, CO, etc. ) are (1) hired by the board of directors for day to day operations (2) responsible to the cast for day to day operations for the benefit of the shareholders and (3) the certificates of in friendship or bylaws will define which roles are officer positions d. Promoters (1) people who are doing the work to create the familiarity (2) before certificate of incorporation creates shareholders, directors, and officers and (3) can become a shareholder, director, or officer e. 3rd Parties something impacted by the corporations including customers, suppliers, vendors, government, environment B. Promoters and the merged EntityCorporation A distinct legal entity characterized by continuous existence assoil alienability of interests held therein centralized management and limited liability on the part of the shareholders of the corporation Southern-Gulf Marine Co. No. 9, Inc. v. Camcraft, Inc. Facts Plaintiff, Southern-Gulf Marine Co. No. 9, Inc. , contracted with Defendant, Camcraft, Inc. , to buy a supply vessel from Defendant. Defendant refused to comply with the agreement, arguing that the contract was invalid be caseful Plaintiff was not in bodiedd in Texas as the sign agreement stated. ROL where a party has contracted with what he acknowledges to be a corporation, he is estopped from denying the existence or the legal validity of such a corporation C. The Corporate Entity and Limited Liability Corporate veilCorporate veil refers to the protect from personal liability of a corporations officers, directors, or shareholders for unlawful conduct tenanted in by the corporation when in bodily formalities are respected, the corporeal veil will be left intact courts will prune the in integratedd veil whenever necessary to prevent humbug or to deliver the goods equity Corporate veil makes risk finite in cost of liability to that which is invested to encourage investors to invest in those with managerial skills and contribution of capital into the business The combination of capital and managerial expertise is key to effective business operation Piercing the in unifiedd veil is an act of equity Walkovszky v. Carlton Facts A pedestrian struck by a taxicab sued the corporation in whose name the taxi was registered, the cabdriver, nine corporations in whose names other taxicabs were registered, two additional corporations, and three individuals. ROL An individual can be held liable for the acts of a corporation through the article of faith of respondeat superior if it can be shown that the individual used his control of the corporation for personal gain. a. pon the principal of respondeat superior, the liability extends to negligent acts as well as commercial dealings b. however, where a corporation is a fragment of a larger corporation have which actually conducts the business, a court will not pierce the corporate veil to hold individual shareholders liable Under capitalization is a value judgment Sea-Land Services, Inc. v. Pepper Source Facts Plaintiff corporation, Sea-Land Services, Inc. , delivered a shipment of peppers for Defendant, Pepper Source, but was never paid and Pepper Source was fade away before judgment could be enforced against it. Plaintiff wanted to hold Pepper Source and the other Defendants, Gerald Marchese and other corporations he controlled, liable.ROL van Dorn sample In order to pierce the corporate veil and impose individual liability, a creditor must show (1) that there was such a angiotensin converting enzyme of interest between the individual and the corporate entity that separate identities no immenseer existed, and (2) that a failure to do so would promote injustice or sanction a fraud in some way beyond simply leaving a creditor unable to sate its judgment 4 Factors in evaluating the unity of interest (1) failure to maintain adequate corpor ate records or comply with corporate formalities (2) commingling of coin or assets (3) undercapitalization (3) one corporation treating the assets of another corporation as its own Possible for one corporation to be liable for the acts of another through a neat of the corporate veil, in this case there was a reverse piercing, must initially pierce the corporate veil to get to the other corporation. setback piercing puts Sea-Land into the position of a debtor instead of shareholder and would have a higher priority to receive funds Commingling assets- combining of money or property into a joint account or asset An unpaid judgment is insufficient to pierce a corporate veil- must examine to see if he shareholder treated the corporation as something different Fulfilling corporate niceties are a transactional cost to the business Frigidaire sales Corporation v. Union Properties, Inc. Facts Frigidaire Sales Corp, a creditor of Commercial Investors, a limited partnership, brought an ac tion against the corporate general partner and its limited partners individually when the partnership failed to pay installments due on contract ROL Limited partners are not liable for the debts of a limited partnership simple by their spatial relation as officers, directors, or expectholders of the corporate general partner as long as they conscientiously hold open the corporate matters General partners are liable for the debts of limited partners Officers in the main not liable for corporate debts Shareholders (owners of the guild) rights (1) money-residual value of the firm, usually by way of dividends or through appreciation of footing stock trades. P/E Ratio where P is market hurt and E is earnings, divide profits by shares outstanding, 12 P/E means 2 years to get your money back and (2) vote-for directors of the corporation D. Shareholder Derivative Actions Shareholder derivative law font lawsuit brought by shareholders on behalf of the organization to compel the organi zation to take certain action wherefore? be designer shareholders feel the corporation is not protecting shareholder interest. The shareholder steps into the shoes of the corporation When? ypically found where officers have some relationship with third party or the third party is the corporate officers Precondition of a derivative lawsuit shareholder must demand corporation to act before suing. about jurisdictions excuse the demand requirement where the demand would be futile (i. e. asking the director to sue self) Applies when? the corporation has suffered a loss. sublime from direct shareholder loss Institutional investor- people who have substantive investments in a corporation Cohen v. Beneficial Industrial Loan Corp. Facts Plaintiff brought a stockholders derivative action in federal court. Defendant, Beneficial Industrial Loan Corporation, argued that a New Jersey tate law requiring parties to secure a bond for payment of the opposing partys legal fees should be followed ROL A shareholders derivative suit will follow state non-procedural laws regarding the derivative suits when possible. E. The Role and Purposes of Corporations A. P. Smith Mfg. Co. v. Barlow Facts mutation lawsuit. Defendant stockholders, Ruth Barlow et al. , questioned the legality of a charitable donation to Princeton University do by Plaintiff corporation, A. P. Smith Manufacturing Company. ROL State legislation adopted in the universe interest can be constitutionally applied to be corporations under the reserved power. Corporate gift-giving is an allowable method of increasing goodwill. nder Erie doctrine, state rules apply for substantive issues whereas, federal rules apply for procedural issues Business notion retrieve (BJR) Doctrine that relieves corporate directors and/or officers from liability for lasts honestly and rationally do in the corporations best interest BJR In the absence of fraud, illegality, or combat of interest, the court will not substitute its judg ment for the judgment of the corporate managers Why? (1) there are identifiable transactional costs for hesitate (2) designed to accommodate the purloin level of risk, which is better for the economy as a whole gambit v. Ford Motor Co. Facts Plaintiff shareholders, Dodge et al. brought an action against Defendant corporation, Ford Motor Company, to force Defendant to pay a more self-colored dividend, and to change questionable business decisions (expand manufacturing plant capability by adding steel plant & use profits to lower footing of its cars) by Defendant. ROL The purpose of a corporation is to make a profit for the shareholders, but a court will not interfere with decisions that come under the business judgment of directors. Although a corporations directors have ingenuity in the means they choose to make products and earn a profit, the directors may not reduce profits or withhold dividends from the corporations shareholders in order to benefit the public. IV. The Duties of Officers, Directors, and Other Insiders (Chapter 5) A. The Obligations of Control Duty of CareFiduciary Duty a legal obligation to act for the benefit of another, including subordinating ones personal interests to that of the other person Business Corporation law permits actions against directors for failure to perform duties in managing corporate assets option the right to buy X shares at Y wrong for Z amount of time Kamin v. American Express Company Facts Stockholders brought a derivative action, asking for a declaration that certain dividend in kind was a waste of corporate assets ROL Whether or not a dividend is to be declared or a distribution made is exclusively a matter of business judgment for the board of directors, and the courts will not interfere as long as the decision is made in good faith.ROL A complaint alleging some course of action other than that taken by the board would not have been more payoffous does not give rise to a cause of action for damages Errors in judgment are not sufficient grounds for equity enlistment for the powers of the entrusted with corporate management are largely discretionary-courts will not interfere with such discretion unless it first appears that the directors are acting in atrocious faith or for a dishonest purpose Smith v. Van Gorkam Facts Plaintiffs, Alden Smith and John Gosselin, brought a class action suit against Defendant corporation, Trans Union, and its directors, after the Board approved a uniting proposal based solely on the representations of the CEO of Trans Union, fellow Defendant Jerome Van Gorkom.ROL The business judgment rule presumes that, when making business decisions, directors act on an advised basis, in good faith, and in the companys best interest ROL the business judgment rule shields directors or officers of a corporation from liability only if, in reaching a business decision, the directors acted on an informed basis, availing themselves of all existent learning reasonably f unctional. 1. Director may only rely on credible entropy provided by competent individuals, after taking reasonable measure to substantiate it 2. Directors have a duty to be informed to go about their responsibilities in a deliberate manner hire outside experts (attorneys and investment bankers) 3. Gross negligence is the standard Directors are fully protected in relying in good faith on reports made by officers.The term report has been liberally construed to include reports of informal personal investigations of corporate officers There is no protection for directors who made unintelligent or unadvised judgment Valuing the Business Intrinsic value what the company is truly worth no one knows what this is 3 Value indicators of a business (1) change flow (2) asset value (3) share bell Discounted Present Value (DPV) what is the present value of the income stream. What would you pay to get X sawbucks tomorrow a dollar today is worth more than a dollar tomorrow because of infl ation. DPV is just one value indicator of a companys value Leveraged BuyoutLeverage Buyout purchase of a company financed by a relatively depleted amount of equity and a large amount of debt. Management Leveraged Buyout (MLBO) inbuilt conflict in that the management would be making money. (1) Sellers are the shareholders and they want to get the highest terms possible, represented by the BOD (2) Buyers want to pay as little as possible, in a MLBO, the BOD are the ones buying the firm. In a MLBO, the directors are on both sides of the command table therefore we need to have a dis interest director or 3rd party value the firm BJR 1. If the BJR applies, then the psychoanalysis ends, no further inquiry needed 2. If BJR does not apply, then matter to see if there is a breach of duty 3.A combination of fiduciary duties of care and loyalty give rise to the requirement that a director transgresss to the shareholder all secular facts bearing upon a merger vote 4. Five Factors to co nsider in the pallidness of the legal proceeding (1) timing (2) intro (3) negotiation (4) structure of the transaction (5) disclosure to and by the directors and shareholders Francis v. United States Facts Plaintiffs, the trustees in bankruptcy of Pritchard & Baird Intermediaries Corporation (P&B), filed suit against Defendant, the executrix of the estate of Lillian Pritchard, for a breach of fiduciary duty as a director of P&B. Lillian Pritchard did not exercise ordinary care n monitoring the funds of P&B when her sons, other members of P&B management, misappropriated funds ROL Directors have the duty to act honestly and in good faith and with the same grad of diligence, care and skills that a reasonably prudent person would use in similar circumstances ROL Liability of a corporations directors to its clients requires the following to be demonstrated (1) a duty existed (2) the directors breached that duty (3) the breach was a immediate cause of the clients loss ROL A director s general obligation make it incumbent upon directors to discharge their duties in good faith and with that degree of diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions. The general rule is that Directors are not personally liable for the debts of the corporation ROL a director should acquire at least(prenominal) a rudimentary understanding of the business of the corporation . 1) a director should become familiar with the fundamentals of the business in which the corporation is engaged. (2) Because directors are bound to exercise ordinary care, they cannot set up as a defense lack of knowledge needed to exercise the requisite degree of care ROL Directors are under a continuing obligation to keep informed about the activities of the corporation and cannot rely on reports/ learning by officers if the director knows or should have known that such information is not reliable ROL Usually a director can absolve himself of liability by informing other directors of the impropriety and voting for a proper course of action. 1) Conversely, a director who votes for or consents in certain actions may be liable to the corporation for the benefit of its creditors or shareholders, to the extent of any injuries suffered by such persons, respectively, as a result of such action. (2) A director who is present at a board clashing is presumed to concur in a corporate action taken at the meeting unless his dissent is entered in the minutes of the meeting or filed promptly after adjournment ROL if the business judgment rule does not apply, determine if the decision of the director was a breach of fiduciary duty and establish if it was the proximate cause of the damages B. Duty of Loyalty Bayer v. Beran Facts Plaintiffs, Bayer et al. filed a derivative shareholder action against Defendant directors, Beran et al. , contesting their decision to pay for radio receiver advertise that employed a directors wife. Plainti ffs also argued that Defendants needlessly renew the employment contract of Dr. Henri Dreyfus. ROL A director does not breach his fiduciary duty by approving a radio advertising program in which the wife of the corporate president, who is also a member of the BOD, was one of the featured performers ROL A director has a fiduciary duty to support the corporations interest over his or her own conflicting interests, and any competing interests renders the business judgment rule inapplicable. i. f the BJR does not apply, the directors have the burden of proof, to prevent a conflict of interest, demonstrating they dealt at an arms length with the specific transaction ii. if a disinterested majority of directors have formalize a contract and if the complaining party could not prove it unfair, the courts generally hold the contract valid C. Corporate Opportunities Broz v. Cellular Information Systems, Inc. Facts Defendant, Robert Broz, was the sole stockholder of RFB Cellular, Inc. (RFBC) while also acting as an outside director for Plaintiff Cellular Information Systems, Inc. (CIS). Plaintiff brought an action against Defendant when Defendant purchased a cellular license for RFBC over a bid by CIS.ROL The corporate probability doctrine holds that an officer or director of a corporation can take a corporate opportunity (1) if the opportunity is presented to them in their individual capacity (2) the opportunity is nonessential to the corporation (3) the corporation has no expectation for the opportunity (4) and they have not outlaw(a)ly utilise corporate resources to take advantage of the opportunity. HC ROL Under the doctrine of corporate opportunity, a corporate fiduciary must place the corporations interest before his own interests in appropriate circumstance, but a corporate fiduciary does not breach his or her duty by not considering the interests of another corporation proposing to acquire the corporation in deciding to make a corporate purchase.Usurpation o f Corporate opportunity factors (1) corporation is financially able to take advantage of the opportunity (2) the opportunity is in the corporate line of business (3) corporation has an expectancy interest and (4) accepting the opportunity would create a conflict of interest In Re eBay, Inc. Shareholders Litigation Facts Shareholders of eBay brought derivative action against certain eBay officers and directors for usurping corporate opportunities when they accepted thousands of initial public offering shares at the initial offering price from eBays investment banker, Goldman Sachs ROL Where a corporation regularly and consistently invests in marketable securities, a claim for usurpation is stated where it is maintain the corporations officers and directors accepted the IP share allocations at the initial offering price instead of having those shares allocated to the corporation.ROL A claim of aiding and abetting a breach of fiduciary duty is stated where it is alleged that an invest ment banker has allocated lucrative IPO shares to a corporations insiders knowing(1) that the insider owed a fiduciary duty to the corporation not to profit personally at the corporations expense i. e. created a conflict of interest (2) the corporation regularly invested in marketable securities, i. e. , in the line of business and (3) the company was financially able to take advantage of the opportunity E. Dominant Shareholders Sinclair Oil Corp. v. Levien Facts Plaintiff, Francis Levien, brought suit as a minority shareholder of Sinclair Venezuelan Oil Company (Sinven) which was a subsidiary of Defendant, Sinclair Oil Corporation. Plaintiff alleged that Defendant caused Sinven to pay out excessive dividends, and that Defendant breached their contract with Sinven.CB ROL A standard of intrinsic fairness will be applied in any self-dealing transaction by a parent corporation whose majority ownership places a fiduciary duty upon the parent corporation, but the transaction only be self -dealing if the transaction is to the detriment of minority shareholders. Self Dealing transaction in which a fiduciary uses property of another, held by virtue of the confidential relationship, for personal gain. Shareholders do not have a fiduciary duty to one another 3 Cause of Action Arguments (1) Excessive dividends (Self-Dealing) No self dealing because each shareholder received a proportionate share of split payment (2) Usurpation of corporate opportunities No opportunities presented to Siven independently and which Sinclair either took for itself or denied to Sinven.OK to use different subsidiaries in other countries for different business opportunities-apply BJR (3) bruise of contract self-dealing involved and Sinclair required to account to Sinven Intrinsic Fairness test (IFT) ROL IFT should not be applied to business transactions where a fiduciary duty exist but is unaccompanied by self dealing IFT is a defense to a claim that a director engaged in an interested transac tion by showing the transactions fairness to the corporation when the situation involves a parent and subsidiary, with the parent controlling the transaction and improve the terms, the test of intrinsic fairness, with its resulting shifting of burden of proof, is applied.The basic situation for the performance of the rule is the one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary if such a dividend is in center self-dealing by the parent, then intrinsic fairness standard is the proper standard for example, suppose a parent dominates a subsidiary and its board of directors. The subsidiary has two classes of stock, X and Y. Class X is owned by the parent and Class Y is owned by minority stockholders of the subsidiary. If the subsidiary, at the direction of the parent, declares a dividend on its Class X stock only, this energy well be self-dealing by the parent. If would be receiving something from the subsidiary to the exclusion of and detrimental to its minority stockholders.This self-dealing, coupled with the parents fiduciary duty, would make intrinsic fairness the proper standard by which to evaluate the dividend payment Dominant Shareholder Some fiduciary duties imposed (1) controlling shareholders can control the board. It is possible to control the board with less than 50% ownership (2) Some corporate actions require the shareholder vote and if the shareholder uses the vote in an unfair manner, the court will hold the shareholder liable. Intrinsic Fairness Test is triggered when one party is on both side of the transaction. The controlling shareholder has the burden of proving that transaction was fair to the corporation F. Ratification Fleigler v. LawerenceFacts Plaintiff, Irving Fliegler, brought a suit on behalf of Agau Mines, Inc. , against Defendant directors, John Lawrence et al. , after they voted to exercise an option to purchase shares of another company. CB ROL Shareholder ratification of a tr ansaction between the corporation and an interested party will not be legitimate if the majority of the shareholders are the interested parties. G. Disclosure and Fairness H. Delaware General Corporation Law persona 144 manage 10b-5 (a) unlawful to defend or make simulated statements in connection with purchase or sale of securities-Look for deception or manipulation (i) disclosures must be honest (ii) allows for a private cause of action iii) companies are required to speak to tell things to the market and when they break down it must be honest (iv) if a company discloses information to the market, whether required to disclose or not, must make an honest disclosure (v) typically, companies refrain from disclosing unless required by the SEC or required by market forces. Basic Inc. B Levinson Facts Respondents, Max Levinson et al. , held shares in Petitioner Corporation, Basic Inc. Respondents brought this action after 3 misleading statements concerning a potential merger induce d them to sell their shares at a depressed price. CB ROL Misleading statements during merger discussions will be real(a) under Rule 10b-5 if the misstatements would have changed the view of the make out information by a reasonable investor.ROL whether a companys state is secular, in the context of merger discussions, requires a case-by-case analysis of the probability that transaction will be consummated and the deduction of the transaction to the issuers of the securities ROL an investors reliance on material, public, falsehoods may be presumed under the fraud-on-the-market theory for purposes of a Rule 10b-5 action Materiality richness-the degree of relevance or necessity to the particular matter, a fact based inquiry (1) to receive the corporality requirement there must be a substantial likeliness that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available. Does the state ment made by the company change the total mix of the information available? 2) materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information (3) As the probability of the event increases, it becomes more and more material and increases the need to disclose (4) As the magnitude of the event increases, it becomes more and more material and increases the need to disclose (5) opportunity x Magnitude = Materiality SEC Securities and transform commission encourages transparency through disclosure of information that is material spoof on Market (FOM) FOM the price of a companys stock is determined by the available information regarding the company and its business. Misleading statements will therefore learn purchasers of stock even if the purchasers do not directly rely on the misstatements. The market must be able to recognize the information and deliberate the information in an adjustment in the price of stock fend in Basi c he court should not endorse the fraud on market theory for 3 reasons (1) common law doctrine of fraud and deceit (2) the court presumption of reliance also assumes that buyers and sellers rely not just on the market price, but on the justice of that price and (3) many investors purchase or sell stock because they believe the price inaccurately reflects the corporations worth. Therefore, Efficient Market Theory (EMT) in a deep and liquid market, The market takes into account all available information and no one has any additional, valuable information if thats true, over the long term you cant beat the market because the market will always have more information than an individual over time. Therefore, for Rule 10b-5 action the court presumption is that the shareholder relied on the price of the stock. now the burden of proof is on the defendants to prove that the shareholders actions were not in reliance on the price of the stock but some other reason. RelianceReliance provides th e requisite causal connection between the defendants illusion and a plaintiffs injury we previously dispensed with a requirement of positive proof of reliance, where a duty to disclose material information had been breached, concluding that the necessary nexus between the plaintiffs injury and the defendants wrongful conduct had been established Reliance of individuals on the integrity of the market price may be presume however, that presumption can be rebutted Misc because most publically available information is reflected in the market price, an investors reliance on any public material misrepresentation. The court adopted the TSC Industries standard of materiality for 10b5, which concludes that an omitted fact is material if there is a substantial likelihood that reasonable shareholder would consider it important in deciding how to vote. (a) further to fulfill the materiality requirement, there must be a substantial likelihood that the disclosure of the omitted fact would have b een viewed by the reasonable investor as having significantly altered the total mix of information made available. b) there must be reliance on the statement or omission. (1) there is more than one way to demonstrate the casual connection between the misrepresentation and the plaintiffs injuryno requirement of positive proof of reliance, (2) the class action is extremely important because it allows the plaintiffs to secure counsel to pursue claims that otherwise would be cost terminateive (3) The court held that there is a presumption of reliance. transcription in Principle Test Preliminary merger discussions do not become material until agreement in principle as to the price and structure of the transaction have been reached between the would be merger partners. rationales are offered in support of this (1) an investor should not be overwhelmed by excessively critical and trivial information and focuses on the substantial risk that preliminary merger discussions may collapse (2) it helps to preserve the confidentiality of merger discussions where earlier disclosure efficacy prejudice the negotiations. (3) the test also provides a usable, bright line rule for determining when disclosures must be made. In Basic, the shareholders sold stock based on their reliance on the integrity of the price set by the market, but because of Basics material misrepresentation that market prices had been frequently depressed Probability/Magnitude Approach ateriality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the evaluate magnitude that the event will occur and the anticipated magnitude of the event in light of the totality of the company use (1) to assess the probability, a fact sentry will need to look to indicia of interest in the transaction at the highest corporate levelsboard resolutions, operating instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest (2) to assess magnitude of the transaction to the issuer, a fact finder will need to consider such facts as (a) the size of the two corporate entities and (b) the potential premiums over market value Why allow private individuals to press claims? allows people with a real stake in the claim to pursue it encourages reaching the larger statutory goal of disclosure by having mini-private-attorney generalsbasically a multiplier for the SEC West v. prudential Securities, Inc. Facts Plaintiffs, Dean West et al. brought an action under the fraud-on-the-market doctrine after a stockbroker for Defendant, Prudential Securities, Inc. , gave then non-public tips that were fraudulent. CB ROL A fraudulent statement needs to be made in public accessible in order for a plaintiff to claim that the statement caused a loss on the investment. ROL Unless the information reaches the market, there can be no fraud on the market to satisfy the reliance factor Santa Fe Indus tries, Inc. v. Green Facts Plaintiffs, Green et al. , were minority shareholders of Kirby forest Corp. Plaintiffs brought this action to recover a greater share price after Defendant majority shareholder, Santa Fe Industries, Inc. , forced Plaintiffs to sell their shares.CB ROL Section 10(b) of the Securities commute Act and Rule 10b-5 prohibit conduct involving manipulation or deception, but are not so expansive as to govern incidences of fiduciary breach. ROL before a claim of fraud or breach of fiduciary duty may be maintained under 10b-5, there must first be showing of manipulation and deception Manipulation and incantation inadequate compensation does not rise to level of manipulation or deception when all facts are disclosed No manipulation or deception therefore, the shareholders filed the wrong cause of action and should have sought an approximation remedy In addition, state law generally governs the internal affairs of a corporation, such as fiduciary responsibility Rem ember Rule 10b-5 is a federal cause of actionThe Court granted which relief that could be granted (a) federal law was asserted violated because the merger was undertaken without prior notice (b) the low valuation placed on the shares in the cash exchange offer was itself said to be fraud that is actionable under 10b-5 (c) the purpose of getting rid of the minority shareholder helps to eliminate the fiduciary duty and also if you can buy the minority shareholders out at a lower price, theres more money to be made (d) 10b-5 cause of action is based on market manipulation and there can also be a 10b-5 action when there is no sufficient disclosure, but not for insufficient compensation 10b-5 reach for minority shareholder squeeze out 0b-5 reaches breaches of fiduciary duty by a majority shareholder against a minority shareholder without any charge of misrepresentation or lack of disclosure Neither misrepresentation nor non-disclosure are necessary elements of rule 10b-5 sop uping point of every 10b-5 case involving construction of a statute is the language itselfthe language gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception cardinal factors determine whether Congress intended to create a federal cause of action (1) language of the statute and (2) whether the cause of action is traditionally relegated to state law. Absent a clear indication of congressional intent, the Courts are loath to federalize the substantial portion of the law of corporations that deals with transactions in securities, specially where established state policies of corporate regulation exist. 2 Reasons Sante Fe is an appropriate case for an appeal 1) the district courts order marked an substantial extension service of the fraud on the market approach Basic held that because most publicly available information is reflected in the market price, an investors reliance on any public material misrepresentation-that public information trades quickly and influences securities prices (2) Few securities transactions are litigated to conclusion, so a review of this novel and important legal issue may be possible only through the Rule 23(f) device (a)it is hard to see how Hofmans non public statements could have caused changes in the price of Jeffersons Savings stock -found the fraud on the market doctrine on a causal mechanism with both theoretical and empirical power, for non public information there is nothing comparable (b) there is non public information and securities prices, let alone show that the link is as strong as the one deemed sufficient (c) Blue Chip Stamps court held plaintiff had no cause of action under 10b-5 because it had neither bought or sold shares, plaintiff argued because the corporation negatively painted their position, it exercised the right not to purchase share on which they would have made a profit. (d) Ernst v.Ernst court held that liability for take of a false or misleading statement requir es proof of a state of mind referred to scienter, court also held recklessness would be sufficent (e) interchange Bank court held that there was not implied private right of action against those who aid and abet violation of Rule 10b-5 I. Inside Information Securities and deputize Commission v. Texas Gulf Sulfur Co. Facts Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf siemens Co. , et al. , after Defendants bought shares of Texas Gulf while they secretly had positive information regarding mining activities carried out by the company.CB ROL Insiders cannot act on material information (information that a reasonable man would deem important to the value of the stock) until the information is reasonably, publicly disseminated. ROL it is unlawful to trade on material inside information until such information has been disclosed to the public and has had time to become equally available to all investors ROL A company press release is considered to have been issued in connection with the purchase or sale of a security for purposes of princely liability under the federal securities laws, and liability will flow if a reasonable investor, in the exercise of due care, would have been misled by it. The essence of Rule 10b-5 is that anyone, would have been misled by it.In the securities if a corporation has access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone may not take advantage of such information knowing it is unavailable to those whom he is dealing Rule of Disclosure or Abstention Anyone in possession of material inside information must either disclose it to the investing public, or if he disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from handicraft or recommending the securities concern while such inside information the Great Compromiser undisclosed. Be comes a Rule of Abstention insider must either disclose or abstain. in this instance the company prohibited the insider from disclosing the information..Thus even if the insider quit the company and sought to disclose, the insiders fiduciary obligation to the company prohibits the insider from disclosing the information (i) because the information is private information of the company, it ultimately results in requiring the insider to abstain from trading (ii) insiders must refrain from trading until the market tolerates the information Materiality Test the basic test of materiality is whether a reasonable man would attach importance in determining his choice of action in the transaction in question. (i) this encompasses any fact which in reasonable and objective contemplation might impact the value of the corporations stock or securities. ii) thus, material facts include not only information disclosing the earnings and distribution of a company, but also those facts which affect the probable future of the company and those which may affect the desire of the investors to buy, sell, or hold the companys securities Required Disclosures 10Q quarterly earnings 10k annual earnings 8k material events that occur between reporting periods. Insider Information anyone in possession of material inside information must either disclose it to the investing public or if he is prevented from disclosing to protect corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. a) the insiders duty to disclose information or his duty to abstain from dealing in his companys securities bone only in situation which are essentially extraordinary in nature and which are reasonably certain to have a substantial effect on the market price of the security if the extraordinary situation is disclosed (b)the test of materiality is whether a reasonable would attach importance in determining this choice of action in the transaction in question (c) corporations are only required to disclose that information that is required to be disclosedthere is a duty to disclose every annually, quarterly, and between quarters those events and activities that are extraordinary information (d) a fall over of the facts establish that knowledge of the results of the husking hole K 55 1 would have been important to a reasonable investor and might affect the price of stock (e) a major factor in determining discovery was material is the importance attached to the drilling result by those who knew about it (1) once the information is disclosed, the market will adjust (2) the insider traders can start trading as soon as the market can digest the information (in modern society thats quickly) Holding All transactions in TSG stock or calls by individuals apprised by the drilling results were made in violation of Rule 10b-5 V. Problems of Control (Chapter 6) A. Proxy Fights Proxy i s the right to vote someone elses shares Proxies are need to establish quorums (50%+1), which are typically required for an election to count The outcome of voting will depend on which group has collected the most proxies Under corporate law, shareholders may appoint an agent to attend the meeting and vote on their behalf and hareholder placeholder holder Incumbent managers of large firms solicit proxies from shareholders directly Both Tender offers and representative fights are subject both to the 1934 Securities Exchange Act and to state corporate statutes SEC Federal Rules Require Certain Disclosures when Soliciting Proxies Proxy statement must be given statement must disclose material information Proxy battles is a way to change the way a firm is manage Proxy Contest proxy contest is a peel between two corporate factions to obtain the votes of uncommitted shareholders. A proxy contest occurs when a group of dissident shareholders mounts a battle against corporations managers 1.Strategic wont of Prox