BUSINESS ASSOCIATIONS OUTLINE

LAW OF AGENCY

Hypo Trigger: More than one person acting within organization  Questions of Agency

Law of Agency: interactions among principals AND agents & third parties, who work on principal’s behalf.

Agent: Person authorized to act on behalf of principal.

o Best interest of Principal

Principal (Employer): Person whom agent acts on their behalf

Principal Control: Shown by 1) ability to give instructions, 2) Agent follows principle’s instructions, and 3) penalize agent for not following
instructions.
* Ask: Through what means does Principal have control?

A. Agency Formation
 Restatement Third: Principal and agent relation forms when:
1) Principal manifests assent to have agent to act on their behalf and under principal’s control
2) Agent consent to relationship
 No contract required to form agency
 Agents can act gratuitously
 Agency Formation has both inward and outward-looking consequences:
1) Inward looking: relationship between principal and agent and governed by contracts & fiduciary duties
o Ex: Franchisee not following manual
2) Outward looking: relation among principal, agent, & third party governed by attribution.

Nears
Rule:
 Restatement Third: Acceptable service quality does not by itself create relation between employee and employer.
* I.e. Quality control standards for agency does NOT create agency formation.

Issue: Did HHFI have control over Mr. Marshall (Regional Manager) to have Principal/Agent Relationship?

Holding:
No. Holiday didn’t control the daily actions of Marshall in his capacity as the hotel’s general manager. The training and quarterly inspections by
Holiday Hotel do not create an agency relationship. Because Holiday Inn did not perform the training and inspections to ensure guest
satisfaction, there was no supervision as to the treatment of hotel employees, thus, Holiday had no control over Marshal’s daily acts as
hotel’s manager. Holiday had no financial control over the hotel, not involved in the hotel’s employment decisions, and did not compensate
employees. Thus, no express/implied control from HHFI to ETEX/Marshal. No agency formation between HHFI & Marshall.

(UPDATED ABOVE: YES / WRITTEN: YES)---------------------------------------------------

A. AGENT’S FIDUCIARY DUTIES TO PRINCIPAL

 Agent’s fiduciary duty to Principal: Agent acts in Principal’s interest

Restatement Third of Agency:

 Agent’s Fiduciary Duties:
1. Performance of contract obligation
2. Act with care, competence, diligence, obedience, and disclosure.

 Principle’s Fiduciary Duties

1. Performance K obligation
2. Good faith
3. Fair deals
4. Indemnification

Restatement Third of Agency:

 Agent’s duty of loyalty to Principal is:
1. Not to use or communicates confidential info for Agent’s or 3rd party Benefit
2. Not to compete with principle
3. Not to act as adverse party to principle in transaction connected to agency
 Example: Employee breaches their duty of loyalty if acts adversely when misappropriates employer’s profits,
property, or business opportunities.

Note: Even if agent doesn’t fall under any of the above, may still be disloyal under rule below.
Food Lion
Facts: Two ABC reporters thought they could investigate meat mishandling claims by working for Food Lion. They lied about their job
background to get jobs there. While there, they secretly videotaped Food Lion employees in meat dept. ABC aired footage. Food lion sued ABC.

Issue: Did reporters beach their duty of loyalty to Food Lion while working for Food Lion?

Rule: Employees breach duty of loyalty when:

Deliberately (intended) act adversely to employer’s best interests
o Ex: Because ABC reporters while working for Food Lion intended to act adverse to their second employers
interest to benefit first employer they breached their duty of loyalty to Second Employer.

Holding: Yes. ABC’s broadcast interest was to expose Food Lion as food chain that engaged in unsanitary practices AND Dale & Barnett served
ABC’s interest while working for Food Lion by secretly taping for ABC, thus D & B were disloyal & their interest adverse to Food Lion, AND D
& B had intent to act against interest of Food Lion to benefit ABC (main employer), thus, D & B were disloyal to Food Lion.

(UPDATED ABOVE: Yes/ Written: YES) ----------------------------------------------------------

B. AUTHORITY
 Principles of Attribution are based on Principles of Authority: Principals may incur liability for the actions of their agents based on
Vicarious Liability (Respondeat Superior).
ACTUAL AUTHORITY
 Agent acts according to principal’s manifestation that the principal wanted agent to do shows agent had actual authority.
 Restatement Third of Agency: Principal manifests (communicates) to agent that the principal consents to agent acting on
his behalf - agent has actual authority.
o Note: Look at communications from principal to agent.
 No written contract needed
 Includes Express and Implied:
 Express Authority: May be conveyed orally or in writing
OR
 Implied Authority: Doing necessary things to achieve an agent’s duties
 I.e. Acts that reasonably required to fulfill work

Castillo
Facts: Case Farms, a chicken processing plant, reached out to Tempcorps to hire employees for Case Farms. Tempcorps hired and recruited
employees in Texas to work at Case Farms. Tempcorps offered housing conditions and free bus tickets and $20 to cover travel costs. When
recruits arrived, placed in bare houses or slept on the floor, or shared home with 17 other recruits and crowded vans for transportation.

Rule: Agent with express authority to do task + has implied authority to do all proper, usual, and necessary to achieve express authority.

Issue: If Case Farms gave agent express authority to undertake task, does it also include implied authority to do all things proper, usual, &
necessary to perform express authority?

Holding:
Yes.
 Agency relation formed between Tempcorps & Case farms when Case Farms (CF) hired Tempcorps to recruit and hire workers for
them.
 Express authority exists when CF told Tempcorps to recruit and hire workers.
 The express authority to recruit and hire workers for Case Farms also includes the implied authority to do all things that would be
proper, usual, and necessary to exercise the express authority, such as housing & transportation to be in Ohio for Case Farms due to
the bad crowded vans and sleeping on floor, thus housing and transportation were within scope of agency formation and Case Farms is
liable thru Tempcorps acts.

APPARENT AUTHORITY
Principal may be liable when third person reasonably believes he was authorized to act on Principal’s behalf, based on his manifestation.

Purported principal: Called apparent authority b/c does NOT require prior agency formation.

Manifestation: Person manifests consent or intention by written, words, or conduct.

Apparent authority requires:

1. Principal manifests directly or indirectly to agent

2. Third Person reasonably believe that the agent with whom she did business with, had apparent authority to do
make transaction.
 Ask: Whether third person reasonably believed that the agent whom she did business with had
authority to enter transaction?

Estoppel v Apparent Authority

  Estoppel requires detrimental reliance without manifestation by principal but apparent authority requires manifestation by principal
 Estoppel allows Third party to hold principal liable but Principal cannot hold Third person liable

Bethany Pharmacal Co.

Facts: QVC (D) held trade shows to select vendors to sell products on QVC broadcasts. QVC contracted w/ Janis, EE of Dept of Commerce, to
help in picking vendors. OVC instructed Janis to send information sheets to vendors that included a disclaimer: Any products sales from vendor
to QVC would be purchased directly w/ QVC. Only way to enter K was to purchase directly w/ QVC. Janis sent letters to selected alternate
vendors & instructed them to attach post-it note w/ word “alternate.” Letter didn’t have post it, but based on letter, she bought $100K in skin care
products to sell.

Rule:
 Apparent agency exists if 1) principal consents to agent’s conduct, 2) third party’s reasonable belief agent had authority to act on his
behalf, and 3) Third party detrimentally relied on agent’s apparent authority.

Issue: Did Janis have apparent authority of QBC & did Bethany perceive her to be agent of QBC?

Holding:
- No
- Bethany could not reasonably think Janis was a agent of apparent authority of QBC and Janis did not directly or indirectly receive
manifestation from QVC b/c Disclaimer said, “You need to have a purchase order from QBC to enter a K.”
- QVC didn’t manifest or consent directly Janis that she may contract w/ Bethany because the disclaimer only said purchase
orders to be done directly w/ QVC to enter K.
- Bethany never got purchase order from ABC, so Janis couldn’t reasonably think Janis was working on QBC’s behalf.
(UPDATED ABOVE: YES/ Written: YES)------------------------------------------------------------

PARTNERSHIP FORMATION
Uniform Partnership Act (UPA)
Revised Uniform Partnership Act (RUPA)

Business: Every trade, occupation, or profession

Person: individuals, partnerships, corporations, and other associations

Profit organizations includes Non-profits

Partnership Defined
 UPA & RUPA 202(a): Partnership is an association of two or more persons to carry on as co-owners of a business for profit.

Holmes v Lerner
Facts: Holmes (P) & Lerner (D) orally agreed to start cosmetic business called Urban Decay. Soward was general partner of Urban Decay,
consisting of Soward, Lerner, & her husband. Holmes attended board meetings & worked in warehouse. Lerner said in press that its was Holmes’
idea. Holmes’ asked for something in writing but no profit share was agreed & was only told that she was “director.” Soward offered Holmes
1% share of company. She was barred from Urban Decay. Sued for breach of oral partnership agreement.

Rule:
 Under UPA, Profit sharing is prima facie evidence that partnership exists.
 Intent to carry on a business for profit is the essential requirement for a partnership.
 Partnership should depend on intent of parties as to their verbal agreement or implied by circumstances that suggests that persons
entered business for profit.

Issue: Does partnership exist if they orally agreed to do business together, but didn’t talk about profit sharing?

Holding & Reasoning:

 Yes. Even though there were no share of profits because there was talk about profit sharing, nor written agreement about it, court held
that Holmes & Lerner verbally agreed to operate Urban Decay together & that both would hire EEs and engage in entire
process together was enough to form a partnership for court.

UPDATED ABOVE: YES / WRITTEN: YES)-----------------------------------------------

MANAGEMENT
Management issues are about ongoing operations in partnership.

UPA 18 & RUPA 401

In absence of agreement, all partners have equal right in management in partnership.

UPA
 Unanimous consent of partners is required to authorize amendments to partnership agreement and add new partners.
RUPA 3011
 Partnership is liable for any partners acts within ordinary course of activities in business.
 Ordinary activities include types of activities normally performed by partnership.

Vecchitto v Vechitto
Facts: Chris & Co files suit against 2 partners (Defendant) for breach of partnership agreement on selling treats, alleging they improperly
transferred interests in partnership & added new people w/o consent. D seeking dismiss suit on behalf of partnership b/c no consent from all
partners as to filing of suit.

Rule
 Acts Within the ordinary course of business may be decided by Majority of Partners
 However, Acts Outside the ordinary course of activities of business and changes to partner agreement requires consent from all
partners.

Issue:
Did all partners have to consent to actions outside of the partnership’s ordinary course of business?

Holding & Reasoning: Yes. Based on the affidavits, because partners never agreed to filing a suit on behalf of the partnership, the filing of the
suit was not the ordinary course of partnership’s business. Because the filing of a lawsuit fell outside of the ordinary course of business of
selling frozen treats, any action that’s not about selling frozen treats needs consent is required by all parties. However, partners never
consented to filing of suit. Thus, partnership lacks standing in suit.

(UPDATED ABOVE: YES/ Written: YES) ----------------------------------------------------------

PARTNERSHIP DUTY
UPA 21
Contains description of fiduciary duty of loyalty and provides only that partners must not steal from the partnership.

Other Sections of UPA may be understood to supplement duty of loyalty.

UPA contains NO provision for duty of loyalty, but some courts implied a duty of care.

UPA 19 & UPA 20

To access partnership records, partners must show “true & full info” about partnerships.

UPA has no duty of care, but RUPA does.

RUPA 404 (b): Duty of Loyalty

Partner’s duty of loyalty to partnership
1) Anti-theft duty
2) Prohibit self-dealing
3) Prohibit competing against partnership

RUPA 404 (c): Duty of Care

Not be Grossly negligent, reckless, intentional misconduct, or knowing violation of law.
 Ex: Partner who engages in gross negligence when mishandling firm’s business.

Meinhard v Salmon
Facts: Salmon agreed to lease Hotel Bristol for 20 years. Salmon hoped to convert building into shops & offices but didn’t have enough money.
Meinhard formed a venture that he would pay Salmon half the amount required to manage property and Salmon would pay him 40% of
profits for first 5 years. When lease was about to expire, new lessor wanted to lease nearby property & offered it to Salmon, who entered
another 20-year lease with Midpoint, but didn’t tell Meinhard about this new transaction. Meinhard claims Salmon breached fiduciary duty of
loyalty

Rule
 Co-partners have fiduciary duty to share any benefits from joint venture agreement.
Issue
 Whether Salmon had a fiduciary duty to inform about Meinhard about the new lease opportunity belonging to partnership?

Holding & Reasoning

Yes. Because Salmon’s opportunity to enter a new lease arose from his status as a co-adventurer of Bristol Lease, he had a duty to tell
Meinhard about it, who made investment to Bristol lease. Salmon breached his duty by preventing Meinhard from enjoying the benefits arising
from their joint venture. Thus, Salmon breached his fiduciary duty to Meinhard.

Corporation Opportunity Doctrine: 2 tests to determine if there was breach of duty:

Line of business test: asks whether partnership has enough experience and ability in field to exploit opportunity.

Interest or expectancy test: asks whether opportunity would further the established business of partnership.
 Does it advance the development of partnership?

No Breach of Duty: Departing Partners Scenarios

 Partners who talk to other partner about leaving firm – No Breach of Duty
 Partners taking files from desk – No Breach of Duty
 Partner telling client, “I just want to let you know that I wont be with the current firm until this day” – No Breach of Duty

Gibbs v Breed, Abbot, & Morgan

Facts
 Gibbs & Sheeran (P) are partners in trusts & estates dept of law firm Breed, Abbot, & Morgan (D)
 Not happy w/ firm, they joined new firm Chadbourne & Park (Chad)
 Created & Sent new firm memo w/ confidential info from current firm of names, salaries, billable hours, educations, & other info
about EE from the trusts & estates dept in old firm
 Took copies of desk files to new firm
 Memo given to Chad WITHOUT NOTIFYING current firm of their PLANS TO LEAVE
 Memo intended to recruit from current to new firm.
 G &S sued to recover $ but D counterclaimed.
Rule
 Partners owe a duty of loyalty to not put partnership at competitive disadvantage.
 Partner in a law firm breaches their duty of loyalty by sharing confidential info w/ another firm prior to notifying partnership of
their plan to leave.
 Partner allowed to recruit partnership’s employees only after partner NOTIFIED partnership of their intent to leave.
Issue
 Does partner owe fiduciary duty to partnership to not put partnership at a competitive disadvantage?

Holding & Reasoning

Yes. Sheehan breached their duty of loyalty because Sheehan prepared and gave a memo to new firm with confidential info (not public) before
notifying the firm of their intent to leave. Gibbs & Sheehan also breached their duty of loyalty because were secretly recruiting EE from their
firm to new firm before giving their firm notice of their intent to leave, and breached their duty of loyalty because the shared information of
billable hours and billing rates, which put their firm at a competitive disadvantage. Thus, they breached their duty of loyalty.

(UPDATED ABOVE: YES / WRITTEN: YES) ---------------------------------------------------

FINANCIAL ATTRIBUTES
If there’s a partnership formation  Partners personally liable for all debts and obligations of partnership

Partners are also entitled to share profits of partnership

Equal sharing of profits and losses is the default rule under both UPA 18(a) and RUPA 401(b)
 Example: When partners are not government by contract

Partnership Accounting
Fundamental concept of partnership accounting is capital account.

Capital account tracks partner’s ownership against partnership.

How is each partner’s ownership claim determined (allocated)? By looking at the following:
 Partners CONTRIBUTIONS to partnership
o Loan not a contribution
 Partners SHARE PROFITS OR LOSSES from operations
o Partners can get repayment of any money contributions made in advance UPA 18(a) and RUPA sec 401(a) and
(d)
o Partner must refund partner for payments and compensate a partner for liabilities incurred in ordinary course of
partnership or for preservation of the partnership’s business or property UPA 18(b) and RUPA 401(c)
o Partnership assets used to pay partnership liabilities in order :
1. Amounts owed to creditors of the partnership who aren’t partners
2. Amount owed to partners other than for capital and profits
3. Amount owing to partners for repayment of capital
4. Amount owing to partners for any remaining profits

o Not enough assets to cover partnership liabilities  partners have to make money contributions to pay those
liabilities UPA 40 & RUPA 807.
 Any WITHDRAWALS of funds from partnership
 Sale of partnership/assets  Each GAINS OR LOSSES
Kovacik v. Reed
Facts
 Kovacik (P) & Reed (D) entered a partnership to remodel kitchens
 They didn’t talk about share of losses but share profits w/ Reed on 50-50 basis
 P made financial contributions in amount of 10,000, but Reed’s contributed labor without compensation.
 Venture was unprofitable, so P demanded contribution of monetary losses, but D didn’t agree to venture’s losses
 Trial court ordered D to pay half of the losses b/c agreed to share profits and losses equally.

Rule: SERVICE PARTNERHIP

 Partnership Agreement 1st Partner who made Money Contributions cannot recover equal profits/ losses from 2nd Partner who only
made Labor Contributions.
 Each lose their own capital
 Partner who contributed labor only loses TIME b/c time is human capital
Issue
 Is a partner who contributed only labor liable for the financial losses of the enterprise?

Holding & Reasoning

No. P cannot recover financial losses from D because D only contributed labor, which means that he losses capital through labor. Losses and
profits are not to be divided equally because P lost capital through money while other lost capital through time & effort. Thus, D is not liable
for the monetary losses of P.
(UPDATED ABOVE W/ PPS: YES / WRITTEN: YES) ------------------------------------------

PARTNERSHIP LIABILITY
Partners may be responsible for fulfilling their obligations of partnership to third parties out of their personal funds.

UPA: Partner Agent of Partnership as to Partnership Business

1. Every partner is an agent of the partnership for the purpose of its business AND act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a
member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular manner,
and the person with whom he is dealing has knowledge of the fact that he has no such authority

2. An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.

RUPA: Partnership Liable for Partner’s Actionable Conduct

Partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable
conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership
 I.e. At Time or Before Wrong or Omission by Partner (s)  All partners Liable

UPA 15
 Partners jointly liable for all debts of partnership + other obligations of partnership, except wrongful acts (UPA 13) or breach of trust
(UPA 14).

Joint + Several Liability

 Each partner responsible for paying entire judgment against partnership.

In Re Keck Mahin v Cate

Facts
 Plan administrator (Keck’s creditors) sued two former Keck partners named Billauer and Hookano seeking to hold them jointly and
severally liable for some of Keck’s debts.
 Keck’s creditors argued claim arose while they were still partners, which occurred before filing malpractice claim.
 Defendants argued that claims happened after they left the partnership, and that they did not assume Keck’s debts anymore.
Rules
IUPA 15(b)
 Even if partnership dissolved or not, any partners can still be liable from prior debts or obligations
 Partners cannot escape liability simply by leaving the partnership after malpractice is committed but before client wins or settles a
malpractice claim.
 Simply by leaving they are NOT free of their debts, even If their old partnership becomes new partnership
 Third party consent (expressed or implied) required to exempt partner from liability

Issue
 Is former partner liable for the malpractice claim of another partnership filed after they that partner left partnership?

Holding & Reasoning

 Yes
 Because malpractice occurred while they were still partners, former partners cannot escape liability by leaving partnership
  Malpractice occurred while they were still partners at the time when wrongdoing occurred  claim filed after  partners of
old firm still liable for prior wrong doing.
 Without consent from third party claimant, Partners cannot be released from liability to third parties.
 Thus, Ms. Billaur & Mr. Hokokano still jointly and severally liable for claims arising before or during time they were partners.
UPDATED ABOVE: YES / WRITTEN: YES)--------------------------------------------------

LIMITED LIABILITY PARTNERSHIPS (LLP)

In general
 Partners in LLP not liable for any partnership obligations to third parties, unless partners become personally liable for their own
conduct or involved in or supervised wrongful conduct of another partner
 Requires 2 or more people join to perform business activity for profit
 To become an LPP, partnership must file an application with secretary of state and include information such as name and address of
partnership, number, description of business nature.
 UPA Section 9: Every partner is an agent of the partnership for the purpose of business, and act of partner, including execution in the
partnership

Frode Jensen & Pillsbury, LLP: A Case Study

Facts
 Jensen announced intention to leave LLP of Latham & Watkins in August 2002
 Jensen not happy with firm regarding the merger b/c of their unrealistic view of achieving American Lawyer 100 first quartile
profitability & goals of professional excellence, including their financial struggles
 Unhappy w/ firm’s decision of laying off employees
 August 2002 , Jensen offered a job w/ Latham
 Negotiated terms of departure w/ John F. Pritchard, employee of Frode Jensen & Pillsbury.
 Pritchard promised to Jensen that his withdrawal would not be result in negative or defensive press statements by Pillsbury
 September 3, Jensen hired at Latham firm and issue press release calling him a “a very capable lawyer w/ extensive contacts &
experience, but Next day, Pillsbury said things about Jensen’s sexual harassment claims in Press Release involving and
productivity decline
 Conspiracy Count: One of Ds made call to Latham and read substance of September 4 release to undermine Jensen’s partnership
at Latham. Another D issued false & defamatory September 4. Thus, Ds jointly & severally liable for conspiring to defame Jensen
& interfere to destroy his partnership.
 Didn’t mention sexual harassment allegations to latham, so Latham is concerned as to why Jensen didn’t disclose past allegations
 Defamation: As a result of the September 4 Release re defamatory statements, Jensen forced to withdraw from Latham leaving
behind 1 million in annual draw. Thus, Ds jointly & severally liable to Jensen.
 Breach of K Count: Jensen & Pillsbury & Pritchard enter Separation Agreement w/ confidentiality clause:
o That Firm agrees to Jensen to keep all info about Potential Claims & reason for departure confidential.
Pillsbury breached the Separation agreement by issuing September 4 Release. Jensen suffered substantial damages such as loss of
partnership w/ Latham and future employment. Thus, D’s are jointly & severally liable to Jensen.
 Pillsbury is a LLP registered to Delaware

Rules
Delaware Statute
 Owners of Delaware LLP may be personally liable for their own actions: (e) Notwithstanding the provisions of subsection (c) of this
section, under a partnership agreement or under another agreement, a partner may agree to be personally liable, directly, or indirectly
by way of indemnification, contribution, or assessment for any partnership obligations while partnership is LLP.

Issue:
Would the partner’s individual actions bind the partnership LLP?

Holding & Reasoning

 Yes
 Pillsbury firm is liable for their partnership obligations because Pillsbury breached the Separation agreement when other
defendants & Pillsbury & Prichard called Gordon & Davenport Latham firm to tell them about the September 4 Release
regarding the sex harassment claims against Jensen and other defamatory statements against Jensen.
 Prichard and Other Defendants acts fell within the ordinary course of activities with the firm because Prichard are likely to
enter agreements to be kept confidential with employees who have notified them of their intent to leave, thus, their a ts bind
the partnership.
UPDATED ABOVE: YES / WRITTEN: YES) ---------------------------------------------------------
Dissolution
Dissolution defined as:
o Partner departing from partnership
o Process of liquidating or winding up a partnership
o Completion of process
UPA: Dissolution
 Dissolution is any change in relation of partners caused by any partner ceasing to be associated in carrying on as distinguished from
winding up business.

Termination
  Termination is point in time when partnership affairs settled.
Wind Up
 Settling partnership affairs after dissolution

Note: Dissolution is when partners ceases to associate with partnership; not when partners added.

RUPA
Under RUPA, if any partner leaves before the end of term, this dissociation is considered “wrongful dissociation,” unless the dissociating partner
get consent of the remaining partners.

Article 7: Dissociated
1) Dissociated partners must be bought for greater of the liquidation value or value based on sale of entire business as a going concern without
dissociated partner and 2) dissociated partner’s liability and ability to bind partnership are terminated.
 Main Issue is to Ask: Whether dissociation was rightful or wrongful

Rightful Dissociation
Dissociation is rightful when its accomplished without violating partners agreement.

Wrongful Dissociation (see rule for Not At Will Partnership)

Fischer v Fischer
Rule: NOT AT WILL PARTNERSHIP
 Partnership cannot dissociate before expiration of term if partnership agreement is for a specified period of time or for a specific goal,
otherwise it’s a wrongful dissociation and partner is liable to partnership and damages to others.
 Partnership agreements that contains specific time or specific goal to achieve  Partner cannot Terminate (dissolve) until goal or term
achieved.
1. Does partnership agreement include a specified time?
2. Does partnership agreement include a specific purpose (goal to achieve)?
Facts
 Richard Fischer formed partnership w/ son, Todd Fischer, which is an At-Will Partnership, where a partner can elect to dissolve
partnership
 Partnership agreement said formed to purchase, lease, and sell real estate at certain address in Kentucky
 1995, both added that if either partner died, surviving partner would buy decedent partner’s interest for $50,000, to be paid in 5
years w/ interest
 Included buy sell provision, other partner had choice to buy the deceased’s partnership business.
 600K minus 200K, so net value is at 400K
 Letter sent to son in which Richard said was dissolving partnership when dad got ill
 Richard left will to 2nd wife, Jacquelyn Fischer (Plaintiff), who doesn’t want buy provision to be effective.
 Wants partnership to continue but with no agreement
 Son wants to buy partnership instead of having it passed down to deceased dads spouse.
 Widow sued as executrix of Richard’s estate & Todd moved to enforce buy-sell provision
Issue
 May partnership be considered for a particular undertaking?

Holding & Reasoning

 Yes. Majority agreed.
Was the partnership agreement for a specified time?
 No, partnership agreement between dad & Todd didn’t include a specified time, but agreement was for a particular undertaking.
Was the partnership agreement have a particular goal to fulfill?
 Yes, because partnership agreement indicated to buy, lease, and SELL land in Kentucky & partnership terminates when property
SOLD.
 Even though they leased and purchased the land, particular undertaking was not fulfilled because land not sold  Partnership
DID NOT CEASE (DISSOLVE), even if dad intended to dissolve partnership, so Buy-Sell Provision still active.

UPDATED ABOVE: YES / WRITTEN: YES) ------------------------------------------------

CORPORATION STRUCTURE
Intro
Corporate governance
 Corporate regulates powers and duties of directors, officers, and shareholders.
 Study of human relations.

Officers
 Officers include Chief executive officers, president chief financial officers are responsible for daily operations in corporation
 Officers make decisions for corporation
 Law of corporation focus on directors and shareholders
Directors
 Directors are elected by shareholders to supervise the officers
 Directors act as a board of directors; not individuals

Shareholder
 Shareholders aka owners of corporation
 Shareholders possess important control rights (elect directors and vote on some transactions) and right to all assets of corporation
when corporation’s creditors paid in liquidation
 Shareholders personally liable for corporation’s obligations b/c have limited liability.

Ownership Structure: Public & Closely Held Corporation

What is Ownership Structure?
 Determines nature of interaction between officers, directors, and shareholders
Differences between Public & Closely Held Corporation
Mechanism of Control
Public Corporation
 Shared Owned by a LARGE # of shareholders (investors) and traded in public securities markets
 Ran by board of directors who manage corporation’s affairs
 Shareholder control directors through elections & voting, but shareholder oversight weak
o Ex: Google started out as a close held corporation. When Google offers public to become members of the
corporation. Now there’s thousands of small investors, making them a Public Corporation.
Close Corporation
 Shares Owned by SMALL # of shareholders (investors) without access to public securities markets
 Ran by shareholders (founders and venture capitalists), who manage prior contractual agreements

Federal Securities Law

 What’s the purpose of Fed Securities Law?
 Fed Securities law requires companies to provide markets quarterly and annual disclosure of large quantities of financial
results, business risks, financial relations w/ managers & directors, litigation, executive compensation, and info of
managers & directors
 Public corporation subject to disclosure requirements under federal securities law.
 Closed corporations silent on whether fed securities law applies

Market for Corporate Control

 Public corps may be threatened of being taken over by other company that gain control of most of the corporation’s stock.
 Directors in hostile takeovers do not arise in close corporations

(UPDATED ABOVE: YES / WRITTEN: YES) ----------------------------------------------

A. Incorporation
Under UPA, Corporations are legal entities w/ identities separate from owners of corporation

Incorporation is the process by which separate legal entity is created.

How does corporation come into existence?

 When articles of incorporation are filed with state, unless date specified.
 Document used to incorporate company is called “articles of incorporation” or “certificate of incorporation”, but term for both is
“charter.”
 Charter must have certain provisions, name of corporation, number of authorized stock shares, and address of registered agent

Note: Class will focus more on Model Business Corporation Act.

Delaware General Corporation Law (DGCL): Certificate of Incorporation

 Corporation’s purpose must be stated.
 Enough by stating that the corporation’s purpose is to conduct lawful business and all lawful acts shall be within purpose of
corporation, except for express limitations.
 Applies to Public Corporations that incorporate in Delaware.

Model Business Corporation Act: Articles of Incorporation

Model Business Corporation Act: Applies to Close Corporations that incorporate in their home state.

How does corporation get incorporated?

2.02 (a)- Articles of Incorporation MUST include in Charter

(1) Corporation’s name

(2) – State number of shares corporation is going to issue.

6.01: Authorized Share: Charter must specify number odd shares of each class.
(3) – State street address of corporation’s registered office and name of corporation’s registered agent at office.

(4) – Names and address of each incorporator

 For incorrect address, secretary will seek to contact person to remedy incorrect registered address; rather than reject.

2.02 (b)- Articles of Incorporation MAY include in Charter

(2)(i)- purposes for which corporation is organized. (What’s the purpose of corporation?)
 Some corporations may want to keep it in to prevent fraud or clarifications on expansion of business

2(ii): Provisions of managing business and regulating corporation affairs

- Note: Board of directos can fluctuate b/c some may resign
Ex: Number of directors of corporaition shall be four – Limited to four which may not create even decisions; instead odd numbers is better

2(iii): Defining, limiting, and regulating powers of corporation (board & shareholders)

2(iv): Par Value for authorized shares

8.01 (b) – Allocation of authority given to board of directors (i.e. Managed by Board)
 Ex: business affairs of corporation shall be managed under direction of board of directors – Although not required, may still be needed
under some circumstances.

10.20(a)
 May be amended by shareholder without approval or consent.

10.03 Amendment Process

Board of directors – proposed amendment sent to shareholder
Shar holder – approved by shareholders
Approved amendment filed with state.

(4)- Provision eliminating or limiting liability to director or shareholder for money damages, except liability for financial benefits that director
not entitled to, or intentional infliction of harm on corporation or shareholders, or violation of criminal law.

(c) – Exculpatory Provision: Articles of incorporation doesn’t have to lay out any corporate powers.

1.20. Requirements for Documents; Extrinsic Facts

(a) Secretary of State must accept documents (charter) that meet requirements of this section & other section that adds to it, authorized by statute.
Ex: Secretary of State may not refuse to file document that they thinks are irrelevant or not authorized by Model Act.

1.25 Filing Duty of Secretary of State

(a) When Document delivered to Secretary of State’s office meets requirements of section 1.20  Secretary shall file.

Charter
 Public documents filed w/ state of incorporation
 Required to contain only basic info about corporation designed to protect public interest
* Ex: Board meeting about corporation’s liability protection

3 Requirements to Amend Charter?

1. Board’s approval and refers it to shareholder
2. Shareholder’s approval of amendment
3. Approved amendment filed w/ state
Note: See Model Act 10.03; DGCL 242(b)

Requirements to Amend Bylaws?

Shareholders may amend without prior board approval.
Note: Model Act 10.20(a); DGCL 109(a)

Bylaws
 Private documents
 Includes rules of internal operations, shareholders, board meetings, office positions & duties, and indemnification of directors &
officers.
 Ex: Held, where, and who calls meetings, and notice, quorum and voting requirements)

Grant v Mitchell
Facts:
 Founders of Epasys, Plaintiff, Grant & Defendant Mitchell & non-party Jack Meltzer.
  Create computer software program, Monitor, to help business keep track of federal & state environmental requirements
 Program to be under name “Phoenix Environmental, LLC, a Limited Liability company.
 Founders wanted to make LLC into a corporation
 Egan, corporate partner, said Mitchell & Grant talked about Grant being incorporator, which all agreed & board of director would
have five persons, Grant, Mitchell, & three others
 Directors consented for Grant to be incorporator, but never executed nor was there any incorporator consent.
 January 7, 2000, Foreign Corporation Certificate named Grant as President & both of them as Directors & Mitchel was also
Treasurer & Secretary. Both Mitchel & Grant signed. (Mitchell says Grant exercised authority)
 Grant said he didn’t know Meltzer was not listed as director.
 B/c Grant believed weren’t working hard & causing morale issues & claimed awarded themselves bonuses, he hired Will to remove
them, but Will believed Mitchell was on board.
 August 2000, Will & Grant agree that there was no named board members, Will made written consent of Grant naming himself as sole
director & removed Mitchell & Meltzer from their jobs (Grant says exercised authority here)
 Michell & Meltzer sued Grant that they owned majority of Epasy’s stock.

Rules
 108(a) Organization Meeting of Incorporators/Directors Named in Certificate of Incorporation: After filing certificates of
incorporation (corp formation), a meeting of incorporator (s) or board of directors (named in certificate incorporation) shall be held
(for purposes of adopting bylaws) to elect directors until first annual meeting of stockholders or until others qualify.
 If an incorporator signs a document clearly naming an initial board of directors for a corporation, then those individuals are the
directors.
 Incorporator has authority to name initial board of directors.

Issue: Whether Grant first exercised authority as sole director and whether Mitchell was member of board of directors? What role does Mitchel
have Under DGCL?

Holding & Reasoning:

 Yes: Sole Director & Yes on Board.
 Grant acted as incorporator on January 7, 2000 when he named himself & Mitchell as initial directors of Epasys.
 Grant’s sworn signature is most reliable evidence that he exercised authority as an incorporator.
 Grant admitted that he told Mitchell & Meltzer that one of them would be on board at time of Epasys formed.
 Employes at McDermott, Will who worked on Epasys matters believed Grant & Mitchell were directors into year 2000 (Corp. Docs.
Identified Mitchell & Grant as directors).
 January 2000 Massachusetts Foreign Corporation Certificate created by Will firm (partner) showed Grant created a board of
Grant & Mitchell & was signed by Grant under penalty of perjury.
 In opposition, Grant that his signature was not a valid record as incorporator b/c he signed as officer of Epasys.
 Foreign Corporation in January 2000 suggests that Grant formed board and made Grant President & Mitchell Treasurer &
Secretary, thus his later statement that he was sole director invalid.
 Mitchell is board of directors and prevails, despite Grant’s statements.
(UPDATED ABOVE: YES / WRITTEN: YES) --------------------------------------

4- Problem p. 189
 If an official at Corp Division believes hat Sherrie’s statement of corp purpose is irrelevant or ill advised, can official refuse to file
articles of incorporation?
 NBCA Model Act 1.25 – if document needs requirements of 1.20, secretary shall (must) file it. Cannot deviate from this even if they
don’t agree with it. No Discretion if filing meets all requirements of 1.20. Secretary of State cannot refuse to file.
 Cab incorrected registered address invalidate an article of incorporation of being filed with the state?
 Incorrect address would not prevent corporation formation
 Address is not missing rather inaccurate which may be easily rectified

B. Capital Structure
Equity and debt claims make up capital structure

What is a stock?
Shareholders own stock

What is an Equity?
stock is an equity claim against a corporation.

What’s the equity of incorporation?

Gives Power to control (voting) and right to profits from business.
Definition of Debt: Fixed duty of repayment

EQUITY CLAIMS
 How Articles of Incorporation authorize equity?
o Articles of incorporation must set forth total number of equity that corporation allowed to issue
o When articles authorize more than one class of shares  Must approve classes & number of shares in each class (SEE
PAGE 191)
 Equity interest: Equity interests are called corporation’s “capital stock”
o What are Individual units of capital stock called?
 Shares
o What are Shares?
 Related to someone owning number of shares.
o Do Shares show Control?
 Number of shares don’t show us control; rather matters on how much percentage they own.
o Articles of Incorporation defines shares as?
 “Common shares”: 1) unlimited voting rights and 2) right to residual assets of corporation
 “Preferred Shares”: Shares that have some priority in payments

 What is the Articles of Corporation required to do?

o Lay out total number of shares the corporation is authorized to issue
o Distinguish designation of classes
o Before issuing shares, rights of classes must be described in articles

DEBT CLAIMS
 Definition of Debts?
o Obligations to repay
 Are debt claims included in articles of incorporation?
o Not Described but yes in Contracts, which means money is borrowed that must be paid off w/ interests.
 What’s it called when Corporations borrow & have to pay it back?
o When Corporation borrow money & in debt  Issue Bonds, which is a promise to repay interest (money) over a period of
time
 What happens when Corporations cant make payments?
o Bond contracts include event of default where corporation cannot make payments & clause allows bondholders to ask for
payment quickly.
 What do Indentures contain?
o Describes procedures for issuance, payment, or discharge
o Promises by corporations to perform actions
 Ex: make payments on time
o Refrain from actions
 Ex: Make distributions of corporation’s money
o Events of default that let bondholders make payments in advance
 Ex: Nonpayment of principal
o Defines special terms of debt
 Ex: Redemption
 Definitions of Corporation Bonds:
o How do Redemptions help Corporation?
 Allows Corporation to buy back debt obligations (holder’s name & address in registry & payments to person in
registry) from bondholders (owners) when interest rate is right.
 Ex: They call bondholder and tell them that they want to buy them back at lower interest to save
them money
o What are Ratings? Debt securities issued to public are rated by various private ratings organizations.
 Why do companies prefer debt instead of equity? Debt has tax advantages over equity.
Ex: Interest payments on debt are tax-deductible

Grimes v Alteon Inc

Facts
 Defendant: Alteon Inc, specializes in drugs for cardiovascular and renal diseases.
 Plaintiff: Charles Grimes, lawyer & investor buy stocks 9.9% of in small technology companies.
 G & wife held 9.9% of Alteon’s stocks
 Moch, president of Alteon told Grimes he needed more money to raise funds
 Moch (offeror) orally promised that he would offer Grimes 10% & Grimes (offeree) orally promised to buy 10% of offering
(verbal K) and Grime accepted by promise, so consideration exists here.
 Grimes says Promises 1) not in writing and 2) Board didn’t approve.
 Alteon didn’t allow Grimes to participate in this private offering & their stock went up, so sued Alteon for specific
performance of oral agreement
  Court of Chancellory agreed that the agreement was a right within meaning of 8 Delaware 157 and thus fails for lack of board
approval & written doc.

Rule: Delaware General Corporation Law title 8

 Section 141(a): business affairs of all corporations should be managed under direction of board of directors
 Section 152: Form and manner of consideration for subscriptions to or purchases of the capital stock to be issued by corporation shall
be determined by board of directions.
 Section 157: Investors enter K to invest capital to buy stocks  creates rights and options entitling holder to buy stock, which
requires approval of board of directors and must be in writing.
o (Ex: Transferring shares of stock to would-be stockholder)
 2 fundamental policies for Capital Structure:
1. Board of directors have exclusive authority to regulate corporation’s capital structure, and
2. Ensure certainty in instruments that capital structure is based on
Issue
 Whether an oral promise made to stockholder by CEO to sell 10% of the corporation’s future private stock offering to stockholder,
coupled with corresponding oral promise to buy 10% is enforceable when there was no approval by board and not in writing?
Holding & Reasoning
 No - Oral agreement btwn CEO & Stockholder was NOT enforceable b/c oral agreement created a “right” to require
corporation to issue stock of 10% within meaning of section 157, such that board approval and writing is required.
 Grimes argued agreement applied to “option like” rights, however, it was a right that qualified under 157.
 Because Grimes has a right for requiring issuance of 10% of agreement, Section 157 required issuance of stock be approved
by board and in writing, thus this oral agreement was unenforceable .
 Thus, because oral agreement entitling a right to issuance of stock shares was not in writing nor obtained approval from
board, this oral agreement was not valid under 157.
 Allowing investor to hold 10% interest in corporation gives the investor leverage over the corporation, which may result in Grimes
have a continuing influence over future decisions of corporation.
 Requiring approval by board and writing may deter potential investors from investigation in a corporation

(UPDATED ABOVE: UPDATED / WRITTEN: YES) -------------------------

Directors & Shareholder Powers

Corporation law doesn’t focus more on board and shareholder duties, who both monitor top officer performance.

Corporation Structure
Director’s Role
 Public corporation  directors have statutory power to manage or supervise the management of corporation.
 Have limited role in management, except can engage in time of crisis.
Officer Role
 Top executive officers manage corporation’s daily activities.

Shareholders Role by Voting

 Each share has one vote
 Vote on election of directors through annual elections on following transactions:
 Amend Charter
 Amend bylaws
 Approve mergers
 Approve sale assets not in ordinary coursework
 Ex: when shareholder sells all or substantial amount of company’s assets
 Vote to approve dissolution of company
 May vote ratify conflicts of interest transactions
 Proxy Voting
o Shareholders can vote their shares either in person or by proxy
o Proxy: Shareholder allows another person to vote the shareholder’s shares
 Quorum Requirements
o To show a Quorum  Shareholders with majority shares must be there in person or by proxy

Role of a Board
 Public corporations
* Must have board of directors, who hire, advise, supervise, and when necessary, firing chief executive officer of
corporation.
* AT LEAST 1 DIRECTOR
* Majority consent needed to remove board director
 Meet typically meet around 4 to 10 times a year
 Nominated by and supportive of management
  Close held corporations (I.e. Private Incorporation)
o NO board of directors required
o Unanimous consent needed by Shareholders to remove board of directors
 Qualifications
o Charter or bylaws may prescribe qualifications of directors
o Modern corporations statutes do not prescribe qualifications
o Traditional Corporation
 At least 3 directors

 Inside Directors
o Full time employed as corporate officers + on board of directors
o Always have Chief Executive Officer (CEO) + chief financial officer (CFO) + general counsel
o Employed by Corporation  Not Independent.
 Outside directors
o Don’t work for corporation; rather as board members
Ex: Architect who designed theme parks for Disney Corp is NOT independent director
 Independent Director
o Doesn’t have financial relation w/ company  called Independent Director
Ex: Headmaster of private school where CEO’s children went are Independent.
 What’s important about mostly outside directors?
o Better decisions and better monitoring of officers’ performance, more independence, + less conflict of interest

 Terms of Office
o Each director is elected by shareholders at an annual shareholder’s meeting, unless terms staggered
o What’s staggering?
o Staggering allows classes of directors to be elected for multiple year terms, where majority of directors who
continue w/ being re-elected.
 Ex: 9 person board divided into 3 classes. 3 directors elected for 3 year term, but 6 directors stay on
board w/o being re-elected.
 Removal of directors
o Shareholders may remove directors, with or without cause.
 Except: Cannot remove if Charter states director may ONLY be removed for cause.
o Delaware: Directors may only be removed for cause when corporation has staggered board, unless charter says otherwise
o Ex: Shareholder who wants to remove director needs to do it with cause. However, if director didn’t do
anything wrong, then its not a cause to remove her.
o Model Act: Directors may be removed by judicial proceedings for fraud or gross abuse of authority.

Adlerstein v Wertheimer
Facts:
 Joseph Adlerstein (Plaintiff) founded SpectruMedix Corporation (Defendant-SMC) in 1992 & served as chariman of CEO of SMC
and shareholder & Voting Control through shares when lent $500K to company
 Wertheimer and Mencher, as board of directors, learned that Adlerstein was not truthful about the company’s liquidity issues.
 Adlesein tried preventing operational changes to company
 Wertheimer & Mencher agreed that the company couldn’t prosper unless Adlerstein was removed b/c mismanagement,
misrepresentation, and sex harassment.
 Began discussions w/ investor IIan Reich & made plan b/c he has been resistant for company to survive.
 Report by consultant said that company would go out of cash in 2 months.
 Presented to Adlerstein for first time on July 9, 2001 without a chance to object to the removal & approved Adlerstein be
terminated as CEO
 Decided Reich would give influx of capital, gain control of majority votes od shares, & become new CEO
 Recich got shareholder consent to remove Adlerstein
 Adlerstein sued Weitheimer, Mencher, Reich, SMC,b/c July 9 meeting was a breach of fiduciary duty b/c he wasn’t notified
about this meeting.
Issue:
 May directors execute a plan to remove a controlling shareholder & director without first informing him of the plan and giving
him a chance to object?
 Whether July 9 board meeting was properly called by Adlerterin? Yes the meeting was validly called.
Rule:
 Directors may not act on a plan to remove a controlling shareholder and director without first informing him about it and giving him a
chance to object.
 Written notice is not required
 Board of directors must conduct business in a manner that satisfies minimum standard of fairness
 Even if the company is about to become insolvent, when well-established rules are crashing down, most important to adhere to
minimum standards of fairness.
Holding & Reasoning:
 No.
  Controlling shareholder not called and noticed about Meeting  Not Okay
 Directors must satisfy minimum fairness in their dealings with each other.
 Other directors with no voting control of company cannot take away from majority shareholder’s control without his chance to object
 Although the meeting was properly called and held as a result from SMC’s financial state, there was a breach of loyalty of fair
dealing by Mencher and Wertheimer for not giving notice of their intent to remove Adlerstein
 Adlerstein didn’t like the July 9 letter about proposal that Reich would have shared by Co, which results in diluting his voting
power, but this is self-interest, so rejected the Reich proposal given his status as director and member – not for company’s
interest.
 President didn’t call the meeting
 Adlersteain was tricked into it because he understood it to be something regarding Arbitration.
 Since there was an Pending Arbitration meeting, there was an urgency, but Adlerstein didn’t want to attend meeting, so there
was valid meeting to meet.
 Adlerstein calls for a vote but didn’t participate in vote, so his objection was not part of the vote.
 If Adlerstein was aware of the nature of the meeting, he could’ve acted to remove Wertheminer and Mencher from board
Problem

(UPDATED ABOVE: YES / WRITTEN: YES) ----------------------------------------------------------------

BEGINNING OF POST-MIDTEM MATERIALS

DIVIDENDS & DISTRIBUTIONS

Issuing Dividends
 Most familiar method of distributing money to shareholders.
 A dividend is a payment, usually in cash, from a corporation to shareholders calculated on a per share basis
 The board of directors have discretion to decide how much to give dividends.
 The corporation will be taxed on corporate earnings before dividend distribution.
 Shareholders need to also pay dividend tax on any dividends received.

Share Repurchases
 An alternative method of distributing money to shareholders.
 When a corporation repurchases its own stock, it pays money to the shareholders and retires the shares.
 Creditors & debtholders are the first to get paid, but shareholders are second.

Limit on Distributions to Shareholders

 What are the two limit tests on Distributions?
 Solvency Test
 Most statutes (Delaware is a notable exception) impose a solvency restriction on distributions.
 This restriction would prohibit distributions that would result in insolvency (that is, a condition in which the
corporation is unable to pay its debts as they become due in the ordinary course of business)
 In such a circumstance, the payment of dividends would also run afoul of fraudulent conveyance laws, and
creditors of the corporation would be able to avoid payment.

 Balance Sheet Tests

* Measured by concepts from the corporation’s financial statements. Two tests:
o “Impairment of capital” test: Some statutes, including the DGCL, permit distributions out of
“surplus,” which mean all capital in excess of the aggregate par values of the issued shares, plus any
amounts the board has elected to add to its capital account.
o Technical insolvency test: The MBCA prohibits distributions that would result in total assets being
insufficient to pay the corporation’s liabilities and any liquidation preferences that would be owed if
the corporation dissolved at the time of distribution.
Legal Capital
 Par Value
o Historically, was equal to sales price of shares
o Modern Times: Today par value of shares has no relationship to sales price
 Legal Capital
o Sum par value of share times number of corporation’s outstanding shares
o If distributions exceed surplus  Capital impairment
o Legal Capital Today
* No limit on issuance of dividends
 Surplus
o Capital in excess of the legal capital
o Distributions can only be made out of surplus
 Delaware Law
o Must specify what’s the par value and Corporation may sale par value stock.
 o Under Delaware Law, if possible to sell “no par stock,” board of directors must specify amount of legal capital (i.e. stated
capital) or all money raised in no-par stock issuance, which is treated as legal capital

 Model Business Act

o May (Not Required) to specify Legal Capital
Klang v Smith Food & Drug Centers
Facts
 Smith Food & Drug Centers (SFD-D) enter merger & agreement w/ Ucaipa companies to share repurchase from Smith and
family who had preferred shares that they wanted to buy.
 Smith and family have majority vote and shareholders
 Before approving agreement by shareholders, SFD’s board got an investment firm to give opinion about how the agreement may
affect SFD’s solvency (whether they would have to pay debts in the future).
 Firm found agreement wouldn’t impair their capital (by making distributions to shareholders in excess of the surplus)
 After agreement, total investment capital would be 1.8 billion, but long term debt was 1.46 million.
 Board provided balance sheet showing the merger and self-tender offer that showed a negative net worth of only $346 million,
less than the total par value of SFD’s stock & argue weren’t getting enough money to pay back creditors called capital
impairment.
 Plaintiff argues books of corporation do not reflect current values of its assets and liabilities
Rule: Delaware Corporation Law 160
 Under Delaware law, a corporation may not repurchase its shares if it would cause an impairment of capital. Repurchase impairs
capital if funds used in repurchase exceed amount of corporation’s surplus
o Surplus? Excess of net assets over par value of corporation’s issued stock.
 Board of Directors MAY reasonably calculate corporation’s surplus in balance sheet for:
1. capital impairment (so distributions don’t exceed surplus) as long as they revalue the corporation’s liabilities and assets in
good faith; AND
2. Use acceptable data; AND
3. Use methods in re-valuing what they reasonably believe shows present values and arrive at a surplus amount as long as it
doesn’t amount to fraud.

Issue
 Was board of director to authorized to change what’s on the balance sheet to make sure the corporation was not at risk of impaired
capital?
Holding & Reasoning
 Yes
 Plaintiff argued the balance sheet showed negative net worth.
 Defendants agree they showed a negative net worth on their books, but argued that they had right to revalue their assets and
liabilities to avoid capital impairment and comply with Delaware Sec 160.
 Ct agrees that board has authority to revalue the number and determine a different surplus and not violate the Delaware law.
 Even if the balance sheet didn’t use terms “total assets or liabilities,” there was NO fraud; rather good faith and reflect all the
elements in the rule of Delaware.
 Even if board made mistake of putting inaccurate liabilities on sheet, not enough to show there was capital impairment.
 Ct agrees that balance sheets may not always be accurate as to the current liabilities and assets, so ct authorizes directors to
make revisions of the balance sheet.

Generally Accepted Account Principle (GAAP)

 GAAP is accepted by all but MBCA and Delaware Law DO NOT require universal account principle.
 MBCA: ONLY needs to be REASONABLE in accounting
 Public Corporation
o Must have financial statement comply with General Accepted Account Principle
 Private Corporation
o Financial statement NOT REQUIRED to follow General Accepted Account Principle.
(UPDATED ABOVE: YES / WRITTEN: YES) -------------------------------------------

LIMITED LIABILITY & PIERCING CORPORATION VEIL

General Rule
 Generally, individuals who are part of or invest in corporations have limited liability.

Advantages of Limited Liability

 Mostly seen in Public Corporations
 Public Corporations: If a Shareholder is not fully liable for debts of a public corporation, then this helps them avoid liability and
allows them to diversify more faster
 Private Corporation: Investors don’t invest to diversify because employed by corporation

Free transfers
 Public Corporations:
o Limited liability allows free transfer of shares in Public Markets AND If shareholders risked incurring personal liability
every time they bought shares, there’s a severe impairment in Public Trading.
  Private Corporations: No public trading in private corporations

Monitoring Costs
 Public Corporation: Limited liability reduces monitoring costs in Public corporation in 2 ways by:
1. Reducing need to monitor corporation manager
2. Reducing cost of monitoring other shareholders
 Private Corporation: Reduction of monitoring cost not emphasized in Private corporations because shareholders and managers are the
same people.

Limited Liability Effects

 Limited liability in corporations increases debt costs AND decreases equity costs
o Example: Limited liability increases cost of debt by increasing business risk for creditors.

Social Cost
 People with limited liability have Incentive to engage in riskier behavior because they are not required to incur total costs, known as
“Moral Hazard, which does not impose social costs in every transaction
 Voluntary Creditor: Lender will not incur extra costs; instead FIRM must pay higher interest rates
 Involuntary Creditor: Insurance will not incur all liability costs
o Ex: Tort Victims will incur liability costs.

Limited Liability Within Corporate Groups

 Wholly owned subsidiary is a separate incorporated corporation from Parent Corporation, but Parent Corp. still owns 100% of
subsidiary stock.
 Parent and wholly owned subsidiaries usually considered separate businesses, unless formalities of separate corporate procedures for
each is NOT observed.

Soerries v Dancause
Facts
 Soerries, sole shareholder of Chikasaw Club Inc until closed in 1999
 Aubrey Pursley intoxicated when went into club
 Columbus ordnance is undisputed that the club EE didn’t check Pursley’s ID to show her age
 Pursleys friends said she drank more at the club and visibly drunk when she left
 Was killed when lost control of car and struck tree
 Stepfather sued club for car cost and punitive damages
Issue
May the corporate veil be pierced if an individual disregards separateness of legal entities by commingling what should be separate property,
control, or records?

Rule
 Piercing of corporation veil may apply when an individual disregards separating legal entities by comingling, confusing corporation’s
and individual’s funds, and records.

Holding & Reasoning

 Yes
 Sorries is not separate as individual from entity.
 Paid employees and other operating expenses out of his personal funds or under the table and not put in bookkeeping records, so not
paying from corporate account
 Paid monthly mortgage of the club in the amount of $4,830 from the club’s cash proceeds
 Even though club reported tax returns of $34,173, this wasn’t true because corporation reported paying $43,000 in rent in1996 tax
return, which means that there were inconsistencies as to what should’ve been reported as tax return.
 Thus, he was treating funds as his own by not bookkeeping or using it from corp funds.
 He was conducting corporate business as his own personal business, despite being under the name of Chicasaw Club.
 Thus, jury concluded that club conmingled individual and corporate assets by waiving corporate rent payments or using
corporate funds to pay mortgage and other expenses.
 He should kept a separate corporation account and not withdraw to pay personal expenses, instead only to pay corporate
expenses.

Exception to Limited Liability: PIERCING CORPORATE VEIL

 In some cases, courts will impose more liability to shareholders beyond amount of their investments, called piercing corporate veil.
 i.e. Liability expanded where corporation is liable; not individual.
 Corporation Pierce Veil Framework: To determine whether to pierce corporation veil:
1. Direct Liability: Is shareholder directly liable for their own actions or whether it’s a corporation liability that must be paid
by shareholder due to corporation piercing?

2. Corporate Formalities: If no personal liability, are corporate formalities followed?

 (Ex: Corporation with separate bank accounts must avoid comingling personal and corporation funds.)
 (Ex: Directors must have meetings, identity, annual meetings, and separate bank accounts)
 3. Fairness: Most courts require showing of injustice or unfairness that wrongdoing is connected to harm.
 2 types of injustices
a) Third party has reason to be confused about whether they are dealing with corporation or individual.
OR

b) Shareholder disregards separating corporation’s funds and treats them like their own.
Note: Courts pierce Close Corporations; Not Public.

Problem 4-5
 Sun trust wants to make sure they get paid
 How would a court analyze Sun Trust under piercing corporate veil?
1. Seeing if sun trust claims can show direct liability
 If yes, no limited liability (personal liability)
 Yes, claim that Josh was deceit of being a Gol Medal athlete
 Life guard cleaning pool was in tragic accident – harm establishes direct liability? Limited liability doesn’t
protect them against tort victims while working for the corporation
 Corpo could’ve taken preautions to train life guard to properly clean pool.
 Does limited liability apply when there’s a breach of K? Yes to protect Josh and Sherri, shareholders or owners,
unless contract around limited liability.
 If Sun Trust did contract around limited liability, pierce of corporate veil to say that Josh and Sherri are
individually liable,
2. Did Finz follow corp formalities?
 Bookkeeping records and separately mainatained records or bank accounts and regular board meetings,
3. If they were, Because of the lack of formalities, did the harm strongly connect to lack of formality?
 Being deceitful led to series of events such that FInz willing to lend money.
 Josh being deceitful when said that he won the Olympic Medal, but is this related to the harm to Sun Trust, but
Sun Trust’s harm is not being repaid b/c of financial difficulties by Finz
 Analyze: Drug helped win gold medal and start FInz and let It grow. When expanded, Sun Trust loan them
money. Finz doing well when got money by Sun Trust.
 Being deceitful not related to the harm to Sun Trust.
 Court are not convinced with Sun Trust undercapitalized argument.

(UPDATED ABOVE: YES / WRITTEN YES) -------------------------------------------

CLOSELY HELD CORPORATION: SHAREHOLDER AGREEMENTS

 Minority Shareholders: One of the most common ways of allocating control in close corporations is to create a contract among
minority shareholders to protect their interests.
 Minority shareholders often protect their interests by fixing composition of board of directors through vote pooling
 Minority shareholders not protected by default rule, so enter vote pooling agreements
 Majority Shareholders: Do Not Require contracts to protect their interests because Default rules allow them to exercise control.

Vote Pooling Agreements

 Definition: Vote Pooling requires shareholders to vote together as a single block so directors are nominated by shareholders (Ex:
Preferred candidates get nominated)
 Courts long enforced vote pool agreements and Model Business Act and Delaware Law expressly provide for vote pool
agreements.
 Vote pool agreements sometimes grant shareholders right to “appoint” or “designate” directors, but corporation statutes require
director elections
 Given everything above, Shareholders may nominate candidates and those candidates may be elected to be board of directors.

Minority Shareholders Want More Control Rights

 More controversial shareholder agreements are those that want control over directors, which courts in many states approved such
agreements
 Today, there’s more freedom to contract in shareholder agreements.
 Model Business Act: Example of legislation that validates shareholder agreements, even if limits board.
 Electing directors is not enough, so they want to bargain for more control over directors in certain transactions, so they try to assert
affirmative rights (Ex: Right to name certain officers / right to salaries/dividends) by asking for protection for veto rights.
 Model Business Act: Minority shareholders cannot merely appoint directors, but may elect directors.

Ronnen v Ajax Electric Motor Corp

Facts
 Neil Norry (P) was chief executive officer of Ajax Electric (Ajax – D)
 Norry & sister owned majority issued and outstanding stock by Ajax, a closely held corporation.
 Norry’s sons and Ronnen entered shareholder’s agreement, which granted Norry right to vote Ronne’s shares and her
children to have control and management of Ajax.
 Norry wanted managerial control of the company.
  However, Ronnen retained right to vote on other major corporate decisions
 Parties agreed to vote shares to make sure:
1. seat on board of directors for Ronnen
2. Ronnen had continuous access to all reports about Ajax’s management
3. Cap Norry’s total executive compensation at $125,000 a year
 At shareholder meeting, Ronnen served a temporary restaining order on Norry prohibiting Norry from voting Ronnen shares
to change the bylaws or certificate of incorporation, but he still vote her shares and has majority vote.
 Nory voted the Ronnen shares with Norry shares for majority vote to adjourn and left (adjourn)
 Ronnen stayed behind with few other shareholders and elected new directors
 Norry sued to invalidate the election of directors in his absence and direct new election
 Trail ct granted Norry’s request for new election.
Issue
 Is Agreement enforceable giving Norry authority to vote Ronnen shares to vote on Director elections?
Holding & Reasoning
 YES
 Authorized to vote her shares to provide for the vote for Ronnen shares and provide for Ajax and Ronnen shareholders
agreed for him to have control over daily and management operations of Ajax.
 So Must be able to do that to vote on board of directors, otherwise undermines shareholder’s agreements
 Agreement said that Norry would continue control, otherwise how would he have control director elections (to determine who
the directors will be) – Just wouldn’t make sence
 Intent of agreement was to allow Norry to use her votes to exert control over the election of board of director
 Thus, agreement is enforceable.
 Under Delaware law, daily management of corporation should be directed by board of directors.
 Here, no provision of Ajax certificate of incorporation transfers management from directors to shareholder, thus, directors have
control of corporate management.
 Provision in shareholder agreement granting Norry right to vote Ronnen’s shares for corporate management doesn’t mean anything
unless referred to election of directors
 However, shareholder agreements should be interpreted to give meaning & effect to each provision in the shareholder
agreement, such that the shareholder agreement should be interpreted to give meaning and effect to giving Norry right to vote
Ronnen’s share on corporate management issues, which means that Norry had right to vote Ronnen’s stock in election of
directors
 Other provisions in the agreement limit Norry’s compensation, etc
 Because Ronnen agree to give Norry power to vote for directors  order of new directors was within ct’s discretion under
Business Corp Law Sec 619 “to confirm election, order new election, or take such other action as justice may require.”

(UPDATED ABOVE: YES / WRITTEN: YES) ------------------------------------------------------

Close-Held Corporation: TRANSFER RESTRICTIONS

 Basic Rule: Transfer restrictions are restrictions on sales of stock as to who can buy shares in close corporations.
 Under Delaware & other states, general rule is that shares of stock are freely transferrable.
 In most Close-Held Corporations, shareholders Do Not want freely transferrable shares in order to:
1. Retain power to pick future associates to keep collegial work relation among owners and managers, who often work
closely.
2. To prevent competitors or other unfriendly people to corporation from buying shares
3. To prevent any shareholder from getting absolute control of corporation by buying colleague’s stock
4. To preserve corporation’s eligibility to elect tax status provided by subchapters of internal revenue code, or its eligibility to
elect to be governed by special close corporate statutes in number of states that require close corporations to restrict
transfer of stock.
 Transfer restrictions are imposed in Charter, Bylaws, separate agreements among shareholders, or between shareholders and
corporation.
 Transfer restrictions Do Not affect shares before restriction adopted, unless shareholders vote to allow it.
 2 Part Test for Transfer Restrictions: Transfer restrictions are enforceable if:
1. Restriction complies with formal requirements regarding adoption of restriction and clearly noted on share certificates
2. Restriction is for a proper purpose. Test for proper purpose is “reasonableness” as to why you want to transfer restrictions
on sale of stock (Note: Ask if restrictions are for a proper purpose)

Types of Transfer Restrictions

A. Most Common Transfer Restriction: Buy-Sell Agreement
 Buy-Sell Agreement: Corporation or other shareholders are required to buy shares and most common and usually
enforceable.
 Buy-Sell Agreement allow you to know how much you can buy shares for.
 Prices in buy-sell agreements take one of the 4 forms:
a) Fixed price: Must be updated constantly to reflect current value of shares.
b) Book Value: Most popular measure because easy to determine, but based on historical costs and
may not reflect true values
c) Appraisal: potential to be good, but parties should decide beforehand on what basis business should
be appraised.
d) Formula: Very complicated.
 B. Second Common form of transfer restriction: Option Agreement
 Option Agreement: Shareholder must offer corporation or other shareholders the option to buy shares either at price
specified by prior agreement or price offered by prospective third party buyer and Common form and enforceable too.

C. Third Common form of transfer restriction: Prior approval or Consent Requirement

 Prior approval or Consent Requirement: Corporation or other shareholders must approve transfer of shares and prior
approval usually enforceable if approval is not unreasonably withheld.

D. Fourth Common form of transfer restriction: Prohibition

 Prohibition: Shareholders prohibited from transferring shares to certain persons or classes of persons and usually struck
down as unenforceable.
Capital Group Companies Inc v Armour
Facts
 Capital Group Companies (CGC – P), a privately held Delaware corporation.
 Timothy Armour (D) was executive vice president, employee, of CGC subsidiary and bought CGC stock as an employee
 To buy shares, Armou was required to enter Stock Restriction Agreement, which means that they had permission by
company.
 SRA didn’t allow transferring either direct ownership or any interest in the CGC shares to non-employees of CGC.
 Gives CGC right to repurchase; not to non-employees
 For tax-planning, Armour and his wife made a revocable trust to buy more stock
 Both divorce
 She’s asking order for him to pay half of the stock but she’s not an employee.
 Trust provisions required CGC approve any distributions of the trust’s CGC’s shares.
 Trust said that shares may be repurchased by CGC if shares were distributed to someone else, not Armour when revocation of trust
 Armour and Ritter singed joinder agreement to be bound by SRA
 After Armour divorced, Ritter said that she was seeking 1) award of director or indirect interest in trust, and 2) one half of any
dividends received from CGC shares
 When found out about Ritter’s request, CGC sues Ritter and Armour seeking declaration that SRA prohibited award of a beneficial
interest in CGC shares to Ritter
Issue
 Does their stock restriction agreement prevent transfer of stock in a divorce and held as reasonable to have this kind of restriction from
getting stock after getting divorce?
Holding & Reasoning
 YES
 Under Delaware corporation, stock-transfer restrictions are governed by Delaware Code Sec 202.
 Here, SRA prohibits transfer of any interest in CGC stock to Ritter, a nonemployee and prohibits Ritter’s requested
distribution of dividends & sales
 Question is whether SRA’s restriction is reasonable to achieve a legitimate purpose?
 YES, so meets the proper purpose test under Reasonableness
 Because SRA was designed to limit number of record shareholders to avoid public company reporting and filing requirements
and align interests of CGC employees, they are valid under Delaware Sec 202.
 Company wants to prevent restriction between employee shareholder and spouse, non-employee.
 Under SRA distribution of stock through a divorce is prohibited, because stock that she would have would be under Armour’s
name, so this carries a transfer restriction.
 Transfer restriction bears reasonably necessary relation to best interest of corporation.
 Thus, SRA’s restrictions are reasonable to achieve these legitimate corporate purposes and so, CGC is entitled to the use of
the SRA agreement, which prohibits Ritter’s requested disbursement.
 2 purposes are reasonable: They want to restrict transfer to : 1) to align interests of shareholders with employees and families
of employees
 However, she can get transfer of stock if she were a employee or get permission from company to get share stocks with Armour before
she divorced.

(UPDATED ABOVE: YES / WRITTEN: YES) ----------------------------------------------------------

Close-Held Corporation: VOTING TRUSTS

 Under Delaware Law and Model Business Act are examples of modern statutes that allow use of voting trusts
 History of voting trust: Voting trust initially disfavored b/c instruments of deceit
 Modern Statute Limit Duration:
o Limit on duration for voting trust should be no more than 10 years
 Formal Requirements for voting trust
o Voting trust must be 1) in writing and 2) filed with corporation
 De Facto Voting Trusts Do Not Comply with formal requirements, so not enforceable.

Why were voting trust used to protect shareholders?

 Shareholders still has ownership of shares, but allows proxy holder (someone else) to vote shares through voting trusts
 Legal title of shares transferred from shareholders to voting trustees, so voting trustees have exclusive power to vote shares
  Even if trustees have exclusive voting power over shares, shareholders still have financial right to shares
 Voting trustees vote on certificates

How do voting trusts help maintain continuity of corporation management?

 Voting trusts hep maintain continuity of corporation management
 Giving control to trustee means shareholders assured consistent voting
 Voting trust often implemented by corporation as part of re-organization plan OR to prevent conflicts between shareholders to
maintain consistency as to who will be elected.
 Modern judicial view is that voting trusts are enforceable, unless goes against public policy.
Warehime v Warhime
Facts
 Alan Warehime was chairman and chief executive officer of HFC from 1956 to 1989
 In 1988, Alan Warehime created two trusts having the majority of HFC’s voting stock.
 One trust, 199,496 shares of Class B voting stock was made for Alan & three kids, and other trust with 15,025 Class B shares
made by Alan and five grandchildren
 Alan served as sole voting trustee for both trusts
 Most of shares in trust for his three kids: John Warehime (D), Michael Warehime (P), and Sally Warehime (P)
 Trusts were to expire in 10 years
 When Alan died in 1990, John became sole voting trustee for both trusts, which means that he had exclusive voting power by
electing all the directors.
 John used his voting power to change HFC’s voting structure to control election of HFC’s board of directors
 Michael and Sally not happy with John’s change in HFC’s voting structure b/c HFC was unable to raise the necessary equity capital
 1996, some HFC formed committee to address uncertainty as to John’s operation and recommended that articles of incorporation
be amended Charter to stabilize governance structure or contuinuity or consistency in the corporation.
 Amendment meant issuing Series C stock would be controlled be 1) by disinterested directors (who were elected by John) and
2) entitled to 35 votes per share to resolve dispute among Warehime family about the election of board of directors, and if no
dispute in family, it is deemed non-voting
 Through amendments, means that his voting power further voting power of John passed expiration date in 1998, by removing
directors or keeping them in office, which benefits John.
 Besides stabilizing HFC’s governing structure, proposed amendment would extend time that John’s elected directors would retain
control of HFC and extend John’s part control of HFC would beyond 1998 expiration
 Michael and Sally sued John seeking injunction to prevent John from voting trust shares b/c voting breached John’s duty of
loyalty to trust beneficiaries
 John argues that he acted in good faith by proposing these amendments, but Appellate court said it’s not enough that he acted
in good faith; instead he needs to have absolute loyalty, means that it will bar voting trustee from influencing corporation
beyond expiration of voting trust b/c violates duty of loyalty.
Issue
 Is a voting trustee under a duty to act in good faith to handle the trust in the best interest of the beneficiaries?
 Whether voting trustees in conflict of interest when trust was set to expire?
Holding & Reasoning
 YES
 Agreement: Under terms trustee has broad power to trust shares and any limit on authority should be limited by voting trust
terms in an agreement.
 If voting trust agreement says that he has voting power during 10 years, then John has broad voting power during the 10 years
until expiration date.
 There was no need to impose a higher duty of loyalty; rather only have good faith.
 Voting trustee has duty to act in good faith to handle trust in the best interest of beneficiaries
 Here, trust agreements required trustee to 1) act in good faith and 2) use his best judgment in voting the stock.
 Instead of prohibiting trustee’s authority with a provision regarding their obligation or prohibiting him from voting on any proposal
that would dilute voting strength, parties gave broad voting authority to trustee and only required that trustee take actions in good faith
such that it benefits trusts’ beneficiaries.
 Because John took actions in good faith under belief that would benefit trusts’ beneficiaries, no injunction is needed.
 Order reversed and remanded.

Concurrence
 Agree proposed amendment should move forward if it can help value of the shares, this is in the benefit of the company which
can benefit all the shareholders.
 If whole company, then minority shareholders will benefit too.
 If for greater good of company, then will benefit minority shareholders, regardless of conflicts.

(UPDATED ABOVE: YES / WRITTEN: YES)------------------------------------------------------------------------------

Close-Held Corporation: CLASSIFIED SHARES

 Both Model Business Act and Delaware allow corporations to create more than one class of shares with each class having unique
rights
 Classified shares is a very common method of allocating control among various shareholders in Close-held corporations
 Ways to allocate control by assigning different rights to different classes of shares:
 o Giving a class a veto power over all decisions
o Giving class no voting power, except financial rights
o Allow class to vote only on certain transactions; OR
o Providing right to board representation to certain classes
 When reading terms of preferred stock, Delaware Law states that any rights, preferences, and limitations of preferred stock that
distinguish from common stock must expressly and clearly state it and cannot be presumed.
 Under Delaware law, a protective provision that goes beyond basic statutory protections and protects class of shares against negative
effects of a merger, provision must make clear that mergers are included.
 What’s a merger? A merger is another way to amend and issue a new class of shares
 Under Delaware law, mergers are allowed to issue new class of shares.
 In Benchmark, court held if Benchmark wanted to vote on proposed merger, the contract should’ve had more specific language by
contracting for specific rights in merger
 Junior shareholders cannot vote on proposed mergers unless protected provision expressly (specifically) protects against negative
effects of a merger.
 Additional Info: Doctrine of Independence Legal Significance holds transaction in compliance with one part of Delaware’s section is
valid, even if leads to substantive results not allowed in statute.

Benchmark Capital Partners v Juniper

Facts
Benchmark Capital Partners IV, L.P. (Benchmark) (plaintiff) was the initial investor in Juniper Financial Corp. (Juniper) (defendant).
Benchmark received Series A Preferred Shares. Juniper then raised additional capital by issuing Series B Preferred Shares, including some
to Benchmark. Both Series A and Series B Preferred Shares were protected by provisions in Juniper’s certificate of incorporation, sometimes
referred to as a charter.

Relevant here, there was a Merger (protective provision) that prohibited and barred material changes of right and privileges of Series A &
B of shares WITHOUT PRIOR CONSENT.

Juniper (D) made an additional investment from Canadian Imperial Bank of Commerce (CIBC) (defendant) in exchange for Series C
Preferred Shares.

Then Juniper needed yet more capital funding. The new, post-merger certificate of incorporation would make the Series D stock preferred
shares, whereas Series A and Series B were less preferred shares.

Benchmark sued because proposed merger was invalid because this was a way to get around original merger provision that required
Benchmark prior consent.

Issue
Were junior shareholders allowed to veto (propose mergers) when there was a merger already included by the initial investors?

Holding & Reasoning

NO because merger was valid.
The terms of protective provisions for preferred shareholders must be clearly expressed and will not be presumed. Delaware law
expressly describes the rights of stock classes to vote on any amendments to the certificate of incorporation that would adversely affect
the rights of the shares. 8 Del. C. § 242(b)(2). Separately, Delaware law specifies the process for corporate mergers. 8 Del. C. § 251. If a
protective provision is supposed go beyond the basic statutory protections and protect a class of shares against the negative effects of a
merger, the provision must make it clear that mergers are included. Otherwise, mergers are presumed to be a separate matter.

Here, the protective provision does not expressly provide any additional protection against negative effects of a merger. Therefore,
Benchmark does not have a right to a vote on the proposed merger. Because merger didn’t specifically say what’s allowed for a merger,
Benchmark had no right to vote on proposed merger.

Benchmark’s does not have right to vote unless there is clear language in contract that Series D issuance will diminish the financial rights
of the Series A and B shares.

The impact from the post-merger amendments does not fall clearly within this language, and CIBC may use its waiver.

Thus, the protective provision does not clearly express protection for Benchmark here, and Benchmark is only entitled to clearly
expressed protections.
UPDATED ABOVE: YES / WRITTEN: YES --------------------------------------------------------------------------------

Close-Held Corporation: Cumulative Voting

 Purpose of Cumulative Voting: To increase minority shareholder participation on the board of directors.
 Cumulative voting is a method of counting shareholder votes in director elections, and each shareholder is entitled to cast a number of
votes equal to cast a number of votes equal to product of number of such shareholder shares times number of directors to be
elected.
 Cumulative voting allows shareholders to cast all his or her votes in favor of single director rather than allocate them among
candidates.
 Minority shareholders may be able to elect one or more directors despite best efforts of majority shareholders
  Straight Voting: Straight voting allows shareholders to vote a max of 500 shares spread out among 500 shareholders and only
majority shareholders can elect all directors by straight voting; not minority shareholders
 Model Business Act and Delaware Law: No right cumulate votes for directors, unless “Opt In” provisions allows them in the
Articles of Incorporation.
 Default Rule “Opt Out”: Many states have “Opt Out” provisions that allow cumulative voting as the Default Rule.
 Board with Staggered Terms:
o Board with staggers destroys cumulative voting when voting for everyone is at same time.
o No staggered terms, cumulative voting is helpful
o Not too many director candidates to pick from

 Cumulative Voting Calculations: To calculate number of shares required to elect 1 director under cumulative voting
o [Shares voting / directors to be elected + 1] + 1 = Required Shares
 Example: 1800 shares of stock and 3 directors to be elected. [1800 shares / 3 + 1] + 1 = 46 Required shares.
Thus, [450] + 1 = 451 shares to ensure could elect one director.
o Formula for cumulative voting confirms that when only 1 director position is filed, majority of shares voting is required to
win.

Additional Class Notes

 Other method of including minority shareholders on board is through shareholder agreements or special classes of stock

UPDATED ABOVE: YES / WRITTEN: YES -----------------------------------------------------------------

Close-Held Corporation: Supermajority Requirements
 Gives minority shareholders veto power over corporate decisions without offending corporate norms because corporate statutes allow
high quorum and voting requirements
o Example: Supermajority quorum requirements and voting is easy to ensure giving minority shareholders a voice in
corporation affairs.
 Delaware Law:
o Supermajority provisions may be applied to board of directors
 How does a corporation determine whether to repeal or amend supermajority requirements? Depends where supermajority
voting requirements are found:
o Model Act:
 Supermajority requirements must be specified in Charter
 To amend or repeal in Charter, need supermajority vote
 Supermajority votes cannot be in Bylaws
o Delaware Law
 Supermajority requirements must be specified in either Charter or Bylaws
 Supermajority requirements in Charter, may amend or repeal only by supermajority vote
 Supermajority requirements in Bylaws, may amend or repeal by simple majority vote unless Bylaws says it
requires supermajority votes to amend or repeal
 Model Business Act: Supermajority provisions often appear in Shareholder agreements in close held corporations
 Supermajority provisions may apply to mergers or sales of all or substantially all of assets of corporation or all transactions
 Common use of Supermajority Requirements
o To protect against change in other negotiated allocations of control.

Additional Notes
 Simple majority vote – over 50%
 Super majority vote – Require higher standard to approve something (75% - 100%)
UPDATED ABOVE: YES / WRITTEN: YES ------------------------------------------------------------------

Close-Held Corporation: Preemptive Rights

 Definition of Preemptive Rights: Preemptive rights gives minority shareholders first opportunity to buy first part of shares (first
refusal to buy) to be at same level as majority shareholders.
 Example: If preemptive right provision included, minority shareholders have right to first buy share before majority
shareholders buy it.
 Shareholder rights that entitles them to a part of any increase in corporation’s capital stock needed to maintain shareholder’s voting
power
 Example: If shareholders own 10% of corporations shares, preemptive rights entitles shareholder to buy first part of shares
of 10% of subsequent issuance of shares
 Preemptive rights not inherent in capital stock but maybe granted or denied by articles of corporation
 Model Act and Delaware Law: Include “opt in” provision for preemptive rights, which means default rule does not give preemptive
rights, but most state corporation statutes include “opt out” provision for preemptive rights.
 Public Corporations: rarely include “opt in” and “opt out” provisions for preemptive rights
 Close Held Corporations: Preemptive rights are common in private corporations
 Preemptive rights meant to keep minority shareholders at same power of control as majority shareholders
Additional Notes
 Delaware Law: If Stock purchase agreements is not ambiguous, clear wording of agreement controls.
Kimberlin v Ciena Corporation
Facts

In 1993, Kevin Kimberlin (plaintiff) provided $190,000 in seed capital to Ciena Corporation (Ciena) (defendant) pursuant to a stock-purchase
agreement. Ciena manufactured fiber-optic technology. Kimberlin then purchased Series A preferred stock during a capital funding campaign
in 1994. In 1995, Kimberlin obtained Series B preferred stock during Ciena’s second round of private financing. Kimberlin distributed some of
this stock to companies he owned. The Series B stock-purchase agreement included a provision that granted the Series B holders a right of
first refusal to purchase additional stock offered by Ciena proportional to each holder’s overall ownership. The purchase agreement also
provided that the right of first refusal could be waived by the holders of 67 percent of existing shares. By this time, Ciena was growing and
was pursuing a significant contract with Sprint. This resulted in Ciena needing additional capital funding. During the third round of private
funding, Ciena anticipating selling $10-25 million of Series C stock. Kimberlin attempted to assert his right to purchase a pro rata amount of
Series C stock. However, Kimberlin had not been included on some of the communications, and Ciena had made commitments to other
investors. Ciena asserted that fully honoring Kimberlin’s request would cause the entire third round to fail. The existing investors executed a
stock-purchase agreement for the Series C stock. The agreement included a provision that waived the right of first refusal for additional
stock. Seventy-five percent of these votes came from minority shareholders. Kimberlin then purchased fewer shares of Series C stock than
he was entitled to under the pro rata formula. Kimberlin sued Ciena, asserting that he was entitled to purchase additional shares of Series C
stock.

Issue

Can a stock-purchase agreement include provisions that allow the waiver of rights of first refusal and other preemptive rights?

Holding and Reasoning (Sotomayor, J.)

Yes.

A stock-purchase agreement can include provisions that allow the waiver of rights of first refusal and other preemptive rights.

Under Delaware law, if a stock-purchase agreement is not ambiguous, the clear wording of the agreement controls. If the agreement is
ambiguous, then courts may look to course of dealing and trade usage to interpret the meaning of the stock-purchase agreement and any
potential waiver provisions.

Case Summary
 Kimberline wanted more rights
 Ciena wanted higher class of shares, which meant that Kimberline didn’t get the advantage over higher shares
 When Cienna entered agreements for Series C ,meant it waived right of Kimberline of first opportunity to buy part of the shares
 But Cienna wanted more funding, so hired another outside investor
 Issue: Can a stock-purchase agreement include provisions that allow the waiver of rights of first refusal and other preemptive
rights?
 Yes, Court held he waived his preemptive right in Series C agreement under waiver provision because stock-purchase provision
clearly states that Kimberlin’s right of first refusal to buy a pro rata amount of the Series C stock could be waived by a vote of 67
percent of the existing shares.
 Court said 67% of shares waived right of first opportunity to buy shares for all shareholders.
 The agreement is not ambiguous. Therefore, there is no need to look beyond the clear wording and this provision is valid.
However, 75 percent of the votes were cast by minority shareholders. These minority shareholders did not owe any fiduciary duty to
Kimberlin, and Kimberlin does not have any other argument for why these votes do not count. Therefore, more than 67 percent of existing
shareholders waived the pro rata provision. Accordingly, Kimberlin’s claims are dismissed

UPDATED ABOVE: YES / WRITTEN: YES --------------------------------------------------------------------------------

Deadlock
 Deadlock Definition: Corporation comes to a halt or stand still
 Shareholders votes are evenly divided, but also occur at director level
 Usually occur intentionally when unable to allocate control, whereas sometimes planners provide strategic opportunities
 If deadlock is not resolved, leads to dissolution
 Decision to dissolve requires approval by directors and shareholders, and after dissolution authorized, corporation may dissolve by
filing articles of dissolution with secretary of state
 2 Corporation’s remedies to Resolve Deadlocks
o To allow corporation to move forward without dissolution, use buyouts of shares and prevents deadlocks;
 Example: Buying out dissenting directors or mediators or temporary directors to resolve deadlocks.
OR
o Consider provisional directors or custodian or use arbitration to resolve deadlocks
 Remedies to avoid corporation dissolutions do not have to be in Bylaws or Charters
 Courts will judicially decide to dissolve if directors are deadlocked about corporate management and shareholders unable to break
deadlock (Conklin)

Conklin v Perdue
Facts
Jeffrey Conklin (plaintiff) and Beth Perdue (defendant) formed CPInternational, Inc. (CPI) as a Massachusetts corporation in 1993. Conklin and
Perdue were attorneys who met while working at Digital Equipment Corporation. Conklin and Perdue each were co-owner and held 50 percent
of CPI’s stock. They were directors & officers, and managed the corporation’s affairs. ONLY Conklin provided all the capital contributions for
CPI. The business was not successful, and Conklin continued to contribute capital funds to CPI. Conklin and Perdue were reimbursed for
expenses by CPI and also took a draw from CPI. Conklin has asserted that Perdue’s drew $112,434 loan from CPI was a loan because they
weren’t doing economically well and that Perdue signed a promissory note for that amount. By the end of 1995, CPI was still not succeeding,
and Conklin decided that CPI was not economically viable. Conklin informed Perdue that the arrangement was not working out and
attempted to set up a meeting to discuss the issue. Conklin and Perdue then began making accusations toward each other, and Perdue went as
far as removing files from the CPI office. Corporation did nothing to wind (steps to no dissolve). Conklin agrees to dissolve while Purdue
didn’t want to dissolve. Conklin and Perdue exchanged letters through January 19, 1996. Conklin and Perdue then completely stopped
communicating about CPI. However, neither party took any action to dissolve CPI. Conklin began a new business called TradeAccess, which
was not in the same business as CPI. TradeAccess was also not successful. Conklin sued Perdue for: (1) breach of the promissory note and (2)
breach of her fiduciary duty for removing files from the CPI office. Perdue asserted that Conklin breached his fiduciary duty by starting
TradeAccess.

Issue
May a corporation be judicially dissolved if the directors of the corporation are deadlocked about corporate management and the shareholders
are unable to break the deadlock?
Holding and Reasoning (Van Gestel, J.)
Yes.
A corporation may be judicially dissolved if the directors of the corporation are deadlocked about corporate management and the
shareholders are unable to break the deadlock.
Specifically, Massachusetts law allows a shareholder to bring an action to dissolve a corporation if the directors of the corporation are
deadlocked and the shareholders are unable to break the deadlock. Mass. G.L. c. 156B, Sec. 99.

However, if the shareholders have the ability to dissolve a corporation but fail to do so, then a court may exercise its equitable powers to
dissolve the corporation if it finds a dissolution in the shareholders’ best interests.
Class Summary of Reasoning
 Court will judicially decide to dissolve if neither will dissolve if corporation directors are deadlocked about corporation
management and shareholders unable to break deadlock (Conklin).
 Court judicially dissolved it as of January 19, 1996, because no business opportunity exists, so no fiduciary duty to each other.
In this case, CPI may be dissolved if its directors were deadlocked and its shareholders were unable to break the deadlock. Conklin and Perdue
were both directors and shareholders for CPI. Based on the exchange of correspondence ending on January 19, 1996, Conklin and Perdue
were deadlocked on how to wind down CPI and could not break this deadlock. Therefore, CPI is declared to have been dissolved on January
19, 1996. The evidence supports that Perdue’s draw from CPI was intended to be compensation rather than a loan. Additionally, Perdue did
not breach her fiduciary duty to CPI by taking files because the removal did not cause any damage to CPI. Finally, Conklin did not breach his
fiduciary duty because TradeAccess did not take any business opportunity from CPI. Therefore, each party’s claims are dismissed. Conklin and
Perdue are each entitled to half of CPI’s net book value.

(UPDATED ABOVE: YES / WRITTEN: YES) --------------------------------------------------------------------------------

Closely-Held Corporation: Oppression of Minority Shareholders

 Model Jurisdiction: 2 Minority Oppression Views
o Most states and Model Act follow the minority view and address 2 issues:
1. Whether majority shareholders acted reasonably from perspective of minority shareholders; AND
2. Whether minority shareholder’s reasonable expectations have been met
 Majority View: Less common but looks at Majority Shareholder’s perspective as to whether actions were reasonable.
 Majority shareholders in a closely-held corporation owe a fiduciary duty to minority shareholders that require utmost good faith and
fair dealing (Leslie)
 Majority shareholder’s duty to Minority Shareholder:
1) Control group must show legitimate purpose for harm to minority shareholders
2) Minority shareholder must show that same objective could’ve been achieved thru less harmful means
 Delaware Law: Rarely grants claims of minority oppression
 Massachusetts Law: Likely grants claims on minority oppression.

LESLIE V BOSTON SOFTWARE COLLABORATIVE INC

Facts

 Mark Khayter (defendant), Robert Goulart (defendant), and Dennis Leslie (plaintiff) formed Boston Software Collaborative, Inc.
(BSC) as a Massachusetts closely-held corporation in 1994. Each of these founding shareholders contributed $200 in capital funds
as start-up money, and each received approximately one-third of BSC’s shares. All three became BSC directors. Khayter was BSC’s
president and chief executive officer. Goulart was BSC’s clerk. Leslie was BSC’s treasurer and performed administrative and office-
management functions. BSC provided technical services in software engineering and billed clients by the hour. Khayter and
Goulart billed significantly more hours than Leslie, and they received additional compensation based on their billings. Leslie
 sought additional compensation, asserting that the office-management tasks should be taken into consideration. However, BSC
had received several complaints regarding Leslie, from both employees and clients. The employees claimed that Leslie would make
inappropriate comments and overreact to employees. The clients claimed that Leslie did not produce high-quality software
engineering when he was assigned to a project. At one point, three key employees threatened to quit due to Leslie’s conduct. In
2000, Leslie considered leaving BSC, but he decided to stay. Leslie wrote an email to another employee expressing his decision to
stay. However, Leslie also said that his wife reserved the right to shoot the other two partners. This email was forwarded to
Khayter and Goulart. The threat was taken seriously because Leslie had a permit to carry a gun and did so occasionally. Khayter
and Goulart placed Leslie on unpaid leave and offered him a separation agreement. The agreement included a severance package
with 10 weeks of pay, a potential consulting opportunity, and the potential of BSC looking for contract work for Leslie. Leslie
refused to accept the offered separation agreement. Khayter and Goulart then used power as majority shareholders to terminate
his employment, and compensated him less, and removed Leslie as officer, and voted against Leslie not to attend board meetings,
and not paid any dividends,

Leslie sued Khayter and Goulart for wrongful termination, failing to pay dividends, and freezing Leslie out.

Issue

(1) Do majority shareholders in a closely-held corporation owe a fiduciary duty to minority shareholders that requires the utmost good faith and
fair dealing?

(2) Even if there was a legitimate purpose, was there a less harmful alternative that would consider the minority shareholder?

Holding and Reasoning (Van Gestel, J.)

(1) Yes.

(2) Yes.

Majority shareholders in a closely-held corporation owe a fiduciary duty to minority shareholders that requires the utmost good faith and
fair dealing.

Generally, the controlling group in a closely-held corporation owes a fiduciary duty to minority shareholders.

To satisfy that duty, the controlling group must have a legitimate business purpose for taking an action that causes harm to a minority
shareholder. If the majority can show a legitimate business purpose for harming the minority shareholder, it is up to the minority to show
that the same objective could have been achieved using a different action that would have caused less harm to the minority shareholder.

In this case, Khayter and Goulart could have achieved their business purpose using less harmful means.

1. Leslie was not given the opportunity to take courses to upgrade his technical skills. Additionally,
2. Khayter and Goulart did not attempt to prevent Leslie from direct contact with other employees or attempt to restructure the
compensation to address any of Leslie’s issues.

3. Leslie was not a model employee, but was co-founder who owned 1/3 of corporation and part owner so owed utmost good faith
and fair dealing because he is an owner as a minority as a shareholder, which raises utmost duty

They breached their fiduciary duty because there were less harmful alternatives: Courses to enhance his technical (building) skills, bring
someone else to work on behalf of the corporation to reduce the staff interaction (i.e. an Intermediary), modify his job duties to remove him
from interactions with employees who didn’t want to work with him, thus, he didn’t receive utmost good faith and fair dealing

As a remedy, Leslie shall receive: backpay, a seat on the board of directors again, and one-third of future distributions to BSC shareholders.

What would be the proper remedy for Leslie? 1. Compensation for loss of work, 2) compensation that other co founders received, considering
that he was still a shareholder even though he was fired as an employee, 3) provisions for leslie to help him in company

Problem 5-6
If we represented both shareholders, what facts should I use?
 They stepped down from the board, so voluntarily took this step, which suggests that they could have stayed on. This may be
relevant to show that they were oppressed.
 If both shareholders in a private corporation, they have to sell shares to corporation so prices are not done fairly, as opposed to a
public corporation
 If board intending not to give distributions and dividends to shareholders, this may help build claim for minority oppression.
  They are not co founders rather investors so the test of whether there were less harmful alternatives to minority shareholders does
not apply

Model Jurisdictions for Minority Oppression – 2 views

1. minority view – majority states follow it and Model Act. Whether majority shareholders acted reasonably from perspective from minority
shareholders and whether minority shareholder’s reasonable expectations have been met?

2. Majority view – less common. Looks at perspective of majority shareholders as to whether their actions were reasonable.

Delaware – rarely grants claim of minority oppression (lead the way in corporate law) Not likely to grant claims of minority oppression.
Massachusetts – likely to grant claim of minority oppression.
(UPDATED ABOVE: YES / WRITTEN: YES) --------------------------------------------------------------------------
Facebook Case Study: Prior to Converting to Initial Public Offering (IPO)

Facebook Case Study – Responses to Question on Page 305

 IPO – Initial Public Offering (preparing to go from private to public through initial offering to public for a corporation)
 Prior to IPO, Facebook is still private.
Would the entrepreners (CEO and founder and fellow officers) or investors (merely outside people who want to invest such as venture
capitalists) make the following decisions:
 Expanding Facebooks product offerings –
o Common or Ordinary activities (business decisions) in product expansion managed by officers, who manage day to day
activities
o Board of directors oversee the officers’ activities, so they have an indirect decisions regarding what the officers may be
thinking about
o Venture capitalists have a special expertise so they are consulted
o Thus, Entrepeneurs would make these decisions.
o Out of ordinary offerings falls under control of the Board of Directors.
 Merging with Microsoft
o Who makes the decisions? Begins with board because this is an extraordinary business decision to merge and propose it
and then go to shareholders for approval.
o Because Facebook still private, shareholders have power over board with shareholder approval, thus largely driven by
shareholders
o Marc controls majority shares of company through directly owning percentage of shares and indirectly vote other shares.
o How are venture minority shareholders? Venture capitalists can protect themselves by including protective provisions in
the charter (docs filed in the corp) if they will give financing and have veto power over liquidation transactions of
charter doc that includes mergers, thus they can block it.
 Selling shares by venture capitalists
o If no transfer restrictions, venture capitalists allowed to sell shares.
o Yes there are transfer restrictions in Bylaws of Facebook (No holder of shares can transfer without prior written consent
of corporation)
 Converting preferred stock into common stock
o Yes, Face book has option to covert preferred shares into common stock
o Why convert to common stock? When they are low in cash or not investing wisely, but most importantly, when value of
shares go up, then common shares will give more money, so Venture Capitalists would have the option to choose
common stock to make more money, and another scenario is the merger, which gives more money too.
o When it’s a right time to exit? Typically after the IPO, which is when they become public.
o Is there a new control when becomes public? Yes, the public control as shareholders, so venture capitalists no longer
control since not private and have no more influence on market.
 Paying dividends
o Board of directors decide to pay dividends and not required to do it
o Other way to pay is through repurchase
o No approval needed by shareholders to issue dividends
o Who decide this? Shareholders control board directors, so entrepreneurs make these decisions
o A protective provision for the Venture Capitalists - Venture capitalists have some control through a negative covenant
(prevents board from doing something) by negotiating that preventing board from declaring a dividend without prior
approval of venture capitalists, thus not just up to shareholders to decide dividends
 Expanding the size of board of directors
o Look to bylaws or charter to see size of board of directors
o If want to expand, size has to be amended.
o In Bylaws with Facebook, # of directors shall not be fewer than 5 and no more than 8, so havent maxed so can add one
more and no need to amend b/c provision allows up to 8.
o If goes over 8, need to amend but need approval from venture capitalists (minority shareholder give approval through
negotiations) , and majority shareholder (mark)
 Replacing Mark as director
o Shareholders have power to remove him.
 o Because Mark common shareholder, he controls both common stock, but will make sure he doesn’t get remove
o Here, Mark can be replaced but no because its up to him, because no approval needed from venture capitalists
 Replacing Mark as officer
o Shareholders
 Increasing Marks salary
o At will means you have no job security
o As CEO has employment K with Facebook – here’s the salary
o Who does he negotiate about employment terms? Board of directors and approved by them – for a Private
corporation
 What if entrepreneurs wants to get rid off capitalists?
o They can but if capitalists are rid off, then not getting financing from venture capitalists, resulting in the end of the
company.

Note: You can divorce your spouse but cannot divorce your investors!!!

 When would venture capitalists want to redeem their shares?

o Preemptive rights – allows them to buy first dibs to buy other investors to stay at same level of ownership. (to buy
additional shared to stay at a certain percent level, which is deemed as a state of confidence)
o How can they stay at same level as to their continued confident in the same level? If no, this is vote of no confidence,
which tells other investors fear that they will not get anymore money, and leads to downfall of the company.

UPDATED ABOVE: YES / WRITTEN: YES)-----------------------------------------------------------------------------------------------------------------

Duty of Care
a) Director’s Duty of Care Intro
 Board of directors viewed as agents, economically speaking, and these directors do not serve their own interest; rather
serve interests of their “principal (aka corporation)
o Analogy: Similar to law of agency where agent cannot serve their own interest; rather only serve their
principal
 However, debate exists as to who is the principal between the corporation, shareholder, or corporation and shareholder
together.
 Board of director’s duties consist of 1) duty of care and 2) duty of loyalty
 Director’s duty of care asks whether the director made decisions that injured the corporation
 Model Act: Includes Duty of care
 Delaware Law: Does not include any statement of director’s duties; instead duties are judge-made
b) Business Judgment Rule
 Courts unwilling to impose liability for poor business decisions to avoid being involved in area where judges lack
expertise and encourages directors to be make risky business decisions.
 Liability for director’s poor decisions rarely imposed b/c don’t interfere w/ business decisions.
 Model Act: model act cases similarly analyzed to Delaware cases and cite major Delaware cases as precedents
 Even if Board of directors make poor business decisions doesn’t mean breached duty of care

Gagliardi v. Trifoods International Inc

Facts
Eugene Gagliardi (plaintiff) founded TriFoods International, Inc. (TriFoods). Gagliardi was fired from the company in 1993, but he
continued to own 13 percent of the company’s stock. Following Gagliardi’s termination, Gagliardi claimed that TriFoods had severely
deteriorated due to several poor business decisions by the board of directors (defendants) and management.
First, Gagliardi was unhappy that TriFoods had purchased a manufacturing plant in Pomfret, Connecticut and borrowed funds to do so.
Second, TriFoods had purchased and renovated a new research facility that Gagliardi claimed was a duplication of an existing research
facility.
Third, in 1994, TriFoods purchased the exclusive rights to produce and sell a food product known as Steak-umms. Gagliardi claimed that
TriFoods had overpaid for Steak-umms.
Fourth, TriFoods had instituted a sales commission to increase volume, and Gagliardi claimed this action was reckless or grossly negligent.
Fifth, Gagliardi claimed TriFoods failed to pay key suppliers.
Sixth, Gagliardi contended that TriFoods had destroyed customer relationships by selling inferior products.
Finally, Gagliardi was unhappy that TriFoods had spent $125,000 for a new name, logo, and packaging.

In his capacity as an existing shareholder, Gagliardi sued the board of directors, alleging negligent mismanagement of the company. The
board members filed a motion to dismiss the negligent mismanagement claim.
Class Summary
 Gagliardi brought a suit for duty of care
Issue
Is an independent and disinterested corporate director liable for a corporate loss if the director acted in good faith?

Can he recover for corporation’s losses due to mismanagement?

Holding and Reasoning (Allen, J.)
No.
An independent and disinterested director of a corporation is not liable for a corporate loss, unless the facts are such that no person could
possibly authorize such a transaction if he or she were attempting in good faith to meet their duty. Saxe v. Brady, 184 A.2d 602 (1962).

In other words, if there is an allegation that a corporation has suffered a loss that was: (1) the result of a lawful transaction, (2) within the
corporation’s powers, (3) authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, then that allegation does
not state a claim for relief against the fiduciary, regardless of how foolish the investment may appear in retrospect.

Corporate fiduciaries are only liable for corporate losses that result from self-dealing, a conflict of interest, or other improper
motivation. This is referred to as the business judgment rule.

This deference is given to corporate directors to encourage corporations to take reasonable risks in the pursuit of profits. If directors were
subject to liability for business decisions made in good faith that happen to turn out poorly, then corporations would become overly risk
averse.
That would create an inefficient marketplace.

In this case, each of the allegations made by Gagliardi relate to business decisions made by disinterested directors in good faith. At most,
Gagliardi’s claims amount to good-faith mistakes. There are no allegations that the board had any conflicts of interest or improper
motivations. Therefore, the allegations do not state a claim for relief against the TriFoods board members for negligent mismanagement of
the company. Accordingly, the negligent-mismanagement claim is dismissed.
Class Summary
 Gagliardi disagreed with business decisions for mismanagement, but not for improper motive
(UPDATED ABOVE: YES / WRITTEN: YES)--------------------------------------------------------------------------------------------

Duty of Care
b) The Decision-Making Context
 Exception exists under the Business Judgment rule for substantively egregious decisions
 The Waste Standard: 2 standards to determine whether director made an informed decision:
1. Director engaged in conflict of interest re poor decision, courts applies duty of loyalty
2. Director’s decision was not based on information, court applies gross negligence
 “Procedural” Aspect of Duty of Care: When directors make decisions, required to make informed decisions, known as
“procedural” aspect of duty of care

Additional Book Notes

 “Procedural” Exception to Business Judgment Rule: Rule itself is a presumption in making business decisions, directors acted on
informed basis, in good faith & honest belief that the action was in the best interest of corporation.
 Business Judgment rule does not protect directors who made uninformed decisions
 Director’s duty of care is to inform himself in preparation of decisions that comes from fiduciary duty to serve corporation and
shareholders
 Director’s duty to make informed decisions is in nature of duty of care, distinct from duty of loyalty

Smith v Van Gorkom

Facts
Jerome Van Gorkom, the CEO of Trans Union Corporation (Trans Union), credit checking company, engaged in his own negotiations with
a third party for a buyout/merger with Trans Union. Prior to negotiations, Van Gorkom determined the value of Trans Union to be $55
per share and during negotiations agreed in principle on a merger. There is no evidence showing how Van Gorkom came up with this
value other than Trans Union’s market price at the time of $38 per share.
Subsequently, Van Gorkom called a meeting of Trans Union’s senior management, followed by a meeting of the board of directors (defendants).
Senior management reacted very negatively to the idea of the buyout. However, the board of directors approved the buyout at the next meeting,
based mostly on an oral presentation by Van Gorkom. The meeting lasted two hours and the board of directors did not have an opportunity to
review the merger agreement before or during the meeting. The directors had no documents summarizing the merger, nor did they have
justification for the sale price of $55 per share. Smith et al. (plaintiffs) brought a class action suit against the Trans Union board of directors,
alleging that the directors’ decision to approve the merger was uninformed. The Delaware Court of Chancery ruled in favor of the
defendants. The plaintiffs appealed.

Issue
(1) May directors of a corporation be liable to shareholders under the business judgment rule for approving a merger without reviewing the
agreement and only considering the transaction at a two-hour meeting?
(2) Did directors reach an informed decision?
Holding and Reasoning (Horsey, J.)
Yes.
Under the business judgment rule, a business determination made by a corporation’s board of directors is presumed to be fully informed
and made in good faith and in the best interests of the corporation. However, this presumption is rebuttable if the plaintiffs can show that
the directors were grossly negligent in that they did not inform themselves of “all material information reasonably available to them.”

The court determines that in this case, the Trans Union board of directors did not make an informed business judgment in voting to
approve the merger. The directors did not adequately inquire into Van Gorkom’s role and motives behind bringing about the transaction,
including where the price of $55 per share came from; the directors were uninformed of the intrinsic value of Trans Union; and, lacking
this knowledge, the directors only considered the merger at a two-hour meeting, without taking the time to fully consider the reasons,
alternatives, and consequences. The evidence presented is sufficient to rebut the presumption of an informed decision under the business
judgment rule. The directors’ decision to approve the merger was not fully informed. As a result, the plaintiffs are entitled to the fair value
of their shares that were sold in the merger, which is to be based on the intrinsic value of Trans Union. The Delaware Court of Chancery is
reversed, and the case is remanded to determine that value.
Class Summary
Issue: Whether directors reached an informed decision under their duty of care and if so, were their decisions grossly negligent?
 Here, no allegations of fraud, bad faith, self dealing, thus presumed that directors reached their business judgment in good faith
 The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the “sale” of the Company and in
establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these
circumstances, at a minimum, were grossly negligent in approving the “sale” of the Company upon two hours' consideration,
without prior notice, and without the exigency of a crisis or emergency
 None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to
propose a cash-out merger of Trans Union. No members of Senior Management were present, other than Chelberg, Romans and
Peterson; and the latter two had only learned of the proposed sale an hour earlier. Both general counsel Moore and former
general counsel Browder attended the meeting, but were equally uninformed as to the purpose of the meeting and the
documents to be acted upon.
 Court ruled they didn’t reach informed decision, using the standard of gross negligence regarding Gorkins sale of the company
because price per shares of sales was decided to be $55, which was not good because too low. They priced it higher ($55) , but this
was lower than $65. Range was very low so shares undervalued under direction of the directors. Thus, these shares were
undervalued.
 Under Gross Negligence Standard, no informed decision about the price per share price, which was done by Van Gorkom, which
means other directors made uninformed decisions as a results of Van Gorkons instructions.
 Intrinsic value of shares not really defined as to the intrinsic value of the company, which other directors were uninformed about
the intrinsic value as to how much the company would be worth.
 In the manner they approved of these shares, they were grossly negligent.
 No prior notice for the meeting and only invested into the 2 hours to approve – though might seem quick, might not be an abuse
 Rule: Corporation directors must make informed decisions as oppose to cursory or superficial judgment.
 Decision here was made without prior notice and based on no information an so no information, then this is not an informed
judgment or lack informed judgment.
 Lacked information about the intrinsic value of the company and price they should sell company for.
 Were directors informed of the intrinsic value of the sale of the company?
 In order for board to have informed judgment, they have to rely on a formal and information report by Van Gorkon, which must
be supported by information, but Gorkon didn’t do this investigation regarding the $55 share, thus directors lacked information.
 Thus, directors breached their fiduciary duty to their shareholders by not providing true and correct disclosure of all info that
should’ve been submitted for approval.

- Liability did attach to shareholders here

(UPDATED ABOVE: YES / WRITTEN: YES) ---------------------------------------------------------------------------------------------

Shareholder Primary Norm

 Conclude duty of care by revisiting question: To whom do corporate directors owe their duty of care?
 Debate exists whether duty owed to corporation or shareholders.
a) Many cases say duty owed to corporation and shareholders which implies corporation is something more than just
shareholders
 Court usually concluded shareholders are primary beneficiaries of the duty of care, known a Shareholder Primary Norm
 Michigan supreme court Dodge v Ford Motor gives an example of Shareholder Primary norm (See Notes)
 Delaware Law
o Charitable donations are expressly authorized
o Although no limits on size of charitable gifts, any reasonable corporate gifts is allowed of charitable or educational
nature
o To determine validity of corporate gift, apply reasonable test: Look for whether there was information relied on for
directors to act reasonably.
Kahn v. Sullivan
Delaware Supreme Court
594 A.2d 48 (Del. 1991)

Rule of Law
Corporations can make valid donations for charitable purposes.

Facts
The board of Occidental Petroleum Corporation (Occidental) was presented with a proposal to make a charitable donation to build and
fund an art museum named after Armand Hammer, Occidental's chief executive officer and chairman of the board.  The board retained two
well-known law firms and Occidental's public accountants to evaluate the proposal. After hearing the law firms' and the accountants'
analyses, the board established a special committee that was comprised of its eight independent and disinterested outside directors to
review the proposal. The special committee discussed the proposal with the law firms and the public accountants. Finally, the special
committee concluded that the construction of the museum would be beneficial to Occidental and unanimously approved the proposal.
Occidental subsequently submitted the approval of the proposal to its shareholders in the proxy statement for its annual meeting. Two
shareholder actions were filed, challenging the validity of the gift. Before trial, the plaintiffs in the Kahn action (plaintiffs) moved for a
preliminary injunction to enjoin a proposed settlement in the Sullivan action. The Delaware Court of Chancery denied the motion. The parties to
the Sullivan action (defendants) submitted the settlement agreement to the court of chancery for its approval. Despite the objections from
some shareholders, the court of chancery found the settlement to be "reasonable under all of the circumstances" and approved it. The Kahn
plaintiffs appealed.
Summary
 Contribution was for Museum getting a lot of financial benefit; which was not a controversial issue
 Corporation is generous in giving money to museum and board approves of generous terms of museum proposal
 Standard of gross negligence is applied to assessed actins of board.
 Using corporation money to construct museum
Issue
Can corporations make valid donations for charitable purposes?

Holding and Reasoning (Holland, J.)

Yes.
Under Delaware law, Delaware corporations can make valid donations for charitable purposes. Del. Code tit. 8, § 122. This court also
agrees with the reasonableness test applied in Theodora Holding Corp. v. Henderson, 257 A.2d 398 (Del. Ch. 1969), to determine the validity
of a charitable corporate gift. In addition, the record must be reviewed not to determine "the intrinsic fairness of the settlement," but to
determine "whether or not the Court of Chancery abused its discretion by the exercise of its business judgment."

In this case, the court of chancery concluded that the gift to the museum was within the range of reasonableness established in Theodora
Holding based on the net worth of Occidental, annual next income before taxes, and the tax benefits to Occidental. The court of chancery
noted that the plaintiffs' potential for ultimate success on the merits in the Sullivan action was "very poor."

In applying its own independent business judgment, the court of chancery decided that the settlement was fair and reasonable. The court
of chancery found that the amount was adequate, considering the weakness of the plaintiffs' claims. The court of chancery's factual
findings are supported by the record, and its legal conclusions are based on a proper application of well-established law. There is no abuse of
discretion in approving the settlement. Therefore, the decision of the court of chancery is affirmed.
Summary
 First Standard: Did they act grossly negligent?
 Board didn’t act in gross negligence of duty of care in their settlement terms; instead acted with duty of care in approving this
project because approval was made based on information regarding net worth of Occidental Museum and annuals income
before taxes, and tax benefits to museum, thus directors were not grossly negligent.
 Next New Standard: Did they act reasonably?
 Court classified this project as a charitable contribution (non-profit) in approving charitable contriution? Yes they acted with
due care consistent with charitable duty. (but if no information was relied, then this shows they acted unreasonably)
 They were also reasonable because board relied on net worth of Occidental Museum (annual net income before taxes) which
resulted in tax benefits for the museum, thus the gift was within range of reasonableness and didn’t breach their duty of care.
 Reasonable contributions or donations were generous because it created tax benefits for the museum.

(UPDATED ABOVE: YES / WRITTEN: YES) -----------------------------------------------------------------------------------

Duty of loyalty
THE OVERNIGHT CONTEXT AND GOOD FAITH

Duty of loyalty Intro

o Director or manager participate in transaction with conflict of interest (serving corp interest and self interest) duty
of loyalty implicated
o As general rule, duty of loyalty requires directors to serve interest of corporations
o Directors have to follow statutory procedures that remove taint of self interest from transaction
o Good faith Is an element of duty of loyalty

A) Oversight Duty
 Separate duty is a duty to be informed about what’s happening within corporation, called providing overnight
 Duty of oversight is aspect of duty of loyalty
 Model Act: Oversight Liability: Director shall not be liable to corporation or shareholders for any decisions to take or not,
unless party asserting liability in proceeding establishes that challenged conduct resulted from failure of director to devote
attention to ongoing oversight of business and corp affairs
 Directors responsible for ensuring that there are systems in place to get financial information to board on a timely basis so
directors can determine if company is on target financially to ensure there’s reason to believe company’s financial reporting is
accurate and ensure company has functioning law compliance structure.
 Oversight Duty Exception: Only sustained or systematic failure of board to exercise oversight, such as an utter failure to
attempt to assure a reasonable information and reporting system exists – will establish lack of good faith that’s necessary
condition to liability.
In re Caremark International Inc. Derivative Litigation
Delaware Court of Chancery
698 A.2d 959 (1996)

Rule of Law
The directors of a corporation have a duty to make good-faith efforts to ensure that an adequate internal corporate information and reporting
system exists.

Facts
Caremark International, Inc., a health services company, was the subject of a major federal criminal investigation. The company allegedly
violated laws that prohibit health care companies from paying doctors to refer Medicare or Medicaid patients to their services Prior to
1991, Caremark had a regular practice of entering into financial arrangements with referring doctors which were not clearly prohibited but
which raised legal questions. However, Caremark’s board issued guidelines that attempted to clarify what sort of arrangements were
acceptable. After they were notified of the federal investigation, the board announced that it would no longer pay certain types of fees to
Medicare and Medicaid doctors. The board also employed an outside auditor to review its practices for business and ethical concerns. The
federal investigation resulted in indictments of junior officers in 1994. The officials took plea deals to lesser charges and Caremark paid
roughly $250 million in civil and criminal penalties. A group of Caremark shareholders (plaintiffs) promptly brought derivative suits,
alleging that Caremark’s directors (defendants) breached their duty of care by failing to adequately oversee the conduct of Caremark’s
employees and thereby exposing the company to enormous civil and criminal penalties. The parties negotiated a settlement.. In the
settlement, the board did not agree to any monetary penalties; it simply agreed to implement a number of more cautious policies moving
forward, such as the creation of a compliance and ethics committee.
Summary
 Law (RPL) that prohibits giving financial incentive to medical providers to bring pattients to Caremark
 Board of directors, to properly monitor this, they hired auditors
 Shareholder sued corporations for failure to monitoring directors
Issue
Does a director’s duty of care include a duty to ensure that an adequate internal corporate information and reporting system exists?

Whether settlement was fair and reasonable?

Holding and Reasoning (Allen, J.)

Yes.

The duty of care owed by corporate directors may be breached either by active decisions which are negligent, or by negligent failure to act.
Generally, a director’s inattention must be egregious for liability to attach. Directors are not expected to oversee all actions of all employees.
However, fraudulent acts by ordinary employees can have enormous effects on the corporation. Recent extensions of federal law make
corporations more vulnerable to lower-level mistakes. Therefore, directors must make good-faith efforts to ensure that reporting and
informational systems exist.
The business judgment rule protects directors’ discretion in determining the extent of such systems. Total failure to exercise reasonable
oversight, however, may subject directors to liability.

In this case, the directors of Caremark clearly made at least minimal efforts. They made good-faith attempts to keep abreast of the law
and to adjust Caremark’s practices when they strayed from legal requirements.. There was no systemic or sustained failure of oversight. The
derivative claims here for breach of duty would be unlikely to succeed. It follows, then, that the settlement is appropriate, even though it is
relatively favorable to Caremark. The directors’ concessions are minimal, but the claims that are being waived are weak. The settlement is
therefore approved.

Summary
- Settlement was fair and reasonable because no breach of duty
- To show Caremark directors breached their duty of care by failing adequately to contro Caremark’s employees, Plaintiffs have to show that
either 1) directors knew, 2) should’ve known that violation of law were occurring, or 3) that directors took no steps in good faith effort to prevent
or remedy that situation, or that such failure proximately resulted in losses
- Whether directors knew of the violations of law: None of the documents submitted to review, nor any of the deposition transcripts
appear to provide this evidence. Board was informed by experts that the company’s practices were lawful, thus reliance was reasonable.
- Whether they failed to monitor: No evidence that Board was unaware of the activities that led to liability. Because of this, lets turn to
director inattention or negligence. If there’s corporate loss due to ignorance of liability creating activities with the corporation, then only
sustained or systematic failure of board to exercise oversight, such as an utter failure to try to assure a reasonable information and
reporting system exists – will establish lack of good faith that a necessary condition to liability.
- Caremark promise not to give compensstisn to third parties to get services from Medical and Medicare was fair and reasonable
- Evidence doesn’t show that they breached their duty of loyalty and even though they tried to stop economic losses, there were econimoc
losses
- Board did everything they and yet unconsidered inaction
- There has to be absolute failure

Problem 8-1
 Process used to make their informed decisions? If ill informed, this raises duty of care concerns.
  What additional facts relating to the foregoing situation would a shareholder plaintiff find most useful in mounting a case
against directors of Hollanders based on a breach of the duty of oversight?
 Did board take steps to make sure there were systems in place and reporting mechanisms to address any wrong doing?
 Board cant just say nobody came to us, so they didn’t know
 Standard of liability: Continuos pattern that they failed to prevent the employee’s conduct.
 Is it enough that

(UPDATED ABOVE: YES / WRITTEN: YES) --------------------------------------------------------------------------

Duty of Good Faith

In Re The Walt Disney Company Derivative Litigation
Delaware Supreme Court
906 A.2d 27 (Del. June 8, 2006)

Rule of Law
The concept of intentional abandonment of duty and a conscious disregard for one’s responsibilities is an appropriate standard for
determining whether fiduciaries have acted in good faith.

Facts
Michael Ovitz was hired as the president of The Walt Disney Company (Disney). Ovitz was a much respected and well known executive, and
in convincing him to leave his lucrative and successful job with Creative Artists Agency (CAA), Disney signed Ovitz to a very lucrative
contract. The contract was for five years, but if Ovitz were terminated without cause, he would be paid the remaining value of his
contract as well as a significant severance package in the form of stock option payouts. The contract was approved by Disney’s
compensation committee after its consideration of term sheets and other documents indicating the total possible payout to Ovitz if he was
fired without cause. The compensation committee then informed Disney’s board of directors of the provisions of the contract, including the
total possible payout to Ovitz. The board approved the contract and elected Ovitz as president. After Ovitz’s first year on the job, it was
clear that he was not working out as president and that he was “a poor fit with his fellow executives.” However, Disney’s CEO and attorneys
could not find a way to fire him for any cause, so Disney instead fired him without cause, triggering the severance package in the contract.
Ovitz ended up being paid $130 million upon his termination. Disney shareholders (plaintiffs) brought derivative suits against Disney’s
directors for failure to exercise due care and good faith in approving the contract and in hiring Ovitz, even if the contract was valid.
Even if the contract was valid, for breaching their fiduciary duties by actually making the exorbitant severance payout to Ovitz. The Delaware
Court of Chancery found that although the process of hiring Ovitz and the resulting contract did not constitute corporate “best practices,”
the Disney directors did not breach any fiduciary duty to the corporation. The Disney shareholders appealed.
Summary
 Entered an employment contract for 5 years
 Agreements included that if Disney terminated employment for any reason other than gross negligence, he would be entitled for large
set of payment, called non-fault payment, by getting remaining salary, $7.5 million dollars per year and $3 million shares, and cash
out of $10 million.
 Committee voted to hire him under these terms and approved by Board and approved by CEO
 However, President’s poor culture fit (didn’t fit well as President and didn’t work well with collegues)
 President had trouble adapting to company’s culture. For example, He didn’t get along well with his colleagues.
 Disney CEO went to Ovits told him to start him to look for another work opportunity and because the contract required a without
cause, so CEO consulted number of lawyers to terminate him with cause, but there wasn’t a cause to terminate.
Issue
Is the concept of intentional dereliction of duty and a conscious disregard for one’s responsibilities an appropriate standard for
determining whether fiduciaries have acted in good faith?
Did Ovits breach duty of care and loyalty
Holding and Reasoning (Jacobs, J.)
Yes.
As an initial matter, the court determines that the directors did not breach their duty of due care in approving the contract or hiring Ovitz
because the directors were fully informed of all information available (term sheet and possible severance payout to Ovitz)

In terms of the bad faith claim, there are at least three categories of fiduciary bad faith.
The first two are clearer: subjective bad faith, meaning intent to harm, and the lack of due care, meaning gross negligence.

However, there is a form of fiduciary bad faith that is not intentional, but “is qualitatively more culpable than gross negligence.” This category is
appropriately captured by the concept of intentional dereliction of duty and a conscious disregard for one’s responsibilities. Therefore,
although it is not the exclusive definition of fiduciary bad faith, that concept is an appropriate standard for determining whether fiduciaries
have acted in good faith.

The court determines that because the Disney compensation committee and directors were fully informed about the total potential payout,
and because of the well known skills and qualifications of Ovitz, the Delaware Court of Chancery properly held that the directors’ actions,
although not in line with corporate best practices, did not violate a duty to act in good faith. Finally, the court finds that the directors did not
violate any fiduciary duties by actually making the severance payout to Ovitz because the directors were entitled, under the business
judgment rule, to rely on advice from Disney’s CEO and attorneys that there were no grounds for Ovitz to be fired for cause. They were
thus entitled to fire him without cause.
As a result of the foregoing, the court finds in favor of the defendants and the Delaware Court of Chancery is affirmed.
Summary
 Lawyers in the corporation said there were no grounds to fire him, didn’t recommend termination, so Ovits was terminated without
cause, so he was paid out a lot of money
 Disney shareholders sued because directors didn’t act in good faith due to the money loss from the corporation regarding the pay out
contract.
 Did Ovits breach duty of loyalty and care? No, non fault payment clause, negotiated payment plan prior to commencing work as
President , owed no duty to corporation because before job as President in corporation.
 Did Disney breach their duty of care and loyalty? No, because they made informed decisions, unless they made utter failure to make
an informed judgment to make them liable for breach duty of care.
 Why did they include the pay out? To persuade him to become President.
 Paying him
 Whether paying Ovits under the contract was a waste? No,

(UPDATED ABOVE: NO / WRITTEN: NO) ------------------------------------------------------------------------

Duty of Good Faith
Stone v Ritter
Delaware Supreme Court
911 A.2d 362 (Del. 2006)

Rule of Law
Directors can be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system, or
having implemented such a system, consciously fail to monitor or oversee its operations.

Facts
AmSouth Bancorporation (AmSouth) was forced to pay $50 million in fines and penalties on account of government investigations about
AmSouth employees’ failure to file suspicious activity reports that were required by the Bank Secrecy Act (BSA) and anti-money-
laundering (AML) regulations. AmSouth's regulatory violations resulted from an AmSouth employee failing to follow the BSA/AML policies
and procedures already in place. 

AmSouth’s directors were not penalized. The Federal Reserve and the Alabama Banking Department issued orders requiring AmSouth to
improve its BSA/AML practices. The orders also required AmSouth to hire an independent consultant to review AmSouth’s BSA/AML
procedures.
AmSouth hired KPMG Forensic Services (KPMG) to conduct the review and KPMG found that the AmSouth directors had established
programs and procedures for BSA/AML compliance, including a BSA officer, a BSA/AML compliance department, a corporate security
department, and a suspicious banking activity oversight committee. A group of shareholders (plaintiffs) brought a derivative suit against
AmSouth directors (defendants) for failure to engage in proper oversight of AmSouth’s BSA/AML policies and procedures. The Delaware
Court of Chancery deemed the shareholders’ allegations as a Caremark claim, which derives from In re Caremark International Inc. Derivative
Litigation, 698 A.2d 959 (1996).
Under Caremark, if a shareholder’s claim of directorial liability for corporate loss is based upon ignorance of liability-creating activities within
the corporation, then only the board’s sustained or systematic failure can establish the lack of good faith that is required for liability. Applying
the Caremark standard, the Court of Chancery dismissed the shareholders' complaint. The plaintiffs appealed to the Delaware Supreme Court.
Summary


Issue
Can directors be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system, or having
implemented such a system, consciously fail to monitor or oversee its operations?

Holding and Reasoning (Holland, J.)

No.
Directors can be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system,
or having implemented such a system, consciously fail to monitor or oversee its operations.
The standard for such a determination is whether the directors knew that they were not fulfilling their oversight duties and thus breached their
duty of loyalty to the corporation by failing to act in good faith. This is a forward-looking standard and hindsight may not be used to determine
whether directors exercised their corporate oversight responsibilities in good faith.

In the present case, the KPMG report shows that the AmSouth directors had substantial BSA/AML policies in place, including a BSA
officer, a BSA/AML compliance department, a corporate security department, and a suspicious banking activity oversight committee,
thus the implementation of this system discharges the directors’ oversight responsibilities because it is an adequate reporting system and it
delegated monitoring responsibilities to AmSouth employees and departments.
Simply because an AmSouth employee failed to follow the BSA/AML policies and procedures in place does not mean that the directors
did not put the policies and procedures in place in good faith. As a result of the foregoing, the Delaware Court of Chancery’s dismissal of
the plaintiffs’ complaint is affirmed.

(UPDATED ABOVE: NO / WRITTEN: NO) -------------------------------------------------------------------------