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Agents and Employees; An Introduction to the Organization of Business:

Rest Agency: s1 agency is a consensual fiduciary relationship b/t 1
person (agent) who agrees to act on behalf of or under auth of & under
the dir & control of another. (principal)

Agency has highly institututional effects most things in a free mkt
system. We make agent’s actions are binding on the principal. We give
the principal the beneit of the rts or prop acquired by its agent.

W/agency we allow principal to broaden the scope of its activities.
Tort law uses agency to eliminate privity as a barrier to recovery. (by

Vicarious liability: liability w/o fault based upon relationship. Can
be the result of the creation of an agency. Principal can be liable for
torts of her agent.

Apparent auth; inherent agency, etc.
Agent: person who acts, generally.
Principal: one for whom action is taken.
Indep. Contractor: (non-agent or agent)
Agent: Master-Servant relationship


Servant: an agent employed by a master to perform service in his affairs
& who’s physical conduct is controlled/subject to rt of control by the
***An express K or agreement isn’t req’d to create an agency. Agency is
simiply a consensual relationship. The agent agrees to subject to
principal’s rt to control.
Tort: whether servant was acting w/in the scope of her employment.
-If servant is, then master will be called to answer by virtue of his
relationship to servant w/o fault.

Partnership: Uniform Partnership Act; an association of 2 or more
persons to carry on as co-owners a business for profit.
Partner is a general partner. (v. limited partners)
*** w/a general partnership, they are exposed in general to unlimited
personal liability.

Limited partnership: ususally liability will not exceed amt of one’s
contribution. You generally don’t have a voice in the operation of the
-When does a limited partner cross the line of separation? (w/bus
ie. Corp is gen partner, indivs control operation w/limited
partnerships. Can do that usually.

Indep Contractor:
Non-agent: person who contracts to do something for another & is not
controlled by that other person re: his phys conduct in performance of
the work.

Fowler v. Penn. Tire Co.:
Penn delivered tires to Martin (bankrupt). K appeared to be a
consignment agreement, but actions of the parties appear to be a sales
Consignment: after goods are delivered to dealer, no obligation arises
on part of dealer to pay for them.
Trustee in bankruptcy claims they were sold to Martin, so are part of
Bankrupt’s assets & can be used to pay off the creditor’s.
Look to the actual language of the K, & then also look to the
actions/conduct to determine the intent of the parties.
No segregation of tires, no signs to identify being sold on assignment.
Pro: Referee for Martin/Fowler. Dist Ct for Penn. Ct. App aff’d for

Options for selling tires:
1. Sell to Co. owned stores, Mgrs employed by co.
2. Sell to indep. outlets
3. Sale on consignment
If you operate a business, there are a number of ways to operate, each
having diff levels of liability.
Who Bears the Risk????

Adv/Disadv of options:
1. Employee: Co can set prices, Indivs aren’t resp for advertising,
Liaility is on employer, Profit goes to employer, etc.
Greater control w/co operated stores. Don’t have to rely on indep
operator to sell tires.
Greater risk of loss b/c co borrows money to buy & stock the stores.
Also must invest in training.
Fixed costs, irregardless of how much is sold (salary). Lack of
incentive for emp to maximize profits. (if salary only)
Issues: salary, bonus, type of work to be performed, hrs, duration of
agreement, & terms of employment.

2. If Martin is an indep-Kor Non-agent:
Penn isn’t req’d to train, purchase stations, etc. No liab of Penn to
Penn incurrs less risk, less costs, etc.
Penn needs a sales force to push to indep dealers, more mkting costs.
May be problems w/quality control. May be lower profits.
Issues are credit ratings of owners of the stores, advertising, quality
standards, requirements for selling goods, image of Co.
If sale on consignment, consignee was legally req’d to return unsold
tires. Diff b/t consignment & sale w/rt of return (old law)
***If sale of consignement, then Martin is an agent, acting on behalf of
Penn. Under a pure classic consignment, Consignor doesn’t have
exclusive control over consignee. You can vary it by K. Consignor can
threaten to terminate the relationship.
Who has legal title to the tires?

Depends on:
1. Intent of the parties. Conduct may be conflicting w/intent of the
Penn believed it owned tires is inconsistent w/finding #9.
Dissent: inconsistent w/consignment.
Exercise of Control re: employees & indep. contractors.

Respondeat Superior: Master is responsible for actions of employee.
Servants & indep contractors
Agent v. Non-agent Indep contractors.
Master-Servant: Servant agrees to work for Master & is subject to
control of Master.

Employee Versus Independent Contractor and The Exercise of Control:
Humble Oil Refining Co. v. Martin:
A servant isn’t an indep-contractor. (agents & non-agents) Possible
w/agent indep contractors.
Generally, an indep-Kor agent is when one agrees to act on behalf of a
principal & the principal will not likely have control over the physical
act, but will have control over the result.
Facts: Love dropped off her car at Humble station operated by
Schneider. The car rolled away, striking & injuring the Martin’s. The
car had been left in control of the station for repairs. Rolled by
virtue of gravity b/c hand E-Brake wasn’t set.
Focus is on actual authority.

Humble says not liable b/c:
1. Schneider was an indep Kor Non-Agent
Schneider & Humble had an agreement whereby Humble paid a substantial
portion of the utilities & controlled the store hrs.
Humble has the rt to control the sale of gasoline.
Schneider is an indep-nonagent w/re: service.
Held: Schneider is a servant of Humble & Humble is liable for
Schneider. Master is a principal who hires an agent to perform services
& conduct affairs & controls/rt to control final product.
An indep-Agent you have some rt of control.

1. Indep Kor: does not act on hehalf of other party. The other party
does not have rt to control hysical conduct.
2. Indep Kor-Agent: acts on behalf of, but not subject to control of
how it’s accomplished.
3. Indep Kor-Servant:

Agency: if you are an agent, you generally act on behalf of another &
the other has a rt to control how you act….Makes Indep Kor-agent
definition above make no sense.
Humble Oil: an indep Kor or a servant.
Can have a statement saying they’re an indep Kor, but ct may determine
that that person is a servant.
Must determine whether there are indicia of control. Also must
determine whether acting for, but not subject to control of.

Definition of agent & non-agent type independent contractor.

Smilyk apparently dropped his cigarette which started the fire which is
the core of this action. Sun Oil, Barone (operator), & Smilyk were the
Sun Oil moves for summ J, claiming Barone is an indep Kor & not an
agent, so no vicarious liability. P’s contend that Barone was acting as
Sun’s agent. P’s should contend that Barone is a servant b/c would
expose Sun Oil to maximum liability.
Pro: Ct determines that Sun is not a Master & Barone isn’t a servant.
Held: Sun had no rt to control Barone, Landlord-Tenant relationship
only. No control & no implied liability.
Sun had no day-to-day control over Barone’s operation of the station.
Barone bears the risk & gets the profit.

Franchisor: controls the distribution of his goods and/or services
through a K which regulates the activities of the franchisee, in order
to achieve standardization.

Franchisee: enjoys the rt to profit & runs the risk of loss.
P slipped & fell on water drainage from an air conditioner on the
premisies & was injured. The hotel was owned by Betsy-Len, a licensee
of Holiday Inn.
P claims that there is actual agency b/c there exists a Master -Servant

Actual Agency: a consensual relationship, agency is the fiduciary
relation from the manifestation of consent by one person to another,
whereby the other shall act on his behalf & subject to his control, &
consent by the other so to act. Rest 2d Agency s.1

The fact than an agreement is a franchise K doesn’t insulate the King
parties from an agency relationship.. If a franchise K so regulates the
activities of the franchisee as to vest the franchisor w/control w/in
the definition of agency, the agency relationship arises even though the
parties expressly deny it.

Consent, Control, & acting under are necc to establish an agency

Control and The Liability of Creditors:
P’s were 86 farmers who sold grain to Warren, an agent of Cargill, who
became bankrupt & never paid the P’s.
Warren owed Cargill $3.6 million & the P’s $2 million.

Issue: Whether Cargill was liable as principal on K’s made by Warren
w/P’s. Whether Warren was acting as an agent of Cargill.
Cargill is liable b/c of its control over Warren.

-Rest Agency s1: A creditor who assumes control of his debtor’s
business may become liable as a principal for the acts of the debtor in
connection w/the business.

The point at which the creditor becomes a pricipal is that at which he
assumes de facto control over the conduct of his debtor, whatever the
terms of the formal K w/his debtor may be.

Buyer/Supplier relationship OR Principal/Agent???

Agent: one who contracts to acquire property froma 3rd person & convey
it to another is the agent of the other only if it is agreed that he is
to act primarily for the benefit of the other & not for himself.

Supplier: is to receive a fixed price for the property irrespective of
the price paid by him. He acts in his own name & receives the title to
property which he thereafter is to transfer. He has an independent
business in buying & selling similar property.

Where a creditor exercises veto power over imp. decisions, coerces
debtor to put in cntrol a person designated by creditor, & where
creditor provides assurance to other creditors of assurance, then that
Creditor is at increased risk of being classified as a principal &
exposed to liabilities.

Actual/Express Agency
Actual/Implied Authority
Apparent Authority
Inherent Agency Power.

In general, if an indiv is acting under ambit of actual-express
authority, then a 3rd pty can enforce the K b/t principal & agent even
when the 3rd pty doesn’t know that the agent was acting on behalf of the
principal. [principal is liable]

Actual Express Auth: agent isn’t acting contrary to her mandate.

Actual Implied Auth: arises from custom, usage, & conduct. Assume orig
actual/express auth, Can the principal think of everything necc to
accomplish the task? Have agency w/actual-express. Agent may need to
take steps to carry out requests of the principal. Agent undertakes
incidental tasks to accomplish her mandate.

Apparent Auth: ask whether there has been comm b/t principal & 3rd pty.
Comm need not be explicit. Based on holding someone out as the agent,
as having authority, which agent may not necc possess. Must ask whether
agent is held out to the public by the principal.

Ratification: when principal decides to adopt a K, negotiated by an
unauthorized person purporting to act as an auth person/agent.

Inherent Agent: principal should pay for torts of their agents.
Respondeat Superior. Hold the principal responsible for some of the
acts of their agents, which weren’t auth, but nevertheless close
to/incidental to acts which were authorized. In general, as a predicate
to inherent agency, it is req’d that there must be an existing agency.
3rd pty has a reas belief that the agent has the auth which he
exercises. Generally don’t have any holding out by the principal,
principal is either undisclosed/partly disclosed. Principal is
responsible for unauthorized acts incidental to the agent’s actual

The Scope of Authority; Apparent Authority:

P worked for Park, who later merged into Schenley (D).
P originally worked for Herrfeldt, who later told him that he’d been
promoted & was to now report to Kaufman.
Lind contends Kaufman told him he’d get his regular salary plus a 1%
commission on the sales of the people under him.
Pro: Jury found for Lind, then the judge issued a jnov. App Ct rev’d &
remanded back to trial ct to reinstate the J for Lind
Apparent Auth: principal acts in such a manner as to convey the
impression to a 3rd pty that an agent has certain powers thich he
may/may not actually possess.
1% would quadruple the salary of Lind’s supervisor, Kaufman. May be
unreas for Lind to believe that he was offered that salary.

Three-Seventy Leasing Corporation v. Ampex Corp:
Joyce owned 370 Leasing Corp, Kays was his salesman.
Cost of memory units was 100,000 each & w/a down payment of 150,000.
Nov 17,1972 Kays sent Joyce a confirmatory memo for the delivery dates
for the memory units.
An agent has apparent authority sufficient to bind the principal when
the principal acts in such a manner as would lead a res. prudent person
to suppose that hte agent had the auth he purported to exercise.
Muller agreed that all communications were to be channeled thru Kays to
Neither Mueller nor Kays has the auth to bind Joyce in this case.
Ampex should indicate that all negotiations are subject to the approval
of the K manager.
Joyce should have inquired as to who had the auth to make a binding K.
A resolution from the board of directors of the firm, issued by the Firm
Secretary should be issued/requested by Joyce to assure who has the auth
to form a binding K.

Indicators of Apparent Authority:
-a holding out to the public that the person is an agent
-Kays was held out that he had authority, indicia of app. authority
Quest: Whether person was held out as having apparent authority.

Billops v. Magness Construction Co.:
P’s entered K to rent a ballroom at the franchisee’s hotel.
Day of the banquet, director of the ballroom requested additional money
(extortion) & P’s refused. Director continued to ruin the entire
This ct finds evidence of actual & apparent authority.

Actual Authority: principal expressly/implicitly grants to an agent when
the “or” controls “ee”/rt to control the “ee”‘s business.
Franchisor here had a lot of control & the franchisee had little
discretion w/the operation of the hotel.

Apparent Authority: a holding out & reasonable reliance that originated
by the principal.

Co. sells out/advertises for a group of hotels. Hotels are indep. owned
& operated. The Franchcisor/Franchisee/all to become insolvent. How do
the Hotels protect themselves?
How do the other hotels protect themselves from injuries occurring at
other indep operated hotels w/the same name?
-Disclaimers will not work in the K b/c the law won’t allow it.
-Signs indicating Owned & Operated by & Indep ownership & operation of
each hotel.
-Must reduce indicia of control.

***You can’t prevent all liability on a guarenteed basis.

Inherent Agency Power:
Watteau v. Fenwick: [Inherent Agency]:
Humble was D’s Mgr, license was always taken out in Humble’s name. D’s
were Watteau.
P was Fenwick who supplied the cigars.
Humble only had auth to buy bottled waters & mineral water.
Goods were req’d to be supplied by D’s
We have an undisclosed principal

Holding one out as an agent requires:
Difficult to hold out if one doesn’t know who the principal is.
-If the agent is empowered to carry on business w/the public, & the
agent does so, then that may constitute a holding out after the
principal is disclosed.

Must Prove (w/o holding out):
1. Agency in fact existed
***Where anyone has been held out as an agent by the principal, then
there is a K w/principal by Estoppel. The principal is resp for agent,
even if undisclosed, b/c they hired the indiv & b/c the agent is acting
for & at the benefit of the Principal.
***Reqt’s of Agency [for exam purposes]
1. consensual relationship
2. agent is under control of the principal
3. agent acts on behalf of the principal

Rest 2d Agency s.
***Inherent Agency:
1. Must be an existing general agency
2. An act w/in the scope of auth/within scope of typical agent
3. An unauthorized act of the agent
(No holding out by the principal is req’d)
4. Reas belief by 3rd person must exist that the agent has the
auth.which she exercises
even if 3rd pty is unaware of the existence of the agency itself (or

Kidd v. Thomas A. Edison, Inc.:
Fuller was hired by TAE,Inc. to K singers for “tone tests” recitals.
-singers were going around the U.S. promoting records
Fuller was to learn what the artists wanted re: fees expected
Fuller was to tell the artists that TAE, Inc would pay for the fees, or
insure the payment.
Fuller was to make the K’s & then bring them to Maxwell for approval.
Maxwell was Fuller’s supervisor & Maxwell had to ultimately report to
P,Kidd, alleges that the K was an unconditional engagement for a singing
tour. She is most likely alleging a breach of K.
This case should have been argued under inherent agency. (some
disclosure of the principal, so it can’t be apparent agency/shouldn’t

Rest 2nd Agency s3
HYPO: Principal says not to hire Tom to operate the camera. Principal
then pays off the Agent & Agent leaves Tom. Can Tom sue Principal &
prevail? & if so, under what theory?
Tom may win against the Principal under the theory of inherent agency
b/c the agent in this case would usually hire him to operate the camera,
so Tom could reas. believe that the agent had the power to do so.
Agent was never held out as having a power that she didn’t possess.
Fiduciary Obligation: Agent’s duty to the Principal
1. To act w/reas care & skill for the purposes of the agency
2. To disclose all relevant info to the principal
3. Keep & render accts
4. To act only as authorized
5. To act in good faith & loyalty

Fiduciary Obligation:
General Automotive Manufacturing Co. v. Singer:

Singer, D, is a machinist consultant & Mfr’s rep. D was also a general
manager & was to receive a fixed monthly salary together w/a sum equal
to 3% of the gross sales of the P.
-P was to devote entire time, skill, labor, & attentionto employment &
was to work for 51/2 days.
Singer made a profit for himself while employed by GAM.
-failed to disclose info to employer.

Ct deprives D & others in his position from engaging in other
bus/incentive to not report to your employer such information.
Possible breach of employment K.
-less to recover b/c based on hrs lost & not actual damages.

Bancroft-Whitney Company v. Glen:
Glen was President & director of the co. He had fiduciary obligations
to the co & possibly the shareholders.
Lawyer’s Co-op owned the P/Company & Gosnell was the President.
Bender was the head of Bender Co & Glen accepted an offer of employment
by Bender, & brought many associates w/him to the company.
Glen failed to disclose information to P co. when he had a fiduciary
duty to do so, never informed them of the raid, used info to attract
employees when making the offers, assisted in solicitation of employees
of P to Bender.
Issue: Whether Glen violated his fiduciary duty b/c of the above-
mentioned conduct & therefore those who hire, guilty of unfair

Could give rise to tortious interference w/contract
Corporate officers & directors aren’t permitted to use their position of
trust & confidence to further their private interests. They stand in a
fiduciary relation to the corporation & its stockholders Rule demands
of a corp officer/director, peremptorily & inexorably, the most
scrupulous ovservance of his duty, to protect the interests of the
corporation committed to his charge, to refrain from doing anything that
would work injury to the corp, or to deprive it of profit/adv which his
skill & ability might properly bring to it, or to enable it to make in
the reas & lawful exercise of its powers.
An officer must exercise his powers in good faith w/a view to the
interest of the corp.
Duty of loyalty & care, to corporation & shareholders.

Town & Country House & Home Service, Inc. v. Newberry:
Cleaning business, employees left & took a lot of their ex-exployer’s
Issue: Whether the employee’s owed a duty of loyalty?
Even where a solicitor of business doesn’t fraudulently operate under
former emplyer, he acan’t solicit employer’s curtomers who aren’t openly
engaged in business in advertised locations or whose available as
patrons can’t be easily ascertained & whose business waas secured from
yrs of bus. effort, advertising, time& money, etc.
If you’re making a general solicitation, then you’re not using
confidential information
Ct: former employees lose & the Employer wins (Town & Country)

Agency is a consensual relation, no express agreement to form. Somewhat
of a fiduciary relationship b/t the agent & principal. Agent works for
& under the control of the principal.
Indep Contractor Agents & Non-Agents OR Indep Contractor v. Servant.
Indep Contractor doesn’t work on behalf of or under the control of

Indep contractor Non-Agent: works at arms length for another

Indep Contractor Agent: not under control of the other, but does act on
behalf of another.

Indep Contractor Agreement: ct characterized the indep contractor as a
servant. Whether principal had the rt to control. If servant, acts on
behalf of the principal.

Partnership: an association of 2 or more persons to carry on as co-wners
a business for profit.

Advantages & Disadv of Partnerships & Coporations:

1. Current tax system: tax partnership income only once (v. corp
income-taxed twice)
-Corps: Calc profit & loss & tax net profit
-Corps: Indivs pay indiv tax on same profit (shareholder)…Double

2. Gains & Losses go to the Partners & claim the gain/loss indiv. tax

3. Sub. ‘S’ corporations: smaller corps, under such status won’t pay
taxes, but instead shareholders claim corp income on indiv tax returns,
very much like partnerships.

Life v. Unlimited Life:
1. A corporation has unlimited life, can remain for an indefinite time
2. A partnership has a limited life b/c if one partner leaves/dies, then
the partnership is dissolved.

Corporations can limit their liability.
-Limited to amt of investment.
Partnerships, exposed to unlimited, personal, liability.

Partnerships; Partners Compared w/Employees:
Fenwick v. Unemployment Compensation Commission:
Beauty supply shop. Ct is trying to determine whether Fenwick should
have to pay unemployment comp under NJSA § 4:21-1. [If she's a partner,
then he doesn't have to pay.]
Although a partnership K was agreed upon, she was lacking many of the 5
elements req’d for a partnership to exist.
He who alleges a partnership has the burden of proving the partnership.

Frank v. R.A. Pickens & Son Company:
Parties involved: -RA Pickens & Son (owners of the land)

-RA Pickens & Son Company (lease from above)
In general, the private agreement of the ptys occupies the highest
degree of priority.
Frank is looking for his accounting & liquidation of a partnership share
in the co.
Frank was a partner in the RA Pickens & Son.
After termination w/co., a ck for $35,805.97, which Frank refused.
Initial purchase of his partnership was based upon the book value:

***-Book Value: an amt on the books of a firm, reflecting the or cost
of assets, less depreciation . (an allowance for decline on value of an
asset by virtue of the passage of time & wear & tear), plus profits that
haven’t been distributed to the partners. Can be misleading. FOR EXAM
-Mkt value & book value can e substantially different.
In mkt-oriented society, good pub policy reas to allow indiv K to
override UPA Code.
Legislature won’t necc include/foresee all problems. Need to
allow/utilize flexibility when applying the code.
Frank was more likely an employee w/a profit share.
-if he is a partner, then he is an agent.
Ct determined that the UPA wasn’t applicable, but that he was a partner,
but the rules for termination of his partnership interest were pursuant
to that agreement by the ptys.
If Mr. Frank is an employee of the Co & the President of Son, then he
would have a conflict of interest b/t fiduciary duties to Co & fiduciary
duties of Son.

Partners Compared w/Lenders:
Martin v. Payton:
KNK is a firm/partnership. They were in fin. trouble & Hall, the had of
it, had friends who would invest w/a loan.
The other three (who gave them a loan for 2.5Mil)
The return of the loan was 40% of profits w/a min & max amt to be
Hall operated KNK partnership, and also achieved resignation of all the
KNK partners.
KNK lost a lot of money by dealing w/a foreign exchange speculative
-dealing w/exchange rates, speculate & give advice to others, &
offered Xamt US v. Xamt in another currency. They speculated poorly on
values of the currencies.
KNK theorizes that the creditors became partners in the firm, doing
banking & brokerage. P was a creditor of firm, claimed D’s made
investments, were partners, & were liable for the firms debts as such.

How do we distinguish b/t this & the Cargill case?
-In Cargill, Cargill was an agent of Warren, but not necc a partner.
Principal was exposed to liability.
-In Martin, funds were given, but Payton, etc, were not partners, only
creditors to the company.
-Argue that Payden didn’t control Hall & weren’t at same level/weren’t
w/same level of mechanisms for controlling operations, etc as in

The Fiduciary Obligations of Partners:
Mainhard v. Salmon:
Lessor, Gerry & lessee, Salmon, entered a K to lease a Hotel which was
to be used as shops & offices.
Meinhard fronted money & in return was to receive 40% of the net profits
for the 1st 5yrs & 50% of the net profits for the remaining 15yrs.
Claim is Salmon breached fiduciary duties to Meinhard by entering a new
K for the same prop w/o consulting Meinhard.

Issue: Whether this is a joint venture & Whether this is a partnership
& Whether the fiduciary obligations are the same or diff from regular
-This is a joint venture/Co-adventure
Joint Venture: has a limited duration & a limited scope
Partnership: doesn’t generally have a limited scope & the duration is
generally only limited by the lives of the ptys.

***Dissent by Andrews. W/in scope of joint enterprise, a fiduciary
obligation to all that relates to that venture. Fiduciary obligations
don’t extend to the new entity.

***Correct rules re: partnerships made by Cardozo.
p.100 Duty of Loyalty by joint adventurers & partnerships.
-W/Partnerships: duty to disclose new opportunities & businesses.

Ct: P gets 50% less 1 share in the equity
Meehan v. Shaughnessy:
Meehan & Boyle were partners in D’s law firm, Parker, Coulter, Daley, &
P’s contacted clients & sent letters, requesting to take their bus.
w/them & sent authorization forms.
P’s also approached Cohen re: establishing the new firm.
P’s also recruited Black & Fitzgeral in joining the new firm.
P’s breached their fiduciary duties to the D’s as partners.
***Not the last word on the issue of contacting clients b/f leaving.
***Obligations of partners can be varied by K (fiduciary obligations)

Would need disclosure b/c of potential breach of loyalty & duty to
If Norma sued Mark, then the remedy would be disgorgement.

Bassan v. Investment Exchange Corp.:
Investment was Gen Partner in Auburn West
Auburn West was a Real Estate Investment Trust
Action was brought for an accounting & dissolution of the partnership

Issue: Whether partners consented to profits derived by Investment (Gen

No Agreement re: profits to be rec’d by IEC in selling prop to the
Ct: no consent by the limited partners & IEC should be liable for
profits realized from the sale of the prop.

The Rights of Partners In Management:
National Biscuit Company v. Stroud:
Stroud told NBC that he wouldn’t be personally liable for the sale of
bread to the partnership.
If 2 partners, need unanimous agreement b/t partners to be binding
Bread was delivered for $171.04, ordered by Freedman, after Stroud
declared he wouldn’t be liable.
Partners are jointly & severally liable for the acts & obligations of
the partnership.

NBC prevails in this case.

-Unpleasantness is generally insufficient for dissolution of a
-Gen.View: A & B run real risk that terminating Don v. C’s orders may
violate the Partnership agreement.
-What if A & B make an anti-nepotism rule & C hires D against the rule.
If grandfather clause, then not necc. a problem.

Day v. Sidley & Austin:
Law firm merges w/another firm.
P occupied chair on committee, and later was assigned a co-chair & his
offices were moved.
P seeks damages for loss of income, damage to professional reputation, &
personal embarrassment resulting from his forced resignation.
D’s Summ J was granted b/c failure to state a claim upon which relief
could be granted.
The Executive Committee led the negotiations for the merger.

P had no rt to approve/disapprove & stop movement to new offices, so his
veto of the move is irrelevant.
No diminution of status b/c no rt to remain chair. (b/f or after merger)

Merger: fundamental change in a partnership & generally requires some
form of agreement.
-Agreement among the ptys.

Partners at Loggerheads: The Dissolution Solution:
Owen v. Cohen:
Owen & Cohen are the partners. Bowling Alley was orig operated at a
profit, later declining. Purpose of entity was to make a profit.
Owen was to paid back initial outlay of $$ out of the partnership
profits in addition to his salary.
Upon dissolution the partnership owed the loan to Owen.

§2: Dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying
on a distinguished from the winding up a the business.
§3: On dissolution the partnership is not terminated, but continues
until the winding up of partnership affairs is completed.

Owens claims they can’t carry on b/c of disagreements
Ct: dissolved partnership b/c serious disagreements that prevented the
partnership from carrying out.

UPA §32, judicial dissolution is a more equitable remedy/situation.
§4: After dissolution, rules for distribution, can derogate from rules
by agreement. (b)
Capital: generally orig capital investments in the company.

Collins v. Lewis: (I got called on for this case)
Cafeteria partnership. Collins was the investor & Lewis was to
construct, manage & operate.
Dispute over extra $$ beyond estimations.
Ct. held Lewis held up to his part of the bargain & Collins was in
Ct. refused to grant a decree of dissolution.

Monin v. Monin:
2 Brothers entered into a milk delivering partnership. Business began
to deteriorate & they dissolved the partnership.
Sonny applied for a DI K b/f actual dissolution & asked to be granted
the license from them to deliver milk from the time of dissolution.
Private auction resulted w/Charles getting the equip, etc.
Damages were awarded $64,000 [86,000-22,000(equip)=64 milk license]
Sonny breached/violated his fiduciary duties. Possible breach of K b/c
of the covenant not to compete.

Pav-Saver Corp. v. Vasso Corp:
PSC (Dale) & new Partnership w/Meersman is (Pav-Saver Co.), later to be
known as Vasso.
Dale turned over the trademark & patents to the new partnership. He also
allowed Meersman to draft the agreement, later approved by an attny of
PSC (& Pres).
Should have charged a license fee so that it is obvious that the patent
was still controlled by Dale.

§38 UPAsupp.
Dale wrongfully dissolved the partnership & violated the agreement.
Difficult/impossible to continue to run the business w/o the patents &
Ct held for Vasso, he keeps the patents, trademark, & the liquidated
damages as specified in the partnership agreement.
-Dale gets a portion of the value of the partnership.
Liquidated damages aren’t a penalty in this case in the view of the

Good Will: intangible assets, can’t be measured objectively/technically.

Limited Partnerships: generally run by a general partner. Limited
partners don’t control the operation of the partnerships, & if they do
so, then they expose themselves to liability. Rely on the expertise of
a general partner. Very common in the real estate commodity. One of
the dangers is the risk of being made a general partner. (from
exercising control in the business)

Limited Liability Companies (): provide for limited liability & various
other corporate characteristics, however they retain sufficient
partnership characteristics so that they are classified as partnerships
for tax purposes.
-useful for firms that can’t qualify as “S” corporations. “S”
Corporations have pass-thru taxation. Income earned by the corp accrues
to the indivs who own the S corp. Generally a “C” corporation, the
income of the firm is taxed as a corp & then the dividends rec’d by
shareholders is taxable.
-Limited liability, but partnership taxation methods.
***Authors of casebook that such limited liability companies will become
dominate form of business in the US.

Limited Partnerships:
Holzman v. De Escamilla:
Limited partnership which ran the farms. Gen. partner De Escamilla.
Russell & Andrews were limited partners.
Went bankrupt. Trustee brought action to determine whether Russell &
Andrews lost their limited partner status & have become the equivalent
of general partners.
Evidence revealed that R&A had some control over crops to be planted,
had control over check writing authority, & they required the Gen.
Partner to resign & replaced him w/a new manager.
-they managed the business.
Ct. found that all 3 were liable as general partners.

***Limited partners not to be liable as a general partner, unless, in
addition to exercise of rts & powers as limited partners, he takes part
in control of business.

The Nature of the Corporation; Promoters and the Corporate Entity:
1. If he lies, could be misrepresentation.
-Barrett still liable even after, under the doctrine of Corp. by

Southern wins b/c they are a Corporation by Estoppel:
-could be argued that it is a de facto corporation.

1. Can a corp be a pty to action?
-Corps can unilaterally agree to be held liable.
2. Can the initial agent/promoter avoid liability, absent an agreement
to the contrary, an agent for a not yet formed corp, an agent is liable
on the K. For the agent to escape liability, after the formation of
corp, the agent must obtain agreement of the other corp.
3. Who is liable if corp not ever formed?
-Absent an agreement to contrary, the agent is.
4. Are putative shareholders personally liable?
-They aren’t, if the corp isn’t a de jure corp.
5. A de facto corp is a firm not properly incorporated. It arises when
the organizers:
a. try to incorporate in good faith.
b. they have the legal rt to do so.
c. they acted as if the corp had been formed under these conditions,
cts may treat firm as de facto corp & impose limited liability.
6. A ct. will also treat a firm that wasn’t properly incorporated as if
it were a corp, if the persons dealing w/firm:
a. thought the entity was a corp all along, and
b. they would earn a windfall, if not allowed to argue the firm is not
a corp.

The Corporate Entity and Limited Liability:
Walkovszky v. Carlton:

Escaping personal liability by incorporating.

Piercing Corp. Veil:
1. Alter Ego
2. Unity of Interest
3. Fraud.
Enterprise Liability:
-Reverse Piercing: related, but distinguishable

Dismissal is supported
Inadequate insurance is NOT enough to pierce.
Held: Complaint falls short of adequately stating a c/a against the D in
his indiv. capacity.

They allow an amended complaint, so there could be some type of c/a.
We don’t allow agency to be used as a theory b/c we would eviscerate
limited corp. liab. if we allowed personal liab. every time.
When do avoid personal liab. in a corp context?
-observe corp rules
You can incorporate in any of the 51 juris
-better rules
-large # opinions in Delaware cts.
Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc.:

The ct assumes that there was no “showing that the P was misled by or
relied on D practices.
Either alter-ego or unity of interest is advanced here.
Creditors chose to deal w/this corp:
-they have option to look at credit services.
-Creditors deal intentionally
-cts have less sympathy for creditors who choose to deal w/them.

This case suggests we can Pierce where there’s:
a. injustice
b. inadequate capitalization
c. failure to observe corp formalities.

If a reverse pierce, then Marchees’s other corps would be liable for the
$87,000 J. Only corp assets become avail.
If a pierce, then Marchees would be personally liable.
Enterprise Liability Entity: holds all persons’ entities liable as a
single entity.
Ct Reversed Summ J in favor of D & remanded it back to trial ct for
further proceedings.
“Alter-Ego” corp: reflects unity of interest, no sep ownership;
injustice to allow sep existence.

VanDorn Rule: (Disjunctive part 2 test)
1. Unity of interest
2. Fraud or Promotion of injustice

To disregard Sep. Interests:
1. failure to maintain adequate corp records
2. commingling of funds/assets
3. undercapitalization
4. one corp treating the assets of another as its own.

Ct. says it passes the first part of the VanDorn Rule/Test, but must
prove separate identities would promote injustice.
Intentional Fraud would likely be req’d; too difficult to be proven on a
Summ J motion b/c the contention is that there is no issues of fact.
-must deal w/issue of scienter. (knowledge; intentional misstatement
of material fact; or material misstatement make recklessly.)
“Promote Injustice”: an affirmative showing of fraud, but how much less?
Permitting the appellants to hide behind the shield of limited liability
would clearly serve as an injustice against appellee b/c it would
impermissibly deny appellee satisfaction.
-Some element of unfairness, something akin to fraud/deception or the
existence of a compelling public interest must be present in order to
disregard the corporate fiction.
[Applies the law of Ill, law varies from state to state. Cal, for
example, seems less clear.]

Kinney Shoe Corp v. Polan:
Polan had not made any investments in either Polan Ind/Industrial.
Polan possessed a lg amt of financial sophistication. His corporations
did not.
-B/C of sophistication was trying to shield & preclude financial
liability thru the corps.
Piercing is an equitable remedy b/c it seeks to get at personal assets
though the person didn’t necc negotiate the transactions that are at
issue for breach.
The P has the burden of proof in seeking to pierce the corp. veil.
-pty seeking the equitable remedy.

2 prong Test:
1. Unity of interest such that the separate personalities of the corp &
the indiv shareholder no longer exist.
2. Would an equitable result occur if the acts are treated as those of
the corp alone.
Potential 3rd Prong:
3. When it would be reas for pty entering K w/the corp to conduct an
investigation of the credit prior to entering the K, such pty will be
charged w/the knowledge that a reas credit investigation would disclose.
If such investigation would disclose the corp is grossly
undercapitalized, the pty will be deemed to have assumed the risk of
gross undercapitalization & will not be permitted to pierce the
corporate veil.
-Not well accepted in most jurisdictions
***Hutch doesn’t like the decision of this ct b/c it didn’t address the
issue of fraud/injustice.
-doesn’t think you should only show 1 prong of the VanDorn Test.
Could have owner of bus. personally guarantee the loan/debt.
Polan could have avoided personal liability by adhering to formalities
of corporations or to place a statement in the lease declaring that he
would not be held personally liable under any circumstances.

Frigidaire sales Corp v. Union Properties, Inc.:
In general, partners are generally liable, but limited partners aren’t.
In general, shareholders aren’t generally liable beyond their pers.
investments, unless there is piercing.

In general, corp officers aren’t personally liable for their actions on
behalf of the corp.
Case in which limited partners, Commercial Investors, and gen partner,
Union, is a corp.
Union Prop is gen partner in Commercial, but is also its own corp.
Limited partners are also officers, directors, & shareholders in the
corp, Union.
2 Limited partners of Commercial are Mannon & Baxter. They’re also the
officers, directors, & shareholders in Union.
-No persons are individually liable.
-Primary motivating factors is for tax purposes. Possible as a
limited partner to turn in $10 & then write of funds borrowed by the
partnership, thereby writing off all the $ you put in plus the amts
borrowed by the partnership.
-Became abusive tax shelters in the 80′s & 90′s.
A breach of K suit by Frigidaire, originally contracted w/Commercial.
Mannon controlled Union Properties, which controls Commercial which is a
partnership. If they manage the limited partnership w/in their indiv.
capacity, then they can become liable as general partners.
Ct held that limited partners don’t incur gen. liab for the limited
partnership’s obligations simply b/c they’re officers, directors, or
shareholders of the corporate gen. partner.
If they are agents acting wrongfully, then their Principal, Union, is
liable as a corp, which thereby shields them from personal liability.

Shareholder Derivative Actions:
A corporation is a legal person. Derivative suit is a suit brought
about by a shareholder on behalf of the corporation. i.e. By a
shareholder to convict the gen manager of fraud, etc.
-Issue is usually direct or derivative c/a
Direct: direct loss to the shareholder. i.e. Board of dir. reconfigures
shareholders rts at detriment of one type & preferred benefit to others.
The 1st type has a direct loss.
Derivative: alleges loss to shareholder by virtue of a loss suffered by
the corp.

Cohen v. Beneficial Industrial Loan Corp.:
P demanded the corp institute proceedings for its recovery, but the
indiv D’s prevented it b/c they held most of the shares.
-Sometimes they turn into “strike suits” in which the shareholder only
sues to harass the corp, like a strike
Cohen was held to post bond for this suit b/c of the state statute which
demanded it.
***Really a civ. pro. & Constitutionality issue, not a Bus. Org. case.

Merger combines 2/more companies into one, generally a consensual
Holding Company: a company which buys & sells other companies for
profits. In many cases, is a non-operational company which holds stock
in operating companies. Usually receives income, in form of dividends,
from operating company, & invests in another unrelated company that
isn’t under the control of the same regulations.
Parent Company: has subsidiaries, entirely/partially controlled by the
parent company.
-Lg firms usually have a lg number of subsidiaries.

Eisenberg v. Flying Tiger Line, Inc.:
P claims that there was a dilution of his voting rts as a result of the
formation & replacement by new organizations/entities to which his
share was transferred.
When derivative action is settled b/f judgment the attny probably wins.
Cts generally must approve settlements.
An indiv. shareholder cannot usually recover in a derivative action.

The Requirement of Demand on the Directors:
Heineman v. Datapoint Corp:
P alleged corp waste & breach of fiduciary duty, which was dismissed by
the lower ct.
-ct refused to allow P to amend his complaint.
The corp & the “Edelman Group” distributed funds, etc, to other corps
owned &/or having sub. connections to & an interest in the fin. well-
being of the Directors/etc.
-8 Directors, including Edelman were targets of the suit.

Is Claim Futile?
1. Whether the directors are disinterested & indep and
2. the challenged transaction was otherwise the product of a valid
exercise of business judgment.

Business Judgment Rule: ct is disabled/unable to effectively evaluate
business decisions, so great deference given to directors elected by
shareholders to run & manage the business/corp.
-suggests directors have power to control/discretion to make decisions
re: suits by shareholders. If in good faith & obliged w/fiduciary duty,
then the Ct. will show deference to their decisions.
Showing Deference: adherence w/duty of loayalty & care. Also
disinterested board.
Issue: does a boards decision to disallow/preclude a derivative suit
controlling upon the court?
-Yes, if it meets the standard for showing deference.
Ct. determined that the P should be allowed to amend his complaint b/c
if the facts as alleged were true, then he may have a prima facie case.

A shareholder derivative suit: is a uniquely equitable remedy in which a
shareholder asserts on behalf of a corp a claim belonging not to the
shareholder, but to the corporation.

Directors aren’t necc disinterested w/re to the 1st 2 claims.

Purpose of a pre-complaint demand: to protect the director’s
prerogative to take over the litigation or to oppose it.

Derivitive suits (v. Direct): on behalf of all of the shareholders.
Class action by all shareholders.
-Bus. J Rule: cts inclined to exercise deference re: Board of Dir.
decision assuming disinterestedness & carefulness.

-Aronson: Stand for pleading futility on demand to Board of Directors.
Whether, under the particular facts alleged, 1) a reasonable doubt is
creatd that the directors are disinterested & independent and 2)the
challenged transaction was otherwise the product of a valid exercise of
business judgment.
-Dinstinction b/t Fed Action & State Action & what state rule is &
does it control Fed. Action.

The Role of Special Committees:
Auerbach v. Bennett:
Questions whether there were funds distributed as kickbacks & bribes by
the Board, so an audit was conducted.
-evidence existed that the payments were made & totalling 11 million.
Purpose of special litigation committee is to determine whether the corp
should go ahead w/litigation(s).
Application of the business judgment rule is controlling in this case.
-particularly to the decision of a specially appointed committee of
disinterested directors acting on behalf of the board to terminate a
shareholders’ derivative action.
Determine activity complained of (examine) & then examine what the
committee determined & see if it was in good faith & done w/care &

Business J. Rule: Board of Directors oversees & is in charge of the
primary competence of the entities & if it comes into
question/controversy/subject of litigation, then cts will defer to the
BJR if it is shown that the directors acted w/ loyalty & care.

For Bus J Rule to apply must show the committee & board were
disinterested & loyal & acted w/care.
-sham investigations aren’t alright w/the cts.
-look at investigatory procedures used by the committee.
-look at substance of decision reached by committee
-look at motives of committee opting for dismissal

Zapata Corp v. Maldonado:
P alleges 10 officers & directors breached their duties.
P did not demand that the corp bring action b/c all of the D’s were
members of the board, so Futility of Demand Rule applies.

Issue: When, if at all, should an authorized board comittee be permitted
to cause litigation properly initiated by a derivative stockholder in
his own right, to be dismissed?

1. Ct shold inquire into the independence & good faith of the committee
& allow limited discovery. Corp bears the burden of proving indep, good
faith, & a reas. investigation.
2. Ct should det, by its own business judgment, whether the motion
should be granted.

1) If demand-req’d case, decision of committee not to sue will be
protected by the business judgment rule.
2) When P doesn’t make demand on the board, then demand is likely
excused b/c no indep exists re: board’s decision.

***If demand on board isn’t excused, then implies that the board isn’t
faced w/a conflict of interest.
***If demand is excused then might implicate lack of independence of the
board & may indicate a conflict of interest.

Where demand is req’d, ct can conclude in effect that there is no
conflict in interest & in such cases the ct should defer to the board’s
Where demand is excused ct says there is a conflict of interest & the
Board isn’t indep. Thus under these circ, one can argue for the
greater judicial review of the committee’s decision.

Alford v. Shaw:
Rule #1 relied on in trial ct.
Correct rule to be deployed is a modified Zapata Rule.
-unmodified is a strict scrutiny by the cts.
Precluded judicial review on merits & looked into the good faith of the
investigation & reports.
-concerned w/symbiosis b/t directors which precludes independence.
Issue: whether deference by the cts would abdicate the judicial duty to
consider the interest of shareholders imposed by the statute.
Demand-Excused case. Must a ct defer to recommendations by the special
litigation committee?
On Remand ct must allow P to present certain things.
Arises in a manner different from other cases.
Ct. app rev’d b/c corp directors may not confer to committee the power
to bind the corporation.
What is the modification of Zapata?
-preclude those accused of wrongdoing from decision of conferring power
to bind corp to committee (special litigation.)

Par-Value: stated value of shares at the time of incorporation.

The Role and Purposes of Corporations:
A.P. Smith MFG. Co. v. Barlow:
Corp. made contributions (charitable) to a local university.
Generally allowed.

Dodge v. Ford Motor Co.:
Gen Rule: cts will show deference to board decisions.
P’s are the Dodge Bro’s.
Issue: Whether a dominant shareholder can w/hold dividends to re-invest
in the co.
Whether the ct can interfere w/his decision?
Dodge wins on the dividend issue. Ford wins on the issue of
construction issue.

Shilensky v. Wrigley:
P, minority shareholder, seeks to force D corp to install lights in the
stadium. Also, P claims the directors for negligence & mismanagement.
Must apply the Business Judgment Rule Doctrine.

Problem 1:
1. She might prevail under Dodge case. Bill may be able to prevail if
he can prove that he had other reasons for making the decision that he

***BJR: grants to directors a great deal of control & power, but only if
there is a lack of neg, duty of care, & actions were taken in good

The Duties of Officers, Directors, and Other Insiders; The Obligations
of Control: Duty of Care:

Kamin v. American Express Company:
A stockholder derivative action against the indiv directors of the Corp.
P seeking a declaration of dividend in kind as a ast of corp assets,
directing D’s not to proceed w/distribution, or in alternative, for
monetary damages.
Dividend: payout (return).
-common shareholders: (voting rts)
-preferred shareholders: stated dividend; will be paid b/f common
shareholders are paid.
-cumulutive shareholders: adds up & is paid b/f any common
shareholders will be paid dividends.
Corp bought company for 30mil & it dropped to 4mil, so a 26mil loss.
-better to sell & recognize as a loss & recognize capital gains. Diff
b/t selling it & buying it.
-capital gains are codified in the IRC. Capital gains are
distinguishable from other types of income.
P’s allege that b/c such a sale resulted in tax to co that the co is now
worse off.
-If this approach is adopted, would sophisiticated investors recognize
the consequences of the investments.
Appropriate ground for relief is determined by looking at Leslie v.
Lorillard & Liebman v. auto Strop. Co…
Ordinary Negligence doesn’t give rise to an action against the
A conflict of interest b/t decision taken & the true interests of the
shareholders, so the Ct.s won’t usually adhere to the BJR.

Joy v. North:
P sued via a derivative action against 23 “outside” directors & seven
other senior officers as “inside” defendents.
The case primarily concerns “outsiders”.
A special litigation committee was appointed, composed of 2 directors
who became members of the board after the events complained of & who
were not defendants. The committee recommended that the suit be
discontinued as to the outside defendants & that the settlements be
sought as to the inside defendants.

Reason to uphold BJR:
1. Shareholders voluntarily undertake the risk of bad business judgment.
2. After the fact litigation is likely an imperfect device to evaluate
corp business decisions. business imperatives often call for a quick
ecision on less than perfect info. Must encounter risks and confron
uncertainty for a reasoned decision made may seema wild hunch view in
3. B/C potential profit corresponds to potential risk, the interest of
shareholds may lie in that the law not create incentives for overly
cautious corp decisions.

If a low risk taker, then perhaps should diversify risks by investing in
some high risk, high yield businesses to ensure a yield & growth in your
-If invest in low-risk low-yield co’s, then you may find yourself not
making advances/growing.

***EXAM: Whatever its merit, however, the BJR extends only as far as
the reasons which justify its existence. It doesn’t apply in cases in
which the corp decision lacks a bus. purp, is tainted by a conflict of
interest, is so egregious as to amt to a no-win decision, or results
from an obvious and prolonged failure to exercise oversight or

Ct. concluded that the probability of a substantial net return to the
corp is high. They rejected the recommendation of the special
litigation committee. The grant of summ J is reversed, the protective
order is vacated, and the case is remanded.
In Kamin, a board decision based on an investigation, but in this board,
the members neglected their duty to investigate. Failure to exercise J
re: loans.

Francis v. United Jersey Bank:
Reinsurance: the process by which an insurance co that has agree to
insure a risk (the ceding co) asigns all or a portion of that risk to
another co (the reinsurer), along w/a share of the premium. The broker
acts as intermediary. It receives funds from ceding companies and is
obligated to pay these funds over to the reinsurers.

Sons in corp borrowed shareholder loans which caused the co to go into
bankruptcy. Mother is held liable b/c she was the director & failed to
uphold her duties.
Directors aren’t generally insurers of the companies for which they are
Directors of financial institutions are generally held to a higher
standard of care.
As a general rule, a director should acquire at least a rudimentary
understanding of the business of the corp & be familiar w/the
When the corp is insolvent, holders of residual interest is the
creditors. Directors hold a fiduciary obligation to the creditors.

Directors general obligation makes it incumbent upon directors to
discharge their duties in good faith & w/that degree of diligence, care,
and skill which ordinarily prudent men would exercise under similar
circumstances in like posotions.

*** General Standards for Directors.
-Owe a fiduciary duty. Compare the $5,000 w/the risk/chance being
taken. Also must consider the shareholders. Use the reas. prudent
person in like position standard.
-By showing that the decision was carefully considered & made
w/awareness of all the potential consequences, this MAY immunize the
directors from liability.

Decentralized: risky decisions made by lower mgt., lot risk, can be very
Centralized: forcing decisions down from hierarchy. Bad decisions
effect a lot.

Graham v. Allis-Chalmers Manufacturing Company:
Anti-Trust laws were to prevent companies from monopolizing particular
Derivative action on behalf of Allis-Chalmers against its directors &
four non-director employees.
Complaint alleges actual knowledge/kowledge of facts which should have
put themon notice of such conduct, on the part of direcotr defendants of
the anti-trust conduct that the indictments were based on.
Deploy BJR w/strict scrutiny in situations such as these.

***Rules are changing. Today corps encounter greater risk of larger
losses, accordingly, some cts look to directors as fiduciaries & require
significant monitoring from directors to ensure corp employees comply
w/boards & w/stat policies.

Duty of Loyalty; Directors & Managers:
Bayer v. Beran [Conflict of Interest]:
Product Differentiation: tyring to deceive the consumer into believing
your product possesses superior qualities.
Public corp employs spouse of director, paid for by the
***Ask, “how did the directors fulfill their duties/perform their

Structural Bias: possible control by one director over the other
directors, so decisions aren’t truly independent & infects the entire

***W/A normal case, the burden of proof is on those who challenge the
transactions, but here there is a conflict of int, so the burden shifts
to the D directors to prove that the transactions were fair.

Lewis v. S.L. & E., Inc.,: [Conflict of Interest]:
LGT, a tire dealer and SLE owns land which it leases to LGT.
Leon transferred SLE shares to 6 kids (15 shares each), 90 shares in
Those who had no LGT stocks were to sell SLE shares to LGT at book

Book Value: an amt on the books of the fir, orig cost of assets, less
depreciation (an allowance for decline in value of an asset by virtue of
the passage of time & wear and tear), plus profits that have not been
distributed to the partners.

Derivative suit claiming that D directors had wasted the assets of SLE
by “grossly undercharging” LGT for the latter’s occupancy and use of the

***Members of the Board are given extremely wide & vast latitude in
reaching decisions. BJR would likely preclude consid by a ct of most
decisions by a board of directors.
***CL w/re trans in which Directors had an interest was voidable unless
the proponents of the trans could show that it was fair & reasonable.
***Not all of the Directors of SLE had a conflict of interest.
Structural bias is the reason for not upholding the BJR.
***Ratification is one way of insuring retention of the BJR.
-Ratification: full disclosure coupled w/approval of a majority of
disinterested directors (1st instance) and disinterested shareholders
(2nd instance).

Corporate Opportunities (Doctrine)
Energy Resources Corp., Inc. v. Porter:
Porter should have disclosed his intention of forming a corp & the
reasons that ERCO didn’t get the proposal.
Porter employs the Refusal to Deal Defense.
W/O full discloseure it is too difficult to verify the unwillingness to
deal and too easy for the executive to induce the unwillingness.
-b/f a person invokes refusal to deal as a reason for diverting a corp
opportunity he must unambifuously disclose that refusal to the corp to
which he owes a duty, together w/a fair statement of the reasons for
that refusal.
Lack of Financial Capacity Defense: director pursues opportunity b/c
corp is allegedly uncapable of pursuing it themselves regarding their
financial position.
-creates incentive to sabatoge efforts of corp to pursue endeavor.

Fliegler v. Lawrence [Very Important Case; Case is THE rule]

1. Full Disclosure of Material Facts to board or committee & board or
committee in good faith authorizes the K/Trans. NEED MAJORITY APPROVAL
2. Full Disclosure of Material Facts to shareholders entitled to vote.
Approved by shareholders in good faith by vote. DON’T NEED A MAJORITY
D’s must prove that the transaction was fair.

If a shareholder vote, must be disinterested shareholder majority vote.
If not a disinterested shareholder majority, must look to sec.3. [This
-re: ratification

Dominant Shareholders:
Sinclair Oil Corp. v. Levien:
Shareholder & Directors approaches tend to be different.
-Shareholder wants to maximize return on investment.
-Director needs to manage firm to benefit all the shareholders.
Sinclair owns 95% of Siven Corp.

3 Transactions in issues:
1. Dividends
2. K b/t Sinclair & International (Corp Opportunity)
3. Breach K issue.
Self-dealing: when the parent, by virtue of its domination of the
subsidiary, causes the subsidiary to act in such a way that the parent
receives something from subsidiary to the exclusion of, and detriment
to, the minority stockholders of the subsidiary.
***Despite director & shareholder differences, some fiduciary duties are
imposed on some shareholders by some courts.
1. On majority shareholders & some minority shareholders who can
control the board of directors of a firm.
2. Some corp actions require a direct shareholder vote. Where
controlling shareholder exercises that vote in a manner ct considers
unfair, the ct. may hold that the shareholder violated fiduciary duty to
other shareholders.

Ct. held that Sinclair prevails on corp opportunity claim & dividend
claim. Levien prevails on the breach K claim.
Sinclair must meet the Intrinsic Fairness Test:
-2 Elements:
1. High degree of fairness
2. Burden shifting: burden shifts to Corp/Dominant Shareholder, must
prove, subject to strict judicial scrutiny, that the transaction was
objectively fair.

Parent owes a fiduciary duty to subsidiary when there are parent-
subsidiary dealings.
-Intrinsic Fairness standard will be applied only when the fiduciary
duty is accompanied by self-dealing.
1. Fiduciary Duty
2. Accompanied by self-dealing.
ie. Parent interests on both sides of the transaction.

Breach K claim: held that there was self-dealing.
-K called for payment on receipt (Int’l to Sinven), but payments
lagged 30 days behind. Also K called for min. purchases, breached.
BJR: appropriate for determining the dividend claim & the corp
opportunity claim.

Quest 2:
q: Was the shareholder duty of loyalty analysis necc to decide Sinclair.
How might one have resolved the case using only the law regarding the
duty of loyalty of directors?
-Sinclair is the principal & Directors are the agents.
-Sinclair Directors elected by Sinclair & were employees of Sinclair.
(Directors of Sinven) Sinven’s directors were Sinclair’s agents.
-Sinclair’s liability would be derivitive.

Federal Law:
Santa Fe Industries, Inc. v. Green:
***Outside banking, ins., airline, & broadcasting industries, most are
not subject to Federal Regulations. They will if they seek to enter
capital mkts & public capital interests.
1933 & 34 securities acts & states securities acts.
-193: corp must file registration w/SEC & declared effective b/f can
offer interests on public mkt.
-registration req’ts subject to exceptions:
1. Private Placement: exemption for an offering made avail only to a
limited group of sophisticated investors.
-If 500 shareholders and min. assets, become reporting companies,
subject to continuing disclosure, 1934 Act. Periodic forms filed on
annual & quarterly basis.
-Must issue proxy statements.

***10b-: inside trading, duty to disclose, etc.
-Remedy (also 14e-3, 14a-9)
-10b-: allows allegedly defrauded to sue in Fed. Ct. if imp material
disclosure has not been made w/re: sale of a security.
Issue: Whether a federal remedy is avail for a state regulation/law
violation? Can we transmute alleged state law violation into a Fed.
violation? [NO]
Cash Out Merger/Short-Form Merger: Corp that owns ‘X’% stock, then they
can force minority shareholders to sell out to majority owner.

State law remedy avail is appraisal, whereby ct seeks to determine true
fair mkt value of your shares.
10(b): unlawful for any person to use/employ manipulative or deceptive
device or contrivance in contravention of SEC rules, prohibits, in
addition to nondisclosure and misrep, any artifice to defraud, or any
act which operates or would operate as a fraud or deceit.
Wash Sale: artifice designed to take money from one group to benefit
another person, group, etc.
Ernst & Ernst held that in deciding whether a complaint states a c/a for
fraud under 10b-5 you must turn first to the lang of the stat as a
starting point in every case involving construction of a stat is the
lang. itself.
Inadequate comp isn’t fraud if all material facts are disclosed.

1. May invalidate short-form mergers, b/c disgruntled shareholders claim
fraud & 10b-5 claim.
2. Prox cause may still be missing, so no neg. action. Causation
element may still be lacking. Possible argument by shareholder that
misstatement was material, & they would have otherwise sued to enjoin
the merger. Remedy is avail if misleading, appraisal remedy.

Inside Information: (inside trading)
Efficiency: liquidity w/all material information disclosed.
Liquidity: ability to sell quickly & get a good price.
ie. Assume given $5millionG house, & you have no $ to buy anything.
You wish to sell int in house immediately. Price you would get would be
less than 5mil.
-mkts best estimate for future mkt prices, etc.
-1. Sell Promptly
-2. Prices related to actual mkt value. (rationally related to true
-3. Mkt prices adduced & related to public. Reflect earnings

***Primary Mkt Securities: initial mkt in which securities are sold.
***Secondary Mkt: when stocks are resold.
***16(b): short swing profits, precludes officer, director, or 10%
holder from buying/selling stocks in 6mo period for a profit. [FED.
***May be state law rules which govern inside trading.

Goodwin v. Agassiz:
2 D’s MacNaughton, dir & gen mgr company & Agassiz, President &
director corp. Bought 700 shares of stock in Cliff Mining Co., thru the
Boston Mkt Exch.
P claims he sold the stock & D’s purchased w/o disclosing to him
knowledge of geoligist’s theory.
Held: D’s owed duty to corp, not the shareholder, D’s didn’t know
shareholder, not a fact-to-face trans, info D’s had was highly
speculative, exchange was on the open mkt.
***Some cts/cases suggest Special Circumstances Test, an
officer/director may owe a duty to its shareholder.

Securities and Exchange Commission v. Texas Gulf Sulphur Co.:
High Execs of corp found mineral ore deposits in prelim exploratory
drilling. Issued a release to public indicating prospects weren’t necc

Calls: when customer wants to predict where stock will be in future, so
if it is at the price
you’d hoped, then you buy OPTION TO PURCHASE AT A CERTAIN PRICE.
-Adv: options.

Price of stocks went from 173/8 to 581/4 during period of non-disclosure
to disclosure.
***Categorize c/a under SEC rules 3 ways:
1. SEC can itself bring an action (civil action)
2. SEC can refer to judicial sys for crim prosecution
3. S.Ct. narrowly implies private c/a
-This case is an SEC Civil Action

Ct held that they were in violation of 10b-5. Anyone in possession of
material inside info must either disclose it to the investing public, or
if he is disabled from disclosing it in order to protect a corp
confidence, or if he chooses not to do so, must abstain from trading in
or recommending the securities concerned while such inside info remains
Rule of Materiality: is whether a reasonable man would attact importance
in determining his choice of actionin the trans in question. An Fact
which in reas & objective contemplation might affect the value of the
corps stock or securities. Facts whichafect the probable future fo co
and those which may affect the desire of investors to buy, sell, or hold
co’s securities. ***Knowledge of results imp to a reas investor & might
have affected the price of the stock.

***1. Trade (inside) based on info/non-disclosed information
2. Materiality is no longer an element if you can show the
insiders traded based on the info that was w/held.

Insiders must wait until info has been successfully disseminated, by
being made public effectively.
-until info has circulated b/c once circulated, the value of the info
will be reflected.

Unlawful for person, directly/indirectly, interstate commerce/mails, or
facility of nat’l securities exch…To use/employ,
manipulative/deceptive device/contrivance in contravention of such rules
& regs as Commission may prescribe as necc/appropriate in public
interest/for the protection of investors.
Purp of 1934 Act: to promote free and open public securities mkts and to
protect the investing public from suffering inequities in trading,
including, specifically, inequities that follow from trading that has
been stimulated by the publication of false or misleading corp info
Research done by an indiv, not an insider, does NOT have to be disclosed
b/c such a rule would discourage people from doing their own research &
trading on the open mkt.
***Standard for press release, for liab, is negligence. An SEC
enforcement action, so suggested that standard should be lower than in
criminal or private cases.
-SEC action, appropriate standard should be negligence.

1. A) George is not legally entitled to recover profit from Martha, only
a moral obligation to disclose on part of Martha.
B) Same result if brother
C) Possibly fraud in that case.
D) Req’d to disgorge secret profits based on an agency theory. Gen.
Agent v. Limited Agent.
-General: liable for secret profit.
-Limited: may escape liability.
2. Jaun is liable based on a fiduciary duty established thru the
3. In general, don’t conclude shareholder’s owe fiduciary duties to one
another. More than likely she owes no duty. Tippee liability derives
from Tippor (insider) fiduciary duty/liability.
4. Under 10b-5 he is liable. : Agassiz case would hold him liable if it
were a face to face transaction. Under State law good possibility that
he would be liable.

***Rule 10b-5 can give rise to a private cause of action: Texas Gulf
Sulphur, est 10b gae rise to a private c/a for damages. P must prove:
[P's Burden]:
1. Materiality of concealed or misstated fact
2. Reliance
3. Scienter, and
4. Causation.

SEC can seeka civil penalty up to 3 times the insider’s profits.
Express c/a for damages to comtemporaneous traders against inside
traders & tippers. Amt that can be recovered is limited to amt of
insider’s profit reduced by any amt disgorged in an SEC enforcement
Derivative liability of employers for the actions of their employees,
the actions of employees of brokerage firms, but contrary to the GEN
RULE for vicarious tort liability not if the employer is able to prove
good faith and noninducement.

Chiarella v. US:
D, markup man, in printing company. Chiarella correctly identified
target & bought shares of stock through a broker. Tender offer was
announced, shares rose, sold shares at a profit..
SEC brought criminal charges for violating 10b-5 “insider information”.
-Higher standard in an SEC criminal action.
S.Ct. found that he wasn’t guilty, not an insider.

Rule: A corporate insider must abstain from trading in the shares of his
corp, unless first disclosed all material inside info known to him.
Duty to abstain arises from the relationship of trust b/t a corps
shareholder and its employees.
-Since no relationship of trust b/t Chiarella and the shareholders of
the corps whose shares he traded, he had no duty to “disclose/abstain.”

Reasons not to allow Insider Trading:
1. Fiduciary duties insiders own shareholders
2. Level Playing Field Argument: ban trading where there’s unequal
access to trading.

Precluding inside trading increases the value of the services proved by
3rd pty mkt investigators/brokers, so shareholders are possibly
disadvanted from such preclusions.
3rd pty mkt professionals should be precluded from mkt trading if we
truly believe in the Level Playing Field Argument b/c they’re also on
unequal footing w/shareholders, etc.
-Problem w/concept of inside trading.

Dirks v. SEC:
Equity Funding of America, sold Life Insurance.
-Equity in your life, for benefit of your beneficiaries. Hoping firm
will pay off on your policy upon your death.
Dirks investigated alleged fraud w/in Equity Funding. Sr. Mgmt denied
fraud; employees corroborated the alleged fraud story.
Dirks contacted Blundell, Bureau Chief of Wall Stree Journal’s Los
Angeles office, who refused to publish any story related to the alleged
Dirks contacted his clients re: alleged fraud in the company, who later
sold their stocks ($16 million).
S.Ct. refused to hold Dirks criminally liable b/c Dirks was not an
insider. Dirks had no duty to abstain from use of the inside
information that he obtained. Absent a breach of duty to shareholders
by the insiders, there is no derivative breach by the tippee.
-Here, Secrist is the tipper & Dirks is the Tippee.
-Purpose of disclosure to Dirks by Secrist was to disclose the fraud.
Secrist didn’t personally benefit from the disclosure.
-He was disclosing non-public information (Secrist) & if an employee,
then possibly in violation of fiduciay duty/obligation, but since here
the purpose was to disclose the fraud (an illegal act). If tipper
cannot be held liable, then neither can the tippee.

Common Law in some juris imposes on corp insiders, particularly
officers, directors, or controlling stockholder an affirmative duty of
discloseure when dealing in securities.
Outsiders may become fiduciaries of the shareholders, special
confidential relationship in the conduct of the business. Temporary

Duty to Disclose: An insider will be liable under 10b-5 for inside
trading only where he fails to disclose material nonpublic information
before trading on it and thus makes secret profits. Also, only liable
if in breach of fiduciary duties owed by the insider.

Duty to Disclose if: (Chiarella)
1. Agent
2. Fiduciary
3. Officers of securities/relationship of trust in confidence.

Mere possession of nonpublic information doesn’t give rise to a duty to
disclose or abstain; only a specific realtionship does that.
Where a tipper’s disclosure is in violation of Cady Roberts Duty, then
that is improper.
-Must est whether tipper was liable or in breach of fiduciary
obligation, then tippee will likely be liable if knows or should know
there was a breach of tipper’s duty.
Duty of Loyalty & Care. If breach duty of care, clearly have breached
fiduciary obligation to shareholders. Not necc a violation of 10b-5.
(Only a violation if dealing w/securities.)

Question 3:
3. Suppose Secrist had disclosed inside info (not involving fraud) to
Dirks b/c of a bribe from Dirks. Dirks then advised clients to sell
their Equity Funding stock. Dirks would have then violated 10b-5.
Would Dirks’ clients have violated the rule?
-Depends on whether they knew/should have known that he rec’d info in
violation of a fiduciary duty.

***SEC disagrees w/S.Ct. decision in this case. SEC is a regulatory
organization. SEC following Chiarella, adopted 14e-: illegal for a
person who unlawfully obtains advance information concerning attender
to use that info in a securities transaction.
-SEC’s definition of wrongdoer & wrongfullness may be broader than
that of the S.Ct.
-May be able to prevail in front of S.Ct., but you would have to make
great expenditures in order to get there.

Carpenter v. United States:
Concerned w/Winans here, a reporter of the Wall Street Journal, who took
info to be published in his column re: stocks. The info was givn to
indivs who worked for a brokerage firm.
Winans was found guilty of knowingly breaching a duty of confidentiality
by misapporpriating prepublication info regarding timing and contents of
the column. Breach of 10b, securities laws, mail & wire fraud, and
-All convictions were aff’d.

2 Distinct theories for liability under 10b-:
1. Traditional Theory:
2. Misappropriation Theory:

Chiarella did not owe a fiduciary obligation to the shareholders of the
company. Under Chiarella wouldn’t owe a fiduciary obligation to the
shareholders of the companies that he wrote about.
-Under 10b-5, Winans shouldn’t be liable b/c no fiduciary duty to
10b-5 prohibits any artifice to defraud or anything which operates as a
-Winans committed fraud upon the Journal b/c of a property rt & he
misappropriated the property/info.

Journal’s policy was that the info was to be kept confidential by virtue
of their property interest in the information.
Winans had fraudulently misapporpriated property w/in meaning of the
mail and wire fraud stats.
Though misappropriation theory is accepted in 2nd circ, the S.Ct. has
not yet adopted the misappropriation theory.

Footnote 14: Outsiders may become fiduciaries of the shareholders, such
as an underwrite, accountant, lawyer, or consultant working for the
corp. They’ve entered into a special confidential relationship in the
conduct of the business of the enterprise and are given access to
information solely for corp purposes. For a duty to be imposed, the
corp must exprect the outsider to keep the disclosed nonpublic info
confidential, and the relationship at least must imply such a duty.

Disclosure and Fairness:
1934 Act: contains some disclosure provisions, requires some firms
w/outstanding stock to disclose information on an on-going basis.
Regulates transactions thought to be potentially unfair, deceptive, or
fraudulent. Rule 10b-5, 16(b). Limits tactics firms can use in tender
offers and regulats proxy fights.

1933 Act: requires firm disclose extensive information about itself at
itme initially sells its securities. Exempted Securities & Exempted
Transactions. Prohibits sale of securities, unless company issuing
securities “registered” w/SEC. Issuer must give the Commission about to
sell stock to the public for the first time, must file “registration
statement”. Also requires sellers to give prospective buyers a
“prospectus”, a radically abridged version of the registration

State “blue sky” laws: state regulations of securities, in addition to
federal regulations.

Reves v. Ernst & Young:
Issue: whether certain demand notes issued by Farmer’s Cooperative of
Arkansas and Olkahoma are “securities” w/in the meaning of sec 3(a)(10)
of the SEC act of 1934. [Yes].
Demand notes initially issued by the Co-op. Designed to promote
interests of the members.
P’s claim that D’s failed to follow generally accepted accounting
principles in its audit, re: valuation of Co-Op’s major assets.
Inflated assets & net worth, P’s wouldn’t have purchased demand notes
b/c the insolvency would have been apparent.
Sec 3(a)(10) of 1934 Act: Security means any note, stock, treasury
stock, bond, debenture, certificate of interest or participation in any
profit-sharing agreement, but shall not include currency or any note
draft, bill of exchange, or banker’s acceptance which has a maturity at
the time of issuance not exceeding nine months, exclusive of days of
grace, or any renewal thereof the maturity of which is likewise limited.
Stock is, as a practical matter, always an investment if it has the
economic characteristics traditionally associated w/stock. Stock
should be treated as w/in the ambit of the acts.

***Ct adopts the Family resemblance test:
-permits an issuer to rebut the presumption that a note is a security
if it can show that the note in question bears a stron family
resemblance to an item on the judicially crafted list of exceptions, or
convinces the court to add a new instrument to the list.
***Not Securities: note delivered in consumer financing, note secured
by a mortgage on a home, short -term note secured by a lien on a small
business or some of its assets, note evidencing a “character” loan to a
bank customer, short-term notes secured by an assignment of accounts
receivable, or a note wimly formalizing an open-account debt incurred in
the ordinary course of business.
If the seller’s purpose is to raise money for the general use of a
business enterprise or to finance substantial investments and the buyer
is interested primarily in the profit the note is expected to generate
the instrument is likely to be a security. If the note is exchanged to
facilitate the purchase and sale of a minor asset or a consumer good, to
correct for hte seller’s cash-flow difficulties, or to advance some
other commercial or consumer purpose, the note is less sensibly
described as a ‘security’.

Doran v. Petroleum Management Corp:
Doran filed suit seeking damages for breach of K, recission of the K
based on violations of the Securities Acts of 1933 and 34, and a J
declaring the D’s liable for payment of the state judgment obtained by
Doran was liable on a note to Mid-Continent, & he defaulted b/c
partnership got caught over-producing oil & gas. Wells were shut down
for 1 year, so no profits, Doran was making payment to Mid-Cont based on
profits rec’d from Partnership.
Limited partnership interest is a “security” as that term is defined by
the Securities Act of 1933.
***Footnote 57 1933 Securitites Act, sec 5.

D’s used the interstate transportation or communication in connection
w/the sale or offer of sale, the P thus states a prima facie case for a
violation of the federal securities laws.
Ct focuses on whether the offeree’s had access to suficient information
necc to evaluate the limited partnership interest.

Private Placement:
1. Number of offerees
2. Relationship of offerees to each other & the issuer
3. Number of units offered & size of the offering
4. Manner of the offering.

***The ultimate buyer of a security may not necc be the offeree.
Ct reverses b/c P should have change to show that offerees didn’t
know/have opp to know about the investment…details about the
investment. Didn’t have enough facts to make an important decision.

Securities Act 1933:
1. Securities: A security which is part of an issue offered & sold only
to persons resident w/in a single State or Territiry, where the issuer
of such security is incorporated by and doing business w/in such
State/Territory. Intrastate Securities Exemption.
2. Transactions: coverage is limited to specific sales only. Under
trans exemption, you can have security exempt under trans A, but same
security won’t be exempt under trans B.

***If you sell stock exclusively in state to intrastate residents &
proceeds are used primarily to fund develeopments outside state, then
you don’t qualify for 3(a).

Exemptions 1933 Act:
1. Private placement by offering Dorin Case.
2. Transactions by other than dealer/offeror.

Private Placements:
-More than 5mil, no more than 35 buyers, must be sophisticated. Must
file notice of sales w/SEC.
-Regulation D. Don’t apply to accredited investors. Bankers,
Investment institutions, brokers, & wealthy investors.
-4(2): can resell securities, only if find another exemption. Focus
on only 1 trans. Need add’l exemption if want to resell.

Regulation D: resaler can

State Blue-Sky Laws: stricter than SEC in some cases. Assesses validity
of issuance to see if it was a valid investment.

Escott v. BarChris Construction Corp.:
Debenture: debt instrument, not a bond. Negotiable long-term debt
instrument, not secured. May be publicly traded.
Bond: Term may vary, generally long-term, secured, debt instrument. Can
be publically traded. All long term debt instruments, secured. Likely
to be paid off first in a bankruptcy proceeding, by cashing in

Security: collateral to back up the debt.

Convertible Subordinated debenture: Can be converted into stock (common)
or if preferable convertible, then convertible into preferred stock.

Common Stock: Residual interest in a firm.

Preferred Stock:

If Bankruptcy, then order of pay-offs are:
1. Bond
2. Unsubordinated Debenture
3. Convertible subordinated debenture
4. Preferred Stock
5. Common Stock.

***Certain securities are more speculative than others.

Civil Liability Provisions, Sec 11 of 1933 Act
-Ptys liable:
1. Those who sign registration statement
-Experts, undersigners, investment firms
2. Issuer, likely to have no defenses.

Registration Statement: Portions of Statement & Liability of Ptys
1. Expertised Section:
2. Non-Expertised Section:

Portion of Statement Liability of Ptys
Non-Expert Determined by 11(b)(3)(A)
expert Determined by 11(A)(4)
Registration Statement
Expert non-expert Determined by 11(b)(3)(c)
expert Determined by 11(b)(3)(b)

Convertible Subordinated 15yr Debentures are in issue, Class Action by
those on their own behalf and on behalf of all other present & former
holders of such debentures.
Any & all of listed directors & signers can be held liable. Almost a
strict liability.
Failure to prove the Due Diligence Defense.

Elements of Prima Facie Case:
1. Materially false statements/omissions
2. Reliance
3. Causation & materiality of statement

Not all of alleged misstatements were materially false.

Earnings Statement: focuses on revenues & expenses w/in period of time.
Balance Sheet: Assets & liabilites, focused on a particular period of
Asset: Company owns
Liability: Company owes.
***Assets – Liabilities = NET WORTH

***EARNINGS/NET INCOME/PROFITS = Sales Revenue – Cost of

Ct says the sales mistatements/omissions were not material.
Ct says balance sheet errors were materially false w/in Sec 11
Debentures were rated B, meaning they were speculative.

Due Diligence Defenses, Sec 11(a): if any part reg. Statement, become
effective, containing untrue statement of material fact/omitted to state
material fact req’d to be stated or necc to make statement not
misleading, any person acquiring security may sue:
1. Every person who signed the statement
2. Every person who was a director of the issuer
4. Every accountant, engineer, appraiser, of person who has authority to
statement made by him w/his consent, named as having prepared/certified
any part statement, re: statement in reg. Statement, purports to have
been prepared or certified.
5. Every underwriter re: such security.

Due Diligence defense is avail to all but the issuer.
-Issuer cannot invoke the Due Diligence Defense.
***See Sec 11 (a)(3)(A-C)***

Indemnification & Insurance
Sec 145 Delaware General Corp Law:
-Del Sec 145(a) & (b) differ b/c
(a): suits by 3rd ptys allows indemnification in certain circs for
“expenses…judgments, fines, and amts paid in settlement
(b) indemnification for suits “by or in the rt of the corp” (derivative
suits), allows indemnification only for expenses and, if the person
seeking indem has been found liable to the corp, only w/judicial

***Third-Pty action v. Derivative Action, need to distinguish.

Citadel Holding Corp v. Roven::
In general, 16(b) liability arises when a director buys/sells stock w/in
a 6mo period, & company will be disgorged/re-distributed back to the
company. (The profits from the sale).

Problems of Control, Proxy Fights:
Proxy fight: a proxy solicitation by a non-management group in
opposiction to solicitation of mgmt, in attempt to get shareholders to
vote against current mgmt group/directors.
Proxy Solicitation:

***Some companies who wish to entrench directors, do so by form of
staged elections. Only 1/3 are up for election at a particular time.
***Proxy fights subject to 1934 SEC Act & to state corp statutes.

In general shareholder meetings held 1Xyr to elect officers; special
meetings for merger/sales, etc; notice reqt’s for meetings to
shareholders; quorum reqt’s meaning # shareholders or reps should/need
to be present at the meetings.
Only shareholders of record, on particular record date, are req’d to
vote (allowed to vote.)
Some votes for directors results from cumulative voting.
-Cumulative voting: can add up all votes on behalf of one director, ie
Own 10 shares & 5 directors running…can use 50 votes for 1 director.
***Like tender offers, proxy fights are subject to regulations derived
from 1934 SEC act & State Corporate Statutes.

Strategic Use of Proxies:
Levin v. Metro-Goldwyn-Mayer, Inc (MGM):
P’s own 1% outstanding shares.
Law allows MGRS to charge company for costs of informing shareholders.
(Fill in info from case here)

You will probably lose, especially if incumbents claim attempt to inform
others & expenditures are not excessive/unreasonable.
What would happen under Fleiger Rule? Conflict of interest, get auth
from disinterested stockholders or ….?
Potential conflict of interest, burden lies on the D/Corp to prove no

Model Corporations Act:
1. Annual shareholders meetings (in/out state)
2. Failure to hold annual meeting…

7.02 Special Meetings:
1. Call of Directors
2. Articles corpt/bylaws
3. Corp sec, 1/more written demand for meetings.

Bylaws fix/provide manner of record date 1/more record groups, demand
special meeting or demand action. Don’t provided for all manners, not
more than 70 days b/f meeting of shareholders.

after fixing record date of meeting, file list of all shareholders
entitled to rt to notice of meeting w/address & number shares held by
each shareholder.

Burden on Corp re: stock ledger. Other than that, stockholder must
prove b/f stockholder can seek info.

Shareholder Voting Control:
Non-voting shares can be issued to investors, helps to retain control of

Stroh v. Blackhawk Holding Corp:
Class A stock, voting rts, & retaining eco benefits.
Class B stock, voting rts, but no eco return. Used to retain control.
-P’s contend that by depriving Class B shares of “eco” incidents of
shares of stock, or of the proportionate interest in the corp assets,
the Class B shares don’t constitute shares of stock.
-P’s are class A shareholders, want to deprive B types from voting b/c
don’t have rt to dividends.
Control rt is a property rt, indep of eco return.

Arrangements To Increase/Retain Control:
1. Allow class specific board membership, a specific class of voters
will have a rt to vote, based on ownership of a particular class of

2. Voting Trust: Trustor/Benefactor, Beneficiary, and indiv that manages
the trust/trustee to advantage the beneficiaries.
-Trustee: retains the rt to vote the entire trust shares. Generally,
a formal agreement & usually has a specific duration. Person is usually
compensated for their services. Sometimes subject to statutory
-Beneficiaries: the grantors & the beneficiaries of the trust appoint
a trustee & retain the benefits.
-Proxy: get voting rts from a person. No identifiable duration, only
appointed as an agent. Not a formal agreement/contract. Not generally
compensated for services provided in voting on behalf of the
beneficiary/trustee. Generally the proxy agent is revokable, unless
coupled w/some other arrangement. Generally w/large, publically traded

3. Pooling Arrangement: 2/more shareholder pool shares & agree to vote
their shares to vote for ptys that they agree upon. If, however, can’t
agree, then appoint someone as a referee & then the referee decides how
the votes will go.

4. Irrevocable proxy coupled w/an interest: generally a proxy is
revokable. Generally, K ties to consideration w/K agreement.
Shareholder must have some other interest in the firm, ie. employment.
Conditioned on job retainment, loan arrangement, etc.

Sec 151(a) Del. Corp Law: provides that corporations may issue various
classes/seris of stock, “which classes/series may have such voting
powers, full/limited, or no voting powers…shall be stated & expressed
in the certificate of incorporations. Allows differences in voting
power b/t classes of stock, but not w/in a single class of stock.

Control in Closely Held Corporations:
Ringling Bros. Barnum & Bailey Combined Shows v. Ringling:
1,000 total shares. 315 shares by Edith Ringling; 315 by D Ringling-
Haley; & 370 by D John North.
-Ringling & Haley were in agreement to control the board jointly &
increase the # of board that they could elect.
-Each could elect 2 (4 total) & North 3 [w/out the agreement]
-Each could elect 2.5 (5 total) & North 3 [w/the agreement]
Cumulative Voting: number of shares owned (1000) & 7 directors. Total
of 7,000 total votes available.
Haley had 2,205 votes; Ringling had 2,205 votes; North had 2,590.
-If North wishes to elect 3 directors, then he could split the vote 3
ways & have 863 1/3 votes.
-Hailey & edith have 4,410 votes. If they wish to elect 5 directors,
then 882 votes could be used for each director.
-Is 882 more or less than 863 1/3? More b/c could prevent North from
electing 3 directors & North will only be able to elect 2 directors.

If Haley & Ringling maintian agreement, then they will achieve their
D’s contend that this isn’t a legally binding agreement b/c you can’t
separate the voting from the management.
Held: (see Sinclair Case: generally shareholders don’t owe a fiduciary
obligation to other shareholders b/c self-interested indivs seeking to
maximize returns on capital invested.) Shareholders can agree & this
type of agreement is enforceable. This is a vote pooling agreement.

Prior to agreement, what could have prevented this litigation?
-Could have included in K, that upon disagreement voting will be
-Give the shares to the mediator/arbitrator as legal owner, as a
trustee, & pursuant to instructions to maximize votes (5 directors,
possibly), on behalf of the shareholders of those shares.

McQuade v. Stoneham:
Baseball Club. P is McQuade & D’s are McGraw & Stoneham.
-Stoneham owned the majority of the stocks.
Agreement b/t ptys to use best endeavors to continue as directors &
officers, No salaried to be paid to officers/directors except as
provided in the agreement, No changes to harm minority shareholders, &
keep the directors in office.
-K is void b/c can’t make shareholders vote in a certain way; &
McQuade could not legally hold that job/position b/c of his other job.
-Void b/c doesn’t benefit shareholders. Directors can’t give up their

Rule: an agreement among stockholders sttempting to divest the directors
of the power to discharge an unfaithful employee of a corp is illegal as
against public policy.
-Stockholders may not, by agreement, control the directors in the
exercise of the J vested in them by virtue of their office to elect
officers & fix salaries. Motives may not be questioned so long as their
acts are legal. Bad faith/improper motives of the ptys doesn’t change
the rule.
-Directors may not by agreements entered into as stockholders abrogate
their indep J.

Clark v. Dodge:
P’s & D’s owned 2 corps, medical/medicine producers. Entered into a K.
Agreement provided generally that Clark would continue in his positions,
receive 25% of net income, be faithful, disclose the formula, & upon his
death bequeath stock to wife & kids of Dodge.
Dodge breached b/c Where the directors ar the sole stockholder, no
objection to enforcing an agreement among them to vote for certain
people as officers. Stockholders may do as they choose w/corp concers,
assets, provided creditors’ interests aren’t affected b/c they are the
complete owners.

McQuade Rule was to protect minority sharholder intersts. Under this
cts approach, directors in genral manage the corp. Limiting discretion
of directors, there is some authority to limiting the discretion of
1. Shareholders unanimously agree to limit the discretion of the
2. Shareholders who make such agreements owe same fiduciary duties
that the directors owe.

Question 1:
1. In McQuade, ct says it is a matter of public policy that stockholder
may not, by agreement among themselves, control the directors in the
exrcise of the J vested in them by virtue of theier office to elect
officers & fix salaries. What if any, are the goals/criteria of good
gov’t that underlie that public policy?
-Shareholders in larger corps are genreally less well-informed.
Protect them w/directors w/fiduciary duties which are more clear &
stricter. Small firms, you as a shareholder will be at least semi-
actively involved.
3. If McQuade had been assured of representation on the board of
directors, how might he have been assured of continuation in his role as
treasurer of the corp?
-Develop a legal & enforceable agreement that meets the interests &
demands of your client.
5. Suggests directors can appoint officers, sometimes, under Delaware

Use of employment K’s:
-Term yrs; Termination for cause; Illness/incapacity; Compensation;
Duties & Status; Consequences of Termination; Ptys.
-Sell agreements: if problems occur & rt to demand one buys the other
(either way) at a price set by a fact finder/appraiser.

If dealing w/voting trusts, then certificates of voting trusts are
issued to shareholders. Holders are beneficial owners, but not necc
beneficial owners of record. Corp would likely treat voting trustees as
shareholders for most purposes.

Galler v. Galler:
100% stock originally owned & then after the agreement only 95% was
-208share/220 = 95% OR 12/220 = 95%
shareholder isn’t a pty to the agreement, not a unanimous consent
Essential Terms Agreement:
-4 Directors, By laws amnded, Shareholdrs cast votes for particulars,
wife gets rt to nominate director, Salary continuation agreement
(provision 10).

Close Corporation: is one in which the stock is held in a few hands, or
in a few families, & wherein it isn’t at all, or only rarely, dealt in
by buying/selling. Shareholder agreements similar to that in question
here are often, as a practical consideration, quite necessary for the
protection of those financially interestedi nt eh close corp. While the
shareholder of a public-issue corp may readily sell his shares on the
open mkt should management fail to use, in his opinion, sound bus J, his
counterpart of the close corp often has a large total of his entire
capital invested int he business & has no ready mkt for his shares
should he desire to sell.
Agreement is not a voting trust, but rathre a pooling agreement.

If agreement in issue is a voting trust, then it needs to be of a
limited duration, the maximum allowed is 10yrs. [10yr limit is a
traditional rule/limit].
Concerned she might be at the mercy of a uncaring majority.

Ramos v. Estrada:
Whether there was a breach & when the breach occurred if there was a
Broadcast & Ventura merged to form Television, Inc.
Shareholder Agreement concerns Broadcast.
Ramos was elected president. Estrada defected by voting w/Ventura,
against the Broadcast & Merger Agreement.
Agreement provided that members of Broadcast were to vote among
themselves & then shareholders were to vote acc to the majority vote.
Estrada didn’t not breach until Oct 15th, 88 by written repudiation.
-Agreement as written was a shareholder agreement, not an agreement to
limit the discretion by directors.
Her repudiation of Oct 15 results in breach. Agreement is a valid,
enforceable agreement, provided w/a buy out agreement. Forced to sell
shares at 8%.

Agreement has characteristics of a shareholder’s voting agreement
expressly authorized by sec706 subdivision (a) for close corporations.
A agreement b/t 2 or more shareholder of a close corp, if in writing &
signed by the ptys, may provide that in exercising any voting rights the
shares held by them shall be voted as provided by the agreement, or as
the ptys may agree or as determined in accordance w/a procedure agreed
upon by them.

Calif. Practice Guide indicates that such “pooling” agreements are valid
not only for close corporations, but also “among any number of
shareholders of other corporations as well.”
Consideration for the agreement is the limitations on transferability of
stocks w/in the company.

Abuse of Control:
Wilkes v. Springside Nursing Home, Inc:
What type of agreement would have solved some of problems in this case?
-a buy/sell agreement.
Freeze Out: when you invest in a firm & the firm no longer has funds.

1. Any other litigational alternative than suing for shareholder duty
breach by other shareholders?
-wrongful discharge
- shareholder derivative action based on fact that the other
shareholders were paying themselves an amt that is not adequate.
Corporate waste, recover excessive salaries to benefit all shareholders.
-Lawsuit b/c destructive dividends. Other shareholders entitled to
wages. ($5,000-6yr) Constructively a divident, discrimination against

***If firm doesn’t pay dividend, then excessive salaries? Possible
destructive dividend, then possible action for dicriminatory dividend

Ingle v. Glamore Motor Sales, Inc.:
Ingle should have had an employment agreement precluding termination w/o
Wilkes had no shareholder agreement, Ingle had a shareholder agreement.
Glamore should have requsted an employment agreement specifying at-will
employment w/termination w/o cause.
Shareholder agreement specified that if Ingle’s employment was
terminated for any reason, then re-purchase agreement would go into
effect, whereby Glamore could re-purchase Ingle’s stock.

Issue: whetehr P’s status as an officer, director, substantial part
owner & active participant in the affairs & mgmt of Glamore Motor Sales,
a close corporation, gives him equitable rts & remedies which aren’t
subject to the ordinary legal rules of master & servant?
Duty of care & loyalty is owed to minority shareholders by majority
shareholders. P argues it is a breach of fid. duties to terminate him
by vitue of being a shareholder of a close corporation.
-paid him 2,400 for each share, totaled $96,000 for 40 shares.
Gen Rule: minority shareholders in a closed corp are entitled to special

Sugarman v. Sugarman:
Sugarman breached his giduciary duties to the minority shareholders.
This is a closed corp.
Leonard Sugarman owned 61%shares
James & Marjorie owned 21.%each
John was employed & discharged

Minority shareholders alleged:
-excessive payment of salaries & bonuses
-freeze out
-Leonard breached his fiduciary duty
Freeze out evidence: Leonard offered to buy out Jon & Marjorie’s stocks
at grossly undervalued prices.
Shareholders of a close corp owe shareholders a duty of utmost good
faith & loyalty.
Breach of fiduciary duty is the main complaint in this case.

1. Not sufficient for a minority shareholder to prove that the majority
shareholder has taken excessive comp or other payments from the corp.
2. Not sufficient to allege that the majority shareholder has offered to
buy the stock of a monority shareholder at an inadequate price.
3. Minority sharholdr must first establish that the maj shareholder
employed various dvices to ensure that the minority shareholder is
frozen out of any financial benefits from the corp thru such means as
the receipt of dividends/employent & that the offer to buy stock at a
low price is the “capstone of the maj. plan” to freese out the minority.

Quest 1:
1. Force Leonard to buy out P’s at a fair price.
-At what price?
-Value/price should pay the PV of the discounted cash flow.
-Looking at the time value of future money.
-Reduce damages to some dollar amt.
***A buy/sell arrangement would have eliminated/solved most of the
problems/issues in this case. Need to anticipat & consider problems b/f
they arise.

Jordan v. Duff & Phelps, Inc.:
Jordan paid book value for the stocks he purchased.
-Book value is the price paid for the asset. The stated value on the
books of the firm.
-Upon resale to the firm, Jordan was supposed to get adjusted value.
Must sell shares back to the firm if your employment is terminated.
-He is resigning from the firm to create a distance b/t his wife & his
-He is leaving for reasons unrelated to his employment.

Whether failure to disclose potential merger was material to his
decision to go to Texas.
His continued employment to end of year was to end of fiscal year, so
firm was reasonable in allowing him to maximize the value of his shares.

He would have rec’d, if merger was completed, $452,000.
Jordan was motivated to leave b/c his mother & wife didn’t get along.
Domestic concerns prevailed over financial concerns.
He agreed to resell stock to firm at book value.
Jordan’s primary claim for relief is that they didn’t fully discloses
the merger negotiations/discussions.

Merger wasn’t consummated. Book value of stock may still be $23,000
(roughly), unless the merger negotiations increased the value of the
stock. Historical accounting cost will not change in light of a premium
Pursuant to agreement, if there was an acquisition, then he’d be
entitled to appreciation value/mkt value of the stocks.
If had acquired shares at FMV & sell at FMV, then different case.
Here, suggestion is that he’s entitled to book value.
Initial complaint, sought damages. Amended complaint, sought recission.
If seeks recission, then can hold on to stock & seek increased value on
stock. K provides that upon termination of employment, he must resell
stock at book value.

Duty to disclose b/f trading, Rule 10(b)(5).
Abstain/Disclose Rule: limited rule. Predicate for recovery under
10(b)(5), must be an insider, or in 2nd circuit, then misappropriation
theory… Jordan was dealing w/an insider. C/A based on 10(b)(5), CL
fraud, & breach of fiduciary duty.

Materiality Standard: Close corps that purchase their own stock must
disclose to the sellers all information that meets the standard of
-There is a substantial likelihood that, under all the circss, the
omitted fact would have assumed actual significance in the deliberations
of the reasonable shareholder & would ave been viewed by the reasonable
investor as having significantly altered the total mix of information
made avail.

Intentional Misrepresentation…CL fraud in sale of securities.
-Seller can’t lie, may not have to disclose all relevant info,
Duty in question is the fiduciary duty of corp law. Close corps
buying their own stock, like knowledgeable insiders of closely held
firms bying from outsiders, have a fiduciary duty to disclose material
-”Special Facts Doctrine” developed, based on the principle that
insiders in closely held firms may not buy stock from outsiders in
person-to-person transctions w/o informing them of new events that
substantially affect the value of the stock.

“Scienter” is required for Jordan to recover in this case.
Stock, FMV is significantly higher than the book value. Jordan was
harmed from failure to disclose.
Jordan gets to go back to trial ct to prove element of causation
Posner would say Jordan was entitled to “Experience” only.

Control, Duration, and Statutory Dissolution:
Buy out Agreement: minority shareholder arranges w/corporation itself.
Not all shareholders are farsighted, so they haven’t negoticiated this
BOA. Corporation Dissolution is avail when shareholders don’t have a
buy out agreement.
-Statutes may force majority to bargain w/frozen out minority
-Liquidation value of firm may be less than value of the firm.
-Advantage of liberal dissolution state…gives minority shareholders
options to sell shares above FMV b/c can threaten to shut down the
entire firm.
-Cts reluctant to force dissolution b/c can be used opportunistically
by minority shareholders.

Alaska Plastics, Inc. v. Coppock:
Divorce settlelment, Muir got 1/2 of her husband’s shares, a 1/6th
Directors voted themselves annual director’s fees. In addition to
director fee payments, they were also paid personal expenses & expenses
for their spouses.
Actual dividends weren’t paid, but constructive dividends were paid.
Alaska Fairbanks plant burned down & was not insured. After fire,
Valley Plastics was the only asset. Alaska b/c a holding company for
Valley Plastics.

This Ct remanded to the superior ct for further proceedings. Then trial
ct entered J for $32,000 as the FMV. Sup.Ct. upheld the trial cts
findings of oppressive or fruadulent conduct sufficient to warrant a
remedy as drastic as involuntary dissolution of the corp or a forced
buy-out of Muir’s shares.
-ct suggested trial ct reached wrong result b/c perhaps didn’t apply
the right law.
No statutory provision requiring company to purchase a minority
shareholder’s stocks.
Liquidation: dissolve first & the division of the assets is the
liquidation. (2nd)
Dissolution: the dissolution is the termination of the existence of the
company (1st)
Ct has equitable power to force a buy back, instead of forcing a
dissolution. Thereby, majority shareholders must purchase the minority
shareholder’s shares at FMV.

P’s burden: must establish on remant that the Acts were “illegal,
oppressive, or fraudulent”, or aleternatively, constituted a wast or
misapplication of corp assets.
Donahue & Ahmanson, generally the rule is that if we can show unequal
treatment, then the controlled remedy is Equal Treatment

Muir could bring at least 4 actions:
1. may be a provision in articles of incorp or by-laws providing for
purchaseof shares by th corp, contingent upon the occurrence of some
event, such as death of shareholder or transfer of shares.
2. shareholder may petition ct for invol dissolution of the corp
3. significant change in corp structur, ie a merger, sharehoder may
demand a statutory rt of appraisal.
4. Finally, a purchase may be justified asa an equitable remedy upon a
finding of breach of giduciary duty b/t directors & shareholders & the
corp or other shareholders.
5. Liquidation
6. Derivitive Action
7. Pro-Rata share, looking at director’s fees.

Abrams. v. Abrams-Rubaloff & Associates, Inc.:
Dissolutions stats vary from state to state.
Abrams & Rubaloff owned 50% of corp.
Abrams sought to dissove the corp
Rubloff &/OR corp initiated the appraisal process.
Any corp may elect voluntarily to wind up & dissolve by the vote of
shareholders holding shares representing 50% or more voting power. [Cal
Corp Code]

FMV is determined by 3 appraisers. Each pty elects an appraiser & those
appraisers elect the 3rd appraiser. FMV is determined on the basis of
the liquidation value taking into account the possibility, if any, of
sale of the entire business as a going concern.
-Appraisers are not only entitled, but are required, to consider the
maner in which the ptys to such a sale are most likely to maximize their
If shareholders can’t agree re: FMV, then the appraisal process will go
into effect.

2 Appraisers came up to FMV of shares being $355,000. The other value
given was $139,750.
$482,5000 was Abrams’ share as a going concern value.
Potentially, customers could be taken w/them, so value of shares may be
less. Going concern usually has a non-competitive clause (max 5yrs).
***Statute can reduce need for a buy/sell agreement. Agreement doesn’t
eliminate need for dissolution b/c dissolution may be precluded by even
the most liberal statutes.

Transfer of Control:
Payment of control premium & sale of corp offices.
-A control premium payment generally arises when a buyer purchases a
large lot of stock in a firm (%).

Frandsen v. Jensen-Sundquist Agency, Inc.:
Frandsen owned originally majority of the stock of the company.
-Sold 52% of stock in holding company to family & 8% to others. Sold
off a large faction of stock in the company.

Shareholder Agreement provided that no shares would be offered to
ousiders. Majority bloc agreed “that shold they at any time offer to
sell their stock they will first offer their stock to minority
shareholders who negoticiated for this K at the same price as may be
offered to maj bloc & will not sell their said stock to any other
person, firm, or organization w/o first offering said stock to minority
shareholders at the same price & upon the same terms. majority block
also agreed not to “sell any of their shares to anyone w/o at the same
time ofereing to purchase all the shares of minority shareholders at the
same price. If majority bloc offered to sell its shares it had to give
Frandsen a rt to buy the shares at the offer price.

-[Rt to refusal.]
Deal w/1st Wisconsin was primarily a merger. Conceptually, draw
distinction b/t merger & simple acquisition of shares.
-Merger: a combination of 2/more firms.
Distinction matters b/c minority shareholders have no protection under
agreement in case of a merger.
-shareholder agreement is unenforceable.
Majority shareholders did not offer to sell their stock. Provision did
protect from sale of a majority bloc of shares, but not to sale of the

Sell: can mean many things. Theoretically, could embrace “merger”.
Must define terms w/in agreement, w/an explicit statement in Agreement.

Rt of First Refusal should be interpreted narrowly.
D’s prevail in this case.

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