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A. Agency

1. The basic model
If one entity manifests a desire to have another work on its
behalf, and the other consents to it, there is an agency
relationship. The principal must control the objectives of the
agent, but need not control the means the agent uses to achieve
those objectives.

2. Two kinds of authority
a) Express authority
This is authority which can be determined by examining the
manifestation of agency on its face.
b) Implied aurhority
This is authority which is reasonably necessary to carry out the
objectives of the agency, even if it is not expressly granted in
the manifestation of agency.

3. Knowledge
It is irelevant whether the rest of the world knows about the
agency. The creation of authority concerns and requires only the
actions of the principal and agent.

4. Determining the existance of agency
a) Agent
What matters in determining whether an agent has accepted the
agency is the agent’s actions, not his beliefs.
b) Principal
What matters in determining whether a principal has assented to
the relationship is whether the manifestation of intent reached
the agent. The manifestations by the agent of assent need not
reach the principal for the relationship to exist

5. Gratuitous agents
These are agents who are not compensated for their agency. It is
easier for them to quit.

6. When is the principal responsible for the actions of the
This occurs in a situation of respondeal superior. If an agent
who is a servant commits a tort in the scope of its employment,
then the principal is responsible for that tort. To become a
servan, an agent must be subject to the principal with regard to
the manner and means of achieving the objective. Being told in
detail how to perform is the controlling factor.

7. The duty of care
a) Paid agent
Must meet the community standard of care. The testing stadard is
straight negligence.
b) Gratuitous agent
Must meet the standard for other free agents. this is usually
gross negligence. See Rest. Sec. 379.

8. The duty of loyalty
a) Restatement
Section 387 The agent has a duty to act solely for the benefit of
the principal in all matter connected to the agency.
b) Questions for analysis
1) Is there an agency
2) What is the scope of the agency
3) What are the interests of the principal
c) Don’t let looks deceive you:
The appearance of impropriety doesn’t control. Not what appears,
but what is done indicates whether or not there has been
d) Punitive aspect:
When an agent breaches a duty of loyalty, he must disgorge all the
profits he has made from that disloyalty to the principal he has
wronged. Rest. Sec. 407
e) Competition.
The agent is under a duty not to compete with the principal in
matters relating to the agency. Rest. Sec. 381 and 393
f) More on the duty of loyalty and the ending of the agency.
Even if things are looking bad for the purposes of the agency, the
obligation of the agent is to inform the principal, not to
terminate the purpose on his own. This is espectially true if the
agent wishes to later compete against the principal.
g) Description of the duty of loyalty
1) candor
2) good faith
3) not to work contrary to the interests of the principle
while the agency is underway
4) Duties on the termination of agency
a> get out clean
b> not to prejudice the principal
c> not to use confidential information
d> disclose to the principal
h) Remedies for breach of duties
1) Damages
These are recoverable if the principal can show harm and proximate
2) Disgorgement
This is sometimes called constructive trust. Agent must disgorge
his ill-gotten gains.

9. Apparent authority
a) Definitions:
1) True agency
This exists when there is a real principal and a real agency and
actual authority.
2) Obstensible agency
This exists when there is an obstensible agent, an obstensible
principal, and apparent authority.
b) Creating apparent authority
For apparent authority to exist, some information must move
from the obstensible principal to the thrid party that, reasonably
interpreted, leads the third party to believe that the obstensible
agent is a real agent
1) Two part analysis
a> What the obstensible principal said
b> What the third party thinks based on what the obstensible
principal said.
c) Authority by position
If the obstensible principal puts the obstensible agent in a
position, obstensible agent gets apparent authority commensurate
with that position.
d) Undisclosed principle
It is impossible for apparent authority to exist without a
disclosed principal.
e) Manifestation by silence.
This is when the silence of the ox principal leads to the belief
of the third party that there does exists an agency relationship.
This can only occur when the ox principal has either constructive
or real knowledge of the manifestations which lead to the
reasonable belief.
f) Responsibility for the negligence of the ox agent
This is controlled by Rest sec. 267 Onw who sets forth a person
as a servant-agent (check out the definition above!!) is liable
for the orts of the agent upon one who relies on the agency.
1) Actual authority
If there is actual authority for the agent’s acts, then the
principal is responsible for any injuries caused by the agent
acting within that authority.
2) Apparent authority.
If there is only apparent authority, the principal is responsible
for harms flowing specifically from what was relied upon by the
third party. Principal is liable only for what is within the
scope of the trusting by the thrid party.

10. Debtor-creditor
It is possible for a debtor/creditor relationship to turn into an
agent principal relationship. What is most important is the
nature of the control exercised by the creditor over the actions
of the debtor. The controlling section is 14 – O of the
a) No consent
The key here is not the manifestations of consent. Rather, the
procatical nature of the control of the d=creditor controls


Partnerships (“p-ship”)

A. The Uniform Partnership Act
1. Essentially a codification of the common law

2. Does not purport to be exhaustive
The rest of the common law comes into play to help expand and
explain the law. See UPA secs 4 and 5. Agency and estoppel are
especially implemented under sec 4.

3. Tyeps of rules in the UPA
a) Default
Most of the rules controlling the relationships of the partners
are default rules – they apply only when the partners do not
specify differently.
b) Mandatory
Most of the rules controlling the p-ship’s relations with the rest
of the world are unchanging.

B. Determining the existence of a p-ship.

1. UPA Definition
“A p-ship is an association of two or more persons to carry on as
co-owners a business for profit.” Sec 6

2. What the UPA says is not a p-ship Sec 7
a) Co-ownership of property does not of itself create a p-ship.
b) Sharing of gross returns does not of itself create a p-ship.

3. Prima facie evidence of p-ship
“The receipt by a person of a share of the profies of a business
is prima facie evidence that he is a partner in the business….”
Sec. 7 This inference is (of course!) subject to several exceptions:
a) Money received as payment for a debt
b) Money received as wages or salary
c) Money received as rent to a landlord
d) Money received as an annuity to the survivor of a deceased
e) Money received as interest on a loan
This is the case even if the money received varies with the
profits of the business.
f) Money received as payment for the sale of assets or

4. The Kleinberger list of things to look for in a p-ship:
a) A contribution to the p-ship
b) A division of profits
c) The receipt of a share of the profits
d) A say in the business

5. The essence of the question
The core inquiry is whether there is a right to receive profits.
Even if the p-ship never acutally makes a profit, a p-ship still
exists if there is a right to receive profits

C. Types of p-ships
These can overlap somewhat, at least where it makes sense

1. Joint venture
This is a p-ship which is set up to do only one thing. After that
thing is accomplished, the p-ship ends.

2. Term p-ship
The p-ship is for a term of years. At the expiration of the term,
the p-ship automatically dissolves

3. At-will p-ship
One partner can dissolve the whole p-ship.

D. The relationship of the p-ship with the rest of the world

1. Partners are personally liable
Jointly and severally and for every penny. Every partner is
liable to an outside creditor, even though there may be a right to
have the other partners contribute. This is what leads
Kleinberger to say that p-ships SUCK!!

2. Partners have authority to bind the p-ship
This is handled by UPA sec 9. UPA Sec 9(1) is the basis and can
be divided into three types of situations.
a) Actual authority
This is the default situation. All partners are agents of the p-
ship and have authority to bind the p-ship in carrying out its
“usual way of business.”
b) Apparent authority
Further, even if the partner is not authorized to act for the p-
ship in this particular deal, he can still bind the p-ship if it
appears to the third party that he is carrying on the ordinary
business of the p-ship.
1) Exception
This is the exception to apparent authority. If the third party
knows that the partner with whom he is dealing is in fact not
authorized to do this deal, then the acts of the partner do not
bind the p-ship. The idea is basically estoppel intermingling
with apparent authority. This is specifically reiterated in 9(4).
c) Exception in 9(2)
Sec 9(2) excepts actions which are not apparently for carrying out
the business of the p-ship in the usual way from the power of the
partners to bind the p-ship. In general, if the partner tries to
do something which is apparently (to the third party) way outside
the normal way the p-ship does business, the actions of the
partner do not bind the p-ship unless the action is ratified by
the other partners.

3. Specific things partners cannot do
Sec 3 lays out some specific things which a partner cannot under
any circumstances do unless specifically authorized or the
business has been abandoned:
a) Assign the property of the p-ship to creditors
b) Dispose of the good-will of the p-ship
c) Do any act which would make it impossible to carry on the
p-ships business
d) Confess a judgment
e) Submit a p-ship claim or liability to arbitration.

4. One partner’s knowledge=p-ship knowledge
UPA sec 12. If one partner is told something, it is assumed that
the rest of the p-ship knows of it, unless that partner is
cheating the p-ship.

5. P-ship is bound by a partner’s wrongful act UPA sec 13.
If a partner commits a wrongful act in the ordinary course of the
p-ship’s business, the p-ship as a whole is liable for the act to
the same extent as the individual partner.

6. P-ship is bound by a partner’s breach of trust. UPA Sec 14
a) Partner’s fraud
If a partner acting in the scope of his APPARENT AUTHORITY
receives stuff from a third person and misapplies it, the p-ship
is liable to the third party for the loss
b) P-ship’s fraud
If the p-ship, acting in the course of its business, gets stuff,
and any partner misapplies it, the p-ship is liable to the third
party for the loss.

E. Inter se duties of the partners.

1. The core issue
The core is that each party has a fiduciary duty to every other
partner. Therefore, each has a duty of loyalty. The rest of the
rules about the rights and duties of the partners are based on
this core assumption.

2. Good faith
There is also usually a good faith requirement thrown in for good
measure when evaluating these types of questions. The situations
to especially look for it are:
a) Veto power
In situations where a majority is required, the exercise of the
veto power by one partner is usually subject to a good faith duty.
b) Oppressive negotiating tactics
Don’t try to screw your partners, ok?
c) Disclosure of information during negotiations

3. Duty not to comptete UPA Sec. 21.
Every partner is a fidicury to the others and is accountable to
them for “any profits derived by him without the consent of the
other partners from any transaction connected with the formation,
conduct or liquidation of the p-ship or from any used by him of
its property.”

4. Duty to render information
UPA sec 20. Upon demand, any partner shall render “true and full
information of all things affecting the p-ship to any partner….”

5. The big list of other stuff.
This is all in UPA sec 18. Remember that the partners can opt out
of anything in this section by carefully wording their p-ship
agreement. These are just default rules.
a) Rule for dividing losses. UPA sec 18(a)
The rule is that all losses will be divided according to the
percentage of total contributions made to the p-ship. Whoever
initially contributes the most has the most to lose.
b) Rule for dividing profits. UPA sec 18(a)
The rule is that all profits will be divided equally. Note that
this is different from the rule for dividing up losses or
c) Rule for indemnification UPA sec 18(b)
The p-ship must indemnify any partner who acts in the course of
the p-ship’s business.
d) Rule for advances to the p-ship UPA sec 18(c)
A partner can loan extra stuff to the p-ship without it becoming
p-ship property. In that case, he shall be paid interest for that
stuff as long as the p-ship has it.
e) Rule for interest on contributions
UPA sec 18(d)
However, interest begins to accrue on contributions to the p-ship
on the date when repayment should have been made.
f) Rule for control
UPA sec 18(e)
“All partners have equal rights in the management and conduct of
the p-ship business.”
g) Rule for salaries
UPA sec 18(e)
The default rule is that no one gets paid for acting for the p-
ship, except for the partner who is engaged in winding up the p-
h) Rule for new partners
UPA sec 18(g)
No new partners without the consent of ALL partners.
i) Rule for decisions of ordinary matters UPA sec 18(h)
Ordinary matters may be decided by majority vote of the partners.
j) Rule for acts in contravention of any agreement UPA sec
“[N]o act in contravention of any agreement between the partners
may be done rightfully without the consent of all the partners.”

F. P-ship property
A p-ship can own property in its own name.

1. Contributions
Partners generally bring stuff to the p-ship when they
start out. These are called contributions.
a) Title passes
The title of contributed property passes to the p-ship.
b) No claim to the property
The contributing partner loses all claim to the property itself
after he has contributed it to the p-ship.
c) Claim to repayment
At the time the p-ship dissovles, a partner is entitled to a
payment for any property he has contributed to the p-ship, but not
the property itself.

G. Dissolution

1. General definition
Dissolution occurs when “any partner [ceases] to be associated in
the carrying on … of the business.” UPA sec 29.

2. What triggers dissolution
This is specified in UPA sec 31 There are two general types of
dissolution, rightful and wrongful. Keeping track of what type of
dissolution you are dealing with is very important!
a) At will p-ships
If the p-ship agreement does not state otherwise, p-ships are
assumed to be at will. Thus any partner may dissolve the p-ship at
any time.
b) Rightful dissolution
1) Rightful dissolution without contravention of the p-ship
When the agreement of the parties does not say otherwise, a p-ship
may dissolve,
a> End of a term
If the p-ship is for a period of time, when the time expires, the
p-ship dissolves rightfully.
b> Achievement
When the p-ship is meant to accomplish a goal, the p-ship disolves
when the goal is achieved.
c> By the decision of a partner
If no term or goal is specified, any partner can dissolve the p-
ship. It seems, however, that the fiduciary duty of one partner
to the others may put constraints on this power if it would be
unfair for the partner to dissolve the p-ship. See Page v. Page
(359 P.2d 41 (Ca. 1961)
d> By the will of all the partners
Even if a term or undertaking is specified, the partners may agree
to dissolve the p-ship prematurely.
e> Expulsion
The p-ship is rightfully dissovled by the expulsion of a partner
as long as that power is granted to the partnersip by the p-ship
1> Duty of good faith
The partners must exercise good faith in the expulsion of any
2> Burden of proof.
The burden of proof is on the expelled partner to show bad faith
in the expulsion.
2) Other rightful dissolutions
a> Illegality
If it becomes illegal for the p-ship or for any partner to carry
on the p-ship’s business, the p-ship is dissolved.
b> Bankruptcy.
If a partner becomes bankrupt, the p-ship is dissolved. c> Death
The death of a partner dissolves the p-ship.
d> Decree of the court
This is controlled by UPA sec 32. The standards are laid out
there. We didn’t study it in detail, and they are pretty self-
explanatory in the section of the UPA.
c) Wrongful dissolution
This is also known as dissolution in contravention of the
agreement of the parties. Basically, it is any situation where a
partner quits and is not covered by any other portion of UPA sec
31. There are two basic types
1) Premature dissolution
This occurs if the partner bails before the term expires or the
goal is accomplished
2) Breach of fiduciary duties
This is a quick little cross-ap of UPA sec 32(1)(b)-(d)

3. Definitions:
The words are not always what they seem….
a) Dissolution
UPA sec 29
“The dissolution of a p-ship is the change in the relation of the
partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business.”
b) Winding up
Winding up is the process of settling p-ship affairs after
c) Termination
Termination is the point in time when all the p-ship affairs are
wound up.

4. The Big Choice
When the p-ship dissolves, the good partners have a choice. They
can either liquidate the p-ship, or choose to cash out the leaving
partners and continue in the p-ship’s business.

5. Liquidation – Dividing up the p-ship property
Here is where rightful versus wrongful dissolution comes into
play. Assuming that the partners want to end the whole thing,
they liquidate and divide up the partnerhsip’s property. The
partners who have not wrongfully dissolved the p-ship can also opt
to continue the p-ship’s business after paying off any leaving
a) Paying things off
Who gets paid, and who gets paid first are pretty vital questions.
1) Outsiders
Debts owed to outsiders are the first to be paid off
2) Debts to partners
After the outsiders are paid off, any debts of the p-ship to the
partners are paid
3) Contributions
Any contributions by partners are paid off
4) Profits
If anything is left after this, then profits are distributed to
the partners.
a> Exceptions
1> Expulsion
If the dissolution is caused by the rightful expulsion of a
partner, he doesn’t get to share in the distribution of profits if
the p-ship discharges him from all p-ship liablities.
2> Bankruptcy of a partner
If a partner is bankrupt or otherwise cannot be made to pay his
share (say he took off for Rio), the other parties will contribute
the excess needed to cover his missing amount. Their individual
shares of this excess will be determined by their share of the
profits. UPA sec 40(d).
b) Rightful dissolution
If everybody’s been good, all that happens is that everything is
paid off, and any partners remaining have the right to continue
the p-ship’s business.
c) Wrongful dissolution
1) Good partners
a> Distribution of assets
All of the good partners get everything whey would have gotten if
the dissolution had been rightful.
b> Damages
They get to sue the bad partner for breach of the
p-ship agreement.
c> The right to continue the business.
This will be handled seperately below.
2) Bad partners
Bad partners get cashed out. However, they do not get any value
for the goodwill of the p-ship if the other partners decide to
continue. Further, he must pay damages for the wrongful
a> If the p-ship continues
If the p-ship continues the other parties must either indemnify
him against all present and future debts of the p-ship (2(b)), or
released from all exsting liabilities (2(c(II)). The UPA is
inconsistent on this point.
3) Really bad partners
UPA sec 39 If a partner has defrauded another, and the p-ship
agreement is rescinded pursuant to sec 32, the person defrauded
can recover the money he had to pay to get into the p-ship and to
settle its debts from the really bad partner.

6. Continuing the p-ship’s business
a) New p-ship
A new p-ship is created. The old partners are cashed out. New
partners may be added. Sec 41.
b) Liability of new partners
New partners are not personally liable for the existing debts of
the p-ship he joins. His portion of the debts shall be settled
out of p-ship assets (sec 41(7)).
c) Liability of the p-ship
The new p-ship becomes liable for the debts of the old p-ship.

7. Discharging liability UPA Sec 36
a) Directly
This is done by an agreement between the leaving partner, the
creditor, and the person taking over the debt (if applicable).
b) Indirectly
The assent of the creditory may be inferred from a course of
dealing if the creditor knows of the dissolution. See Gjovik v.
Strope, 401 N.W.2d 664 (Minn. 1987). Discharge may alsoe occur
under UPA sec 36(3) if a creditor knows of an agreement by
another entity to assume the obligations of the dissolved p-ship
and the creditor assents to a material change in the obligation,
such as an extension of the length of time to pay the debt.

8. Winding up
This is covered in detail in Kleinberger’s outline.
a) Binding the p-ship while winding up UPA sec 35
A partner can bind the p-ship during winding up when
1) The act is appropriate for winding up, or
2) The act would have bound the p-ship and
a> The other party had
1> extended credit to the p-ship, and
2> had no notice of the dissolution of the p-ship.
b> Or the other party
1> Had known of the p-ship prior to the dissolution, and
2> The fact of the dissolution had not been advertised
Advertising is by a newspaper in the area where the p-ship does
3) The p-ship is not bound if
a> The third party did not know the partner was actually a
partner, or
b> The partner had been so inactive in the business that it
was not a p-ship act,or
c> The partner is bankrupt, or
d> The partner had no actual authority to do the act, and
neither of the following applies:
1> The third party had extended credit and had no notice
that the partner had no authority.
2> The third party had no notice of the lack of authority
and the fact of the lack of authority had not been advertised as
in 35(1)(b)(II).
b) The right to wind up UPA Sec 37
Unless otherwise agreed, all the good partners who are not
bankrupt may wind up.



A. Technical stuff

1. Limitation of liability
The owners of a corp. are not liable for the debts of the corp..
The corp. is a seperate entity.
a) Improper incorp.
If you don’t do the rituals properly, you are not shielded because
you have failed to actually create a corp.
b) Not keeping corp. assets seperate from personal assets
c) Central figure doctrine
If the managers are centrally involved in a wrongful deed, they
may be held liable for it

2. The parts of the corp.
The same person can be a member of all three classes, but there is
no legal requirement of it.
a) The shareholders
These are the owners of the corp. and are not necessarily natural
b) Directors
These must be natural persons
c) Officers
These are the guys in dard suits who actually run the show. 3. The
documents of the corp.:
a) The articles of incorp.
These are filed in the Secretary of State’s office to start up the
b) By laws
These are how the corp. will be run in a very basic way
c) Resolutions of the board of directors

4. State of incorp.
a) Creatures of statute
Corp.s are creatures of statute and the statute controls the
internal relations of the corp.
b) Doing business
There is no requirement that a corp. must incorp. in a state in
order to do business there.
c) Foreign corp.s
If a corp. does business in a state in which it is not incorp.d,
the corp. is referred to as a foreign corp..
d) Delaware
Lots of big corp.s prefer to incorp. in Delaware. Three reasons
have been posited for this:
1) The Delaware Corp. Code is very flexible
2) Delaware has expert state court judges on corp. law. Also,
there is a lot of case law in Delaware.
3) Delaware corp. law is very management oriented.

5. Ultra Vires
a) General idea of Ultra Vires
The doctrine is that some actions are beyond the scope of the
power of the corp., either express or implied, as defined in the
articles of incorp.
b) Operation
If an action was ultra vires, the corp. could be excused from
performance on that ground. Further, a party contracting with the
corp. could be excused, as well.
c) Presumption against ultra vires
A corp. act or contract which is authorized by the board of the
director is presumed to be valid; therefore any act by the corp.
is presumed to be not ultra vires.
d) Doctrine is now disfavored
1) Most corp. charters allow the corp. to do any legal
2) The doctrine is unfair
e) Methods around ultra vires
1) Ratification
If the majority of the shareholders ratifies the act, the act is
2) Fully executed contract
Where everybody has performed, recission of the contract is not
3) Estoppel
When one party has benefited from another’s full or partial
performance, the party benefited cannot use ultra vires to rescind
the contract.

6. Promoter liability
a) The promoter
Before the corp. is actually formed, some of the to-be
incorporators can try to get things set up for the corp. to be.
b) The promoter cannot bind the corp.
This is pretty much a truism. Because the corp. does not yet
exist, the acts of the promoter do not bind it.
c) How the promoter can make contracts
Because the promoter cannot really bind the corp., he must junp
through some hoops
1) Take an option
The promoter can make a contract to have the corp. make a
contract, basically take out an option on the contract. Further,
the consideration for the option could be the promoter’s promise
to use his best efforts
to have the corp. exercise the option.
2) Provide for novation.
The promoter could bind himself to a contract, but provide that if
the corp. is formed and it accepts the contract, he is discharged
from liability.
3) Make the contract in his own name.
This is the one that the promoter would like to avoid!! It is very
d) How the corp. becomes bound
The corp. must either ratify or adopt the contract. This is done
by the board of directors.
1) Ratification
This causes the corp. to ratify the act of its agent, the
promoter. The contract relates back to the point where the
promoter became bound.
2) Adoption
This causes the corp. to accept the contract on its pwn behalf.
The contract does not relate back.
3) Quasi contract
If the corp. accepts the benefits of the contract without formally
taking it up, the other party is entitle to recover the value of
those benefits conferred.

7. De facto corp. and corp. by estoppel
These are both two kinds of defective incorp. The central
question usually revolves around the liability of the owners of
the enterprise.
a) Two questions
1) Is the corp. shield unavailable?
2) Is there some legal basics for holding the participants
b) De facto incorp.
Three elements:
1) A statute which authorizes incorp.
2) A good faith effort to incorp.
Standard for good faith: The element of good faith generally
applies only where the papers have been filed incorrectly, but not
where the papers have never been filed.
3) “User” – the party must have acted like a corp..
c) Corp. by estoppel
If a creditor looked to a corp. for payment and does not rely on
the stockholds, it would by unjst to allow the creditor to deny
the incorp.. Otherwise, the creditor would by unjustly enriched.
d) How to hold owner’s and operators liable
1) Statutory basis – RMBC 146
2) P-ship law
3) Warranty of authority

B. Disregard of the corp. veil
1. Central figure doctrine
If an officer or director is “up to his elbows” in wrongdoing, it
is possible to hold him personally liable for that wrongdoing.
a) Scope:
1) Only gets the individual wrongful act
2) Only gets directors and officers
3) Only gets the contral figure or figures
2. Piercing the corp. veil
This gets shareholders:
a) Fuzzy elements
The courts have never been clear on what is required to pierce,
but here are some things that seem to consistently appear in
pieercing cases.
1) Some inequity or injustice
2) Disregard of the corp. form
3) Disregard of separation of the corp. from the owners
4) Siphoning of funds
5) Failure to pay dividends
6) Insolvency at the time of the transaction
7) Inadequate capitalization

C. The Board of Directors
1. The nature of the Board of directors
a) Board acts as a body
The board of directors acts as a body. The individual directors
do not have the power to bind the corp. only the board of
b) Procedural aspects
Since so much turns on the board’s acting as a body, there are
several procedural requirements.
1) Notice
There must be notice of a meeting of the board of
a> Regular meeting
There is not a formal notice requirement here since it is in the
by-laws of the corp.
b> Special meeting
A special meeting requires prior notice. However, the articles of
incorp. can determine what notice is required.
c> Waiver of notice
The directors can waive the requirement of notice at the meeting.
See RMBCA 144.
d> Corp. may not raise lack of notice to avoid contract
Lack of notice cannot be raised by a corp. to avoid a contract
with a third party who was unaware that the meeting was not
properly convened.
2) Quorum
Valid board action can occur only when there is a quorum present
at the time the meeting is convened. Unless the articles or the
bylaws provide othewise, a quorum is a0 majority of the authorized
number of directors.
a> Voting majority.
For the board to take action, a majority of the directors present
must approve the action. However, this may be less than a
majority of the members of the full board if there is a quorum
b> Committees of the board
The board may appoint committees of itself to deal with certain
business matters. The number of directors required on the board
will vary by statute.
1> Powers of the committee
The committee may do just about anything that the board can. In
Delaware, the powers delegable are any except those involving
fundamental organic changes to the corp.. See Del 141(c).
c) Ratification
Board action at an invalidly convened meeting may be ratified by
the board at a subsequent valid meeting.

2. The duties of directors
a) Fiduciary
The directors and officers of a corp. have a fiduciary
relationship with the corp.. Basically, they can’t play fast and
loose with the corp. for their own benefit.
b) The duty of care
Analysis must be done both on the basis of statute and case law.
Basically, the director owes the corp. a duty of due care.
1) Rational basis
Courts will shield derectos merely upon proof the directors had a
rational basis for their decison. That is, even though there was
an equally plausible alternative means by which the directors
could have achieved a result which would not have exposed the
corp. to a loss, they are protected so long as the route chosen
had a reasonable basis.
2) Which directors are liable
The breach of a duty of care by one or a few of the directors does
not subject all the directors who voted for the transaction to
liability. Only those directors who have breaced their duty of
care will be jointly and severally liable for the losses
proximately caused by the the decision.
3) Habitually absent directors
Directors have a duty to show up for meetings. Not to do so is a
breach of the duty of care. This may be just a technical breach,
with no damages, but if it leads to the corp. running amuck, it
can be the basis for a derivative suit.
4) Duty of officers contrasted with that of directors
Within their spheres of authority, officers must exercise the same
standard of care, skill and diligence as is required of directors,
with one major exception. The officers of the corp. may be held
liable for breach of his duty of care for corp. losses caused by
the acts of subordinates which the officer could have detected or
prevented through the exercise of reasonable care
5) Statutory
a> RMBCA 8.30
1> Good faith
2> Due care
3> Reasonable belief that the act is in the best interests
of the corp..
b> Delaware 141
Delaware interprets the standard to be one of gross negligence.
See Aronson v. Lewis.
6) On what may the director rely?
The directors need to rely on someone to give them reliable
information. If the information is bad, it would not be good to
hold the director responsible. See RMBCA 8.30 (b) and Del 141(e).
a> Officers
The director may rely on one or more officers or employees of the
coproration whome the director reasonably believes are reliable
and competent.
b> Outsiders
Lawyers and accountants, mostly
c> Committees of the board
If the director reasonably believes that the
committee merits confidence.
7) Not perfection
The law does not expect directors to be perfect or to always be
right. Rather, te law makes sure that they use the proper method,
even if the results turn out wrong
8) Business judgment rule
The directors are not liable for losses incurred as a result of
the directors’ good faith business judgment arrived at through the
exercise of reasonable care.
THis rule does not protect all decisions of the board of
directors. A decision which amounts to fraud or arrived at
because of self interest or without the exercise of reasonable
care will not be protected by the business judgment rule.
a> A director who satisfies his duties under RMBCA 8.30
is not liable
b> The law presumes that the director satisfies his
9) Plaintiffs burden of proof
In order to recover against a director for breach of the duty of
care, a plaintiff must show:
a> A breach of the duty
b> Causation
I.e., that the breach of the duty caused the harm he claims.
10) Who is the plaintiff?
Usually the corp., not the shareholders. These are brought as
derivative sutis.
11) How much care is due?
The standard here is that as long as the director is not
negligent, he is shielded by the business judgment rule
b> Delaware
The standard here is that as long as the director is not grossly
negligent, he is shielded by the business judgment rule.
12) Shareholder vote may not exonerate
In situations calling for a shareholder vote on a transaction,
such as a merger or a self dealing situation, the board may have
been so derelict or evit that even a shareholder vote will not
excuse them.

c) The duty of loyalty
This is a part of the director’s duty to act in good faith. A
breach of the director’s duty of loyalty moves him outside the
scope of the business judgment rule.
1) Director self dealing
a> Definition
Basically, if a director makes a personal profit on a deal with
the corp., it is self dealing.
b> Rebuts business judgment rule
Because the director is making a profit, he can no longer be
presumed to be working for the best interests of the corp..
c> Making self-dealing OK
There are three methods of making self interested deals that are
OK. These are usually controlled by statute. Se. Del 144, RMBCA
1> A fair deal
If you don’t cheat the corp. to your own benefit, you certainly
have not breached the duty of loyalty.
2> Approval by disinterested shareholders plus disclosure
If the shareholders who do not stand to profit on the side from
the deal approve, knowing that it is self dealing, it’s OK
3> Approval by the disinterested directors plus
The same analysis as above.
d> Burden of proof
Once the plaintiff has shown that the transaction fits within the
scope of the self dealing statute, the presumptions of validity
that normally atend a corp. transaction disappear. The burden of
proof is then upon the interestd party or the corp. to establish
one of the ways to get around self-dealing.
2) Corp. Opportunity (More duty of loyalty)
a> General Idea
If the corp. has an opprotunity to make some bucks, and a director
swipes the opprotunity for himself, this is covered by the corp.
opportunity doctrine. It is a no-compete type of concept.
b> Remedy
My personal favority remedy: disgorgement of ill-gotten gains.
Possibly an accounting as well, to find the extent of the gains.
The opportunity is considered to be held in constructive trust for
the corp..
c> Three major issues
1> Is there a corp. opportunity

Here there are three tests:
a: The expectancy test
This is the narrowest of the tests
Basically, this test is whether the corp. had some sort of
expenctancy interest in the opportunity
1: Does the corp. have some sort of “beachhead”
2: The corp. must have made some sort of step toward the
3: It captures business necessities
4: Focus is only on the corp.
5: The burden of proof is on the corp.

b: Line of business test
Is the opportunity within the purview of the corp.?
1: Expectancy test
2: Is the opportunity essential, necessary or merely desirable to
the reasonable demands or aspirations
3: Is the opportunity within the corp. power?
4: Can the corp. afford it?
5: Is the deal harmful or unfair?
6: Is the deal within the corp.’s competence
This includes personnel, facilities, equipment, etc..

c: ALI test
1: Any business opportunity which the director or officer came to
know of while doing corp. stuff that the offeror of the
opportunity expects him to send to the corp..
2: Any business opportunity which the director or officer came to
know of through the use of corp. information or property which he
sho7uld reasonably believe would interest the corp..
3: Any business opportunity which the director who is an employee
or officer reasonably should know is closely related to the
business of the corp. or a business in which the corp. would be
expected to engage.
2> Was the opportunity usurped?
No usurpation if the corp. declines the offer after disclosure.
The declination must be made by the disinterestd directors

a: Minnesota
Minneosta offers another out for the director was the director’s
taking of the opportunity fair?
b: ALI
A multi-layered analysis:
1: Was the offer presented to the corp.? If not, the director
has usurped
2: Was the offer rejected either by the disinterested
shareholders or the disenterested directors?

A. Was the deal fair?
If the offer was not rejected and the deal was not fair, then
there has been an usurpation.
c: Delaware
Briefly summarized, the law is that if a business opportunity is
presented to a corp. executive, the officer cannot seize the
opportunity for himself if: (a) the corp. is financially able to
undertake it; (b) it is within the corp.’s line of business; (c)
the corp. is interested in the opportunity. Guth v. Loft, Inc.,
supra, and Johnston v. Greene, Del.Supr., 121 A.2d 919 (1956).
3) Shareholder vote may not exonerate
In situations calling for a shareholder vote on a transaction,
such as a merger or a self dealing situation, the board may have
been so derelict or evit that even a shareholder vote will not
excuse them.

D. Shareholders
1. Duties of the majority shareholders
a) General rule for sale of control
If the majority shareholder(s) sells control for a premium, he is
under a fiduciary duty to the minority . If the buyer does
something bad, the minority may have an action against the
original seller.
b) Elements of the cause of action
1) Sale of control
2) Payment of a control premium
A control premium is a price above the market price for the shares
for the privelege of exercising control of the corp..
3) Bad behavior by the purchaser
The purchase must do something bad. Usually, this is looting the
corp. of the assets or other breach of the duty of loyalty.
4) The seller must have had scienter of the bad stuff.
The seller must have known that the purchaser was going to violate
the duties.
2. Shareholder control
Generally, shareholders have almost no say in the operation of the
corp.. What they do control is
a) Election of directors
b) Removal of directors
Directors can be removed by vote of the shareholders. Some
jurisdictions require that there be cause for the removal of
directors, but the majority of states (and RMBCA 39) state taht
they can be removed at will by the shareholders
1) Strange rules
To protect a minority director elected by cumulative voting when
the removal of less than the entire board of directors is sought,
absent a showing of cause, the director to be removed will not be
removed if the number of votes against removal would have been
enough to elect him under cumulative voting (RMBCA 39).
c) Fundamental change in the corp.
Some examples of this are:
1) Merger of the corp.
2) Sale of all or essentially of the assets 3) Amendment of
the articles of incorp. 4) Dissolution of the corp.
5) Things specially related to stockholders
These are things like time and place of meetings
6) Ratify self dealing transactions
d) The test for sharholder right to control
If the matter concerns the management of the ordinary affairs of
the corp., the shareholders do not have the right to vote on it.

3. Shareholder meetings
a) What goes on
The shareholder’s meeting is the fourm in whidh the shareholders
in most instances express their consent or disagreement with the
management of the corp..
b) Action outside of meeting
The RMBCA (145) allows shareholders to take valid shareholder
action outside of the meeting provided that all shareholders
entitled to vote agree. Other jurisdictions allow this to happen
on just a bare majority.
c) Notice
Most states require notice to the shareholders before even a
regular meeting. Del 222; RMBCA 29.
1) Regular meeting
For a regular meeting, notice is generally required only of the
time and place.
2) Special meeting
For a special meeting, notice of the business to be transacted is
usually required.

4. Proxies
a) Definition
A proxy is a power to vote granted by the shareholder to the proxy
holder. It basically allows the sharehold to have some say in the
corp. without having to go to the meetings. The relationship
between the proxy giver and the proxy holder is one of principal-
b) Revocable
Proxies come in two flavors, revocable and irrevocable. Revocable
proxies are the normal kind. At any time prior to the actual
vote, the proxy giver can strip the proxy holder of his authority
to vote the proxy
c) Irrevocable
Irrevocable proxies are those which are coupled with an interest.
An interest is merely some stake in the outcome of the meeting or
of the value of stock.
1) Coupled with sale of stock
If a stockholder sells his stock just before the shareholder
meeting, the new owner will not be registered yet with the corp.,
and will not be allowed to vote. In order to vote he has to get a
proxy from the original seller.
2) Pledge
If the stock is pledged as collateral to a loan, this has been
held to be sufficient interest to allow an irrevocable proxy.
d) Revoking a proxy
A proxy may be revoked by written notice, the death of the proxy
giver, the proxy giver’s subsequent giving of a proxy to another,
or by the proxy giver actually voting the shares.
e) Federal Regulation of Proxies
1) Scope
The federal regs governing proxies generally apply only to what
could be loosely classified as big corp.s. The actual requirements
a> The stock is listed on a national exchange; or
b> The corp. is engaged in interstate commerce; and
c> The corp. has assets greater than $5 million; and
d> The corp. has a class of equity securities held by more
than 500 persons.
2) Proxy statement
Rule 14a-3 requires that each solicitation of a proxy have an
accompanying proxy statement.
3) Truth
Rule 14a-9 requires that the proxy statement fully disclose all
material information concerning the subject to be voted upon. the
standard is “if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how
to vote.” TSC Industries v. Northway, Inc.
4) Dissidents rights to proxies.
Shareholders who disagree with the board can force the board to
mail their proxies, or furnish them with a list of the names and
addresses of all shareholders. The cost must be borne by the
dissidents. Rule 14a-7
5) Standing to bring action
While the Securities Exchange Act does not expressly provide the
private shareholder with standing to bring an action under 14 (a),
the Supreme Court has upheld the right of private litigants to
bring an action in their own names or to bring a derivative suit
on behalf of the corp. to enforce the proxy rules. J.I. Case Co.
v. Borak
6) Shareholder proposals
The federal rules require that the corp. allow shareholders owning
at least 1 percent or $1,000 worth of stock add what their own
proposals to any corp. proxy. Rule 14a-8. The corp. can get out
of this if the proposal:
a> Not proper subject for shareholder action
The proposal concerns a matter which under the laws of the corp.’s
domicile is not a proper subject of shareholder action.
b> Personal grievance
The proposal relates to the enforcement of a personal claim or
seeks to redress a personal grievance against the corp.’s
management or others.
c> Less than 5%
The proposal relates to operations which account for less than 5%
of the company’s assets and less than 5 percent of its net
earnings and sales for the most recent year.
d> Ordinary business
The proposal consists of a recommendation or request that
management take action with respect to a matter relating to the
conduct of the ordinary business of the corp..
e> Removal of directors
The proposal relates to the election or removal of directors.
f> Counter proposal
The proposal is counter to a proposal being submitted to the
shareholders by the corp.’s management.
g> Moot
The proposal has somehow been rendered moot.

E. Close corp.s
The close corp. is one where the shares are owned by a very small
number of people, and the shareholders are involved in the day to
day business of the corp.. It is a lot like a p-ship with a corp.
gloss put on it.
These things are a mess!

1. Definition of the close corp.
The definitions are often contolled by statute. For my purposes,
they are controlled by Del. 342, Minn. 302A.457 (page 200 in my
handout), and RMBCA 8.01. If the corp is small enough so that you
can get all shareholders to agree on various modifications to the
default corp. structure, you have a closed corp.
a) Delaware
This is Del. 342. Basically: No more than 30 shareholders; a
stock transfer agreement; no sales of the stock; the articles say
there is a close corp.
1) Exception
Under Zion v. Kurtz, the fact that a corp. was not formally a
closed corp (they didn’t change their articles), does not mean
that it is not. This case created close corp by estoppel!!
b) Turning into a close corp
A normal corp. can turn into a close corp.. Usually it requires a
larger than majority vote. Delaware requires a 2/3 vote.

2. Stock transfer restrictions
These are restrictions on shareholders selling their stocks. They
are necessary to prevent the close corp. from being diluted by
outsiders. See RMBCA 6.27, and Del 202
a) Where the restrictions are
They can be in the bylaws, the articles, or even be just private
agreements among the shareholders.
b) Notice
A stock transfer restriction is binding only upon those who have
notice of it. Therefore, the fact that the stocks are under a
transfer restriction is often stated on the face of the stock
c) Types of restrictions
1) First option
In this scenario, the transferor must first offer the stock to the
corp. or to other stockholders. The price to be paid by the corp.
may be determined by either
a> The corp. matches the price offered by the outsider
b> There is a pricing arrangement in the agreement.
2) Mandatory buy sell
Under this scenario, the transferor is obliged to sell and either
the corp. or the other stockholders are obliged to buy the stock.
Price is determined either by
a> Some mechanism in the agreement.
b> A stated value in the agreement
The parties must be careful to reconsider this vale from time to
time, as the value of the shares changes.
3) Corp. restriction
Delaware allows the corp. or holders of corp. securities to nix
any sale. Del. 202(c)(3).
4) In general
These are restraints on alienation, and the law hates them.
Therefore, they are very strictly contrued.

3. Other methods of control
a) High vote requirements
By requiring a vote much greater than the standard 50% +1 formula,
the incorporators can guarantee that minority interests will be
protected and the corp. will not radically change without the
consent of nearly all of them.
1) Directors or shareholders
The requirement of a supermajority can be placed on either
shareholder votes or votes of the board of directors.
2) Unanimity ususally banned
Even though the incorporators can set a requirement of a larger
number of votes than a majority, they are usually banned from
requiring unanimity. This is to prevent corp. deadlocks and allow
the corp. at least some flexibility.
3) De facto unanimity usually OK
Even though true unanimity requirements are usually banned, the
incorporators can require effective unanimity, say 90%
b) Proxies
Then simplest method was to give away proxies. The only problem
is that the proxies were always revocable unless coupled with an
c) Voting trust
This puts several minority shareholders together and turns them
into a majority. Shares are transferred to a trustee, who can
then vote the shares according to the trust agreement.
d) “Lite” voting agreements
These are merely agreemtns about who the stockholder’s will vote
to the board. They are generally enforceable.
1) Not revocable
2) Remedies
The remedies are usually either specific performance, or the
disallowance of the votes cast in breach of the agreement. The
modern courts have tended to favor specific performance.

4. Director agreements
Generally, directors are free to do what they think best,
constrained only by their duties to the corp.. However, in the
close corp., things are a little different, and they can form
agreements on what they will do. In order for them to be valid,
the following are required:
a) Close corp.
b) Does not operate as a fraud on shareholders or creditors
c) Involves only a slight restraint on the board.

5. Modern developments
Since the original corporat law was a pain for the close corp.,
several states have changed stuff to make it easier to do
a) Shareholders replace directors
The articles may allow the shareholders to act as directors of the
corp.. Del 351
b) Management agreements
The shareholders may confer the power of management. Del 350
c) Shareholder control agreements
These are created and controlled by statute. Basically, it allows
the corp. to act as if it were a p-ship See Del 354. Minnesota
makes it enforceable if all the shareholders know of it and it is
advertised on the face of each certificate of stock.

6. Good faith requirements
Because everybody has to work together for the close corp. to
work, the participants in the close corp. have a duty to treat
each other nicely, usually translated into legalese by saying they
have a duty to act in good faith, and that they stand as
fiduciaries one to another.
a) Reasonable expectations
The parties are to look out for each others reasonable
expectations at the time of the formation of the close corp.. See
Minn. 302A.751. The problem is documenting what those
expectations are.
b) Good faith and fair dealing
This deconstructs into procedural fairness and substantive
1) Substantive fairness
“It is substantively unfair and a breach of fiduciary duty for a
controlling shareholder or a group of shareholders to appropriate
overmush of the enterprise’s economic benefits. Those in control
may not “freeze out” minority shareholders, either directly (a.g.
by cutting dividends and selectively cutting salaries) or
indirectly (e.g. by siphoning off assets to other ventures).”
Kleinberger’s article on Good Faith and Close Corp.s.
2) Procedural fairness
“Doctrines of procedural fairness limit the ways in which
shareholders in close corp.s may deal with each other. These
doctrines focuse on process, not outcomes.” Kleinberger. Some of
the bad things are:
a> Arbitrary use of veto power.
“Even where a shareholder agreement gives a shareholder complete
discretion to veto particular corp. actions, the law may impose a
duty not to act arbitrarily.”
b> Oppressive and unfair negotiating tactics
The shareholders must refrain from overly aggressive tactics, even
though those tactics would be OK if they were dealing at arm’s
c> Failure to disclose
“Fiduciaries owe each other the duty of loyalty, and that duty
entails what is often called an obligation of complete candor.”
F. Mergers and acquisitions
The sale of all or substantially all of the corp. asets, or a
merger with another corp. is a fundamental change to the corp.
structure. Usually the vote of the shareholders is required for
its approval. The managers would generally like to avoid these
votes, so they devote a good deal of effort to working around the
voting requirement. This section will also deal with buyouts.

1. Sale of all or essentally all of the corp. assets
a) What is all or substantially all?
The test varies from jurisdiction to jurisdiction for what all or
substantially all of the assets are.
1) RMBCA 12.01
Under the RMBCA, the test is very strict – it leiterally has to be
nearly all of the assets.
2) Delaware 271
The wording is the same as for the RMBCA, but as interpreted in
Katz v. Bregman, it seems that the standard is lower in Delaware
for what constitutes all of the assets. If the corp. sells all of
its profitable divisions, while keeping only the losers, this may
be the sale of essentially assets.
b) Normal course of business.
However, a corp. may be engaged in a business with very high
turnover, and the sale of all or nearly all of the corp. assets
may be in the normal course of business. In that case,
shareholder approval is not required for the sale.
c) Shareholder approval
A sale of all or nearly all of the corp. assets, if it is not in
the normal course of business requires shareholder approval
d) Director approval
The sale of all or nearly all of the corp. assets requires the
approval of the board of directors.
e) Dissenters’ rights
Dissenters (those who do not like the sale) have the right to get
out of the corp. if the sale is one which requires shareholder
approval. The statutes normally allow them to get an appraisal
and their money out.
1) Conditions precedent for getting an appraisal
a> File a written objection to the sale
This must be done before or at the shareholder meeting that
approved the sale.
b> Vote against the sale
c> Give the corp. notice of the dissent
d> Surrender the certificates to the corp.
2) Exclusivity of the remedy.
Many courts have held that the appraisal remedy is the exclusive
remedy of the dissenter – they cannot, if they seek appraisal,
attempt to have the sale enjoined. RMBCA 13.02(b)
3) Exceptions to the appraisal
If the corp. has lots of shareholders (2000) or the stock is
traded on a national exchange, the shareholder cannot get an
appraisal. They get to sell their stock on the market.
Del 262 (k)
4) Price paid
The price the corp. pays for the stock is the fair market value of
the stock on the day preceding the shareholder vote to approve the
f) Fiduciary duty of the majority shareholders
The proposed sale must be fair to all interests of the corp. and
may be set aside if it is fraudulent or oppressive to the
g) Mortgages
The board generally does have the power to mortgage all or
substantially all of the corp.’s assets without shareholder

2. Mergers
These are another area where the general rule is that the
transaction must be approved by the shareholders. The directors
like to find the exceptions to the rule.
a) Definition of a merger
A merger is the absorption of one corp. by another corp.,
whereupon the acquired corp. ceases to exist as a corp. entity.
b) Procedure to do a merger
1) Director’s
The board of each corp. must approve the plan of merger by
majority of the directors in attendance at a properly convened
2) Outline of Plan submitted to shareholders
3) Approval of shareholders
Some jurisdictions require approval by two-thirds of the
shareholders, some only require a majority.
c) Results of a merger
1) Existance
As a result of a merger or consolidation the existence of all
corp.s except the new or surviving corp. is ended.
2) Rights and duties of the Survivor
The surviving or new corp. possess by operation of law all the
rights, priveleges, powers, franchises, property, debts, choses in
action, and other interests of the old corp., and is subject to
all of the restrictions, disabilities and duties of the merged
3) Rights of the old corp.
The new or surviving corp. may enforce the rights of the
constituent corp.s on contract made by them before the merger or
4) Debts of the old corp.
The survivor assumes by operation of law all of the debts,
liabilities and duties of the constituent corp.s. This includes
debts unknown at the time of the merger
d) Getting around shareholder approval
Directors like to ignore the shareholders. Usually, it is
impossible to eliminate the vote of the acquired corp., but with a
little deviousness, it is possible to get rid of the shareholder
vote for the acquiror.
1) Small acquisition
If the acquisition is small enough, no approval by the
shareholders of the acquirer is required. The common requirements
for how small an acquisition fits under this are:
a> The articles of incorp. do not change
b> The shareholders hold the same numbers of voting
c> The shares issued to the acquired corp. do not exceed 20%
of the currently outstanding shares of the acquiror
1> Note on authorized shares
The authorization of a new issue of shares generally requires
shareholder approval. In order for this small acquision exception
to work, the corp. must already have shares authorized which have
not already been issued.
2) Short form merger
When once corp. already owns more than 90% of another, the parent
may merge the subsidary into itself without any shareholder vote
at all (either corp.). The minority shareholders of the subsidary
get cashed out with either cash or stock in the parent.
3) Sale of assets for stock
The generaly idea is that a corp. can barter for assets. A buyer
can buy assets of a seller corp. by giving stock instead of cash.
The application of this idea can lead to methods areound a
shareholder vote.
a> Procedure
1> Buyer buys assets
The buyer gets to buy the assets of the seller corp.. In exchange
for these assets, the buyer gives stock.
2> Seller votes
If this is sale of all or substantially all of the assets, the
shareholders of the corp. selling the assets get to vote on the
3> The seller distributes the shares as a dividend
Thus the seller’s shareholders end up with shares of the buying
corp. and the worthless shares of their old corp..
4> Accomplishes nearly the same thing as a merger.
But it doesn’t require a vote of the buying corp.’s stockholders
if there are enought shares authorized to carry out the deal.
b> De facto merger
Because this does accomplish nearly the same thing as a merger,
some courts (NOT DELAWARE) say that it is a de facto merger, and
the buying corp.’s shareholders get to vote on it. Delaware
rejects in Harrington, Pennsylvania accepts in Glen Alden.

4) Triangular mergers
You do one of these when you want the advantages of the merger
(like the franchises of the acquired corp.), without the
disadvantages (like a shareholder vote).
a> Plain triangular
1> The acquiror creates a subsidary.
2> The acquiror buys all of the stock of the subsidary
How does it do this? By giving it shares of itself. So now we
have a wholly owned subsidary of the acquiror whose sole asset is
a pile of the acquiror’s stock.
3> The target is merged into the subsidary.
This is done as a classic merger. All the shareholders goet to
vote. Therefore, the target’s shareholders goet to vote, as well
as the subsidary’s. But the neat thing is that the only
shareholder of the subsidary is the acquiror, who gets to vote all
of the shares in favor of the merger.
4> The subsidary buys out the shareholders of the target
And what does it use? Why, its only asset – the shares of the
5> The target’s shareholders give all of their shares to
the subsidary.
6> The subsidary is merged back into the parent.
This is a short form merger – no need for shareholder approval!!!
b> Reverse triangular
This is the same as above, except that the subsidary is merged
into the target.

3. Tender offers
These are when an outsider makes an offer to buy the shares of
stockholders. Often, the management of the corp. isn’t very happy
about the buyer, especially since he’ll probably give ‘em the
boot! Therefore, the majority of the analysis here is how the
corp. can keep itself from being taken over.
a) Things the board can do
See the list in the case book. I’m not writing it out again.
b) What the board cannot do
Basically, the board cannot take actions which assure them of
jobs. If they have made the decision that the corp. will either
be sold or broken up no matter what happens, their duty shifts to
one of making sure that the shareholders get the best price
1) Shareholder vote may not exonerate
If the board has been very derelict or very evil, the vote of the
shareholders may not excuse their actions. Smith v. Van Gorkom.
c) Demise of the corp.
1) The duty of the directors changes
Normally, the duties of the director’s are owed to the corp..
However, if the corp. is going to be sold and broken up, no matter
what, their duty shifts to the stockholders. The duty then is to
get the highest possible for the shares.
See Revlon, Inc. v. Mcandrews and Forbes, Inc.
2) What is demise?
What triggers this shift in duty?
a> Will the corp. structure be preserved?
If it will not be, the corp. is probably dead and Revlon kicks in.
b> Is the corp. business preserved?
If it will not be, the corp. is probably dean and Revlon kicks in.
c> Is there a wholesale change in stockholders?
If there will be a total change in ownership, Revlon kicks in.

G. Suing the corp.: Derivative actions.
1. Definitions
The derivative suit is where one or more of the stockholders sue
in the name of the corp.. It is usually used where the person or
persons to be sued are directors of the corp..

2. Direct versus derivative
a) Direct actions
These are actions brought directly by the shareholder against the
board. They are not derivative, and they do not have to junp
through the derivative hoops.
b) Telling the difference
This can be difficult
1) The basic test
The basic test is who has the claim, the shareholder or the corp.?
This can be looked at in two ways:
a> To whom was the duty owed
For there to be a claim, there must be a breach of duty. The
nature of the duty breached will tell you whether this should be a
direct or a derivative action.
b> Who was harmed most directly
All harm to the corp. will probably eventually harm the
stockholders. But some harms go directly to the stockholders. If
so, they have a direct action. If the harm must ripple through the
corp. first, then the action is derivative.
c) Duties owd to stockholders
There aren’t many of them
1) Duty to allow voting
This is in situations like mergers and the election of directors
2) Duty to pay dividends fairly

3. The structure of the derivative suit
a) Parts of the suit
The suit will have two parts:
1) Who’s in charge here
Normally, it’s the Board. They have the right and duty to manage
the corp.. The stockholder must show why he should take charge of
this part of the corp.’s business.
2) The underlying suit
This is just the claim for some breach of duty
b) Issues peculiar to the derivative suit
1) Contemporaneous ownership
The plaintiff must be a stockholder
a> At the time the breach of duty occurred
b> During the whole trial
2) Demand on the board
a> Rationale
Since the board manages the corp., they must have first crack at
the suit. If the board rejects the demand, we then proceed (if
demand was not made because excused)
1> Position to evaluate
The directors are presumably in the best postion to evaluate the
merits of the suit
2> Allocation of resources
The directors are also in a position to decide if the suit is a
good idea for the corp. given the level of recovery possible, the
cost of litigation, and the chance of recovery.
3> Deterrence of strike suits
A big bugaboo
4> Enhances directors’ sense of diligence.
c) Suing derivatively in Delaware
Delaware has two routes to getting a derivative suit off
the ground
1) Route 1 – The boring way
This way the shareholder almost always loses. When demand is not
excused, the business judgment rule applies with all of its power
and glory to the board’s decision to reject the suit
2) Route 2 – The fun way
This is the fun and confusing way.
a> Demand must be futile
This must be shown by the plaintiff
1> Decided on the pleadings
Whether the demand would be futile is decided on the pleadings,
not at trial.
2> Standard
All of this is in Aronson.
To show futility, plaintiffs must allege particular facts which,
if true, raise a reasonable doubt as to either a:
Disinterestedness The Board’s disinteredness as the time of the
original transaction; or b: Business judgment That the business
judgment rule does not otherwise apply to the underlying
3> Pre-discovery
This pleading of particular facts must be done before there is any
4> Difficult
This is a real pain in the but
b> The Zapata Two-step
Once demand has been excused, the court has two routes that it can
1> Modified business judgment
The court can apply the modified business judgment rule to the
decision to reject the suit. The burden of proof will be on the
board to show:
a: Independence
That the people on the board or committee which made the decision
to reject the suit were independent.
b: Good faith (as usual)
c: A reasonable investigation of the suit
2> Court’s business jusgment.
The court can also decide to apply its business judgment to the
decision. Whoah Nelly! Where did that come from?
c> The demand trap
The fact that a defendant makes a demand is prima facie evidence
that a demand is not futile!!!!! If the plaintiff does make a
demand, he goes to the boring, losing route immediately!!!!!

4. Suing derivatively in the rest of the world
The rest of the world uses the test set forth in Auerbach (NY).
Given the standards below, Auderbach can usually be satisfied by
having a committee of the outside directors who are not defendants
to the action examine the matter.
a) Good faith
The Board must show good faith in its rejection of the lawsuit
b) Reasonableness
The court may review the reasonableness of the decision, but may
not second the board
c) Process
The court may review the process by which the decision was reached
d) Inquiry
The directors must be reasonably complete in their inquiry.

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In the years since the Library, based in Nevada’s Capitol, went on-line
we’ve received many requests for referrals to someone who can handle the
formation and/or serve as resident agent for Nevada’s very popular
corporations, partnerships and LLCs, but aware of the abundance of such
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And we almost gave up. . . until we ran across Carson City’s “Resident
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So whether you need someone to take care of all the details of forming a
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or will start yourself, we feel confident in urging you to check them out by
visiting their website at — https://nevada.org

Note: 1. The Library has no affiliation with R.A.N. and gets no commissions
from our recommendation.
2. We do not mean to imply that all other Incorporation concerns are
“shady”… but we know that a number are, so please be very careful when
choosing such firms.