Corporations Cheat Sheet by DheeJayAy

Right to dissol­ution, but still liable for breach of K, damages from dissol­ution

Protect member­s/p­artners from liability while offering pass through taxation and relatively flexible operat­ional requir­ements. If such entitities do not wish the tax pass through status, they merely check a box on a tax form and they are taxed as if they were corporate entities.

Tax

Liability

Involves authority actually given by a principal to an agent. The authority may be express (there is an oral or written statement of what the agent is to do) or implied (inferred from the words or actions commun­icated by the principal to the agent).
Implied authority- often derived by determ­ining what actions are reasonably included in the grant of particular express authority.

Does not depend on intera­ctions b/w the principal and a 3rd party but inheres in a position.
-A 3rd party can rely (unless it knows or should've known of a restri­ction) on the level of authoirty one in that position typically has.
-The difficulty arises when, unbekn­ownst to a 3rd party, the principal has restricted the agent's authority. If the agent exceeds actual authority, but acts w/in the authority a person in the position would normally have, the principal will be liable for those acts.
-No overlap in authority when there an undisc­losed agency relati­onship and the 3rd party believes he/she is dealing w/ a principal

ex) Self-D­ealing, Interl­ocking Direct­orate, Corporate Opport­unity
Structural Hold- officers are often SHs and may have personal stakes of officer as individual
Structural bias- Concept applied to relati­onship among members of closely knit working groups. Directors of major corps. have ths same class, educat­ional, and social backgr­ound. SImila­rities and repeat intera­ctions result in an uncons­cious mainte­nance of collegial, non-co­nfr­ont­ational relations. Directors won't critize colleagues and often "go along" with the idea that they can count on others going along with their proposals even at the expense to the corpor­ation.

Corp. fiduci­aries owe only contra­ctual duties to creditors. There are no duties beyond what is in the K. "­Other consit­ute­ncy­" statues permit (not require) creditors to be considered when fiduci­aries make decisions.
Preferred Shareh­olders (PS) hold a place b/w SHs and creditors. Specific rights of PS are establ­ished in the articles of incorp­ora­tion, and as to them, fiduci­aries owe K-like duties. For all other issues, PS have the same rights as SHs and are owed the same duties. Charters often provide modifi­cations for preferred SHs in areas such as dividend or liquid­ation prefer­ences and reduced voting rights.
-A more subtle modifi­cation involves the callab­ility of preferred shares (see Zahn).

Corps have been obligated to pursue weath maximi­zation.
Nevert­hless, have been permitted rsbl charitable contri­butions and the provision of benefits for workers.
-These were justified by the goodwill and efficiency they generated leading to greater corp. profit.
-Charity was also justified b/c corpor­ation are public citizens and the respos­itory of much of hte nation's wealth, replacing individual philan­thr­opists.
-Many states passed statutes permitting charitable contri­but­ions. SEveral states have also adopted "­other consti­tue­ncy­" statutes which permit (not require) boards to consider the interests of works, suppliers, lenders, local commun­ities, etc. without incurring liability for making such decisions.
-Critics say these statutes give boards even greater power to justify anything they decide to do.

1. Rebuttable presum­ption that the bd. (or other fiduciary) has a made a decision in good faith, in due care, and without conflict of interest.
2. The burden is on the Pl. to show bd breached duty,

Parent­-Su­bsi­diary transa­ctions: Not enought to trigger EF, must show more to show that parent took a benefit at the expense of the minority.

The opport­unity is deemed corporate

Already having some claim on the oppty or has taken action indicating that it is or will be seeking such oppty.

Make full disclosure to the bd. material facts (the nature of the conflict)
-If a majority of the disint­erested directors thereafter approve the transa­ction, it is sanitized to the extent that a compla­ining SH will have the burden of proving any defect in the transa­ction.

-Burden shifts to Pl. to show transa­ction was not entirely fair.
-Does not insulate transa­ctions from challenge

By a SH(s) on behalf of the corp. to recover a judgment in its favor. The claim injury is to the corp. with the sh's injury being derivative (the SH's stake suffers a pro rata dimunation by virtue of the injury to the corp.)The corp. is a nominal def. to give the court jxn over it. The rule is that a SH must make a demand on the bd to bring suit before bringing the suit.

The only excuse for a demand is if it would be futile. Then, the SH must explicitly and in detail allege in the complaint why demand would be futile. Futility can be shown when a maj. of the directors are interested in the transa­ction or where they can not be relied upon to exercise due care where they are dominated by an interested director.
-If excused, BJR dna and the pl. may proceed with the suit. However, a bd. may appoint a:
-Special Litigation Committee (slc) to dermine whether the suit should continue.
Maj. rule: slc's decision is protected if the committee is disint­erested and used approp­orate procecures.
Min rule: Utilizes the same test as a first step, but the minority rule allows the court to determine whether in its judgment, the suit should continue. This position recognizes the possib­ility of structural bias influe­ncing outcomes.

Security for Cost- Requires SHs with less than a certain % of shares or less than a certain dollar value to post a bond for the cost of legisl­ation in case it is not succes­sful, thus creating both a new cost for SHs (cost of the bond) and a new liability (litig­ation costs). This is intended to discourage derivative suits by those with a minor stake in the company but it also discou­rages suits over legitimate concerns by small SHs.

Failure to meet threshold req's when motion for security is made by def, Pl may aggregate the shares of other SHs to meet threshold.

The real def. may be a fiduciary who has allegedly breached a duty to the corp. or a 3rd party who has allegedly caused it harm where the bd. will not sue.

K b/w 2 or more SHs.
It often involves voting arrang­ments (for each other as direct­ors), buy/sell agreements (for min. to exit the corp. and req. that the corp other SHs purchase shares at pre-ar­ranged price), share transfer restri­ctions, and dispute resolution mechanisms and are most prevalent in CHCs.
Some states require the existence of an agreement to be adjudi­cated on the share certfi­cates, partic­ulary if there is a share transfer restri­ction in place.
CHC SA Importance
-No rdy market for shares so a min. SH is subject to oppression from the maj.
-Despite ct. imposed FDs b/w SHs in CHCs, the oppty to oppress is omnipr­esent.
-An SA may remove from the maj the availa­bility of several oppressive mechanisms.
-It can bind future boards by giving particular employ­ment, salaries, pensions, and dividends to the SHs,
-Appointing neglecting officer: fiduciary duty means K must be read to limit SH right to appt. officers to situations where appointee is faithful, effective, and competent if:
1. If it doesn't harm the public, SHs, or creditors AND
2. If it includes all SHs, OR
3. The min. does not object to it

Only involves voting for a directors

Pierces the barrier b/w a corp. and one or more of its owners, whether indifivual or corp.
-It permits creditors to access the personal assets of the owners to satisfy claims against the corp.

Operates on the same principles as standard piercing. The alter ego theory must be accomp­anied by some injustice to the injured party other than merely not being able to collect on an obliga­tion.
-Allows an injured party who has pierced a corp. veil to pierce back from the principal to another corp in which the principal owns shares and which is operated as his/her alter ego (although it need have no relati­onship with the 1st corpor­ation pierced).
-The advantage is that the injured party does not take the princi­pal's shares in the 2nd corpor­ation (which would make the injured party a shareh­older of the 2nd corpor­ation and with a lower priority than that of the corp's creditors) but becomes a creditor of the 2nd corp. on equal footing w/ its other creditors.

2. Min.'s reasonable expect­ation that was known or should've been known to the maj. at the time of entering the venture.

4. Did the corp. action have a legitimate business purpose that might have been achieved by a less harmful altern­ative.

1. Requiring the oppresser to purchase at fair value the shares of the oppressed.
2. SInce the maj may have siphoned off corporate value as part of the oppres­sion, the ct. may also award damages for such losses
3. And may protect the rsbl expect­ations of the min. such as by giving the minority the value of long term employ­ment.
4. The Ct. may also pressure the parties to negotiate a resolution by ordering dissol­ution unless they reach a settlement by a specified time.

-When a bidder makes a hostile offer to a target, it is clear that the bidder believes that the co. is worth more than its current stock price.
-This is either b/c the bidder believes the current mgmt. is not doing a good job or b/c the bidder thinks the co. is worth more broken up that as a going concern.
In either case, it is likely that a successful hostile bidder will dismiss current mgmt.
Therefore, mgmt will have a personal incentive to oppose rsbl bids by hostile bidders.
-While this possib­ility does not rise to a level of conflict of interest, it does justify examining the boards actions in putting defenses in place to thwart a hostile bid.
Interm­ediate test-b/w BJR and EF requires that the ct. assure itself that:
1. The bd had a rsbl belief that the hostile action posed a threat to corp. policy and effect­ive­ness.
-Proof of this prong is enhanced by the existence of a maj. of outside directors who has a good deal less to lose in a successful bid than the inside directors.
2. Requires that any defenses be propor­ati­onate to the perceived threat.
-Means that the defenses need not be unnces­sary, but must be within a range of reason­abl­eness in relation to the threat.
-Defenes may not be draconian--
Preclusive: if the defenses deprive the SHs from voting or receiving other offers or
Coercive: force SHs to accept the bds. position indepe­ndent of its merits.

Includes Prospe­ctus, waits for SEC review and approval

Material Missta­tement: Strict Liability

Private placement: creates a safe harbor from statutory req. if complies w/ reg D, can seek offers:
-504: Unlimited number of accredited investors and the amount of the offering is under $5mil
-506: No more than 35 unaccr­edited investors and the amount of the offering is unlimited
-Subject to blue sky laws req., don't need to apply
-If private placement is not successful in satisfying Reg. D req's, then opens itself up to potential lawsuits.

Williamson test: "­Sol­ely­"­" means that the efforts of others must be "­und­eniably signfi­can­t"
Ct. looks for the ability of the investor, legally and practi­cally, to control the enterprise by looking at a disjun­ctive set of 3 factors:
1. Do the org's docs and agreements b/w the parties leave the investor so little control that the investor appear similar in power to a limited power?
2. Even if the investor has legal authority, is he/she so inexpe­rienced or unknow­led­geable in business affairs (in genera­l-not limited to the business in question) that he/she cannot intell­igently exercise power, or
3. Even if he/she is experi­enced and knowle­dgeable in general, is the investor so dependent on some unique entrep­ren­eural or managerial ability of the promotor so that the promotor cannot be replaced?
If any of these factors is applic­able, the 3rd prong of the basic test is met.

When someone who has been given trust or confidence to material, non-pubic inform­ation, with a Fiduciary or fiduci­ary­-like duty to the source of inform­ation, breaches that duty if he/she does not disclose that he/she will trade on the market based on that info.

Assuming a mislea­ding, material mistat­ement or omission in a proxy solici­tation, the Pl. must show causality. As this often involves millions of SHs, the eviden­tiary task would be overwh­elming if not imposs­ible. The court has developed a bright line test concerning causality:
1. Solici­­tation itself is an essential link in the outcome. If procured by fraud vote of the maj. is worthless.
2. Where proponent did control sufficient shares for approval, VBI left open the possib­­ility that something other than voting (by addressing Pl's arguments that there was some other benefit derived by the solictor in seeking proxies not necessary to carry the vote) could be an essential link
-Such as loss of a state law right, but not bd. avoidance of SH ill will

-A sale of assets doesn't affect the organic status of either the purchaser or the seller. Both continue to exist in their original form. The buyer might not want the seller's liabil­ities or its personnel. Instead it purchases only the assets but may accept selected liabil­ities as part of the transa­ction. No vote of the buyer's SHs is required to approve a purchase.
-A seller may want to dissolve an dsell its assets prior to doing so. A vote of its SHs is necessary for both the sale and the dissol­ution. However, the seller need not dissolve and may use the consid­eration it received (often cash) for its assets and buy new assets or shares in other companies. Therefore, it might stay in bsuiness as an operating co. or holding co.

-Statutory device where a parent who owns at least 90% of a sub can merge w/ the the sub w/o the formal­ities of a tradit­ional merger.
-Since the goal of sfm statutes is speed and cost effici­ency, the bd of the parent merely needs to adopt a resoultion approving of the merger and including the terms.
-No vote is required by the sub's board or minority SHs.
-After the merger, the parent must notify the sub's SHs who are entitled appraisal rights.
-B/c there is no intera­ction w/ the sub in negoti­ating the merger, entire fairness (fair dealing and fair price) is not applic­able.
-The sub's SHs sole remedy is appraisal to set the fair price.

1. Defensive device used by a target to make hostile takeover less attractive
2. Offer shareh­olders other than raider a divident in form of a non-tr­ans­ferable right.
3. If triggered, right entitles holder to purchase heavily discounted shares of target (flip in) or oppty to sell shares back to target for a premium price.
4. Trigger usually is a raider obtaining a percentage of target's stock.
5. Altern­ati­vely, right could entitle the holder to purchase heavily discounted shares of the raider (flip over) in the event of a merger of target and raider.
6. In both cases, the pill intends to dissuade the raider from proceeding due to the financial harm to itself or its SHS, either the dilution of its shares in the target or the diulation of its own shares in the raider or the depletion of net assets of target.
-PP's must be redeem­able: no dead hand (bd at time of pill in place or bd-app­roved directors are only ones to redeem pill) or no hand ( non-re­dee­mable for a period of time after merger, reducing economic viabil­ity))

1. When consid­eration is cash, the target's bd is charged with obtaining the highest price for SHs
2. When consid­eration is other than or inaddition to cash, the bd is charged w/ obtaining the highest value per share.
- In deiding what is the highest value, the bd. may attempt to quantify the various aspects of consid­eration but may also consider long term value for SHs when the consid­eration includes shares in the merged co.
The bd's decision on these issues will be judged by Unocal's Enhanced Scrutiny Std and the bd. will be chaged w/ reaching a rsbl, as opposed to perfect, decision
*Note: This applies when T has deal protection device

Two-ti­ered, front loaded offer:
Tactic used by an acquirer in a hostile takeover attempt.
-In the 1st tier will offer the SHs of target a price in a tender offer that is somewhat above the market.
-Acq. seeks to obtain enough shares in the 1st tier to gain control of target.
-2nd tier is a merger in which the remaining SHs will be cashed out at a price shomewhat lower than the 1st tier tender price (although even this price is likely to be at least at the market level. Otherwise, it could be attacked as inadeq­uate.
-2nd tier may be financed with junk bonds of dubius value and market­abi­lity.
-Concept is coercive b/c SHs who don't have enough shares to influence the outcome of the tender offer will fear that if they don't tender, others will and the offer will be successful even if they believe the first tier price, while above above market, is not the true value of the target.
-The shareh­odlers who didn't tender will be left with the less appealing 2nd tier price.