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Timestamp: 2019-04-20 02:32:44+00:00

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A principle is liable for the acts of his agent which are committed within the scope of his agency. Applies to sole proprietorship – simplest form of business organization.
R2d of Agency 1: The fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf, and subject to his control and consent by the other so to act.
R2d of Agency 13: An agent is a fiduciary with respect to matters within the scope of the agency.
1 Agency; Principle; Agent (1)	Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. (2)	The one for whom action is to be taken is the principle. (3)	The one who is to act is the agent.
7 Authority Authority is the power of the agent to affect the legal relations of the principle by acts done in accordance with the principle’s manifestation of consent to him.
8 Apparent Authority Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from & in accordance with the other partys manifestation to such third persons.
8(a) Inherent Agency Power Inherent agency power is a term used in the restatement of this subject to indicate the power of an agent which is derived not from authority, apparent authority, or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.
26 Creation of Authority: General Rule Except for the execution of instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principle which, reasonably interpreted, causes the agent to believe that the principle desires him so to act on the principle’s account.
27 Creation of Apparent Authority: General Rule Except for the execution of instruments under seal or for the conduct of transactions required by statute to be authorized in a particular way, apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principle which , reasonably interpreted, causes the third person to believe that the principle consents to have the act done on his behalf by the person purporting to act for him.
140 Liability Based Upon Agency Principles The liability of a principle to a third person upon a transaction conducted by an agent, or the transfer of his interests by an agent, may be based on the fact that: (a)	the agent was authorized; (b)	The agent was apparently authorized (c)	the agent had a power arising from the agency relation and not dependent upon authority or apparent authority.
PRINCIPLE is liable to THIRD PARTY if A had actual authority, apparent authority, was an agent by estoppel, or had inherent authority, or if principle ratified the act.
THIRD PARTY is liable to PRINCIPLE if Principle would b liable to third party, except the third party is not liable to an undisclosed principle if the agent or principle knew the third party would not have dealt with the principle.
2.	Buyer/Supplier – ask: (1) does supplier receive a fixed price? (2) does supplier act in his own name and receive and thereafter transfer title to property?, (3) does supplier have independent business buying & selling – other customers?
See Jensen Farms v. Cargill. Critical question is degree of control.
3.	Contract – no fiduciary relationship; only arm’s length contract duties.
Jenson Farms Co. v. Cargill, Inc (Sup. Ct. Minn, 1981). Casrgill laons $ to Warren’s business & later intervenes in a paternalistic way. A creditor who assumes control of debtors business becomes liable as a principle for the acts of the debtor. Court finds on agency—emphasized degree of control. Fixed price – acts in own name—has independent business. More like buyer/supplier or creditor/debtor—but this is Minnesota! Farm state – protect farmers interests.
Nogales Service Center v. Atlantic Richfield (Ct. of Appeals, AZ, 1980) Oral agreement to lend $100,000 for construction of motel.restaurant at the truck stop& across the board discount. . . Then, in reliance they used own money to contruct. The loan was approved, but the discount was not. Inherent agency power is best defined by looking at this case – it is sometimes just fairer that the risk of loss should fall upon principle rather than 3rd party. Inherent authority can make the principle liable for conduct which he did not desire or direct when (1) a general agent does something similar to what he is authorized to do but in violation of orders, (2) when agent acts purely for his own purposes in an action which would be authorized if motives were proper, or (3) when agent is authorized to dispose of goods & does so in the wrong way.
California Corporations Code §16100 et seq serves as statutory source governing California general partnerships. = California Uniform Partnership Act of 1994 – applies to all partnerships whether or not they were created before or after the date of this act. *Sometimes referred to as RUPA b/c it is similar to the national standard version (Revised Uniform Partnership Act).
A partnership is an association of two or more persons to carry on a business as co-owners for profit. (a partnership cannot be formed for non-profit purposes.) A more complex form than agency Joint venture—assoc. of two or more usually agreeing to share profits. More limited than partnership – usually for single transaction & not he complete business of individuals involved. RIGHTS & LIABILITIES ARE SAME AS FOR P-SHIP.
A partnership is a voluntary association. Must find express or implied agreement in order to find formation. 1)	duration – if no term is specified, p-ship is terminable at will of any partner 2)	capacity to become partner – must have capacity to contract. 3)	consent of other partners – a prospective partner must have the consent of other partners. (UPA §18(g) – Calif § _____) 4)	Intent of parties – intent of parties is determined from all circumstances (including sharing of profits of bus.—see UPA §7 and Calif. § ______) --- ask: will a community of profits be shared?
III.	Legal Nature of P-Ship (UPA/RUPA) A p-ship is treated both as a separate entity of the partners and also as merely an aggregate of individual partners. For example, partners are jointly & severally liable for the obligations of the partnership (UPA §15 and Calif. § ____) but for federal income tax, the income & losses of p-ship are attributed to indiv. partners. Entity – p-ship can generally sue or be sued and can hold property in name of p-ship.
IV.	Management of P-Ship Equal Share. All partners have equal share in management (even if sharing of profits is unequal) (UPA § 18(c), Calif. § _____) Profits & Losses – each partner in absence of agreement, shares profits & losses equally (UPA §18(a) & Calif. §____) 	Salary – no partner is entitled to acting in the partnership business unless there is an agreement to the contrary 	Obligations. Each partner is liable to partnership creditors IN FULL. But between partners each is liable only for his share of partnership obligations. (If one partner pays off obligation, he is entitled to indemnification from other partners) UPA §18 and Calif. § ____.
“capital accounts” = internal bookkeeping of ownership interests for p-ship. Its only among partners, not regarding the rest of the world. Capital accounts are adjusted according to the pro rata contribution of partners. “Draw” reduces a partners capital account. Each partners capital account goes up with profits, down with losses.
If you don’t agree then statute kicks in – you split evenly. See 16401. You agree as to what capital accounts are worth. Two partners put in capital assets. Decide what capital assets are worth. At dissolution each gets capital investment back. then, in absence of agreement, they split the rest 50/50 – regardless of what capital investments of each were!
1.	Dissolution of a partnership does not mean termination, partnership continues until all affairs are wound up. (UPA 30) 2.	Distribution of assets: Debts are paid first then capital accounts are applied to pay the partners their capital accounts—capital contributions + accumulated earnings – accumulated loss) If anything is left the partners receive their agreed share of current partnership earnings Distributions in kind – partnership assets can be sold or distributed to partners in kind. Liabilities—where liabilities exceed assets the partners must contribute their agreed shares to make up the difference.
16101. Definitions. As used in this chapter, the following terms & phrases have the following meanings: (1)	“Business” includes every trade, occupation & profession. (7) ”Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under §16202, predecessor law, or comparable law of another jurisdiction, and includes for all purposes of the laws of this state, a registered limited liability partnership (8) “Partnership Agreement” means the agreement, whether written, oral or implied, among the partners concerning the partnership, including amendments to the partnership agreement.
Relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership. Partnership agreement may not: vary rights & duties under 16105 unreasonably restrict right of access to books and records eliminate duty of loyalty (except may identify specific types of activities that do not violate duty of loyalty, or all partners may ratify a specific transaction) Unreasonably reduce duty of care Eliminate obligation of good faith & fair dealing vary the power to dissociate as a partner vary the right of court to expel a partner vary the requirement to wind up the partnership business restrict rights of third parties vary the law applicable to a registered limited liability partnership.
16202. Formation of partnership; rules (a)	. . . the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. (b)	as association formed under a statute other than this chapter, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this chapter (c)	in determining whether a partnership is formed, the following rules apply: 1)	Joint tenancy etc. does not = partnership even if coowners share profits made by the use of the property 2)	sharing of gross returns does not itself establish a partnership 3)	A person who receives a share of the profits of a business is presumed to be a partner unless profits were received in payment of a debt, in payment for services as an indep. contractor, in payment of rent, in payment of an annuity or retirement benefit, in payment of interest or other charges on a loan, or in payment for sale of the goodwill of a business.
§16301. Partner as agent of partnership (1)	Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. (2)	An act of a partner that is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on the partnership binds the partnership only if the act was authorized by the other partners.
§16306. Joint & several liability; personal liability; registered limited liability partnerships (a)	. . . all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law (b)	a person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the persons admission as a partner. (c)	. . .
§16404. Fiduciary Duties (a)	the fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c) (b)	A partners duty of loyalty to the partnership and the other partners includes all of the following: (1)	to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the p-ship business or derived from a use of p-ship property or information (including the appropriation of a p-ship opportunity (2)	To refrain from dealing with the partnership in the conduct or winding up of the p-ship business as or on behalf of a party having an interest adverse to the p-ship. (3)	Refrain from competing with the p-ship. . . (c)	A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
§16807. Application of assets; settlement of accounts; partner contributions (p. 467) (a)	in winding up. . . the assets of the p-ship including the contributions of partners. . shall be applied to discharge its obligations to creditors (b)	each partner is entitled to a settling of p-ship accounts upon winding up the p-ship business. (c)	Etc. . .
Martin v, Peyton (NY Ct. of Appeals, 1927) Implied partnerships. Complicated lending arrangement for the loan of securities; lender exercised veto power over business decisions, required life insurance for borrower w/lender as beneficiary, had option to join firm by purchase of 50% of assets. Held: not a partnership; terms not comprehensive enough. Lambert: must be more of a control relationship. (sharing of profits is considered but is not determinative, nor is language saying no partnership is intended. In this case all features are consistent with a loan agreement).
Lupien v. Malsbenden (Sup. Ct. of Maine, 1984) Malsabenden was sued on a contract he made with Cragin (not a party/disappeared) for a Bradley kit car, alleged that Malsbenden was a partner with Cragin and therefore liable on the p-ship debt. Held: He is a partner, in spite of his contention that he was only a lender. Community of profits to be shared. Remember that the formation of a p-ship is objectively measured. We don’t care what, if anything, Malsbenden thinks. *Rule= if you want to escape partner liability don’t involve yourself in the daily operation of the business and don’t agree to share in profits.
Summers v. Dooley (Sup. Ct. Idaho, 1971) All partners have equal rights in management even if profit sharing is unequal. Two partners had garbage business; one hired an employee. Paid for it with his own funds & sued for reimbursement from p-ship funds for half of the wages. In a two person partnership can one person, over the objection of the other, take action that will bind the partnership? No. Must be decided by a majority of the partners.
Meinhard v. Salmon (NY Ct. of Appeals, 1928) Duty of loyalty. Joint venture (co-adventurers) for lease of commercial property-hotel, one negotiated a new lease near the end of the first lease term. Held: breach of fiduciary duty. Co-adventurers owe each other a duty of undivided loyalty, includes a duty of disclosure of opportunities. Managing co-adventurer under a heavier duty. Essentially an agency relationship. DISSENT: this is a joint venture, not a genl’ partnership. Limited purpose, not violated by execution of a new lease. Lambert: disclosure or consent of co-adventurer would have saved him. Fiduciary duty is the glue that holds this all together.
Definition: A limited partnership is a partnership formed by two or more persons and having as it members one or more general partners and one or more limited partners. General Partner -- assumes management responsibility & full personal personal liability for debts of the p-ship. Limited Partner—makes a contribution of cash, other property, or services & obtains an interest in the p-ship in return, but is not active in mgmt & has limited liability for p-ship debts. (RULPA 303(b). . .) Limited Liability – a limited partner’s liability is limited to the amount they put in. Max loss= loss of investment. If a limited partner takes part in management, he becomes liable as a general partner.
§15632. Liability. (a) a limited partner is not liable for any obligation of a limited p-ship etc. . . see page 429.
II.	Definitions	member – owner of an interest in an LLC and a party to the contract known as the operating agreement operating agreement – agreement among members as to the rights and duties articles of organization—a filed document that create the LLC	member-managed – members have statutorily granted agency and the authority to make management decisons	manager-managed – members are not agents of the LLC, and only have the authority to make major decision, and managers (which are not necessarily members) have the authority to make most ordinary managment decisions.
§17000. -§17700. See page 485.
Corporations have five substantive advantages and a tax attribute: 1)	limited liability (shareholders are not liable—managers also are treated as agents of the corp, not as principles) 2)	free transferability of ownership interests (vs. p-ship interest which cannot be transferred without consent of all partners, equity ownership of company can be freely bought & sold.) 3)	continuity of existence (perpetual unless they state otherwise in cert. of incorp.) 4)	centralized management (all partners have right to participate in mgmt, but in a corp. B/D manages, and s/h has no right to participate in mgmt.—s/h has no power to bind corp.) 5)	entity status (under RUPA partnerships are also treated as entities). 6)	taxation of the enterprise at the entity level.
2.	Compare to JOINT STOCK COMPANY joint stock companies were used to avoid state restrictive regulation of corps. Large #’s of partners who were issued shares – and subject to personal liability for debts of company (unlimited) Most states now treat any bus. assoc. that operates like a corp. as a corp.
4.	Compare LLC 5.	Compare to LLP 6.	etc. . .
Filing. Copy of articles must be filed with the secretary of state.
Corporate existence—begins when the articles are stamped as filed in the secretary of state office. The Organizational Meeting. As soon as articles are filed the B/D must meet to: (1)	resignation of incorporators & election of directors (2)	election of officers (3)	adoption of bylaws (duties of officers, meetings to be held by directors and s/h’s, where corp. records will be kept, regulate issuing shares. (4)	authorization to issue shares and other matters—bank account, leases of property, etc.
Operating outside state of incorporation. States usually require foreign corps doing business in the state to register, pay a fee, and name an agent for service of process. Can include criminal penalties etc.
In the course of forming the corporation, promoters often contract for products or services on behalf of the corporation (not yet formed).
General Rule on Promoter Liability: If the promoter contracts in the name of and solely on behalf of the corporation to be, the promoter cannot be held liable if the corporation is never formed. If the promoter contracts in his own name, then the promoter may be held liable and may enforce the contract. The tough cases are the ones where both the promotor’s name and th name of the corporation appear. Here court attempts to determine “intent” of the parties.
Goodman v. DDS (Darden Doman & Stafford Associates) Supreme Ct. of WA en banc, 1983 Goodman sold property to DDS (gen’l partnership), made contract for renovation. Contract was between DDS and corp “in formation”. The promoter is personally liable even if the contract is to benefit future corp that isn't formed yet. EXCEPTION: if other party agreed to look solely to corp. for satisfaction. Burden of proving that parties intention is solely on the promoter.
General: becomes an issue when one or more of the formalities of incorporation are omitted or performed improperly & creditor wants to hold shareholders liable by disregarding the corp. entity.
1)	de jure corporation – a corporation which has complied with all the mandatory provisions of inc. cannot be attacked by any party (even the state) 2)	de facto corporation – there is a body of common law which indicates that even in where a corp. has not complied with all the mandatory requirements, it may have complied sufficiently to be given corporate status vis-à-vis 3rd parties (although not via the state). Good faith attempt to comply good faith actual use of business as though a corp. existed. 3)	states have eliminated the question by statute – if the articles are stamped by the secty of state there is a corp. 4)	corporation by estoppel – Where a corp. is not de jure or de facto, its existence as a corp. can be attacked by any third party. However in some cases the attacking party is estopped.
Timberline Equipment Co. v. Davenport (Oregon, 1973) De facto corp. does not exist in Oregon. Orgeon Business Corps Act precludes the existence of de facto corp.—corps only exist when articles are issued. Ct. does not decide whether corp. by estoppel still exists b/c the p dealt with D as a partnership not as a corp.
I.	General 1)	Limited Liability Rule: Corporation is a separate entity from shareholders. Corp. incurs debts & obligations of its own which are not the responsibility of the owner/shareholders (and s/h’s debts are not corps responsibility) 2)	Exceptions: in exceptions the court is said to “pierce the corporate veil” and to dissolve the distinction between corporate entity and shareholders so that s/h’s can be held liable as individuals (a)	Fraud of Injustice – if maintenance of corp. as a separate entity results in fraud or injustice to third parties (creditors etc.) (b)	Disregard of corporate requirements – if shareholders have disregarded the corporate form then it is really the alter ego of the individuals and it is for their benefit not the corps. (examples – so-mingling of money, corp. meetings not held, records not kept, etc.) (c)	Undercapitalization – If corporation is undercapitalized given the liabilities, debts & risk it reasonably could be expected to incur. (Walkovsky v. Calton) (d)	requirement of fairness. – the veil may also be pierced in any other situation where it is only “fair” that the corp. form be disregarded. Two ways to characterize after veil is pierced: 1)	individual shareholder 2)	“entity enterprise” theory (companies must be instrumentalities for carrying on business without imposing burden of financial or other liabilities). When considering this type of piercing, remember the entity you are imposing liability on consists of BOTH investors investments and creditors claims.
Voluntary vs. Involuntary creditor: Contract vs. Tort. major difference is that in contract cases the plaintiff has an opportunity in advance to investigate the financial resources of the corporation and has then chosen to do business with it. Therefore the intent & knowledge of the risks assumed are factors to considered in deciding whether corp. veil should be pierced. Can argue that courts are more inclined to pierce w/ involuntary creditors. But also argue the “social costs” of piercing—if you allow piercing here the K creditors will be screwed & then they won’t lend.
Walkovszky v. Carlton (Ct. of Appeals NY, 1966) Undercapitalization/ taxis/ tort liability. Pleading case. Walk was injured in an accident with a cab. P sued the cab driver, the corp. owning the cab, and Carlton who owned the corp and nine others (each corp. had two cabs with the minimum liability insurance). Compliant alleged that the corps operated as a single entity & constituted a fraud on the public. Court held that P has no cause of action – there is nothing wrong with running a corp as part of another corp, what you have to allege is that there has been a disregard of corp. formalities & business is being carried on for personal purposes rather than corp. Says having min. insurance is not undercap. b/c state legislature should make min. higher if that is the case. YOU HAVE TO PLEAD SOMETHING MORE THAN THAT THE CORP. IS OPERATING AS ONE ENTERPRISE IN ORDR TO GET AT A SHAREHOLDER. FRAUD OR PERSONAL INVOLVEMENT. DISSENT: says it is undercapitalized.
Sea-Land Services Inc. v. Pepper Source (7th Circ. 1991) Marchese (Pepper Source) owned 5 businesses, all inadequately capitalized, took money from all of them whenever he wanted, didn’t pay taxes, didn’t pay Se-Land. One company was co-owned by someone else. “Marchese’s playthings”. Sum, j-ment granted by trial court, holding all entities and Marchese liable. Reversed by 7th Cir. “reverse piercing” – you get to Marchese in order to get tp other corps. But you cant get anything from other corps until their own creditors are paid. – he is a s/h in them, so if you get his assets you get his shares, and it is your responsibility to get the other creditors paid. . .
Part 1 of test satisfied. (four subparts to determine unity of ownership & interest): 1.	adequate records kept 2.	commingling of funds 3.	undercapitalization 4.	one corp. treats assets of another as its own Part 2 is still a question of fact (must show that failure to pierce would sanction a fraud or promote injutice). Insufficinet factual showing of fraud or injustice. Must be some “additional wrong” beyond creditor’s inability to collect.
Major issues w/ respect to shareholders: 1.	when must s/h approval of corporate actions be secured? 2.	when might the directors ask for such approval as a matter of policy 3.	When may shareholders initiate corporate action?
When you want to attack board action: 1.	is it something that requires shareholder approval? 2.	is there a full and fair disclosure of all material facts? 3.
CCC §300: Powers of the Board; delegation; close corporations; shareholders agreements; validity; liability; failure to observe formalities (page 25) Subject to the provisions of this division and any limitations in the articles relating to action required to be approved by the shareholders (section 153) or by the outsnading shares (section 152), or by a less than majority vote of a class or series of preferred shares (section 402.5) the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board. The board may delegate the management of the day-to-day operation of the business. . . to a management company or other person. ..
CCC §152: Approved by (or approval of) the outstanding shares . . . means the affirmative vote of a majority of the outstanding shares entitled to vote.
CCC §153: Approved by (or approval of) the shareholders means the affirmative vote of a majority of the shares represented and voting at a duly held meeting which a quorum is present. . .
Charlestown Boot & Shoe Co. v. Dunsmore (New Hamp. SC 1880) Charlestown sued two of its directors for refusing to work with Osgood (who they appointed to liquidate company). they sue for losses allegedly cause d by their failure to act & by not insuring buildings that burned down. Holding: that state law appoints the directors to manage the corp. Unless articles, bylaws, or state law says otherwise directors are responsible for management, officers work under their direction. Shareholders action was outside the legal structure of corp. management. The duties of a director are LOYALTY and DUE CARE (that’s all). Auer v. Dressel (Ct. of Appeals, NY, 1954) A stockholder sued to compel the president to call a special meeting of the Class A shareholders. The bylaws provided that the pres. must call a meeting when requested by a maj. of the voting stock. 55% asked for the meeting. Members of this class were entitled to elect 9 of 11 directors. 4 had changed sized & voted Auer out of president. Purpose of meeting is to pass resolution asking that fired pres. be rehired , amend articles & bylaws so that vacancies on the board would be filled by stockholders of the class which the removed dierctor represented, hear charges against the four disloyal directors in order to remove them, & amend the bylaws so that a quorum is 50% of all directors. Rule: president may not refuse to call a meeting for tshe purposes above. Purposes= proper. Stockholders who elect directors have an inherent right to remove them for cause.
Schnell v. Chris-Craft Industries, Inc. (SC Del. 1971) “Inequitable conduct”. Action by dissident shareholders to enjoin the managing directors from advancing the date of the annual s/h’s meeting (by amending the bylaws—new Del law allowed them to do this) in order to gain an advantage in a proxy contest. Held: even though legally permissible, this is not an equitable exercise of the powers of the managing directors. “Inequitable action does not become permissible simply because it is legally possible. Furthermore management attempted to conceal this action as long as possible.
Unocal Corp. v. Mesa petroleum (SC Del. 1985) This case legitimized a share offer that excluded a shareholder—the concept of treating one share different than another. Pickens proposed a cash buyout of shares – ad in Wall Street Journal (tombstone) and caused a merger of target company and all common stock would be cancelled. Selective treatment of shareholders—you want to price high so that people tender stock, and high enough that you don’t attract competing bidders (if you go to broker each day—you just drive the price of stock up and make it harder for yourself to acquire it). 13%--open market purchase 37%-tender offer for cash at end of day 49% is not bought. . .SEC says that if everyone tenders you have to buy all of it on pro rata basis (if you buy 50% of company, you have to buy 50% of everyone’s stock) When Unocal is merged into Mesa, rest of people get junk bonds and get share for share stock in new company.
Blasius Industries Inc. v. Atlas Corp. (Chancery, Del., 1988) Shareholder franchise. Atlas Corp’s charter allowed a maximum of 15 directors but less sitting under current bylaws. 9% shareholder Blasius Industries (the signle largest shareholder) had submitted a consent statement that (1) adopted a precatory resolution recommending a “leveraged recapitalization” of the company, (2) amendment of the bylaws to expand the board to 15, and (3) electing 8 new directors to give Blasius control of the board. In response the board amended the bylaws to allow two new directors, and appointed two new directors. Issue is whether the board acting in good faith for the benefit of the corp may act to prevent the shareholders from electing a maj. of directors? Held that the action even though taken in good faith in response to a perceived threat interferes w/ shareholder franchise & is thus impermissible. Where the board acts deliberately to thwart a shareholder vote, it is not per se illegal or invalid, but the board must show a competing justification for doing so. (the business judgement rule wont save you) It has to be a good reason though (here they thought they were saving the corp and it wasn’t good enough). Here, no bad faith, no breach of loyalty, no breach of due care. . . just that board invaded s/h’s realm.
Williams v. Geier (SC, Del., 1996) Recapitalization plan changed voting rights of shareholders, included tenure voting provision which granted multiple votes to existing shares which are lost if shares are transferred. Court of Chancery held that Unocal applied and that this was a Reasonable response to a perceived threat etc. On appeal they argue that it should have been analyzed under Blasius (b/c of s/ h franchise) and also that analysis under Unocal was wrong. Held: Neither Blasius nor Unocal applies because there was no unilateral board action. (there was stockholder approval). Stroud applies here. Clarifies the holdings of previous cases: Blasius: (“compelling justification standard”) applies where a board acts for the primary purpose of preventing or impeding shareholder vote Unocal: (“Reasonableness standard”; sort of intermediary scrutiny – its less that intrinsic fairness but more than the rational basis of the BJR)—where board acts in response to a perceived threat, there is at least the appearance of conflict of interest, the burden is on P to show by a preponderance of the evidence that the board acted to perpetuate itself in office, or some other breach such as fraud, overreaching, lack of good faith, or being uninformed. If not met the court will not substitute its judgement for the board’s. Both Blasius & Unocal involved unilateral board action, Williams v. Geier does not. Here vote approving recapitalization & tenure voting was fully informed, and the boards actions are protected by the BJR, therefore s/h vote was valid & operative. No disproportionate benefit to majority shareholders, no showing that board was trying to perpetuate itself in office, no violation of fiduciary duty by the board. Only a showing of breach of fiduciary duty of the board can rebut the presumption of the business judgment rule. Burden is one the party relying on shareholder approval to prove that it was informed and without fraud, but if it is shown, the burden shifts to plaintiff to prove unfairness. (Lambert: this case is an extension of Stroud). Shareholders may vote their own economic interests so long as they don’t breach any fiduciary duty to minority shareholders in doing so. Majority of minority vote only required in interested director transactions. Compare to controlling majority shareholder cases. . .
General Datacomm Industries, Inc. v. Wisconsin Investment Board (Chancery, Del. 1999) By-law says they will never reprice a stock option. ???
see Van Gorkom – more like regular negilgence than gross negligence???
BJR gives wide latitude to substance of decision if the process is proper.
Bates v. Dresser (SC US, 1920) receiver of a small bank sues the president and directors because the bookkeeper was stealing money. President fails to catch him. Pres liable b/c he had duty to investigate and he controlled management and situation. Directors are not liable b/c they are entitled to rely on president—also twice a year a committee examined affairs of the bank and they are entitled to rely on this.
Kamin v. American Express Company (SC, 1976) American Express purchased DLJ stock and then its value fell substantially. wants to distribute the stock to s/h as a dividend. Some shareholders wanted AmEx to sell the stock, take the loss, and realize tax benefits (offset other income). Held: no fraud or self dealing and it was informed (they heard arguments to sell stock and decided against it). Only if P can rebut presumption will burden shift to the board to prove anything. . .
The 2d of the fundamental fiduciary duties of directors	means that directors must place the interests of the corporation above their own personal interests/gains	problems arise because B/D usually have other interests – that is often why they are on the board! 1)	contracts between corp and one of directors 2)	transactions by a director that result in profits that the corp. might have engaged in 3)	contracts for directors compensation 4)	etc.
Analysis: 1.	Usually BJR protects directors decisions, but it presupposes no conflict of interest 2.	to know if you have a duty of loyalty issue ask: if you have a “materially interested” director –must be material financial interest 3.	once you show this the standard becomes “just and reasonable” (in Cal--§310(a)), or “entire fairness” (Del.--§144(a)) 4.	Burden of proof to show fairness is on party asserting the validity of the transaction (Lewis v SLE) 5.	If there is shareholder ratification the burden of proof shifts to those challenging the transaction (Wheelabrator) to show that it wasn’t fair. (otherwise BJR applies) 6.	? 7.	?
self dealing = intrinsic fairness standard and burden is on defendant to prove. Otherwise—BJR applies.
3. Last, are there any reasons to shift burden? (full and fair disclosure shifts burden, independent committee with bargaining power (Lynch Communications/Kahn v. Tremont), ratification. Burden shifts to prove/disprove fairness, but it still is fairness not BJR.
Lewis v. S.L.&E. Inc. (2d Circuit, 1980) Burden of proof to show fairness is on the party that is asserting the validity of the transaction. 2 corps—SLE (land owner) and LGT (renter, tire shop). Some of Lewis’ children owned stock in both, Donald owned stock only of SLE. Shareholders agreement required SLE owners to sell stock to LGT owns for book value (assets minus liabilities divided by number of stock) in 1972. LGT directors were also directors of SLE, and had rented the building to LGT well below market value for many years, which resulted in a decreased "book value"of SLE stock. Held: When directors have an interest in the transaction other than as directors of the corp, the transaction is voidable unless the proponent of the transaction can show that it is “fair and reasonable” to the corp. The burden of proving fairness is on the interested directors. (Book value – if SLE did not collect rent at $6K per month for 10 years, that si cash that SLE does not have on hand for evaluating book value. If liabilities of SLE had exceeded assets, Donald would get nothing, so how you value the assets (building) is crucial. here Donald alleged “waste” – they wasted assets of SLE—no conceivable corporate benefit to SLE. Compare to gifts where at least in theory the corp. gets something. . .
Sinclair Oil Co. v. Levien (SC Del 1971) Sinclair was a holding company – held 97% of Sinven. Levien held 4000 of Sinvens 120000 public shares. Sinclair controlled Sinven’s Board, and caused Sinven to pay huge dividends. Sinclair also created Sinclair International to do foreign oil stuff. Sinclair caused Sinven to contract with Sinclair International for sale of oil, but Sinclair Intl. breached (made late payments, didn’t buy as much oil as was supposed to). held: 1)	payment of dividends not a breach of fiduciary duty because all shareholders benefited equally, so BJR protects that decision 2)	causing Sinclair Intl. to breach its contract with Sinven was overreaching and caused the burden to shift to Sinclair to prove “intrinsic fairness”—a burden it failed to meet. Once P can prove over-reaching burden shifts (Lambert: self-interest) RULE: When a parent controls a subsidiary and receives a benefit at the expense of the subsidiary’s minority shareholders, the intrinsic fairness test applies and burden is on parent.
Jones v. H.F. Ahmanson & Co. (Sup. Ct. CA 1969) S&L was owned by depositors—vote in proportion to deposit. Converted into to corp – depositors given first right to buy stock (warrants) & 15% took it. President took 86% and sold it to other people. United Savings & Loan (Association) was owned by a few people & public interest in ownership of it increased dramatically. United was not publicly traded & some s/h’s wanted it to be so they formed a holding company United Financial & traded their stock. UF only book value is that of Assoc. stock, and they owned 85% of Assoc. United went public & made a ton of money. They caused Assoc. to underwrite bond debt (cash reserves required under Calif. law) needed to make a big distribution to United shareholders. Held: they owed a fiduciary duty to minority shareholders. Majority may not use its control for its own benefit to the detriment of the minority. Maj. has a duty to use control in a way that is “fair, just, and equitable” Here they used control in two ways that violated fid. duty: 1)	sold control w/out allowing minority to participate 2)	used assets of Assoc. to finance debt of United.
General Rule: A s/h may sell his stock to whoever he chooses at the best price he can get. But courts often apply the principle that one share = one share, whether or not it is controlling.	Majority may sell control at a premium, since control has value and rightfully belongs to them, but they may not sell something more than control (some corporate asset) because it benefits the majority at the expense of the minority. 	Sale of control that is fraudulent, or sale to a foreseeable “looter” creates liability for the seller. Where something more than control is sold the seller bears the burden of proving that minority was not deprived of something it rightfully owned for the seller’s personal gain.	cannot sell board positions without selling stock/control.
Types of transactions: 1.	direct from s/h’s –purchase of stock. When all of outstanding stock is purchased, one price may be offered to controlling s/h’s and a lower price to minor. s/h’s 2.	Purchase of assets – buyer offers to buy corps. assets. Corp itself holds a vote & a maj. is usually required to sell. If the vote is secured the buyer deposits the purchase price with the corp. & price is distributed pro rata to all s/h’s. 3.	Merger or consolidation – purchaser offers to merge a company into it. A vote of the shareholders of the company to be merged is required. If it secured by a major. vote, then the company is merged into acquiring company. S/h’s receive a pro rata interest in the purchase price.
Zetlin v. Hanson Holdings Inc. (NY Appeals 1979) Zetlin owned 2% of Gable Industries. A group of s/h’s (D’s—including Hanson) sold their interest in Gable (44.6%--effective control) to another party for $15/share. (market price was $7.38). P wanted to be paid the same price as D’s. Held: A majority interest can control the affairs of the company. Absent fraud, looting, bad faith etc., a controlling s/h can sell the right to control the affairs of the corp. at a premium.
Perlman v. Feldmann (2d Circuit, 1955) “sale of a corporate asset” Feldman was the president, chairman of the board, and majority shareholder of Newport Steel. Newport had operated under the benefit of the “Feldman Plan”—which required purchasers of steel to advance the price of the steel before delivery (essentially an interest free loan). He sold his shares to Wilport, a syndicate of steel buyers, and procured the resignation of his own Board of Directors. Held: The ‘Feldman Plan” was a corporate asset that belonged to all shareholders. In selling control, Feldman deprived the minority shareholders of the benefit of that asset and thus improperly appropriated it to himself. Burden of proving no breach of fiduciary duty is on the defendant. Lambert: examine the facts closely, look for something more than control of the corporation (here it is the Feldman Plan and source of supply) for PERSONAL GAIN.
Essex Universal Corp. v. Yates (2d Cir. 1962) Sale of corporate office. Yates, president & CEO of Republic Pictures agreed to sell 500,000 shares of Republic stock (28%) to Essex Corp. and to cause the resignation of 8 to 14 of Rep.’s directors, with the vacancies to be filled by Essex—he was selling control of the board with control of the company (it was a staggered board, so this is accelerated control). between the agreement date and the closing date, the value of Republic stock goes up, so he wants to get out of the deal. To do this, he alleges that the contract for transfer of control was illegal, and that the illegality “tainted” the whole contract so as to void the whole thing. Issue: does 28% of stock ownership = control? If not, is the contract illegal? Held: As a general rule, the holder of control will not, as a fiduciary, be permitted to profit from facilitating actions detrimental to the corporation or minority shareholders. here, no such threat. It is illegal to sell control without stock, but it’s a practical certainty that the 28% transfer = control, so contract per se not illegal. “Working control”.
Shareholders are passive investors with an expectation of profit & of limited liability to extent of investment shareholders are not entitled to dividends—it is within business judgment of board problem with distributions is that it compromises creditors when corp gives away assets without consideration if corp has creditors—cant move assets freely in and out of corp. If it has no creditors it can do what it wants Creditors can sue the corporation in event of an illegal distribution (not shareholders) Old terminology: par value- original risk of investor/stated capital paid in capital or capital surplus – still today, some statutes says that dividends come from this Also, if you want to make a distribution in Cal. based on accretion in value of property, you have to sell the property—cant just write it up.
Cal. § 166: Distribution to s/h’s is a transfer of cash or property to s/h’s w/o consideration, except a dividend in shares of the corp., or purchase or redemption of its shares for cash or property.
Cal. §500: No distributions to s/h’s are allowed except as follows: (a)	may be made if the amount of retained earnings immediately prior to distrib. equals or exceeds amount of distrib. (b)	may be made if , immediately after distribution: (1)	assets of corp (excluding goodwill, capitalized research, R&D costs and deferred charges) are at least 1 and 1/4 times the liabilities, AND (2)	current assets at least equal current liabilities or etc. . . see page 49. . .
Cal. §501: Corp cant make a distribution if it is or would as a result of the distrib. not be able to meet liabilities.
§4: Transfers Fraudulent as to Present/Future Creditors A transfer is fraudulent as to creditors if it is made for no consideration or for unreasonably small consideration, or if it is made with the intention to incur debts beyond ability to pay as they come due.
Randall v. Bailey (NY Sup. Ct, 1940) Action by a bankruptcy trustee of a corp against former directors who made distribution based on “writing up” of corporate assets to market value, which changed the equity position of the company (balance sheet valuation) but did not increase cash on hand. Court says ok—directors can take into account unrealized appreciation/accretion in determining the value of assets for distribution purposes. But they also have to take into consideration unrealized depreciation. “All assets must be taken at actual value” Known as the valuation test.
CA seems to follow a combo of profit, modified balance sheet, and insolvency tests. Calif. always uses GAAP accounting.
Morris v. Standard Gas & Electric Co. (Del 1949) Example of Nimble-dividends or current profits test.
Exemptions: §3(a)(9) – security exchanged with an existing security holder where no commission is paid §3(a)(10) – security exchanged for existing securities or property, if terms are approved by a court or official agency §3(a) (11) – security offered and sold only to persons of a single state, where issuer is also resident of the state	§4(1) – transactions by any person other than an issuer, underwriter or dealer §4(2) – transaction not involving any public offering (private placements) §4(3) transactions by a dealer, so long as at least 40 days after the first date of the offering. . .. ????
SEC v. Glen Turner Enterprise (9th Cir) “pyramid scheme”: GTE offered to buyers the opportunity of earning commissions on the sale of other such contracts. Held: “solely” language of Howey not meant literally, rather the real test is whether the efforts of those other than the investor are significant. Common enterprise = one where the fortunes of the investor are interwoven with and dependent on the efforts of those seeking the investment or of third parties.
*LLC interests are securities unless every member is a manager (for Cal.). For FED look at HOWEY test.
“sale” and “offer to sell” §2(3) – applies to all sales of securities, not just IPO’s. Includes most mergers, stock for stock exchanges and pledges.
Housing Foundation v. Foreman Look at the substance of the transaction – Condos—each tenant had to buy stock that was linked to condo – no dividend, no profiy. they got it back when they left.
Landreth Timber v. Landreth (Sup. Ct. 1985) Sale of all of the stock of Landreth Timber, held by trial court to be sale of the busines, and not sale of stock. Trial ct. interpreted Howey as requiring an examination of the economic realities of the situation. Reversed by S. Ct—if it is called stock, and it is stock, there is a per se rule that it is a security. How to tell if it is really stock: 1.	dividends 2.	negotiability 3.	ability to pledge/ hypothecate 4.	voting rights 5.	ability to appreciate in value.
V.	1933 Act §2(1): The term “security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate. . . investment contract . . .any put, call, straddle, option, or privilege on any security . . . etc. . .
§2(2): The term “person” means an individual, corporation, partnership, association. . . etc. . .
§2(3): The term “sale” or “sell” shall include every contract of sale or disposition of a security or interest in a security for value. The term “offer to sell”. . . shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. . . etc. . .
§2(4): The term “issuer” means every person who issues or proposes to issue any security. . .
§2(11): The term “underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security. . . etc. . .
§4: Exempted Transactions The provisions of §5 of this title shall not apply to: (1)	transactions by any person other than an issuer, underwriter, or dealer. (2)	transactions by an issuer not involving any public offering. (3)	. . . (4)	brokers’ transactions executed upon customers oredrs on any exchange or in the over the counter market but not the solicitation of such orders (5)	etc. . .
**know the difference between merit (or content based statutes and disclosure based statutes Merit States — says we will have rules & regulations that will assess the qualities of the security/transaction based on merits—qualification in that state Disclosure State – says that we want you to disclose everything and let the investors make up their mind.
Reves v. Ernst & Young (Sup. Ct., 1990) Note = security. Definition of note as any note w/ maturity date no more than 90 days. Family Resemblance test announced (to determine if notes are securities—must meet one factor to = note): 1.	purpose/motivation (investment or other commercial purpose, such as commercial loan)? Look to motivation of buyer & seller to enter transaction--- general use of business or finance investment vs. minor asset or to correct for cash flow problem 2.	Plan of distribution (publicly offered, negotiable)? 3.	Expectation of public? 4.	Other regulatory scheme? (if it is regulated elsewhere—reduces risk) **Whether notes with less than 90 days maturity date are a security was not decided by this opinion.
The problem: someone related to the corporation in a position to have inside information about how the corp is doing & hence what the stock is or will be worth—buys or sells with an advantage over other party. 	Issue: What duty does the corporate insider have to the other party???
COMMON LAW APPROACH MAJORITY RULE: Was that directors & officers owned no special duty to present or prospective shareholders and could deal with them at arm’s length—no duty of disclosure . (Goodwin v. Agassiz) MINORITY RULE: Special facts doctrine— some courts took the position that a duty of disclosure existed if there were special facts that made omitting information unfair.
§10(b): Manipulative & Deceptive Devices It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange— (a)	. . . (b)	To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5: Employment of Manipulative & Deceptive Devices It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a)	To employ any device scheme or artifice to defraud, (b)	To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (c)	to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.
2. Who has a duty/who is insider?
Silence Cases v. Misstatement cases The silence cases are hard because because the statute doesn’t mention silence. But at some point silence becomes a 10b-5 violation. Where? Ask: 1)	is there a breach of fiduciary duty? 2)	is there personal benefit?
6. Scienter standard of care to which you hold defendant	Supreme Ct= has to be scienter (actual intent to deceive manipulate or defraud)	Texas Gulf Sulfur said: Scienter = negligent conduct or lack of diligence—does not require specific intent to defraud. . . hmm???
see Ernst & Ernst v. Hochfelder. Says it has to be intentional—negl. not enough for 10b-5 liability.
Goodwin v. Agassiz (Mass. 1933) COMMON LAW RULE. Goodwin saw an article in the paper that said the company discontinued copper exploration. He sold his stock on the exchange. Agassiz, a director of the company knew of a geologists theory that he believed had value. Without disclosure he bought the stock. Later, theory proved to be correct & stock went up. Goodwin wants to rescind the sale. Is there a duty to disclose in arms length transaction? Court says no – purchase was impersonal, theory was only a hope.
Kardon v. National Gypsum (PA, 1946) District ct opinion but very important there is a private right of action under 10b and 10b-5. Plaintiffs owned shares of Natl. Gypsum and another company and wre induced to sell tehir stock in both to the Slavins on the basis of material misrepresentations. Alleged conspiracy to defraud by representing that corp. was not negotiating for the sale of its assets. Issue: does ct. have jx. to hear a private c of a. held: yes! The language of the statute suggests that congress intends for it. Problem here is that he did not plead with enough specificity.
In the Matter of Cady, Roberts & Co. (1961) Silence. Insiders (including officers, directors, controlling shareholders but this is NOT an exhaustive list) have a duty either to disclose or refrain from trading on inside information. Analysis: 1.	relationship gives access to information for corporate purposes and not personal benefit 2.	inherent unfairness – where party takes advantage of info unknwn to party with whom he is dealing Lambert: this is a silence case—stands for the fact that a fiduciary must not remain silence—has a duty to disclose. This and Texas Gulf Sulfur – makes omission a part of “misstatement”.
TSC Industries v. Northway Landmark proxy solicitation case. Prior to this case the standard of materiality was that it “might be important”. This says the standard is information that “would be important”. “Substantial likelihood that a reasonable shareholder would find it important”. Significantly altered the total mix of information they would use in making decision. Question is – does this standard apply to 10b-5 cases?
Blue Chip Stamps v. Manor Drug Stores Blue Chip was subject to an antitrust consent decree that required it to offer shares to retailers it had dealt with. It registered and about 50% of stores purchased. Two years later one of the non-purchasing offerees (Manor Drug) sued under 10b-5 claiming that the prospectus was overly negative so that they did not purchase—allowing Blue Chip to then offer the share sto the public at a higher price. Held: Manor Drug has no standing to sue under 10b-5 b/c there was no purchase or sale. Policy reasons also relevant—frustrate business activity, have high settlement value, “I would have done x. . . “ is too easy to say. . .
Ernst & Ernst v. Hochfelder (1976) Supreme Ct. says that “manipulative & deceptive” is intentional conduct. Accountants were sued by customers of the firm because the president embezzled money and they were negligent in discovering it. 10b-5 does not apply where the defendant was negligent in performing duties or in aiding/abetting fraud. Plaintiffs have to show intentionally fraudulent conduct. DISSENT: Blackmun and Brennan—an investor can b hurt just as much by negligent conduct as by intentional. . .
Santa Fe Industries Inc. v Green (1977) Merger case and minority s/h’s thought the terms sucked. Sued in fed ct. to enjoin the merger on grounds that it violated 10b-5 b/c price was bad and there was no business purpose except to screw them over. Held: 10b-5 does not rpovide a remedy for breach of fiduciary duty when full disclosure is made and no misrepresentations have taken place. Here investors were fully informed. this is for state law.
Chiarella v. United States (SC 1980) Chiarella was a printer. He surmised the identity of target company and bought stock = $30K. Consent decree with SEC—he gave money back. Now he has criminal trial. Court held that he did not violate anti-fraud provisions because ehe did not have a duty. Silence is only a fraud when you have a fiduciary duty arising froma relationship pof trust with the parties in the transaction. He was not an insider of either company. Not every instance of unfairness= a fraud under 10b-5. There is no “general duty to disclose” under 10b. Dissent: (Burger) Misappropriation theory: When a person misappropriates nonpublic information he has an absolute duty to disclose or refrain from trading. Dissent (Blackmun & Marshall): what is wrong is use of inside information as a result of access to that information that the ordinary investor does not have and which was not meant to personally benefit defendant.
Dirks v. SEC (Sup. Ct. 1983) Tippee liability is derivative liability – derived from tippor. Tippee cannot be liable unless tippor had 1) breach of fiduciary duty, 2) for personal benefit. Here, the insider was motivated by a desire to expose fraud, not personal gain. therefore, the information was not improperly disclosed. Look to the purpose of the tip. Lambert: this is not a parity of information statute or a general anti-fraud statute either. (if you are plaintiffs lawyer always allege personal benefit – if no financial benefit allege quid pro quo) Dissent (Blackmun, Brennan, Marshall)—this is just another attempt to limit protections to investors. Dirks’ clients benefited from inside information to the detriment of others who did not have that info—that is the problem.
Carpenter v. United States (Sup. Ct, 1987) Misappropriation theory. CIRCUIT COURT: Carpenter had a friend who wrote a column in WSJ. He got info from the fried and gave it to two stockbrokers. WSJ had an explicit written conflict of interest policy prohibiting its employees from disclosing to anyone information received in course of employment. Profits between all defendants = $690,000. 10b-5 applies via misapp. theory. 10b-5 prohibits any person from committing any act that amounts to any fraud. SUPREME COURT: court was evenly divided (4-4) on the securities law question and so affirmed on misapprop. theory (goes way far. . .) But it is evenly divided so it is questionable whether it is good law. ..
Issues Emerging from Misappropriation p. 197-201 in Suppl.
In re Carter-Wallace Securities Litigation (2d Cir. 1998) District court said that “as a matter of law” drug advertisements made in trade journals are not “in connection with” the sale of securities. court says these ads could be highly relevant to analysts. Therefore, false ads in trade journals may be “in connection with” a securities transaction if the proof at trial establishes that ads were used by market professionals in evaluating stock of company.
Esoteric distinction bewteen possession and use of material info. Adler & Smith cases in 9th & 11th Circuit – says poss’n is not enough, have to use info. . . . . Questionable assumptions about human psychology. If someone has info relevant to an action they take, the info must be a casue in fact of the action --- every action a person takes is based on all the then known relevant information. Trader cant know if they would or would not have traded in the absence of that info, unless they were contractually committed to trade before poss’n of the info.
Materiality -follow TSC Industries -- a statement is material is there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.
Rule 14a-9: False or Misleading Statements No solicitation shall be made by any proxy statement or other communication containing any statement which, at any time it is made, is false or misleading with respect to any material fact or which omits to state any material fact necessary in oredr to make the statements therein not false or misleading or necessary to correct any statement in earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
*note: no “manipulative/deceptive” language. That means that a Rule 14a-9 case is easier to make out than a 10b-5 case.
JJ Case Co. v. Borak US 1964) Stockholder sued for recission or damages with respect to a consummated merger authorized by proxies solicited by a proxy statement alleged to have contained false statements. May a s/h bring a private right of action? yes. Will the court unwind a merger that has already been completed? yes. Held: A private right of action in the form of a derivative suit is implied under the act. Remedies are not limited to damages—court can grant rescission. But fairness is looked at in damages proceedings – if it was fair transaction = no damages awarded at all.
Mills v. Electric Auto-Life Co. (US 1970) Causation case—was the defendants omission of material facts in the proxy statement the cause of loss. (s/h’s approved a merger into a company that controlled 54% of the board—11 directors). Trial court ruled that omission was material—but what about causation? Held: yes. As long as the omission is material, causation is presumed. Test is: 1.	material? 2.	was the proxy solicitation an essential link in the accomplishment of transaction? Remedy—doesn’t have to be rescission, can also be money damages. Rescission only if “equitable” to do so.
TSC Industries v. Northway objective test for materiality: would reasonable shareholder consider the omitted fact? Would disclosure of the omitted fact have significantly altered the total mix of info available?
Virginia Bankshares v. Sandberg (US 1991) Can a statement of opinion (“high value”, “fair price”) be a statement of material fact? Proxy solicitation used these terms. . Two arguments—that it is not material, and that it is not a fact. Held: 1.	conclusory terms are reasonably relied on as being based in fact 2.	statements of opinion can be material – it is closely related to underlying financial facts. Disbelief can be material. Additional disclosures can neutralize the misleading effect of materially misleading statements 3.	causation problem here: minority vote was not required, and minority apparently did not forgo any state law remedy. . .
Gerstle v. Gamble-Skogmo scienter not required for 14a-9 liability—negligence is sufficient. But not strict liability.
Two kinds of shareholder suits: 1)	Shareholders suing on their own behalf individual suits class actions 2)	Shareholder derivative suits	s/h sues on behalf of the corp. to enforce a duty or redress a wrong—usually involve officer/director/maj. s/h failure to exercise due care/loyalty procedurally complex & burdensome!
Sax was hired by WWP as the genl. mgr. Oral agmt. of 75K stock options. After acquiring 5% of the stock, WWP refused to sell any more therby breaching the agmt. Sax then terminated employment. Then he sued WWP saysing that after his termination of employment “the individual defendants conspired to deplete WWP’s assets and depreciate the value of his stock”. sax is suing as an individual and seeks actual & punitive damages. District ct. dismissed his claim saying that the alleged acts did not injure him personally, but injured the corporation and that accordingly any action must be brought as a derivative action. Affirned by 9th circuit – allegation that they depleted corp. assets goes to a wrong to the corp.
Dean & Sandra Schumacher suing Mary as executor of Roberts extate. The four of them were the board of the corp (Robert 51 shares, Dean 49 shares). Breach of contract (employment), breach of promise, faikure to pay notes due, breach of fiduciary duty, fraud, deceit, infliction of emot. distress. Trial court holds that it was correct to say that some of these had to be derivative actions – Dean & Sandra appeal. General Rule: breach of fiduciary duty by controlling s/h’s is generally a derivative action. Exception: is in closely held corporation when a minority s/h alleges harm to himself which is distinct from harm suffered by other Test for invoking exception: Would a direct action: 1.	unfairly expose the corp. to a multiplicity of suits 2.	materially prejudice any corporte creditors interests? 3.	interfere with fair distribution of any recovery among all interested parties. Here—none of these. Direct action is okay!
Bagdon v. Bridgestone/Firestone Inc. (7th Cir. 1990) Unclear whether they are saying that Delaware does not follow this exception. . .??? Know for the course that Delaware does not follow this exception. . .
Glenn v. Hoteltron Systems, Inc. (Ct. App. NY 1989) Two guys—each own 50%. One guy misappropriates money into a corp owned only by him. Other guys sues in a derivative suit and wins—question is in a derivative suit do the damages go to the individual or back into the corp? they go back to corp—that means in any case where the wrongdoer is also a shareholder he will get part of the recovery. Here this impact is magnified b/c it is closely held. But that doesn’t change the rule!

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