Source: https://h2o.law.harvard.edu/playlists/3762
Timestamp: 2018-06-18 09:53:07
Document Index: 382433647

Matched Legal Cases: ['§102', '§102', '§102', '§103', '§122', '§121', '§122', '§141', '§141', '§141', '§141', '§141', '§141', '§141', '§141', '§151', '§151', '§202', '§202', '§203', '§ 321', 'art\n3', '§220', '§144']

An Introduction to the Law of Corporations: Cases and Materials, Spring 2019
An Introduction to the Law of Corporations: Cases and Materials, Spring 2019 | Brian JM Quinn | November 15, 2013
This open-source casebook is the fifth edition of a casebook using the H2O platform of Harvard's Berkman Center. This casebook is intended to be used as the main casebook for an introductory course on the law of corporations. Because is subject to a Creative Commons license and can be printed via Amazon/CreateSpace, it is available to students at a very modest cost. Alternatively, students can read and access the cases and materials online via the H20 platform at h2o.law.harvard.edu at no cost. This casebook and the H2O platform are part of an effort by educators to make high quality course materials and casebooks available to students at reasonable prices.
MAKE ALL NOTES PUBLIC (2/8 playlist item notes are public) MAKE ALL NOTES PRIVATE (6/8 playlist item notes are private)
1 Business Boot-Camp
2 Show/Hide More The Delaware General Corporation Law
2.1 Introduction to the DGCL
2.2 Show/Hide More Formation
2.2.1 The beginnings of incorporation
2.2.2 Show/Hide More DGCL Sec. 101 - Formation
A certificate of incorporation is the functional equivalent of a corporation's constitution. The certificate goes by different names in different states. In other states it is known as the articles of incorporation or the corporate charter, or the articles of organization. All of these refer to the same document.
As the corporation's constitution, the certificate may limit or define the power of the corporation and the corporation's board of directors. Drafter's of certificates have a great deal of flexibility when drafting these documents. Although most certificates are “plain vanilla” certificates that rely almost entirely on the state corporate law default rules for limiting the power of the corporation and its directors, such a minimal approach to drafting corporate documents is not required.
For example, some corporations, like the Green Bay Packers professional football team, have highly tailored certificates of incorporation. The Green Bay Packers' certificate is available on the course website. Promoters of the Green Bay Packers corporation tailored the rights of shareholders so that no shareholder can expect to receive any portion of the profits of the Packers – those have to be donated to a charity – and that no shareholder can expect their shares of the Packers to have any resale value on a stock exchange – any attempt to transfer shares to someone other than a family member will result in the corporation redeeming the shares for pennies.
Section 101 makes it clear that the filing of a certificate of incorproation is sufficient to form a corporation. This is the essence of an enabling statute. Rather than require the state to provide permission, enabling statutes like Delaware's General Corporation Law require only a ministerial filing in order to establish a corporation and permit the corporation's promoters a high degree of freedom in the design of their internal governance mechanisms.
2.2.3 Show/Hide More DGCL Sec. 102 - Contents of Certificate of Incorporation
The certificate of incorporation is the corporation's basic governing document. It lays out the basic understanding about governance of the corporation and the corporation's powers. It also limits the power and discretion of the corporation's board of directors in the management of the corporation. To the extent they comply with the requirements of the corporation law, the promoters of a corporation have the flexibility to tailor the internal governance of the corporation as well as to limit the powers of the board of directors.
Section 102 describes the contents of every corporation's certificate of incorporation. Section 102 has two basic components. First, §102(a) lays out the required elements of every certificate of incorporation. Many of the required elements relate to notice (e.g. how can the state contact responsible parties in the corporation). To the extent some of the required elements of §102 seem out of place (e.g. par value), remember they were first included in the code following the transition from discretionary charters to general enabling laws. Consequently, they may reflect a number of vestigal elements of the corporate law.
Second, §102(b) lays out the optional elements of every certificate of incorporation. Many of the optional elements in a certificate relate to corporate governance rights of stockholders and/or the board of directors. Section 102 does not generally limit promoters' ability to tailor governance structures, but it does often provide promoters with menus of options that they can choose from as they draft certificates.
2.2.4 Show/Hide More DGCL Sec. 103 - Filing requirements
Section 103 describes the requirements for filing, where to file, what to file, and who has to sign which documents. Although this section may seem boring, it's actually an important one for practicing attorneys. You should familiarize yourself with §103's requirements.
2.2.5 Show/Hide More Amendment of Certificate of Incorporation
2.2.5.1 Show/Hide More DGCL Sec. 242 - Amendments to Certificate
2.2.5.2 Show/Hide More DGCL Sec. 245 - Restating the Certificate
When certificates are amended, the amendments are simply “stapled” to the back of the orignial certificate. The result is often a document that is cumbersome to read. Rather than rely on a potentially confusing set of documents, a certificate may be restated in its entirety reading all the amendments into the certificate so that the document is easier to read and more understandable. Section 245 lays out the process by which a certificate may be restated.
2.2.6 Show/Hide More DGCL Sec. 107 - Powers of Incorporators
Corporations can not incorporate themselves. The parties who incorporate a business are known as “incorporators” or “promoters”. An incorporator need not be a person. An incorporator may also be another corporation.
Typically, the promoter names the initial board of directors of the corporation immediately as part of the incorporation process, but if not, the incorporator has plenary power to manage the corporation until such time as the initial board of directors is appointed.
2.2.7 Doctrine of Preincorporation Adoption
2.2.8 Show/Hide More DGCL Sec. 108 - Organization Meeting
Once a corporation is incorporated, a formal organization meeting of the initial board of directors is required to adopt corporate bylaws, and ratify any actions taken by the incorporator. This organizational meeting may be in person, or as is often the case, undertaken by relying on written consent of the directors.
2.2.9 Show/Hide More Piercing the Corporate Veil
Legal personality and limited liability are two critical features of the modern corporate structure. Although these two features are often described as different, they are in fact two sides of the same coin. The “coin” in this case is the principal of separateness. Legal personality means that the corporate entity stands on its own, independent of its stockholders, such that the debts and other liabilities of the stockholders of the corporation are not the debts or liabilities of the corporation.
Equally important, limited liability (the default rule, provided under 102(b)(6)) means that the debts and other liabilities of the corporation are the debts and liabilities of the corporation and not the stockholders. The separate life of the corporation and the power of limited liability are extremely powerful policy choices that have implications for third parties as well as for corporate decision-makers.
Businesses can and do fail. When they do, limited liability means that the costs of that failure will mostly be borne by third party creditors of the firm and not by the directors or the stockholders of the firm. This creates may create incentives for third parties to careful when dealing with corporations. But, it also creates incentives that improve the liquidity of capital markets and encourage corporate risk-taking.
“Piercing the corporate veil” is an equitable doctrine that is the exception to the rule. In extreme cases, courts may look through the protective barrier of limited liability and assign the corporation's liabilities to the stockholders. The following cases raise of the issues common in veil piercing cases.
Although the concept of corporate separateness is well understood at the state level, in recent years a series of First Amendment cases have provided the US Supreme Court the opportunity to give its own view on the traditional state law question of corporate separateness. Unlike state level courts, the US Supreme Court has taken a much more malleable view towards the doctrine of corporate separateness as that concept relates to the First Amendment.
2.2.9.1 Show/Hide More Walkovszky v. Carlton
2.2.9.2 Show/Hide More Kinney Shoe Corp. v. Polan
Courts have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation.
In the following case, a Federal court lays out its approach to the question of whether a court should depart from the limited liability norm and “pierce the corporate veil” thus making stockholders liable for the debts of the corporation. The approach taken by the Federal court here differs only slightly from the approach to piercing taken by various state courts, including Walkovszky.
Central to a court's inquiry will be whether the stockholders treated the corporation as a separate entity with respect for the formalities due to a separate entity such that a court should also respect the corporation's limited liability.
Although the court in this case provides us with a convenient “test” it is worth remembering that piercing the corporate veil is an equitable remedy, therefore courts can – at times – appear to be inconsistent in their application of these tests. Success will usually require highly idiosyncratic facts and very sympathetic plaintiffs. In the most general terms, piercing the corporate veil is never going to be a court's first instinct.
2.2.9.3 Show/Hide More Fletcher v. Atex Inc.
2.2.9.4 First Amendment, the Corporation, and "Reverse Veil Piercing"
2.3 Show/Hide More Corporate Powers
Prior to the passage of general enabling laws, the explication of corporate power through the corporate charter was extremely important. State legislatures could tailor corporate charters to provide corporations significant powers, including monopoly rights over markets or territories. Although states no longer grant corporations such unique powers, explication of corporate powers (e.g. right to own property, right sue and be sued, etc.) remains nevertheless important in establishing a corporation's legal personality.
Sections 121 and 122 are authorizing provisions that grant corporate entities both explicit and implicit authority to act and conduct business. While §122 provides explicit authority for certain activities of the corporation, §121 is a catch-all provision that provides implied authority to the corporation to undertake all other actions required to conduct business. Taken together, the corporation has a great deal of flexibility to act.
2.3.1 Show/Hide More DGCL Sec. 121 - General Powers
Section 121 provides for the general powers of a corporation. The corporation has implied authority to undertake all actions required in order to conduct its business as determined by the board of directors and as limited by the corporation's certificate of incorporation and the statute.
2.3.2 Show/Hide More DGCL Sec. 122 - Specific Powers
In addition to a corporation's general powers, the statute lays out a series of specific powers available to every corporation. Many of these specific powers are critical to the life of a corporation. These specific powersunder §122 were once controversial, but by now are almost taken for granted.
For example, the corporate power to make charitable donations is one such specific corporate power that was once controversial. In the early years of the corporate form, donations to charitable causes were deemed to be ultra vires – or beyond the power of boards of directors. Through a series of changes – in the code and the common law – charitable contributions are now permissible.
Section 122 grants the corporation other specific powers, all of which are calculated to facilitating the ability of the corporation to act in its own behalf as a corporate person separate from its stockholders.
2.3.3 Show/Hide More Theodora Holding Corporation v. Henderson
2.3.4 Show/Hide More DGCL Sec. 123 - Ownership of securities
2.3.5 Show/Hide More Public Benefit Corporations
The development of corporate social responsibility and social entrepreneurship has given rise to demand for a different kind of corporate form, the “public benefit corporation”. The public benefit corporation is a for-profit corporation established with a specific public purpose. The certificate of incorporation of a public benefit corporation requires that incorporators specify some public benefit against which the pecuniary interests of the corporation's business must be balanced.
Although the form is relatively new, there is very little in the public benefit form that could not also be accomplished using a regular corporation. For many years, non-profit corporations were nothing more than corporations in which the certificate of incorporation prohibited the board from making a profit for stockholders. In fact, the Green Bay Packers' certificate of incorporation prohibits stockholders from ever receiving a dividend and requires the board of the Packers to donate any profits the team might have to a community foundation.
Public benefit corporations as a specifc form are a relatively new addition to corporate laws of states in response to a growing desire by promoters to have a corporate form that outwardly signals a credible commitment by managers to a more publicly-minded business.
In recent years, there has been a proliferation of public benefit corporations. For example, Ello, a Delaware public benefit corporation (social networking site), specifies as its public benefit that it will not share the private information of its customers with third parties. Plum Organics, another Delaware public benefit corporation (a baby food manufacturer), specifies that its public benefit includes “the delivery of nourishing, organic food to the nation's little ones.” Certificates of incorporation for these and other public benefit corporations are available on the course website.
2.3.5.1 Show/Hide More DGCL Sec. 361-368 - Public Benefit Corporations
The following amendments to the Delaware corporation code became effective on August 1, 2013 and provide for the establishment of public benefit corporations under the Delaware General Corporation Law. Section 362 requires public benefit corporations to identify a public benefit in its certificate of incorporation. Section 365 requires boards of directors to manage the business in a manner that balances profit with the best interests of those affected by the corporation's conduct as well as the specific public benefit identified in the certificate of incorporation.
2.3.6 Show/Hide More Formation Assignment
2.4 Show/Hide More Bylaws
The corporate bylaws, in addition to the certificate of incorporation, make up the core of any corporation's governance documents. Whereas the subject matter of the certificate of incorporation deals with the basic relationships between stockholders and the corporation, the substance of corporate bylaws is typically limited to issue of governance process within the corporation. Bylaws typically do not contain substantive mandates, but direct how the corporation, the board, and its stockholders may take certain actions.
The corporate bylaws are subordinate to the certificate of incorporation. To the extent bylaws and the certificate or the DGCL are in conflict, the certificate and/or the DGCL will take precedence over the bylaws. Because they are subordinate, corproate bylaws are also easier to amend. Typically, corporate bylaws may be amended by a corporation's board of directors or its stockholders. When stockholders amend the bylaws, they need only achieve a majority of a quorom rather than the more exacting majority of the outstanding shares as is the case in an amendment to the corporation's certificate of incorporation.
Whereas the certificate of incorporation must be filed with the state, a corporation is not required to file its bylaws with any state authority.
2.4.1 Show/Hide More DGCL Sec. 109 - Bylaws
This provision authorizes the corporation to adopt bylaws governing the conduct of the affairs of the corporation. The provision provides that the power to adopt and amend bylaws lies with the stockholders. However, if a corporation provides for such in its certificate of incorporation – as most corporate certificates do – then the board of directors may also amend the bylaws. As you might guess, issues may arise when stockholders and directors adopt conflicting bylaws.
2.4.2 Show/Hide More Boilermakers Local 154 Retirement Fund v. Chevron Corporation
In Boilermakers, the court answers the question whether directors can unilaterally adopt bylaws to restrict the rights of stockholders. The bylaw in question is an ‘exclusive forum provision' bylaw that purports to limit the rights of stockholders to bring certain kinds of litigation against the corporation and its board to courts in Delaware. Forum selection provisions are common in commercial contracts.
In this case, the board – and not the stockholders – adopted an exclusive forum bylaw. This case raises important questions about the ability of directors to act unilaterally in the context of corporate bylaws as well as the nature of the “corporate contract” that stockholders enter into when they purchase shares of any corporation.
This case also reviews the standards of review a court will apply to judicial challenges to bylaws as well as the typical subject matter appropriate for bylaws.
2.4.3 Show/Hide More Proxy Access and Expense Bylaws
2.4.3.1 Show/Hide More DGCL Sec. 112 - Proxy Access Bylaw
2.4.3.2 Show/Hide More DGCL Sec. 113 - Proxy Expense Bylaw
2.5 Show/Hide More Board of Directors
Stockholders – as we will see later – have a number of rights with respect to the corporation. However, one right that stockholders do not have is the right to directly manage the day-to-day operations of the business. The general corporation law, as well as the common law, vests exclusive responsibility for corporate management and decisionmaking not with the stockholders, but rather with the corporation's board of directors.
We might like to think that shareholders own and run the business, but they do not. The authority to manage and oversee the operation of the business on a day to day basis is vested exclusively with the board. To the extent stockholders have rights to oversee the operations of the business, those rights are attenuated. Perhaps the most important provision of the Delaware corporate law is §141. Delaware is by no means unique; every state has its equivalent to §141. Section 141 centralizes decisionmaking authority to the board.
The statutory authority granted to the board by §141 lies at the heart of the business judgment presumption, or the “business judgment rule.” The business judgment presumption is judicial presumption that exists as an acknowledgment of the statutory authority vested in boards, and not shareholders, to run the corporation. The effect of this judicial presumption is to cause courts to defer to decisions of the board in most matters when those decisions are challenged by stockholders.
This presumption is quite powerful and have effects beyond the courtroom. Because courts will generally abstain from intervening in disputes between stockholders and boards about most business decisions, boards will feel a great deal of latitude and independence in their decision making process. The insulation from stockholders afforded by this judicial presumption encourages boards to take business risk.
2.5.1 Show/Hide More DGCL Sec. 223 - Director vacanies
When a director resigns from the board of directors, such resignations are not contemporaneous with a stockholder meeting. In the interim period before the stockholder meeting, boards have the power to appoint replacement directors.
2.5.2 Show/Hide More DGCL Sec. 141 - Board of Directors
Section 141 deals with the power and the structure of the board of directors. Of all the provisions in the corporate law, §141(a) is perhaps the single most important. Section 141(a) grants plenary power over the management of the corporation – not the stockholders – but to the board of directors. Among other things, §141(a) provides the statutory basis for the business judgment presumption.
Sections 141(b) & (f) describe the requirements for the conduct of regular business at board meetings or actions by the board without a meeting. Under §141©, a board is authorized to delegate almost all of its authority to committees of directors. Section 141(d) permits the creation of staggered, or classified, board structures.
Section 141(e) creates a safe harbor from liability for boards that reasonably rely on experts when making decisions. Section 141(h) provides boards the statutory authority to set their own compensation, while §141(k) describes the circumstances under which stockholders may dismiss a director.
2.5.3 The Nature of the Board of Directors
2.5.4 Show/Hide More Shlensky v. Wrigley
In this iconic case, a stockholder challenges a decision of the board of directors of the Chicago Cubs not to install lights at the field and to only play games during daylight hours.
For many years, the Chicago Cubs, a Delaware corporation, were controlled by Philip K. Wrigley – also known for his success as a chewing gum manufacturer. In many respects, Wrigley was an innovative businessman. During World War II he founded the All American Girls Baseball League to fill the void created when many professional baseball players went to war. The film, A League of Their Own, was a fictionalized account of the experiences of the AAGBL. In addition, Wrigley made a decision to increase the value of the Cubs brand by effectively giving away the rights to radio broadcasts of Cubs games.
In Shlensky v Wrigley, a stockholder sued the board of the Cubs, including Philip Wrigley, for the board's decision not to install lights and refusal to play night games at Wrigley Field.The stockholder alleged that the board's decision to only play day games at Wrigley caused the corporation to make less money than had the board installed lights and permitted the team to play night games.
This case highlights a very typical board decision and a common tension between the managers of the corporation and its stockholders. In this case we also see the degree of deference that courts will pay to a board's business judgment when that decision is made in an informed manner at arm's length.
2.5.5 Show/Hide More Aronson v. Lewis
In Shlensky, the court described its policy of deferring to the decisions of the board of directors absent some evidence of fraud or wrongdoing. Aronson is the leading case for the restatement of the principle highlighted in Shlensky: the business judgment presumption, or the business judgment rule. This presumption, which is rooted in §141(a)'s allocation of exclusive management authority to the board of directors, requires that court leave board decisions undisturbed unless complaining stockholders present some evidence that the board made the challenged decisions in an uninformed manner, or in a manner not in good faith, or for reasons otherwise not in the best interests of the corporation (e.g. board self-dealing).
Note that the pleading burden is on the complaining stockholders. In the absence of facts to undermine the business judgment presumption, courts will leave board decisions, even bad ones, in place.
2.5.6 Show/Hide More Gagliardi v. TriFoods International Inc.
In this case, a stockholder brings suit to challenge a series of what turned out ultimately to be ill-advised board decisions. As in Shlensky, we see the degree of deference that courts will pay to a board's business judgment. The court in Gagliardi also offers up a rationale for why a high degree of deference for disinterested board decisions might generally be good policy.
2.5.7 Show/Hide More DGCL Sec. 145 - Indemnification of Directors and Other Agents
2.6 Show/Hide More Stock and Dividends
The following provisions of the corporate law are enabling provisions related the corporation's stock. In general terms, a corporation may issue shares with a variety of rights and powers. Unless the certificate reserves to the board of directors the right designate stock rights, such rights must be stipulated in the corporation's certificate of incorporation.
Where the certificate has reserved to the board the power to designate rights, when a board issues shares it may designate special rights, including voting power and dividend rights, for the stock it issues. Boards have used this power to create high vote shares and other types of stock with preferences and rights. This power to tailor the rights of stock is central to the board's ability to adopt “poison pills”, also known as shareholder rights plans.
A common right built in a share of stock is the “liquidation preference”. In firms funded by venture capital, venture capitalists will often demand that the shares they are issued come with liquidation preferences. A liquidation preference is a right that grants certain preferential payments to stockholder in the event the corporation undertakes any one of a series of different liquidation events (e.g. a merger, sale of the corporation, or a dissolution). Below is an example of a liquidation preference that might appear in a certificate of incorporation of venture backed start up firm:
Upon the occurence of a Liquidation, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $5 per share (as adjusted for any stock divdends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Preferred Stock then held by them.
This preference ensures that in the event of a liquidation event like a sale of the corporation, the venture investor receives $5 per share of the transaction consideration before any other stockholder is paid. Once the preference is paid, then stockholders share the balance of the transaction proceeds ratably.
When a board issues shares, this chapter of the code also permits boards to restrict the ability of stockholders to buy and sell shares of the corporation – making such shares subject to redemption rights, rights of first offer, and also prohibiting in some circumstances interested stockholder transactions.
With respect to dividends, the provisions in this chapter makes it clear that decisions with respect to the declaration of dividends are ones that lie wholly within the discretion of the board of directors and are not the realm of stockholder action.
2.6.1 Show/Hide More DGCL Sec. 151- Classes and series of stock
A corporation may issue shares in more than one class, with each class having separate rights and powers. In addition to the liquidation preference, discussed previously, a board can use §151 to issue shares with variable voting rights. For example, Facebook, Google, Twitter and other tech firms have used §151 to issue shares classes of stock to founders with 10 votes per share. Stock issued to the public have 1 vote per share, or in some cases, no votes at all.
Shares issued by the corporation, may also be subject to redemption should that right be stipulated in the certificate of incorporation or the certificate of designation. In a redemption, the board may at any time make a “call” on the stock and can redeem the stock for a price determined in the certificate. A redemption differs from a stock repurchase in the a number of ways. First, a stock repurchase involves a decision by the stockholder to sell their stock. Absent consent of the stockholder, no one can force a stockholder to sell into a stock repurchase. A redemption can lack a certain degree of voluntariness. Stockholders take the stock knowing that the board has the power to redeem stock against the will of stockholders. Second, the stock repurchase can be done at any price. Presumably, the board will want a sufficient number of stockholders to voluntarily tender their shares, consequently the repurchase is typically done a premium to the market price. In a redemption, the redemption price, or at least a formula to calculate the price is set in the certificate of incorporation.
2.6.2 Show/Hide More DGCL Sec. 157 - Rights and options
By now, stock options have become well known as a device for employee compensation in corporations. A stock option provides the holder with the right to purchase a share of the corporation at a stated price. When this “strike price” is below the price of the shares trading in the stock market, the options are considered “in the money” and the optionholder has an economic incentive to exercise the stock option. When the strike price is above the market price for the stock, the optionholder does not have an incentive to exercise the options.
Because stock options increase in value with an increase in the stock price, options are thought to be reasonably efficient incentive mechanisms, delivering value to employees when the firm succeeds. Because stock options issued to employees also vest over time, the existence of unvested options as part of an employee's compensation package creates a bonding mechanism between the corporation and the employee.
2.6.3 Show/Hide More DGCL Sec. 160 - Corporate ownership of its own stock
Corporations, as entities separate from their stockholders, are empowered by the statute to hold and maintain all sorts of assets, including holding stock of other corporations (making the holding company possible). But can a corporation own its own stock? And, if it does, what are the implications?
The short answer is that a corporation can indeed buy and own its own stock. However, the implications of the corporation buying its own stock are significant. When a corporation buys or redeems its own stock that stock is deemed to be “treasury stock” and is no longer outstanding stock. Treasury stock may not be voted and does not count towards determining a quorum at stockholder meetings.
Any corporation stock held by wholly-owned subsidiary of the corporation is also deemed treasury stock. However, corporation stock held by the corporation in a fiduciary capacity (corporation stock held as part of an employee retirement plan managed by the corporation, for example), is not deemed to be treasury stock.
2.6.4 Show/Hide More DGCL Sec. 161 - Issuance of stock
The board of directors has the authority to issuance of new shares of the corporation. Provided the shares have been authorized in the certificate of incorporation, the board need not seek stockholder approval prior to issuing such shares.
2.6.5 Show/Hide More DGCL Sec. 170 - Dividends
When a corporation has profits, it may distribute those profits back to stockholders. These profit distributions back to stockholders are known as “dividends”.
The decision whether or not to issue dividends to stockholders lies wholly within the discretion of the board of directors. Unless the certificate of incorporation states otherwise, stockholders have no right to corporate dividends.
Some old-line corporations, like G.E. are well-known for a long-standing board policy of making dividend payments to their stockholders. Other corporations, like start-up corporations or corporations in high-growth stages of development, have the exact opposite policy. Companies like Alphabet or Facebook have board policies against making dividend payments to stockholders, opting to reinvest all their profits into the company.
2.6.6 Show/Hide More DGCL Sec. 202 - Restrictions on transfer of stock
When a board issues new shares, in addition assigning voting rights to the shares, the board may also, pursuant to §202, place reasonable restrictions on the ability of stockholders to transfer or sell such shares. There are a variety of common restrictions placed on shares, particularly shares of private corporations. For example, a board might include a right of first refusal restriction on shares it issues to ensure that existing stockholders the opportunity to purchase any shares that a stockholder would like to sell. Another common restriction prevents accumulation of shares by any one stockholder. For example, the Green Bay Packers restrict any one shareholder from owning more than 5% of the outstanding shares of the corporation. The ability of boards to design restrictions on the transfer of stock is fairly broad. Of course, this power is not without limits. For example, restrictions against selling stock to based on racial or gender categories would run afoul of Federal law and thus not be enforceable.
2.6.7 Show/Hide More Henry v. Phixios Holdings
In Phixios, the court is asked to rule on the ability of a corporation to place restrictions on stock ownership. In the facts presented in Phixios, it is clear that a corporation has the right, pursuant to Section 202, to place restrictions on who and under what conditions certain people may own shares in the stock of the corporation.
The court's straightforward interpretation of Section 202 makes it clear that when a corporation purports to place restrictions on ownership or transfer of its stock that Section 202 requires actual knowledge by stockholders of such restrictions or at least disclosure of such restrictions on the face of the stock certificate.
2.6.8 Show/Hide More DGCL Sec. 203 - State anti-takeover legislation
Section 203 is an example of state anti-takeover legislation. Section 203 is a flavor of the kinds of restrictions on stock transfer as we saw in §202. In §203 restrictions a board may prohibit a stockholder from purchasing additional shares in the corporation for a period of time once they have completed a transaction that gives them control of the corporation. These restrictions are intended to delay the ability of a hostile acquirer to quickly complete a hostile acquisition of the corporation unless the corporation's board consents.
2.7 Show/Hide More Stockholder Meetings and Voting for Directors
2.7.1 Show/Hide More DGCL Sec. 211 - Stockholder meetings
2.7.2 Show/Hide More DGCL. Sec. 228 - Action by written consent
2.7.3 Show/Hide More DGCL Sec. 212 - Stockholder voting rights
2.7.4 Stock with Multiple Voting Classes
2.7.5 Show/Hide More DGCL Sec. 213 - Record dates
2.7.6 Show/Hide More DGCL Sec. 222 - Notice of meetings
2.7.7 Show/Hide More Who Gets to Vote - 219 and Lists of Record Shareholders
2.7.7.1 Show/Hide More DGCL Sec. 219 - Stockholder lists
2.7.7.2 Show/Hide More In re Appraisal of Dell Inc.
2.7.8 Show/Hide More DGCL Sec. 216 - Quorum and required votes
2.7.9 Show/Hide More DGCL Sec. 214 - Cumulative voting option for directors
2.7.10 Show/Hide More Shareholder Proposals
2.7.10.1 Show/Hide More 14a-8 - Shareholder Proposals
2.7.10.2 Show/Hide More Lovenheim v. Iroquois Brands Ltd.
2.7.10.3 Show/Hide More CA INC. v. AFSCME Employees Pension Plan
2.7.10.4 Show/Hide More Bylaw Amendments and Shareholder Proposals
2.7.10.4.1 Show/Hide More DGCL Sec. 113 - Expense reimbursement
2.7.10.5 Show/Hide More Say on Pay Vote [Frank-Dodd, Sec 951]
3 Show/Hide More Stockholder Litigation
Before we turn to too much more case law, it is important to understand the particular procedural aspects of the stockholder litigation that we will be reading. Because the litigation involves stockholders, directors, and the corporation, it is procedurally different than litigation you may have seen until now in law school.
The source of these differences is often a question about who gets to speak for and vindicate the rights of the corporation – the board or the stockholder. Resolution of this question is especially important when it is the board itself that is accused of wrong-doing against the corporation.
3.1 Show/Hide More Direct and Derivative Suits
3.1.1 Historical Development of Derivative Litigation
3.1.2 Show/Hide More Delaware long arm statute
You might wonder how it is the case that a corporate director sitting in New York or Massachusetts could be subject to the jurisdiction of the courts of Delaware. The short answer is that all persons who agree to become corporate directors also consent to jurisdiction of the Delaware courts under Delaware's “long arm statute.”
3.1.3 Show/Hide More DGCL § 321 - Service of process
You may have wondered why the corporate law statute requires that the corporation name a registered agent, along with an address in the state of Delaware, in its certificate of incorporation. The registered agent plays an important role in ensuring corporate officers and directors are subject to the jurisdiction of the Delaware courts for the purpose of stockholder litigation and other litigation related to the corporation.
3.1.4 Show/Hide More DGCL Sec. 327 - Derivative actions
In order to have standing in derivative litigation, a stockholder must have already been a stockholder at the time of the bad act that gave rise to the litigation. This requirement prevents people from observing some bad act and then buying into a lawsuit.
3.1.5 Show/Hide More Delaware Rules, Rule 23.1
The Delaware Rules of Civil Procedure lay out rules for bringing and maintaining a stockholder derivative action. Compliance with these rules is necessary in order for a claim to stay in court. Often times, defendants will move to dismiss a plaintiff's claim for failure to comply with the requirements of Rule 23.1.
The Rule 23.1 Motion to Dismiss often revolves around the characterization of the claim (direct v. derivative) and the independence of the directors (demand required/demand futility).
3.1.6 Show/Hide More Tooley v. Donaldson Lufkin, & Jenrette, Inc.
In Tooley, the court was asked to determine whether shareholder litigation is direct or derivative. Rather than rely on a more traditional, and cumbersome, “special injury” test, the court in Tooley announced a new, simpler test for determining whether a stockholder action is direct or derivative.
Since Tooley other jurisdictions, like New York, have abandoned their own versions of the special injury in favor of specifically adopting Delaware's Tooley standard.
3.1.7 Show/Hide More Gentile v. Rossette
3.2 Show/Hide More Demand and Demand Futility
3.2.1 Show/Hide More Aronson v. Lewis
3.2.2 Show/Hide More Rales v. Blasband
3.2.3 Show/Hide More Guttman v. Huang
3.2.4 Show/Hide More Beam v. Stewart
3.2.5 Show/Hide More Shoen v. SAC Holding Corp.
3.2.6 Show/Hide More Spiegel v. Buntrock - Wrongful refusal of demand
3.2.7 Show/Hide More Brehm v. Eisner
3.2.8 Show/Hide More In Re The Goldman Sachs Group, Inc. Shareholder Litigation
3.3 Show/Hide More Special Litigation Committees
In situations where demand is futile, stockholders can file derivative litigation without making demand. Does that mean that boards have forever lost control over the derivative litigation? In some circumstances the answer is no.
The following cases lay out the doctrine with respect to how a board can retake control over derivative litigation in later stages.
Unlike in the case of demand and demand futility, at this stage of the litigation, boards bear the burden of proving that notwithstanding the fact that demand was previously futile, the board is now in a position to fairly consider the facts of the complaint. As you will see, this is a heavy burden for a board to bear.
3.3.1 Show/Hide More Zapata Corp. v. Maldonado
Zapata is the leading case on standard a court will apply to a special litigation committee's attempt to take control over derivative litigation at a later stage – following the 23.1 motion to dismiss and prior to going to trial.
3.3.2 Show/Hide More In re Oracle Corp. Derivative Litigation
At the later stages of shareholder litigation, a board may use a special litigation committee to attempt to take control of litigation back from shareholders. However, at that time the burden of proof with respect to the independence of the board and its special committee have shifted. The special committee bears the burden of proving its independence. At this stage, facts that might not have been troublesome at the 23.1 stage take on a different light.
3.4 Show/Hide More 220 Actions and Tools at Hand
Stockholders have a statutory right to access the books and records of the corporation. This power is an extremely important tool for stockholders to monitor the actions the board of directors and to root wrong-doing or malfeasance. However, the right to monitor a corporation's books and records is also subject to limitations. In the following cases we learn about using the “tools at hand” and the limits to their use.
Courts – as in Beam v. Stewart – regularly exhort plaintiffs to use Section 220 to seek out books and records prior to filing derivative complaints. However, the 220 process can be lengthy. Consequently, the economics of plaintiff litigation make it difficult for plaintiffs to both pursue 220 litigation and also maintain control positions in early filed derivative litigation. This challenge makes 220 actions a less than perfect vehicle for curbing the excesses of the litigation industrial complex.
3.4.1 Show/Hide More DGCL Sec. 220 - Inspection of books and records
Stockholders who comply with the requirements of §220 can access the books and records of the corporation.
3.4.2 Show/Hide More Seinfeld v. Verizon Communications Inc.
Sec 220 – stockholder inspection rights
3.4.3 Show/Hide More LAMPERS v Lennar Corp
3.4.4 Show/Hide More Louisiana Municipal Police Employees Retirement System v. Morgan Stanley
3.5 Show/Hide More Settlements and D&O Insurance
3.5.1 Corporate Benefit doctrine and the awarding of attorney fees
3.5.2 Show/Hide More In re Paetec Holding Corp. S'holders Litig.
4 Show/Hide More Fiduciary Duties of Directors
Although the Delaware code – and the corporate codes of all the other states for that matter – do a good job of describing the corporate form and the mechanics of operating this form, with the exception of perhaps §144, the code says precious little about the standards to which boards of directors who are managing the corporation will be held. This is so because corporate fiduciary duties are a product of the common law and not statute. In the following sections we examine the various core duties of corporate directors. Although these duties are fewer in number than the fiduciary obligations of agents, they are entirely consistent.
4.1 Show/Hide More Standards of Conduct and Standards of Review
The question is often asked: to whom do corporate directors owe their duties? And, how are the actions of directors evaluated ex post by courts? In Trados, an excerpt of which follows, Vice Chancellor Laster describes the standards of conduct against which director action is measured as well as Delaware's various standards of reviews.
4.2 Show/Hide More Duty of Care
4.2.1 Show/Hide More Aronson v. Lewis
In an earlier case (Shlensky v Wrigley) you were introduced the business judgment presumption. Remember that in Shlensky, the court ruled that absent some act of fraud or gross negligence that it would not second guess business decisions of a board of directors. This general deference to the board’s statutory role is known as the business judgment presumption and it plays out most commonly in cases where stockholders bring claims that boards have somehow violated their duty of care to the corporation. The case that follows, Aronson, is the leading restatement of the business judgment presumption.
4.2.2 Show/Hide More Kamin v. Am. Express
The business judgment presumption creates a great deal of space for boards to make decisions related to the operation and strategic direction of the business. Provided boards are disinterested and act in good faith in an informed manner, courts will give those board decisions great lattitude when they are challenged by stockholders. The following case is an example of a stockholder challenge to a board decision and the court's implementation of the business judgment presumption.
4.2.3 Show/Hide More Williams v. Geier
Absent the taint of self-interest, boards have great latitude with respect to decisions how to manage the business and affairs of the corporation. Board decisions to amend the certificate of incorporation, like other business decisions, receive the benefit of the business judgment presumption. In the following case, the effect of a fully-informed, uncoerced stockholder vote on the challenged transaction is that the challenged transaction receives the benefit of the business judgment presumption.
4.2.4 Show/Hide More Smith v. Van Gorkom
4.2.5 Section 102(b)(7)
4.2.6 Show/Hide More