BA Cases (Name - Info)

Question 1

Gorton v. Doty

Answer 1

Agency - Express Agency

Facts: Doty told coach to drive her car to game. They got in accident when coach was driving & Gorton was injured. Was there an agency? [Yes]

Holding: When the owner of a car authorizes an individual to drive that car for a specific purpose, the driver acts as an agent for the owner

Reasoning: No compensation was needed. Doty explicitly told coach that he could use her car

Question 2

A Gay Jenson Farms v. Cargill

Answer 2

Agency - Implied Agency

Facts: Jenson loaned $ from Cargill. Their agreement gave Cargill lots of control over the farm, & he eventually became very intertwined with the business of the company. Was there an agency? [Yes]

Holding: A principal-agent relationship exists between a creditor and debtor when the creditor intervenes in the business affairs of the debtor

Question 3

Mill Street Church of Christ v. Hogan

Answer 3

Agency - Actual Implied Authority

Facts: Mill Street often hired Hogan to paint. He couldn’t finish this job without an assistant. He hired his brother, but his brother got hurt.

Holding: Hogan had implied authority.

Why? Having a helper was necessary to complete the jon. Hogan talked to someone at the church about needed a helper – that person agreed. The church paid the 3rd party. Hogan had hired the 3rd party before. Hogan reasonably believed he had the authority to hire his brother.

Question 4

Ackerman v. Sobol Family Partnership

Answer 4

Agency - Apparent Authority

Facts: Ackerman sued Sobol. Ackerman’s attorney settled the deal thinking he had settlement authority

Holding: If an attorney has apparent settlement authority, the client is bound by a settlement offer made or accepted by the attorney.

Reasoning: Test: (1) P must act in a way that it seems that A has authority & (2) the 3rd party must reasonably think A has authority. The attorney was seen talking to Ackerman and everyone thought there was authority.

Question 5

370 Leasing v. Ampex

Answer 5

Apparent Authority

Question 6

Watteau v. Fenwick

Answer 6

Agency - Inherent Authority

Facts: Humble used to own a tavern & sold it, but it was still in his name. New owners said he could buy anything but a few certain items for the tavern. He bought the prohibited items anyways.

Holding: P is liable for the acts of A who proceeds within the scope of authority typically given to an agent with similar duties, regardless of limitations the principal imposes on that agent

Reasoning: Buying these things were within normal job duties. The supplier had no knowledge of Humble’s limited purchasing authority, but rather had every reason to believe that Humble had authority to buy supplies for the tavern.

Question 7

Botticello v. Stefanovicz

Answer 7

Agency - Ratification

Facts: Dispute over the price of some land that several people owned. The wife accepted the benefits of the contract.

Holding: The contract wasn’t ratified.

Reasoning: Marriage alone isn’t ratification. Accepting benefits of a contract without the intent to ratify isn’t enough either.

Question 8

Hoddeson v. Koos Bros

Answer 8

Agency - Authority by Estoppel

Facts: Fake store clerk sold furniture to a woman. She thought he was really an employee, but he wasn’t.

Holding: The store was liable because it would have been unfair to the woman. The store had a duty of reasonable care to prevent customers from being defrauded.

Question 9

Arguello v. Conoco

Answer 9

Agency - Vicarious Liability in the Statutory Context

Facts: Conoco said it couldn’t be held liable for employees’ racist behavior because the stores were not owned by Conoco, but were independently owned.

Rule: The language of the agreement, while offering guidelines, does not establish that Conoco has any participation in the daily operations of the branded stores nor that Conoco participates in making personnel decisions.

Reasoning: To impose liability on a D under § 1981 for discriminatory actions of a third party, P must demonstrate that there is an agency relationship between D and third party. To do that, P must show that Conoco had given consent for the branded stores to act on its behalf and that the branded stores are subject to the control of Conoco.

Question 10

Ira Bushey & Sons v. US

Answer 10

Agency - Within scope of employment

Facts: Seaman damaged a ship. Was that within the scope of his employment? [Yes]

Reasoning: Within the scope of employment because the harm was foreseeable, the sailor was required to be on the ship for his job, and they let him on the ship drunk to do his jobs.

Question 11

Humble Oil v. Martin

Answer 11

Agency - Employee or independent contractor?

Facts: Car rolled at a gas station and hit someone. The gas station said it wasn’t liable for the torts of its employee.

Holding: The gas station was liable.

Reasoning: There was a master-servant relationship. There was an agreement providing that one party has control over the day-to-day operations of the business.

Question 12

Hoover v. Sun Oil Co

Answer 12

Agency - Employee or independent contractor?

Facts: Fire at service station started by employee of station operator.

Holding: There was no agency relationship between operator and Sun because Sun did not retain the right to control the details of the day-to-day service operation.

Question 13

Majestic Realty Associates v. Toti Contracting

Answer 13

Agency - Inherently dangerous activities exception

Facts: Contractor demolishing one building accidentally damaged another through negligence.

Rule: Liability is imposed on a landowner who engages an independent contractor to do work which he should recognize as necessarily requiring the creation of a condition of peculiar risk of harm to others unless special precautions are taken, if the contractor is negligent in failing to take those precautions.

Question 14

Manning v. Grimsely

Answer 14

Agency - Intentional Tort & P’s Liability

Facts: Baseball player was being

Holding: Within the scope of employment because attacking fans was a reasonable & foreseeable result from baseball heckling.

Question 15

Murphy v. Holiday Inns

Answer 15

Agency - Franchises

Facts: Does a franchisor have the requisite control over a franchisee to render the franchisee an employee for purposes of tort liability? Customer slip and fall.

Rule: No agency relationship was created because the franchise agreement gave no control or right to control the methods or details of doing the work.

Reasoning: That an agreement is a franchise contract does not insulate the contracting. The purpose of this franchise agreement is to establish uniformity, not control

Question 16

Miller v. McDonald’s

Answer 16

Agency & apparent agency within torts

Facts: P bit into sapphire stone in Big Mac.

Holding: McDonalds was liable, even though there was no express authority

Reasoning: When a franchise agreement requires a franchisee to operate an establishment so as to closely identify it with the franchisor, the franchisor holds out the franchisee as an agent. Hence, the franchisee of such a uniform franchise is an apparent agent of the franchisor, and the franchisor is liable for the torts of the franchisee.

Question 17

Atlantic Salmon v. Curran

Answer 17

Agency - Undisclosed P

Facts: Curran didn’t disclose that he was acting on behalf of a P
Holding: He was liable under the debt

Question 18

Town & Country House & Home Service v. Newbery

Answer 18

Agency - duty of loyalty, grabbing & leaving

Facts: Former employees of cleaning company solicited customers of their former employee.

Rule: Even where a solicitor of business does not operation fraudulently, he still may not solicit the latter’s customers who are not openly engaged in business in advertised locations or whose availability as patrons cannot be readily ascertained.

Reasoning: These customers had been screened by at considerable effort and expense. So, there is no question that P is entitled to enjoin Ds from further solicitation of its customers and some damage should be paid to P by reason of the customers they enticed away.

Question 19

Reading v. Regem

Answer 19

Agency - Duty of Loyalty

Facts: British soldier stationed in Cairo was bribed to escort lorries through security checkpoints.

Rule: If a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, he ought not be allowed to keep the money, but it shall be taken from him and given to his master.

Reasoning: The uniform of the Crown and the position of the P as a servant of the Crown were the only reasons why he was able to get the money and that is sufficient to make him liable to hand it over to the Crown.

Question 20

Rash v. J.V. Intermediate

Answer 20

Agency - Duty of Disclosure

Facts: Employee had several other businesses, in violation of his contract, one of which he subcontracted with in his position as manager.

Rule: Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency. A fiduciary owes the principal duties to account for profits, not to act as an adverse party, not to compete with the principal, the duty to deal fairly in all transactions with the principal, and the duty to deal openly with the principal and to fully disclose information about matters affecting the company’s business.

Reasoning: Rash was an agent of JVIC and violated his fiduciary duty in failing to disclose his interest in TIPS to JVIC.

Question 21

Fenwick v. Unemployment Compensation Commission

Answer 21

Partnership - Partners v. Employees

Facts: Beauty salon worker entered into agreement with salon owner that there was a “partnership” to increase her wages by receiving 20% of profits; court. Is this a partnership? [No]

Reasoning: Reasoning: Elements the courts have taken into consideration to determine if a partner relationship [see above]. They didn’t hold themselves out as partners between themselves or to anyone else. When Chesire quit, she just left – there was no winding up. The losses were just born by Fenwick.

Question 22

Martin v. Peyton

Answer 22

Partnership - Partners v. Lenders

Facts: Firm borrowed money from PPF; PPF retained right to dividends and 40% of profits and option to buy 50% equity in firm, had inspection rights and right to veto speculative transactions; firm becomes insolvent and creditors sue PFF arguing partnership.

Holding: There was no partnership because the lenders could not initiate transactions or bind the firm

Reasoning: This was a loan agreement. The agreement gave the lenders the opportunity to become partners, but they were not partners beforehand

Question 23

Southex Exihibitons v. Rholse Island Builders

Answer 23

Partnership - Partners v. Independent Contractors

Facts: Plaintiffs Southex entered contracts with third parties in its own name, rather than in the name of the putative partnership

Rule: No partnership. Because of the deferential review standard, Southex must demonstrate that the court ruling is not rationally supported by the record. However, the record evidence indicating a nonpartner relationship cannot be dismissed as insubstantial

Reasoning: Under RI law, a partnership is an association of two or more persons to carry on as co-owners a business for profit. Southex says agreement shows partnership because of (1) sharing of profits (2) mutual control and (3) respective contributions of valuable property. However, factors in support of RIBA are (1) agreement is not called partnership agreement (2) fixed term (3) indemnification provision rather than sharing losses equally (4) RIBA made far less management decisions.

Question 24

Hallock v. Holiday Isle Resort

Answer 24

Partnership - Joint Ventures

Joint venture - single transaction, although it may comprehend a business to be continued over several years

Partnership - general and continuing business of a particular kind, although there may be a partnership for a single transaction

“Even though it has been said that a joint venture is a relationship in the nature of a limited partnership, joint venture and partnership are separate legal relationships. The relationship of a joint venture is generally more informal than the one that exists between partners, and some of the incidents of partnership do not, or may not, apply”

Question 25

Young v. Jones

Answer 25

Partnership - Partnership by Estoppel

Facts: P deposited money in bank, which forwarded it to SAFIG based on audit letter from PW-Bahamas; sues PW-Bahamas and PW-US as partners.

Holding: They weren’t partners by estoppel

Reasoning: Generally, persons who are not partners as to each other are not partners as to third persons. However, a partnership by estoppel may be established according to the rules above. But, that didn’t happen here. There is no evidence that credit was extended on the basis of representation of partnership existing (no reliance or change of position)

Question 26

Meinhard v. Salmon

Answer 26

Partnership - Duty of Loyalty (usurping opportunities)

Facts: Partner signed on to a new lease of partnership property without notice to other partner, violating his fiduciary duty

Rule: A managing adventurer appropriating the benefit of a lease without warning to his partner might fairly expect to be reproached with conduct that was underhanded or lacking in reasonable candor, if the partner were to surprise him in the act of signing the new instrument. Conduct subject to that reproach does not receive from equity a healing benediction.

[This was technically a joint venture, the court just treated it as a partnership]

Question 27

Sandvick v. LaCrosse

Answer 27

Partnership - Duty of Loyalty & Joint Ventures

Issue #1 - Is there a joint venture?

Facts: In an oil and gas joint venture, two of the partners extended leases without telling the other partner

Holding: this was a joint venture, not a partnership. A joint venture is found when: (1) there is a contribution made by each party; (2) the parties share a proprietary interest and mutual control over the property; (3) there is an agreement for the sharing of profits; and (4) there is an agreement showing that a joint venture exists.

Issue #2 - Was the fiduciary duty violated?

Rule: The joint adventurers breached their fiduciary duties of loyalty by taking advantage of a joint venture opportunity when they purchased the top leases without informing the other two.

Reasoning: It was in two of the partners best interest not to sell the leases during the last six months of the original term. Having excluded the other two partners, the sketchy two potentially stood to benefit more by waiting to sell the leases until after the original term expired.

Question 28

Meehan v. Shaughnessy

Answer 28

Partnership - Grabbing & Leaving

Facts: Partners at a firm left to start their own firm. While still employed, they secretly began preparing to take clients with them. They denied their intentions and waited until the end of the year to give the firm a month’s notice of their resignation. One sent solicitation letters to firm clients, and contacted attorneys who could refer clients to the new firm. They waited weeks to provide the list of clients they were taking and obtained authorizations from clients, agreeing to become clients of the new firm.

Rule: A partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership. You can compete with the entity, but you must be loyal still.

Question 29

Lawlis v. Knightlinger & Gray

Answer 29

Partnership - Expulsion

Facts: P was a partner in a law firm when he had an alcohol problem. He missed work as he sought treatment. D reduced P’s work while he was recovering. P also signed a Program, which set conditions for partnership. It stated that there was no 2nd chance if he drank again. He drank again and D gave him another chance. D’s partnership agreement stated that a senior partner may be involuntarily expelled from D if two-thirds of senior partners voted to do so, which they did.

Rule: When a partnership exercises its power under a partnership agreement to expel a partner, it must be done in good faith and for a bona fide reason, otherwise the agreement is breached

Reasoning: Because of the partnership agreement, the partners could vote to expel him at any time for any reason.

Question 30

In re Fulton

Answer 30

Partnership - Partnership Property

Facts: One partner purchased a truck in the name of the company for the company, and upon dissolution, claimed that the trailer was not part of bankruptcy because he paid for the trailer.

Rule: The intent of the partners determines what property is partnership property as distinguished from separate property. Determined from their apparent intention at the time property was acquired, shown by facts and circumstances surrounding the transaction, considered with the conduct of the parties toward the property after the purchase.

Reasoning: Trailer was purchased for use in the business and D actually used the trailer in furtherance of the business. Partnerships are automatically dissolved at bankruptcy

Question 31

Summers v. Dooley

Answer 31

Partnership - Partnership Control Rights

Facts: Summers (P) and Dooley (D) were partners in a trash collection business. P asked D if they could hire an additional employee. D refused, but P hired the worker anyway and paid him out of his own pocket.

Holding: The non-consenting partner was not obligated to pay the other partner for the employee’s salary

Reasoning: Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. Since the partners have equal rights, D had the right to veto the hiring.

Question 32

National Biscuit v. Stroud

Answer 32

Partnership - Agency & Partners’ Control Rights

Facts: Stroud (D) and Freeman formed a general partnership to sell groceries. The partnership agreement did not limit either partner’s authority to conduct ordinary business on behalf of the partnership. D told NBC (P) that he would not be personally liable for bread sold. Freeman ordered more bread on behalf of the partnership, and NBC delivered the bread. The partnership was dissolved, and D refused to pay for the bread.

Holding: when you have 2 partners, each party has the power to bind the partnership for business matters

Reasoning: Every partner is an agent of the partnership for the purpose of its business and the act of every partner for carrying on business of the partnership binds the partnership unless the partner so acting has no authority to act for the partnership in the matter AND the person with whom he is dealing has knowledge of the fact that he has no authority.

Question 33

Day v. Sidley & Austin

Answer 33

Partnership - Delegating Authority

Facts: Day (P) was a partner at Sidley & Austin law firm (D). S&A’s partnership agreement, which Day signed, provided that matters of firm policy would be decided by the executive committee. The committee merged S&A with another law firm. Day voted in favor of the merger and signed the partnership agreement. Day resigned, stating that the appointment of the co-chairman and office move made his job intolerable.

Holding: Partners can properly delegate authority to an executive

Reasoning: Here, the partners agreed to a merger (in compliance with the partnership agreement) that was beneficial to the partnership. It was not a breach of fiduciary duty because one of the partners did not like all the terms of the agreement

Question 34

Kovacik v. Reed

Answer 34

Partnership - Effects of Dissolution

Facts: Kovacik (P) and Reed (D) entered into a partnership to remodel kitchens. P would contribute $10,000. D would contribute labor and skill. They did not discuss losses. They lost money. P asked D to cover half of the total losses. [So one contributed capital & the other services]

Holding: Where one party contributes money and the other contributes services, in the event of loss, each would lose his own capital- one his money and the other his labor.

Reasoning: General rule is that in the absence of an agreement to the contrary the law presumes that partners intended to participate equally in the profits and losses of the enterprise with the losses shared in proportion to the profit sharing. However, that is true when both partners contribute capital (money or property). When one partner contributes capital and the other contributes skill or labor, neither party is liable to the other for contribution for loss sustained.

Question 35

Giles v. Giles Land Company

Answer 35

Partnership - Dissociation

Facts: Giles Land Company, L.P. (D) was a family-owned farming company. The partnership met to consider converting the partnership to an LLC. Kelly Giles (P), was unable to attend, but received notice of the determination to convert. He requested the partnership’s records for review. He sued, claiming he was denied access to the books and records. Ds argued that he should be dissociated from the partnership.

Holding: Impracticability made it appropriate for Kelly to be judicially dissociated from the company

Reasoning: Under the impracticable route to dissociation, despite Kelly’s claims that he had not engaged in the alleged conduct relating to the partnership, threats against family members are related to a business when: (1) the business is a family business, and (2) those threatened family members are the other partners in the business. Kelly’s threats against his family members were thus related to the partnership, because his family members were the other partners in the partnership. Those threats combined with the lack of trust make it not reasonably practicable to carry on the partnership with Kelly as a partner.

Question 36

G&S Investments v Belman

Answer 36

Partnerships - Buyout Agreements

Facts: Is the surviving general partner entitled to continue the partnership after the other general partner’s death and how should the deceased partner’s interest be computed?

Rule: The other general partner’s filing of the complaint did not dissolve the partnership but gave the court power to dissolve the partnership due to partner’s wrongful conduct. Dissolution would occur only when decreed by the court. The buyout formula in the agreement is amount of the partner’s capital account + average of past 3 years profits/gains. Partnership buy-out agreements are valid and binding although the purchase price agreed upon is less than or more than the actual value of the interest at time of death.

Reasoning: Partnership agreement permitted continuation of the partnership on the death of a partner. Court applies the buyout formula from the partnership agreement and finds that the partner didn’t get anything because of the state of his capital account. Filing a dissolution action =/= dissolution
(That comes from the court)

Question 37

In Re El Paso Pipeline Partners Derivative Litigation

Answer 37

Partnerships - Limited Partnerships

Example of limited partnership where corporate entity is general partner; court: example of statutory standard for good faith is for a fiduciary requires subjective belief that determination is in best interests of the limited partnership; contracted around duty of loyalty so no finding of bad faith

Here, the actions of parent and its officers complied with the terms of the partnership agreement and the facts do not support an inference of bad faith

The effect of organization as a partnership, rather than as a corporation, is that the promoter, Parent, winds up with greater freedom to shape to its own advantage the rules for dealing with conflict situations

Question 38

Boilermakers Local 154 Retirement Fund v. Chevron

Answer 38

Corporations - Generally

Facts: Chevron’s articles of incorporation authorized the board of directors to adopt bylaws without a vote by stockholders. Because Chevron was often subjected to litigation in multiple forums involving the same issue, the board adopted bylaws providing that any litigation would be conducted in Delaware. Chevron stockholders sued, alleging that the bylaws were both statutorily and contractually invalid.
Rule: Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are statutorily and contractually valid.

Question 39

Walkovszky v. Carlton

Answer 39

Piercing Corporate Veil

Facts: D owned a taxi business. D was a controlling shareholder of 10 corps, each of which held title to 2 cabs and no other assets. Each cab carried $10,000 in liability insurance, which was the minimum required by state law. P was struck and injured by one of D’s cabs. P sued, arguing that they functioned as one enterprise and should be treated accordingly
Rule: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity.
Reasoning: The law permits business incorporation to enable its proprietors to escape personal liability. However, courts will disregard the corporate firm (“Pierce the corporate veil”) when necessary to prevent fraud or to achieve equity. Whenever anyone uses control of the corp to further her own rather than the corp’s business, she will be held liable for the corp’s act under respondeat superior. Undercapitalization alone is not enough.

Question 40

Sea-Land Services v. Pepper Source

Answer 40

Piercing the Corporate Veil

Facts: D owned 6 business entities. One, Pepper Source, contracted with a shipping company, Sea-Land Services for the delivery of peppers. P failed to pay, and P filed a collection suit. PS never appeared bc it had been dissolved for failure to pay taxes. P sued D and all of his companies, seeking to pierce PS’s veil and collect from D.

Holding: 1st requirement was met. D shared money with corps, and they shared money with each other. However, simply because P would not have been able to collect its debt does not mean that an injustice was being perpetrated. Injustice must mean that there is some wrong beyond the harm to the creditor.
Look to:
(1) Unity of ownership and interest (whether the corporation and individual are really separate), and

Look at these 4 factors [these are very important!!: fraud, undercapitalization, commingling, corporate formalities

(2) Whether justice demands piecing the veil

Question 41

A.P. Smith Mfg. Co. v. Barlow

Answer 41

BJR

i. Facts: NJ statute provided that corps could make charitable contributions without shareholder approval as long as a donation did not exceed 1% of capital stock. A.P. Smith made a donation to Princeton. The donation was not specifically authorized in the articles of incorporation. [It was valid]
ii. Reasoning: Corps have most wealth in America, and contributions to help the community must come from somewhere. The donation must benefit the corporation. Cannot be a pet charity such as (1) charities in which the corp directors have a special relationship or (2) charities that the corp directors might personally benefit from supporting.

Question 42

Dodge v. Ford

Answer 42

BJR

Ford paid special dividends. Then, Ford, announced that there would be no more special dividends, and that all future profits would be invested in lowering the price of the product and growing the company. The board ratified his decision. The Dodge brothers sued to reinstate the special dividends.

Rule: A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns.

Reasoning: A business exists to conduct business on behalf of its shareholders. It is not a charity. Ford was even more profitable in 1916 than it was in 1915, when it paid over $10 million in dividends. However, in 1916, Ford paid only its $120,000 dividend. While a corporation may choose to invest in future ventures, and may choose to maintain cash on hand to plan for future shortfalls, Ford had done that in prior years and still paid special dividends. These actions, combined with Henry Ford’s statements about putting profits into the business to provide for the workers, suggest that the decree was not motivated by business concern. Thus, the Board was acting arbitrarily, to the detriment of shareholders in whose interest they were supposed to be acting.

Can’t be such a bad abuse of discretion that it would constitute fraud or bad faith

Question 43

Shelensky v. Wrigley

Answer 43

BJR

Facts: Every team except the Chicago Cubs played night games. As a result, the Cubs were less profitable than any other team. Philip Wrigley, the Cubs owner was opposed to playing night games. Shlensky sued claiming that it would be financially practicable for the Cubs’ stadium to install lights and play night games, and would be very profitable.

Rule: Unless the conduct of the board of directors shows fraud, illegality, or conflict of interest in its decision-making, courts should not interfere.

Reasoning: A corp’s president and board have authority to determine what is best for the business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference. While Shlensky may disagree with the board, Wrigley could have reached the legitimatebusiness conclusion that the Cubs were better off not playing night games. While Shlensky was able to prove correlation between night games and ticket sales for other teams, he did not prove that night sales would be beneficial to shareholders.

Question 44

Kamin v. American Express

Answer 44

BJR

Facts: American Express (D) authorized dividends to be paid out to stockholders in the form of shares. Minority stockholders in American Express, sued the directors of American Express, alleging the dividends were a waste of corporate assets bc the stocks could have been sold on the market, saving American Express about $8 million in taxes.

Rule: Courts will not interfere with a business decision made by directors of a business unless there is a claim of fraud, bad faith, or self-dealing.

Reasoning: It is not enough to allege, as Ps do, that the directors made an imprudent decision, which did not capitalize on the possibility of using a potential capital loss to offset capital gains. More than imprudence or mistaken judgment must be shown

“Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with corporate management are largely discretionary

Duty of care not breached because directors were careful & deliberate

Question 45

Smith v. Van Gorkom

Answer 45

BJR

Facts: Van Gorkom engaged in negotiations with a third party for a buyout/merger with Trans Union. He determined the value of Trans Union to be $55 per share. There is no evidence showing how he came up with this value other than Trans Union’s market price of $38 per share. He called a meeting of senior management, followed by a meeting of the board of directors (Ds). Senior management reacted negatively to the buyout. The board of directors approved the buyout, based mostly on an oral presentation by Van Gorkom. The meeting lasted two hours and the BOD did not have an opportunity to review the merger agreement before or during the meeting. The directors had no documents summarizing the merger or justification for the sale price of $55 per share.

Rule: The breached their fiduciary duty to their stockholders by (1) their failure to inform themselves of all information reasonably available to them and (2) their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the offer.

This was a very uninformed, spur of the moment decision – gross negligence of failure to inform themselves of the decision

Question 46

Bayer v. Beran

Answer 46

Corporations - Duty of Loyalty

Facts: The directors of CCA started radio advertising. They reviewed studies given to them, brought in a consultant, and hired an advertising agency to produce the ad. The board voted to renew the advertising contract after it had been running for a year and a half. One of the singers on the program on which CCA decided to advertise was the wife of Dreyfus, a CCA director. Ps sued, claiming the campaign was started to benefit Mrs. Dreyfus as it subsidized her career and was a vehicle for her talents. Rule: Directors have an obligation not to put their own interests before the interests of the corporation.

Reasoning: Directors have an obligation not to put their own interests before the interests of the corporation. This duty of loyalty supersedes the business judgment rule so that fraud may be avoided. The burden of establishing that the duty of loyalty is not violated is on the directors. That burden may be met if after rigorous scrutiny it is determined that the transaction in question was made in good faith and would have been made even in the absence of the personal interests of the director. The directors here did not violate their duty of loyalty to CCA by advertising on Mrs. Dreyfus’s program. The directors went through a process to determine whether to advertise on the radio, and on what station to advertise. Although the choice helped Mrs. Dreyfus’s career, it benefited CCA and the same decision on advertising would have been made if Mrs. Dreyfus was not on the program.

[There are also ties of duty of care in this case, basically the basic BJR stuff]

Question 47

Francis v. United Jersey Bank

Answer 47

BJR

Facts: Charles, Jr. and William were directors of a corp. The other director was their mother. They stole money and the corp went insolvent. Mrs. Pritchard did nothing as director. She never went to the corporate office or read financial statements. She died and the trustee in bankruptcy (representing creditors) sued her estate of to recover the funds

Rule: A director has a duty to know generally the business affairs of the corporation.

Reasoning: This duty includes a basic understanding of what the company does; being informed on how the company is performing; monitoring corporate affairs and policies; attending board meetings regularly; and making inquiries into questionable matters. Mrs. Pritchard did none of the above. Her failure to keep herself informed breached a duty

Question 48

Broz v. CIS

Answer 48

Corporations - Corporate Opportunity Doctrine

Facts: Broz (D) was a director of CIS. He was also the president and sole stockholder of RFBC, a competitor. CIS had financial difficulties and began divesting licenses. Mackinac was selling a license. Mackinac thought that RFBC would be a buyer and contacted Broz. It was not offered to CIS. Broz spoke informally with other CIS directors, who told him that CIS was not interested in the license and could not afford it. PriCellular, had undergone discussions with CIS about purchasing CIS. PriCellular agreed on an option contract with Mackinac about the license. Broz, on behalf of RFBC, offered Mackinac a higher price and Mackinac agreed to sell. PriCellular purchased of CIS. CIS sued Broz, alleging that he breached his fiduciary duties to CIS by purchasing the license when the PriCellular/CIS corp had the option to buy it.

Rule: Under the corporate opportunity doctrine, it is not required that the director in question formally present the opportunity to his corporation’s board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity.

Reasoning: 4 factors: The corp is financially able to take the opportunity; The opportunity is in the corp’s line of business; The corp has an interest or expectancy in the opportunity; By embracing the opportunity the officer or director would create a conflict between his or her self- interest and that of the corporation.

Question 49

In re Ebay Shareholders Litigation

Answer 49

Corporations - Corporate Opportunity Doctrine

Facts: eBay hired Goldman Sachs to underwrite its IPO. Goldman Sachs allocated shares of the eBay IPO stock to eBay “insiders,” including members of eBay’s BOD. Goldman Sachs’s purpose in the bribes was to have eBay hire it again. This practice of allocating valuable IPO shares to favored clients is “spinning.” 3 of eBay’s 7-member board received the allocations and sold the shares for a profit. Shareholders brought derivative actions, alleging the acceptance of the stock violated their fiduciary duty to eBay by usurping eBay’s corporate opportunity.

Rule: Directors of a corporation are not permitted to personally accept private stock allocations in an initial public offering of the corporation’s stock when the corporation itself could have purchased the stock.

Reasoning: Applied the same DE 4 factor test

Question 50

Sinclair Oil v. Levien

Answer 50

Corporations - Fairness & Dominant Shareholders Fiduciary Duties

Facts: Sinclair Oil Corp. owned 97% of the stock of its subsidiary, Sinven. Sinclair caused Sinven to pay out $108 million in dividends, more than Sinven earned during the time period. The dividends were made in compliance with law, but Sinven contended that Sinclair caused the dividends to be paid out simply because Sinclair needed cash. Sinclair caused Sinven to contract with International, a Sinclair subsidiary, its crude oil to International. International made late payments and did not comply with minimum purchase requirements.
2. Rule: A parent corp must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing
3. Reasoning: A parent corp must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self- dealing in that the parent is on both sides of the transaction with its subsidiary and the parent receives a benefit to the exclusion and at the expense of the subsidiary. Otherwise, the business judgment rule will apply. The dividend payments were not self- dealing by Sinclair. There was no benefit to Sinclair that came at the expense of Sinven’s minority shareholders and so the payments do not constitute self-dealing. The business judgment rule applies to the payments and the court can find no evidence that the decision to cause Sinven to pay dividends was fraudulent or made in bad faith. Sinclair did not violate its fiduciary duty to Sinven by causing the dividends to be paid. In terms of Sinclair inducing the contract between Sinven and International, Sinclair was engaged in self-dealing, as Sinclair is the parent of both parties. Moreover, when the contract was breached, Sinclair was able to reap the benefits of the crude oil to the detriment of Sinven’s minority shareholders. The intrinsic fairness standard applies to Sinclair’s involvement in the contract, and Sinclair did not meet its burden of showing objective fairness. Sinclair’s involvement is not objectively fair because International breached the contract and Sinclair reaped benefits without fully paying for them. Sinclair breached its fiduciary duty to Sinven by its role in the formation and execution of the contract with International.

Question 51

Zahn v. Transamerica

Answer 51

Corporations - Fairness & Dominant Shareholders Fiduciary Duties

Facts: Zahn was a holder of Class A stock in Axton-Fisher. Axton- Fisher had preferred stock, Class A stock, and Class B stock. Transamerica purchased A and B stock and gained control of Axton-Fisher, with 80% of B stock. Transamerica elected the BoA, composed of its officers or agents. Axton-Fisher’s asset was tobacco, which rose in value. Transamerica, knowing this, redeemed A stock and liquidated Axton-Fisher. This resulted in Transamerica gaining most of the value of the tobacco for itself by virtue of its status as a B stockholder because the redemption precluded A stockholders from participating in the liquidation. A stockholders did not know of the value of the tobacco and Transamerica made sure not to inform them.

Rule: Directors may not declare or withhold the declaration of dividends for the purpose of personal profit

Reasoning: Directors may not declare or withhold the declaration of dividends for the purpose of personal profit. Doing so is a breach of the duty of loyalty. The directors of Axton-Fisher that voted for the declaration of dividends of the Class A stock were instruments of Transamerica. They voted to pay dividends for Class A stocks solely so that Transamerica could profit by virtue of its status as the Class B stockholder. There was no reason for the declaration of dividends on Class A stock to be followed by liquidation other than to profit Class B stockholders.

Question 52

In re Walt Disney Derivative Litigation

Answer 52

BJR
Rebuttable presumption that business decisions are made in good faith

Facts: Disney hired Ovitz as its president. The board of director’s compensation committee approved an employment agreement with Ovitz, which contained a non-fault termination provision providing that if Ovitz left his employment with Disney through no fault of his own, he would receive severance. The committee knew that Ovitz was leaving a lucrative position to work for Disney, sacrificing commissions of $150 million. Ovitz was terminated on a non-fault basis, and received $130 million under his severance package. Shareholders claimed that the board breached its fiduciary duty and committed waste by approving the agreement without informing itself of the cost of the termination provision.

Rule: Good faith includes all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. Violation may be shown where (1) the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, (2) where the fiduciary acts with the intent to violate applicable positive law, or (3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.

Reasoning: The BJR protects director decisions even if they fall short of what best practices would have counseled. The Court identified 2 types of behavior as indications of bad faith: subjective bad faith (actual intent to do harm) and a conscious disregard for one’s duties. Gross negligence is not bad faith. The compensation committee had the power to approve Ovitz’s package and exercised due care in doing so. Ovitz’s compensation package did not constitute waste as the deal had a rational business purpose.

Question 53

Doran v. Petroleum Management Corp.

Answer 53

Securities Registration

Facts: PMC formed a limited partnership and offered an interest in the drilling program to 8 investors. PMC did not file a registration statement. Doran was the only one who ended up investing in PMC. Wyoming ordered the wells sealed for a year due to overproduction so a note on which Doran was liable went into default. He sued based on a failure to register the offering in violation of the Securities Acts of 1933 and 1934.

Rule: A private offering is an offering to those who are shown to be able to fend for themselves and do not need the protection of the Securities Act. To qualify as a private offering and be exempted from registration, the court considers (1) the number of offerees and their relationship to each other and the issuer (2) the number of units offered and (3) the size of the offering and (4) the manner of the offering.

Reasoning: Evidence of a high degree of business or legal sophistication on the part of all offerees does not suffice to bring offering within the private placement exemption. Sophistication is not a substitute for access to the information that registration would disclose. The other factors weigh heavily in favor of the exemption, but case is remanded for a determination on the first factor.

Question 54

Santa Fe Industries v. Green

Answer 54

10b-5 Claims

Facts: Santa Fe controlled 95% of Kirby stock. It filed for a merger under the Delaware short-form merger statute, which allows a parent corporation owning at least 90% of the subsidiary to merge with the subsidiary and make a cash payment to the minority stockholders. The statute does not require approval of the minority stockholders, only notice within 10 days of the merger. The statute provides that if the minority stockholders are unhappy with the merger, they can petition the court to obtain fair value for their shares. Santa Fe completed the short-form merger, giving minority stockholders $150 per share. The minority stockholders, rather than petitioning the court, sued to set aside the merger for fraudulent appraisal under Rule 10b-5.

Rule: A fraudulent transaction under § 10(b) of the Securities Exchange Act of 1934 must involve conduct that is manipulative or deceptive.

Reasoning: The rule prohibits any person from using or employing any manipulative or deceptive practice that contravenes SEC rules, any nondisclosure, misrepresentation, artifice to defraud, or act which operates or would operate as a fraud or deceit. There were no misstatements by Santa Fe, and Santa Fe’s merger was not manipulative in that it did not artificially affect the market in order to mislead investors.

Question 55

Goodwin v. Agassiz

Answer 55

Insider Trading

Facts: Goodwin (P) owned stock in Cliff. Exploration on some of Cliff’s property was undertaken to find copper. Directors learned of a geologist’s theory on the existence of copper in another part of the property. Ds thought that if the geologist’s theory was correct, Cliff’s stock would go up. The exploration was stopped because it was unsuccessful. Goodwin, with no knowledge of the geologist’s report, sold his stock. The stock ended up being bought by Ds. P sued on the ground that Ds nondisclosure of the theory to stockholders was improper. It did not harm Cliff, but P claimed he would not have sold his stock if he had known.

Rule: Where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within the reach of the stockholder, the transaction will be closely scrutinized and relief may be granted.

Reasoning: The facts do not warrant a finding of fraud. The facts only show an unproven geological theory known to Ds that they did not disclose to anyone else.

Question 56

SEC v. Texas Gulf Sulphur Co.

Answer 56

10b-5 & Insider Trading

Facts: Texas Gulf Sulphur began drilling on a site in Canada and found high mineral content. TGS decided to purchase the site, but kept the results quiet. When word of the site’s high mineral content got out, TGS said that the reports were exaggerated and inconclusive. TGS announced the discovery of a major copper-ore strike. In the period between, the TGS secretary and engineer bought TGS stock. After the announcement, the TGS director ordered shares of TGS stock. The SEC sued.

Rule: Anyone in possession of material inside information must either disclose it to the investing public or, if disabled from disclosure to protect corp confidence, or choosing not to, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. Whether facts are material within Rule 10b-5 will depend on balancing both the indicated probability the event will occur with the anticipated magnitude of the event in light of the totality of the company activity.

Reasoning: All transactions in TGS stock or calls by individuals apprised of the drilling results were in violation of Rule 10b-5.

Question 57

Dirks v. SEC

Answer 57

Tipper-Tippee Liability

Facts: Secrist, a former officer of Equity told Dirks that Equity’s assets were exaggerated due to fraudulent corporate practices. Secrist told Dirks to verify the fraud and disclose it. Dirks investigated Equity and discussed his findings with investors, including some investors who had stock in Equity and sold the stock. As a result of the stock sales, Equity’s stock fell and the SEC opened an investigation. The SEC found that Dirks aided and abetted insider trading in violation of SEC Rule 10b-5.

Rule: To establish a Rule10b-5 violation, courts look for (1) the existence of a relationship affording access to inside information intended only for a corporate purpose and (2) the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure. A tippee assumes a fiduciary duty to the shareholders of a corp not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should have known there has been a breach.

Reasoning: Tippee’s liability only due to the tipper’s breach of a fiduciary duty. Corporate insider has committed no breach of fiduciary duty without personal benefit. A tippee is liable only if he knows or should have known of the breach. Because Secrist did not benefit in any way from telling Dirks, he did not violate a fiduciary duty. So Dirks also do not violate any resulting fiduciary duty.

Question 58

Salman v. US

Answer 58

Tipper-Tippee Liability

Facts: Maher was an investment banker and gave inside information to his brother, Michael knowing he would trade on it. Maher testified he gave Michael the information to help him. Michael gave the information to his friend Salman, who also traded it and made over $1.5 million

Rule: By disclosing confidential information as a gift to his brother with the expectation that he would trade on it, tippee breached his duty of trust and confidence to the corp he worked for and its clients. D acquired and breached this duty himself by trading on the information with full knowledge it has been improperly disclosed

Reasoning: No breach of fiduciary duty without personal benefit but a gift to a relative counts, even if you don’t make any money yourself.

Question 59

United States v. O’Hagan

Answer 59

Misappropriation Theory

Facts: O’Hagan was a partner in the law firm that represented Grand Met in its tender offer of Pillsbury Company stock. The possibility of the offer was confidential and not public. During the time when the tender offer was confidential and nonpublic, O’Hagan used the information he received through his firm to purchase call options and general stock in Pillsbury. After the offer became public, Pillsbury stock skyrocketed and O’Hagan sold, making over $4 million. The SEC investigated and charged O’Hagan for violating § 10(b) and § 14(e) of the Securities Exchange Act.

Rule: Misappropriation Theory: Undisclosed trading/tipping on the basis of material, nonpublic information in violation of a fiduciary duty or a relationship of trust & confidence. Constitutes fraud in connection with the purchase or sale of a security and thus violates Rule 10b-5, even though there may be no relationship to the company whose shares are traded.

Question 60

Levin v. MGM

Answer 60

Shareholder Proposals

Facts: The MGM stockholder annual meeting was coming up and 2 groups of stockholders wanted to nominate 2 sets of directors for the board. Both groups solicited proxies. MGM’s proxy statement stated that MGM would bear all cost in connection with the management solicitation of proxies. The O’Brien group used MGM funds in its solicitation of proxies, to retain attorneys, hire a public relations firm, and hire proxy soliciting organizations. The other group sued seeking injunctive relief against the group’s solicitation of proxies in that manner.

Rule: Using corporate funds to hire attorneys or a proxy soliciting organization in a proxy solicitation contest is not illegal or unfair if the amounts paid by the corporation are not excessive.

Reasoning: This method does not violate any fed statute or SEC reg and is in line with the proxy statement filed with the SEC.

Question 61

Rosenfeld v. Fairchild Engine & Airplane

Answer 61

Shareholders Proposals

Facts: In a policy-related proxy contest (as opposed to a personal contest for power) for a board of directors election in Fairchild Engine & Airplane Corp, Fairchild’s treasury paid $106,000 in defense of the old board of director’s position; $28,000 to the old board by the new board after the change to compensate the old board for their failed campaign; and $127,000 reimbursing expenses that the new board members incurred. That reimbursement was ratified by a majority vote of the stockholders. The policy question behind the proxy contest was the long-term and very expensive pension contract of a former director. Rosenfeld sued to compel the return of the above payments.

Rule: In a contest over policy as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe, in good faith, are in the best interests of the corporation. The stockholders moreover, have the right to reimburse successful contestants for the reasonable and bonafide expenses incurred by them in any such policy content, subject to like court scrutiny.

Reasoning: The corp can’t reimburse either party unless the dispute concerns questions of policy. The firm may reimburse only reasonable and proper expenses. The firm may reimburse incumbents whether they win or lose, without shareholder approval. The firm may reimburse insurgents only if they win, and only if shareholders ratify the payment.

Question 62

JI Case v. Borak

Answer 62

Shareholder Stuff

Facts: Those in favor of a proposed merger between J.I. Case and American Tractor circulated a proxy statement to solicit proxies for a shareholder vote. Borak, a shareholder, sued to enjoin the merger, alleging the proxy statement contained false and misleading statements in violation of § 14(a) of the 1934 Act, and the merger would not have been approved w/o proxies’ reliance on the false statements.

Rule: A private federal cause of action exists for rescission or damages to a stockholder with respect to a consummated merger which was authorized pursuant to the use of a proxy statement alleged to contain false and misleading statements.

Question 63

Mills v. Electric Auto-Lite

Answer 63

Proxy Litigation

Facts: Electric Auto-Lite merged with Mergenthaler. Mills was a shareholder of Electric and sued seeking to set aside a merger on the grounds that the proxy statement contained misleading statements in violation of § 14(a) of the 1934 Act. He claimed the proxy statement told shareholders that the Electric board of directors had approved the merger, but failed to tell the shareholders that all of the directors were also nominees of Mergenthaler and were under Mergenthaler’s control.

Rule: Where the misstatement or omission in the proxy statement has shown to be material as it was found to be here, that determination itself embodies a conclusion that the defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote. Where there has been a finding of materiality, a shareholder has made a sufficient showing of causal relationship between the violation and the injury for which he seeks redress if, as here, he proves that the proxy solicitation itself rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.

Remedies: “[A] determination of what relief should be granted in Auto-Lite’s name must hinge on whether setting aside the merger would be in the best interests of the shareholders as a whole. … the merger should be set aside only if a court of equity concludes, from all the circumstances, that it would be equitable to do so.” Monetary “damages should be recoverable only to the extent that they can be shown. … relief might be predicated on a determination of the fairness of the terms of the merger at the time it was approved”

Question 64

Seinfeld v. Bartz

Answer 64

Proxy Litigation

Facts: The directors of Cisco circulated a proxy statement to shareholders with information regarding an amendment to Cisco’s Automatic Option Grant Program that would increase the number of stock options granted to outside directors. The statement did not contain the value of the option grants based on the theoretical Black-Scholes pricing model. The amendment was approved by a shareholder vote. P alleged a violation of § 14(a) of the 1934 Act in that the proxy statement omitted the pricing model and therefore the alleged true value of the options.

Rule: Black-Scholes valuations are not material information for purposes of a proxy statement.

Reasoning: A plaintiff does not
have to demonstrate that disclosure of the fact in question would have caused a reasonable shareholder to change his or her vote.

Question 65

Reliance Electric v. Emerson Electric

Answer 65

143-3 & insider trading relating to tender offers

In Dodge at $63 per share. Within six months thereafter, Dodge merged with Reliance Electric, at which time the stock was priced at $68 per share. Emerson did not want to own shares of the new merged entity, but also did not want to pay Dodge all of the profits it was going to earn by selling the stock under Section 16(b) of the Securities Exchange Act of 1934 (Section 16(b)). To get around the requirement, Emerson sold enough of its shares in the merged entity to bring it below the 10 percent threshold prescribed in Section 16(b). Emerson paid the profits from that sale to Dodge as required in Section 16(b) and then sold the remainder of its shares for $69 per share. Emerson did not pay Dodge the profits from its second sale because at the time of that sale, as a result of the first sale, Emerson owned only 9.96 percent of Dodge’s shares. Reliance made a demand for the profits from the second sale, and Emerson filed an action seeking a declaratory judgment that it did not have to pay those profits to the Reliance/Dodge entity.

Holding: Under Section 16(b), shareholders holding more than 10 percent or more of a corporation’s outstanding shares must pay to the corporation any profits they make from buying and selling the stock within a six-month period.

Question 66

Foremost-McKesson v. Provident Securities

Answer 66

143-3 & insider trading relating to tender offers

Holding: In a purchase-sale sequence, the transaction by which the shareholder crosses the 10% threshold is not a matchable purchas

Only purchases effected after one becomes a 10% shareholder are matchable

Question 67

Lovenheim v. Iroquois Brands

Answer 67

Shareholder Proposals

Facts: Co seeks to exclude proposal based on Rule 14a-8(i)(5) 5% rule: if the proposal relates to operations which account for less than 5% of the total assets of the most recent fiscal year and for less than 5% of net earnings and gross sales for the most recent fiscal year and is not significantly related to the business.
Rule: Based on the history of the rule, the meaning of significantly related is not limited to economic significance. A proposal with ethical or social significance would not fall under the Rule 14a- 8(i)(5) exclusion exception

Reasoning: Inclusion/exclusion does “not hinge solely on economic” relevance

Question 68

AFSCME v. AIG

Answer 68

Grounds for exclusion: Elections

Facts: Election Exclusion/town meeting rule: exclusion allowed where proposal relates to an election for membership on the company’s board of directors or analogous governing body.

Rule: A shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballet does not relate to an election within the meaning of the Rule and therefore cannot be excluded from corporate proxy materials under that regulation.

Question 69

CA v. AFSCME

Answer 69

Grounds for exclusion: Elections

Facts: AFSCME was a CA shareholder and proposed a bylaw that would require CA to reimburse shareholders for the costs of a contested election of its board of directors. CA’s bylaws and cert of incorporation did not address the reimbursement of proxy expenses, but the cert of incorporation provided that the board was responsible for the management of CA’s business and the conduct of the corporation’s affairs. Thus, the decision whether to reimburse election expenses was vested in the board of directors, subject to Delaware law and the directors’ fiduciary duties.

Rule: DGCL § 109(a) After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote; provided any corporation may, in its certificate of incorporation, confer the power
to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws.
Reasoning: Is a shareholder proposal requiring reimbursement of costs for winning insurgent board candidates “improper under Delaware state law?” Yes. It could require the board to violate its fiduciary duty. At the minimum, needs a “fiduciary out.”

Question 70

Crane v. Anaconda

Answer 70

Shareholder Inspection Rights

Facts: Crane announced a tender offer for Anaconda stock. Crane asked for the shareholder list. SEC rule would require Anaconda to mail. Anaconda refused

Holding: Communicating with other shareholders about offer was a proper purpose. The tender offer related to the business of the corporation, so Crane was entitled to the list.

Question 71

Pillsbury v. Honeywell

Answer 71

Shareholder Inspection Rights

Facts: Plaintiff belonged to an antiwar group trying to stop. Honeywell from producing anti personnel fragmentation bombs for the military.After buying some Honeywell stock, plaintiff requested access to Honeywell’s shareholder list and to corporate records relating to production of such bombs

Holding: Pillsbury lacks a proper purpose for requesting the shareholder list or corporate records. The purpose based solely on Pillsbury’s pre-existing social
and political views rather than any economic interest

Question 72

Stroh v. Blackhawk

Answer 72

Stockholder Voting

Facts: Blackhawk designated two classes of stock. Each share of the Class B stock was entitled to a vote in corporate matters, but the articles of incorporation provided that Class B stock was not entitled to dividends. Stroh sued as owners of Class B stock, claiming that the provision invalidated their stock. IL law defined shares as units into which the proprietary interests in a corporation are divided. Ps claimed this connoted some kind of economic interest.

Rule: In this case, the parties went one step further than customary. The stock which could be bought cheaper and yet carry the same voting power per share was not permitted to share at all in the dividends or assets of the corp. This did not invalidate the stock.

Question 73

Ringling Bros v. Ringling

Answer 73

Vote Pooling Agreements

Facts: There were 1000 shares of Ringling Bros.-Barnum & Bailey Combined Shows. Edith owned 315; Aubrey owned 315; and John owned 370. Edith and Aubrey entered into an agreement which provided that they would vote their shares jointly and in the same way. The agreement provided that if they could not agree on how to vote their shares, the issue would be submitted to binding arbitration. The women disagreed on whom to elect to one of the director positions. The arbitrator directed the women to case the final 1/5 of their votes in favor of a Mr. Dunn. Instead, Mr. Haley (as proxy for Aubrey) cast all of her votes for himself and Aubrey. Mr. North voted for himself and Mr. Griffin as he was entitled to do since he was not a party to the agreement. The chairman ruled that Mr. Dunn was elected, and not Mr. Griffin, as would have been the case the way Aubrey voted in violation of the agreement.

Reasoning: It does not appear that the agreement enables the parties to take any unlawful advantage of the outside shareholder or of any other person. It offends no rule of law or public policy of this state of which we are aware.i. Facts: There were 1000 shares of Ringling Bros.-Barnum & Bailey Combined Shows. Edith owned 315; Aubrey owned 315; and John owned 370. Edith and Aubrey entered into an agreement which provided that they would vote their shares jointly and in the same way. The agreement provided that if they could not agree on how to vote their shares, the issue would be submitted to binding arbitration. The women disagreed on whom to elect to one of the director positions. The arbitrator directed the women to case the final 1/5 of their votes in favor of a Mr. Dunn. Instead, Mr. Haley (as proxy for Aubrey) cast all of her votes for himself and Aubrey. Mr. North voted for himself and Mr. Griffin as he was entitled to do since he was not a party to the agreement. The chairman ruled that Mr. Dunn was elected, and not Mr. Griffin, as would have been the case the way Aubrey voted in violation of the agreement.

Rule: A group of shareholders may, without impropriety, vote their respective shares so as to obtain advantages of concerted action.

Reasoning: It does not appear that the agreement enables the parties to take any unlawful advantage of the outside shareholder or of any other person. It offends no rule of law or public policy of this state of which we are aware.

Question 74

McQuade v. Stoneham

Answer 74

Vote Pooling Agreement

Facts: Stoneham was the majority owner of NEC. McGraw and McQuade each bought 70 shares of Stoneham’s stock and entered into a contract that provided that the parties would use their best endeavors to make sure that each would remain directors of NEC. Stoneham became president, McGraw vice-president, and McQuade treasurer. Stoneham selected and controlled the other directors. McQuade and Stoneham disagreed. At a meeting at which the position of treasurer was up for election, Stoneham and McGraw did not vote, McQuade voted for himself, and the other directors voted for a Leo Bondy. The board dropped McQuade as a director.

Rule: A contract is illegal and void so far as it precludes a board of directors at the risk of incurring legal liability from changing officers, salaries, or policies or retaining individuals in office except by consent of the contracting parties.

Reasoning: Stockholders may combine to elect directors, but stockholders may not control the directors in the exercise of the judgment vested in them by virtue of their office. Provisions:

Question 75

Galler v. Galler

Answer 75

Vote Pooling Agreement

Facts: 2 brothers and partners in the Galler Drug Company executed an agreement to ensure that after the death of the one of the brothers, the immediate family of the deceased would maintain equal control of GDC. Prior to Benjamin’s death, Isadore, Isadore’s wife, Rose, and Isadore’s son, Aaron had decided that they were not going to honor the agreement. When Emma presented Benjamin’s stock certificates, they tried to convince her to abandon the agreement. Emma refused, but agreed to let Aaron become the president of GDC for a year in exchange for Aaron reissuing Benjamin’s stock in Emma’s name. Emma demanded enforcement of the terms of the agreement guaranteeing her equal control, dividends each year, and a continuation of Benjamin’s salary.

Rule: The agreement is valid. Unanimity isn’t required if: the corporation is closely-held; the minority shareholder doesn’t object; the terms are reasonable

Question 76

Ramos v. Estrada

Answer 76

Ramos v. Estrada

Facts: Broadcast Group partnered with another group, Ventura 41, to obtain a permit from the FCC to run a television station. Each group owned 50% of the combined entity, Television, Inc. The Ramoses owned 50% of Broadcast Group and Tila Estrada owned 10% of the Broadcast Group. The members of Broadcast Group entered into an agreement to vote all of their shares in Television, Inc. the same way, determined by a majority. The agreement provided that if anyone did not vote with the majority, their shares would be sold to the other members. Mr. Ramos was elected president of Television, Inc. but after that, Estrada defected. She voted with the Ventura 41 members of Television, Inc. to remove Ramos as president and replace him with a member from Ventura 41.

Rule: Pooling agreements are valid and specifically enforceable even if one of the parties seeks to get out of the agreement, even as not a closely held corporation (as in voting who the directors are). However, parties cannot make an agreement as to how they would vote as directors.

Question 77

Wilkes v. Springside Nursing Home

Answer 77

Freeze Outs

Facts: Wilkes, Riche, Quinn, and Connor were directors of the Springside Nursing Home, owning equal shares and having equal power. The relationship between Wilkes and the other 3 directors soured. When Springside became profitable, Ds voted to pay salaries to themselves, but did not include Wilkes in the group to whom salary would be paid. Then, Wilkes was not reelected as director and was informed that he was no longer wanted in the group. Wilkes faithfully and diligently carried on his duties to the corp. He sued for breach of their fiduciary duty owed to him.

Rule: (1) Shareholders in close corporations owe each other a duty of strict good faith. (2) If challenged by a minority shareholder, a controlling group in a firm must show a legitimate business objective for its action. (3) A plaintiff minority shareholder can nonetheless prevail if he or she can show that the controlling group could have accomplished its business objective in a manner that was less harmful to their interests. Courts must weigh the legitimate business purpose against the practicability of a less harmful alternative.

Reasoning: Majority stockholders in Springside did not show a legitimate business purpose for severing Wilkes from the corp’s payroll

Question 78

Ingle v. Glamore Motor

Answer 78

Close Corps

Facts: Ingle was one of 4 directors and shareholders of Glamore Motor Sales; Ingle was also GMS’s sales manager. The 4 directors entered into an agreement that provided that if “any Stockholder ceased to be an employee of the Corporation for any reason,” Glamore would have the option to purchase all their shares. Ingle was voted out of his director position and fired. Ingle sued, alleging a breach of fiduciary duty and arguing that as a minority shareholder in a close corporation his employment rights are attached to the fiduciary duties owed to him.

Rule: A minority shareholder in a close corporation who contractually agrees to the repurchase of his shares upon termination of his employment for any reason acquires no right from the corporation or majority shareholders against at-will discharge. It is necessary in this case to appreciate and keep distinct the duty a corporation owes to a minority shareholder as a shareholder from any duty it may owe him as an employee.

As a shareholder, Ingle had no right to employment security

Question 79

Brodie v. Jordon

Answer 79

Facts: Walter, Barbuto, and Jordan were the 3 directors of Malden. Each held one-third of the shares of the corporation. As Walter got older and wanted to be less involved, he requested multiple times that Barbuto and Jordan buy out his shares. They refused. Walter was voted out as president and died. Walter’s executrix inherited Walter’s shares. Ds repeatedly failed to provide her with company information. She nominated herself as director, but was voted down. She requested Ds buy out her shares, but they declined. She brought suit for breach of fiduciary duty.

Rule: The remedy for a freeze out is to restore the minority shareholder as nearly as possible to the position she would have been in had there been no wrongdoing. Because the wrongdoing in a freeze out is the dental by the majority of the minority’s reasonable expectations of benefit, it follows that the remedy should restore to the minority shareholder those benefits which she reasonably expected but has not received because of the fiduciary breach

Reasoning: Stockholders in a close corp owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. Majority shareholders in a close corporation violate this duty when they act to freeze out the minority. What these examples of freeze-outs have in common is that, in each, the majority frustrates the minority’s reasonable expectations of benefit from their ownership of shares.

Question 80

Smith v. Atlantic Property

Answer 80

Facts: Wolfson, Smith, Zimble, and Burke each owned 25% of the shares of Atlantic Properties, Inc. Atlantic’s bylaws stated that no corporate action could be taken without a vote of 80% of the outstanding stock. This meant that any decision could be vetoed by one of the partners. When Atlantic began to turn a profit, Smith, Zimble, and Burke wanted to declare dividends. Wolfson repeatedly voted against declaring dividends, instead wanting to devote the funds to repairs on the property. Atlantic accumulated so much profit that they were in excess of the IRS limits. The IRS assessed penalties against Atlantic for 7 years.

Rule: Minority stockholder in a close corporation ran serious and unjustified risks of precisely the penalty taxes eventually assessed, risks which were inconsistent with any reasonable interpretation of a duty of utmost good faith and loyalty.

Question 81

Alaska Plastics v. Coppock

Answer 81

Facts: Stefano, Gillam, and Crow were the sole owners and directors of Alaska Plastics. Each owned 1/3 of API’s shares. Crow got divorced and lost half of his shares, giving a one-sixth interest to his former wife, Muir. After Muir obtained her shares, Ds did not treat her equally. They failed to notify her of shareholder meetings; took annual director’s fees without giving Muir one; authorized a salary to Gillam; and used corporate funds to pay for bringing their wives to corporate meetings. Muir never received any money from API. Ds and Muir discussed a buyout of her shares, but Ds would only offer her a price lower than the stock was worth and she repeatedly declined the offers.

Rule: 4 ways that a court can require a corp to buy a dissatisfied shareholder’s share at fair value: (1) provision in article of incorporation or by-laws (2) shareholder may petition the court for involuntary dissolution of the corp upon a showing that that acts of the directors are illegal, oppressive, or fraudulent (3) upon a significant change in corp structure, such as a merger, shareholder may demand statutory right of appeal (4) purchase may be justified as an equitable remedy upon a finding of a breach of a fiduciary duty between directors and shareholders and the corp or other shareholders.

Reasoning: (4) is only appropriate if the buyback is a benefit that other shareholders in the corp received and the complaining shareholder did not. In this case, the fiduciary duty violation did not consist of buying back a shareholder’s stock and not offering the same to Muir. Under (4), a court should only grant relief for benefits conferred on some shareholders, but not all. Muir may be entitled to relief based on the benefits she did not receive, directors’ fees, but she is not entitled to an order forcing API to buyback her stock at a fair value.

Question 82

Cheffe v. Mathes

Answer 82

Facts: Arnold Maremont makes a run at buying Holland Furnace. Holland resists; board offers greenmail. Minority shareholders sue

Primary Purpose Test
1. Reasonable danger to corporate policy & effectiveness
2. Directors not acting in self interest
3. If satisfied, BJR protects

Question 83

Unocal v. Mesa Petroleum

Answer 83

Facts: Mesa Petroleum Co. (Mesa) (plaintiff) owned 13 percent of Unocal Corporation’s (Unocal) (defendant) stock. Mesa submitted a “two-tier” cash tender offer for an additional 37 percent of Unocal stock at a price of $54 per share. The securities that Mesa offered on the back end of the two-tiered tender offer were highly subordinated “junk bonds.” With the assistance of outside financial experts, the Unocal board of directors determined that the Mesa offer was completely inadequate as the value of Unocal stock on the front end of such a sale should have been at least $60 per share, and the junk bonds on the back end were worth far less than $54 per share. To oppose the Mesa offer and provide an alternative to Unocal’s shareholders, Unocal adopted a selective exchange offer, whereby Unocal would self-tender its own shares to its stockholders for $72 per share. The Unocal board also determined that Mesa would be excluded from the offer. The board approved this exclusion because if Mesa was able to tender the Unocal shares, Unocal would effectively subsidize Mesa’s attempts to buy Unocal stock at $54 per share. In sum, the Unocal board’s goal was either to win out over Mesa’s $54 per share tender offer, or, if the Mesa offer was still successful despite the exchange offer, to provide the Unocal shareholders that remained with an adequate alternative to accepting the junk bonds from Mesa on the back end. Mesa brought suit, challenging Unocal’s exchange offer and its exclusion of Mesa. The Delaware Court of Chancery granted a preliminary injunction to Mesa, enjoining Unocal’s exchange offer. Unocal appealed

Question 84

QVC v. Paramount

Answer 84

1. Facts: QVC entered the fray with its own, facially more generous merger proposal. Conditioned on cancellation of the various defensive measures. Paramount board refused to conduct a formal auction on the grounds that it would be inconsistent with Paramount’s contractual obligations to Viacom
2. Applicability of Revlon
   a. Paramount relied on Time to argue that the Revlon duties had not triggered:
   b. Paramount had neither initiated an active
   bidding process nor approved a breakup of the company
3. Applicability of Unocal
   a. A successful Paramount—Viacom merger would not have legally precluded QVC from attempting to purchase the combined Viacom-Paramount entity
   b. Accordingly, Paramount’s actions should pass
   muster under Time’s reading of Unocal
4. Enhanced scrutiny is mandated by: (a) the threatened
   diminution of the current stockholders’ voting power; (b) the
   fact that an asset belonging to public shareholders (a
   control premium) is being sold and may never be
   available again; and (c) the traditional concern of
   Delaware courts for actions which impair or impede
   stockholder voting rights
5. Dealing with Time
6. The QVC court did not overrule Time, but limited Time to its unique
   facts
   a. Rejected Paramount’s reading of Time
   i. While the relevant passage listed initiation of an active bidding process and approval of a break-up of the company as events triggering Revlon, it did so “without excluding other possibilities”
   ii. In this case, one of the “other possibilities” was present; namely, a change of control
   b. Accordingly, Revlon was triggered
7. Under QVC, the enhanced scrutiny test is basically a reasonableness inquiry to be applied on a case-by-case basis:
   a. “The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing.”
8. So, as the transaction falls within the range of reasonable outcomes, the board’s authority prevails

Question 85

Paramount Communications v. Time

Answer 85

1. Facts: Time was initially planning to merge with Warner Bros., but when Paramount made a cash offer, Time’s board changed the plan to an all-cash acquisition of Warner. Shareholders sued, arguing that this change triggered a duty to increase short-term value. Paramount also sued, claiming Time’s response was unreasonable. The main issue is whether Time’s actions were appropriate in light of these legal duties and Paramount’s offer.
2. Holding: Under Unocal, a board of directors may enter into a transaction in order to defeat a reasonably perceived threat to the corporation’s business so long as the board’s decision is reasonable in relation to the threat posed. Such perceived threats include, but are not limited to inadequate value of the tender offer. In this case, Paramount’s claim is misguided as Time’s conclusion that inadequate value was not the only possible threat to its future is reasonable.

Question 86

Revlon v. MacAndrews & Forbes

Answer 86

1. Facts: In this case, Pantry Pride sought to acquire Revlon but faced initial rejection due to an insufficient offer. Revlon explored defensive strategies, including a leveraged buyout agreement with Forstmann Little & Co., which caused a drop in the market value of Senior Subordinated Notes. Pantry Pride increased its offer, prompting Forstmann to raise its bid with conditions, such as a lock-up option and a no-shop provision. Revlon’s board approved the Forstmann deal, leading to a legal challenge by Pantry Pride. The Delaware Court of Chancery ruled in favor of Pantry Pride, finding that Revlon’s directors breached their duty of loyalty by agreeing to the conditions
2. Were the offers proportional to the threat?
3. Holding: In this case, the Revlon board’s initial defensive measures were deemed reasonable given their determination that Pantry Pride’s offer was inadequate. However, as Pantry Pride increased its offer, it became clear that Revlon’s sale was inevitable, shifting the board’s duty to maximizing shareholder benefits. By granting a lock-up option to Forstmann, which ended the ongoing auction for Revlon shares and guaranteed par value for threatened Note holders, the board prioritized its legal interests over shareholder benefits, breaching their duty of loyalty. Therefore, they are not entitled to the protection of the business judgment rule, and the lock-up option should be blocked,

Question 87

Duray v. Perrin

Answer 87

a. Facts: Duray, LLC contracted with Perrin. Duray entered into a 2nd contract with Outlaw Excavating, LLC. Perrin, who had formed Outlaw and was its owner, signed the contract on Outlaw’s behalf. Outlaw did not perform under the contract, so Duray sued. Outlaw did not officially become a “filed” LLC until after the parties signed the second contract.
b. Rule: The existence of the LLC begins on the effective date of the articles of organization, which is effective at the time it is endorsed. De facto corp doctrine provides that a defectively formed corp, one that does not meet the technical requirements for forming a de jure corp, may attain the legal status of a de facto corp. Where (1) incorporators have proceeded in good faith (2) under a valid statute (3) for an authorized purpose and (4) have executed and acknowledged articles of association pursuant to that purpose, a corp de facto comes into being which enjoys the status and powers of a de jure corp. This doctrine applies to LLC

Question 88

McConnel v. Hunt Sports

Answer 88

a. Facts: McConnell (P) and Hunt (D) were part of a group that formed CHL to try to obtain an NHL franchise. CHL began negotiations with Nationwide about building an arena, which CHL would lease. Hunt, purporting to act for CHL, but without consulting CHL members, rejected Nationwide’s lease offers. Nationwide approached McConnell, and McConnell said that if Hunt would not agree to the lease on behalf of CHL, McConnell would individually. McConnell and his group signed a lease independently of CHL. There was a clause in CHL’s operating agreement which stated that members of CHL had a right to engage in business ventures that may compete with CHL. McConnell sued, seeking a declaratory judgment to establish his right to

Rule: An LLC operating agreement may limit the scope of the fiduciary duties of its members.

Reasoning: The clause in CHL’s operating agreement that provides that members of CHL have a right to engage in business ventures that may compete with CHL is valid. Moreover, McConnell seeking to receive an NHL franchise independently from CHL is not a violation of his fiduciary duty to CHL.