Business Organizations - Quiz 3

Question 1

T/F: Limited liability is the default rule for corporations, LLCs, and LPs

Answer 1

True

Question 2

T/F: Partnerships cannot elect limited liability.

Answer 2

False. They CAN elect limited liability

Question 3

What is the two-pronged test for veil piercing?

Answer 3

(1) the court must find a unity of interest and ownership between the parent and subsidiary such that their separate personalities no longer exist; and
(2) the court must satisfy itself that if the acts are treated as those of the subsidiary alone, an equitable result will follow.

Question 4

Who has the burden of establishing the elements of veil piercing?

Answer 4

The plaintiff

Question 5

T/F: No causal connection needs to exist between the first and second prong of veil piercing

Answer 5

False. A causal connection MUST exist.

Question 6

What are the factors to determine whether the two-pronged veil piercing test is met?

Answer 6

(1) Undercapitalization
(2) Absence of corporate records
(3) fraudulent representation by corporation shareholders or directors
(4) use of the corporation to promote fraud, injustice, or illegal activities
(5) payment by the corporation of individual obligations
(6) failure to observe required corporate formalities
(7) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form

Question 7

T/F: Under choice of law, most states apply the law of the chartering state to actions seeking to pierce the corporate veil

Answer 7

True

Question 8

What is judgement-proofing?

Answer 8

an action that seeks to render an entity judgement-proof even while the entity continues to participate in the operation of a business

Question 9

When is an entity judgement-proof?

Answer 9

When a creditor holding a judgement against an entity would be unable to collect

Question 10

Who are equitable owners?

Answer 10

People who control an entity by means other than owning its shares or interest

Question 11

What is the two-pronged test to hold equitable owners liable under equitable ownership theories?

Answer 11

(1) the court must find a unity of interest and ownership between the parent and subsidiary such that their separate personalities no longer exist; and
(2) the court must satisfy itself that if the acts are treated as those of the subsidiary alone, an equitable result will follow.

Question 12

What are the factors courts consider when determining whether to hold equitable owners liable under equitable ownership theories?

Answer 12

(1) Undercapitalization
(2) Absence of corporate records
(3) fraudulent representation by corporation shareholders or directors
(4) use of the corporation to promote fraud, injustice, or illegal activities
(5) payment by the corporation of individual obligations
(6) failure to observe required corporate formalities
(7) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form

Question 13

What is reverse veil piercing?

Answer 13

A process that allows the owner’s personal creditors to seize an entity’s assets to satisfy an owner’s debts.

Question 14

What is enterprise liability?

Answer 14

a court may hold sister entities liable as if they were a single entity

Question 15

What two conditions are generally required for the application of joint enterprise liability?

Answer 15

(1) Such a unity of interest and ownership that the separate corporate personalities are merged, so that one corporation is a mere adjunct of another or the two companies form a single enterprise; and
(2) An inequitable result if the acts in question are treated as those of one corporation alone

Question 16

T/F: A majority of states recognize enterprise liability

Answer 16

False. A MINORITY of states recognize enterprise liability

Question 17

What are the general principles of agency law?

Answer 17

One who acts through another is in law himself the actor.

Question 18

How can sole owners of an entity ever not be liable for tortious or illegal action?

Answer 18

(1) For a parent corporation, the solution is to elect the subsidiary’s board of directors and not tell them, or anyone else working for the subsidiary, what to do.
(2) For one person entities, passing the decision making along to someone else is more difficult. The Supreme Court has cautioned that “one-person corporations are authorized by law and should not lightly be labeled sham.”

Question 19

When will a parent corporation be held vicariously liable for the acts of a subsidiary?

Answer 19

If an agency relationship exists between the parent and subsidiary, which requires:
(1) a close relationship or domination between the parent and subsidiary
(2) the finding that the injury alleged inflicted by the subsidiary, for which the parent is being held liable, was within the scope of the subsidiary’s authority as an agent
(3) the arrangement must be relevant to the plaintiff’s claim of wrongdoing

Question 20

What is the test for determining whether the subsidiaries and parent corporations are alter egos?

Answer 20

Requires a determination of whether:
(1) there is such a unity of interest between the corporate personalities that they do not function as separate personalities
(2) lack of respect toward the separate nature of the corporate entities that would result in fraud or injustice

Question 21

When is a partnership held liable?

Answer 21

A partnership, including a joint venture, is liable for the obligations of the partnership.

Question 22

When will a parent be liable for a subsidiary in a partnership?

Answer 22

If the creditor or subsidiary can show that the subsidiary is in an unintended partnership with its parent.

Question 23

When can partners shield themselves from partnership liabilities?

Answer 23

By causing the partnership to elect limited liability

Question 24

What is a partnership by estoppel?

Answer 24

If a person who is not a partner consents to being represented as a partner, the person can be held liable as a partner

Question 25

What is the test for substantive consolidation?

Answer 25

The court can order substantive consolidation when
(1) Creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit; or
(2) the affairs of the debtors are so entangled that consolidation will benefit all creditors (DISJUNCTIVE test)

Question 26

What is mandatory indemnification?

Answer 26

corporations are required to indemnify directors and officers who are successful in investor litigation

Question 27

What does “success” in investor litigation litigation encompass?

Answer 27

adjudication, voluntary dismissal, or even settlement, provided that the director or officer did not make any settlement payment

Question 28

what is permitted and prohibited indemnification

Answer 28

corporations MAY indemnify their managers

Question 29

T/F: the decision to indemnify may be made before or after occurrence of the act alleged to be wrongful

Answer 29

True

Question 30

T/F: If a commitment or decision to indemnify is made prior to the act alleged to be wrongful, the managers rights to indemnification vest and the entity cannot revoke them with respect to that act.

Answer 30

True

Question 31

Under indemnification, who determines whether the directors or officers acted in good faith?

Answer 31

The corporation

Question 32

What is the default rule for indemnification for partnerships, LLCs, and LPs?

Answer 32

those entities shall indemnify their current and former partners, members, and managers

Question 33

What claims are excluded from indemnification that arise from the managers for partnerships, LLCs, and LPs?

Answer 33

(1) Approval of an improper distribution; or
(2) Breach of fiduciary duty of loyalty, the duty of care, or the obligation of good faith and fair dealing.
NOTE: The fundamental documents may reduce the scope of those underlying claims, which reduces the need for indemnification

Question 34

What are fees on fees?

Answer 34

if an indemnitor obligated to pay attorneys’ fees fails to do so, the indemnitee must incur more attorneys’ fees to sue for the unpaid fees.

Question 35

What is advancement?

Answer 35

an entity’s payment of manager’s litigation expenses before the litigation is concluded.

Question 36

When may corporations pay advancement?

Answer 36

Only upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall untimely be determined that such person is not entitled to be indemnified

Question 37

What is D&O insurance?

Answer 37

insures managers against liability and litigation expense with respect to their actual or alleged wrongful acts

Question 38

T/F: D&O insurance does not cover actions taken in bad faith, breaches of fiduciary duties, and even some kinds of intentional misconduct.

Answer 38

False. D&O insurance CAN cover all of these actions

Question 39

T/F: D&O insurance can indemnify any conduct the insurer is willing to cover, subject to much narrower public policy limitations on what insurance can cover.

Answer 39

True

Question 40

What are the functions of investor litigation?

Answer 40

(1) To enforce law and fundamental document provisions through injunctions
(2) To require managers to defend their actions publicly
(3) To deter wrongdoing through publicity
(4) To provide work for lawyers and business for insurers

Question 41

What is the default rule for the level of agreement for partnerships, LLCs, and LPs?

Answer 41

the level of agreement is set at a majority of the members or partners in the ordinary course and unanimity of the members or partners for other actions

Question 42

What is the default rule for the level of agreement for corporations?

Answer 42

a majority of directors is required for any action other than amending a shareholder agreement

Question 43

T/F: each partner has equal rights in the management and conduct of the partnership’s business

Answer 43

True

Question 44

How many partners are needed to decide a difference arising as to a matter in the ordinary course of business of a partnership?

Answer 44

A majority

Question 45

In a partnership, when is consent of all the partners required for decision making?

Answer 45

When the act is outside the ordinary course of business of a partnership AND when there is an amendment to the partnership agreement

Question 46

T/F: Members in LLCs do not have equal rights in the management and conduct of a company’s activities and affairs

Answer 46

False. Members DO HAVE equal rights

Question 47

How many members are needed to decide a difference arising as to a matter in the ordinary course of business of an LLC?

Answer 47

A majority

Question 48

In an LLC, when is consent of all members required for decision making

Answer 48

To undertake an act outside the ordinary course of the activities and affairs of the company

Question 49

In an LLC, what document may provide governance rules for decision making?

Answer 49

The operating agreement

Question 50

In LPs, who has the authority to manage the LP’s activities and affairs

Answer 50

The general partner or partners and they may do so by a majority vote.

Question 51

In an LP, when is the consent of all partners necessary to act?

Answer 51

On specified issues, including amendment of the fundamental documents, sale of all or substantially all of the partnership’s assets, the admission of a new partner, merger, and conversion.

Question 52

What is a two-tiered system in corporation decision making?

Answer 52

the investors elect or accept managers and then share decision-making authority with them

Question 53

T/F: in corporations, shareholders elect a board of directors and the board manages the corporation

Answer 53

True

Question 54

T/F: a corporation cannot elect to be shareholder-managed (i.e., not have a board of directors)

Answer 54

False. A corporation CAN elect to be shareholder-managed

Question 55

In corporations, do the shareholders or board of directors have more voting rights?

Answer 55

The board in order to protect the corporation from the shareholders

Question 56

What is the default rule for election of a board of directors in a corporation?

Answer 56

They are elected every year.

Question 57

How can shareholders elect directors other than the board’s slate?

Answer 57

challengers must nominate their own candidates and solicit votes in their favor by sending the challenger’s own proxy statements and cards to the shareholders.

Question 58

What is the default rule for removal of director in a corporation?

Answer 58

shareholders have the power to remove directors without cause. Once a director has been removed, a vacancy exists. Either the board or the shareholders may fill that vacancy

Question 59

What is a staggered board?

Answer 59

An arrangement under which only one-third of the board is elected each year and the persons elected serve for three-year terms

Question 60

How are shareholder voting rights allocated?

Answer 60

by assigning voting rights to shares and issuing the shares.

Question 61

In a customary structure, what are shareholders limited to voting on?

Answer 61

(1) The election and removal of directors;
(2) Certain fundamental decisions (amendment to the certificate of incorporation, merger, sale of all or substantially all assets, conversion, or dissolution) but only if the directors propose them;
(3) Corporate bylaw amendments; and
(4) Resolutions proposed by directors or shareholders.

Question 62

What are shareholders entitled to vote on?

Answer 62

(1) Amendments to the certificate or articles of incorporation;
(2) Some mergers;
(3) Sale of all, or substantially all assets;
(4) Conversions; and
(5) Dissolutions.
NOTE: The Board must approve each of the above before it can be put to a shareholder vote.

Question 63

T/F: Shareholders may vote to ratify nearly any action taken by the board, other than a fundamental decision or transaction.

Answer 63

True

Question 64

T/F: When shareholders take governance actions, they generally do so by adopting resolution (shareholder proposals).

Answer 64

True

Question 65

In the customary public corporation structure who has the power to adopt or repeal bylaws by voting?

Answer 65

Shareholders AND directors

Question 66

T/F: In a customarily structured public corporation, the directors and the shareholders can strip the other group on its power to adopt bylaws.

Answer 66

False. NEITHER the directors NOR the shareholders can strip the other group on its power to adopt bylaws.

Question 67

Under federal law, what is the procedure to submit a shareholder proposal?

Answer 67

(1) The shareholder must be eligible (must have continuously held at least $2,000 in market value, or 1% of the company’s securities for at least one year before submission)
(2) The proposal and the shareholder’s supporting statement can be no longer than 500 words.
(3) The corporation must notify the proposing shareholder of any “procedural or eligibility deficiencies” within 14 calendar days of receiving their proposal.
(4) The shareholder then has 14 days in which to cure the deficiencies if they can.
(5) If the corporation intends to exclude the shareholder’s proposal from its proxy statement, the corporation must file its reasons with the SEC no later than 80 calendar days before the corporation files with the SEC the proxy statement to which the shareholder is seeking access.
(6) If the shareholder’s proposal is included in the corporation’s proxy statement, the shareholder or their representative must attend the meeting and perhaps present the shareholder’s proposal.

Question 68

What is the default rule for investor voting in corporations?

Answer 68

They can make decisions by voting or consent

Question 69

T/F: Every corporation may issue one or more classes of stock or one or more series of stock within any class thereof, which classes or series may have such voting powers, full or limited, or no voting powers, as shall be stated and expressed in the certificate of incorporation

Answer 69

True

Question 70

What must a corporation authorize (voting)?

Answer 70

(1) The issuance of shares entitled to receive the corporation’s assets; and
(2) the issuance of shares entitled to voting rights

Question 71

How must controlling shareholders vote under their fiduciary duties

Answer 71

They have fiduciary duties to the minority shareholders and the corporation and must vote their shares accordingly

Question 72

Do non-controlling shareholders have the same fiduciary duties in voting as controlling shareholders do?

Answer 72

No. They can vote however they choose.

Question 73

What is the default rule for voting in partnerships?

Answer 73

each general partner or member has one vote, regardless of the number of shares or interests the general partner or member holds

Question 74

Can partnership agreements eliminate the necessity for the consent of partners with limited liability to a change that would give them unlimited liability?

Answer 74

No.

Question 75

For private companies, when and where are annual meetings held?

Answer 75

When: at a date and time fixed by or in accord with the bylaws
Where: can take place anywhere, or even “by means of remote communication.”

Question 76

In private companies, when must the corporation notify the shareholders entitled to vote at the meeting the date, time, and place of the meeting?

Answer 76

No fewer than ten and no more than sixty days before an annual or special meeting of shareholders

Question 77

T/F: in private corporations, the effect of a failure to comply with the notice requirements is that the actions taken at the meeting are invalid.

Answer 77

True

Question 78

Who determines the order of business and establishes rules for conduct of meetings in private companies?

Answer 78

The chair, who is appointed as provided by the bylaws or in an absence of the provision, by the board.

Question 79

What is the MBCA default rules for record dates and record owners?

Answer 79

the bylaws or board of directors of an MBCA corporation may fix a record date (the period is not more than 70 days before the meeting)

Question 80

What is the DGCL default rule for record dates and record owners?

Answer 80

under Delaware rules, the record date for a shareholders’ meeting must be not more than 60 days nor less than 10 days before the meeting

Question 81

What are indirect securities?

Answer 81

shareholders can hold shares indirectly, in securities accounts, without registering them on the stock ledger.

Question 82

T/F: the owner of a securities account owns the securities represented by the account?

Answer 82

False. The SHAREHOLDER owns the securities, not the owner of the securities account.

Question 83

Is a securities entitlement a contract right?

Answer 83

Yes. It is a contract right against the securities intermediary for the value of the shares

Question 84

How is a securities entitlement issued?

Answer 84

the securities intermediary is required by law to own that number of shares directly – or to own a securities entitlement to that number of shares.

Question 85

What is the custom for the bylaws in regard to the date and time of annual meetings in public companies?

Answer 85

the custom is for the bylaws to authorize the board of directors to set a date and time each year for the annual meeting.

Question 86

In public companies, who can call a special meeting?

Answer 86

The board of directors or holders of 10% of the voting power

Question 87

What is the default rule for record dates and record owners in public corporations?

Answer 87

the board of directors of a public corporation or its bylaws may fix a record date.

Question 88

T/F: Shareholders of record in a public corporation do not have the right to vote

Answer 88

False. Shareholders of record DO have the right to vote

Question 89

What is the default rules for holding a meeting in a public corporation?

Answer 89

requires that each corporation hold an annual meeting of shareholders.

Question 90

What is the quorum default rule in public corporations?

Answer 90

defines a quorum as a majority of the shares entitled to vote.

Question 91

What are the consent procedures?

Answer 91

By consent, shareholders can take without a meeting any action that they could take by voting at a meeting.
Consent is accomplished by shareholders delivering to the corporation written consents, signed by the shareholders, setting forth the action taken.

Question 92

What is the default rule for consent procedures?

Answer 92

requires that consent be unanimous.

Question 93

What is straight voting?

Answer 93

(1) To be elected by straight voting in a public company, a director candidate needs to win a plurality of the votes
(2) If a public company adopts typical majority voting in its bylaws, a director candidate is elected only if the candidate receives a majority of the votes cast.
(3) The default rules is that a director serves until his or her successor has been elected.

Question 94

What is cumulative voting?

Answer 94

each shareholder has the right to cast all their votes for a single candidate or distribute them among two or more candidates

Question 95

What is class voting?

Answer 95

occurs if the articles or certificate of incorporation provide: (1) for the issuance of more than one class of voting shares; and (2) for the classes to vote separately.

Question 96

What are the voting by alliance devices?

Answer 96

(1) One or more shareholders may create a voting trust by transferring shares to a person who, by written agreement, agrees to hold them in trust and vote them in accord with the terms of the trust.
(2) Two or more shareholders may agree in writing on the manner in which they will vote their shares.
(3) Irrevocable Proxies

Question 97

What are irrevocable proxies?

Answer 97

a shareholder’s written authorization to cast votes on a shareholder’s behalf.

Question 98

Where is record information kept?

Answer 98

kept in any storage medium, provided that the information can be converted into clearly legible paper form within a reasonable time

Question 99

What records must corporations maintain?

Answer 99

(1) its current articles of incorporation;
(2) its current bylaws;
(3) accounting records;
(4) lists of its current officers, directors, and shareholders;
(5) most recent annual report;
(6) minutes of meetings of its shareholders, board of directors, or board committees;
(7) records of actions taken without meetings;
(8) written communications within the past three years to shareholders generally, and notices to shareholders

Question 100

T/F: The failure of a partnership or LLC to observe formalities relating to the exercise of its powers or management of its business or activities and affairs is not a ground for imposing liability on a partner, member, or manager

Answer 100

True

Question 101

T/F: Federal securities laws require public companies to disclose large amounts of information without request

Answer 101

True

Question 102

T/F: Private companies are also subject to the federal securities laws and must disclose large amounts of information without request.

Answer 102

False. Private companies are NOT subject to the federal securities laws.

Question 103

What documents/information must partnerships disclose to partners automatically (i.e., without demand)?

Answer 103

any information concerning the partnership’s business, financial condition, and other circumstances which the partnership knows and is material to the proper exercise of the partner’s rights and duties under the partnership agreement or this act, EXCEPT to the extent the partnership can establish that it reasonably believes the partner already knows the information

Question 104

T/F: In a partnership, a member-managed LLC, or a limited partnership, each general partner or member does not have both the duty to furnish and the right to receive the information

Answer 104

False. They DO HAVE the duty to furnish and the right to receive information.

Question 105

Directors’ fiduciary duties of care or loyalty require that directors disclose information without demand in what three circumstances?

Answer 105

(1) Ratification
(2) Shareholder Decisions
(3) Purchase and Sale of Shares

Question 106

T/F: Shareholders have a long-standing right to “inspect and copy” the “books and records” of a corporation for any “proper purpose.”

Answer 106

True

Question 107

A shareholder may inspect and copy records only if (three conditions):

Answer 107

(1) Their demand is made in good faith and for a proper purpose;
(2) They describes with reasonable particularity his purpose and the records they desires to inspect; and
(3) The records are directly connected with their purpose

Question 108

Who has the burden of proof to establish that each category of books and records requested is essential and sufficient to the party’s stated purpose?

Answer 108

The burden of proof is always on the party seeking inspection

Question 109

What is a “proper purpose” for examining records?

Answer 109

The requester’s primary purpose, NOT a pretext.

Question 110

T/F: Corporations must bear the cost of producing requested documents for a shareholder.

Answer 110

False. The corporation may impose a reasonable charge to cover the costs of providing copies of documents to the shareholder, which may be based on an estimate of such costs.

Question 111

T/F: Although certificate of incorporation and bylaw provisions can expand shareholder inspection rights, they cannot impair or eliminate them.

Answer 111

True.

Question 112

What inspection rights to partners and members have?

Answer 112

Partners and members have:
(1) the right to inspect existing entity records,
(2) the right to some information without demand, and
(3) the right to other information—recorded or unrecorded— regarding the entity’s activities, affairs, or financial condition on demand.

Question 113

T/F: If a shareholder dies, the shareholder’s estate holds the shares and has inspection rights.

Answer 113

True

Question 114

T/F: If a partner or member dies, the shareholder’s estate holds only the partner or member’s economic rights

Answer 114

True.

Question 115

What is a controlling investor?

Answer 115

A controlling investor is an investor that holds a majority of an entity’s voting power or a sufficient proportion of it to control the entity’s decisions

Question 116

What is the controlling investor rule?

Answer 116

controlling investors owe fiduciary duties to the entities they control.

Question 117

T/F: A minority of jurisdictions apply the controlling investor rule to all entity types, without regard to how many investors the entities have

Answer 117

False. Substantially ALL jurisdictions apply the controlling investor rule to all entity types.

Question 118

What is the controlling shareholder’s duty?

Answer 118

The controlling shareholder’s duty is to serve the interests of the entity and its investors as a group

Question 119

T/F: Controlling shareholders are liable only for their own decisions

Answer 119

True

Question 120

In what two circumstances are controlling shareholders liable for their own decisions?

Answer 120

(1) The first is when a matter is submitted to a vote of the shareholders, and the controlling shareholder outvotes the minority.
(2) The second is when the controlling shareholder directs the actions of the managers in what one court described as a puppet-puppeteer relationship.

Question 121

When are controlling shareholders not liable for decisions?

Answer 121

Controlling shareholders are not liable for the decisions of independent directors— even independent directors the controlling shareholders nominated and elected.

Question 122

When does a controlling investor have actual control over the entity?

Answer 122

(1) When the investor holds a majority of an entity’s voting power; or
(2) when the investor holds a sufficient proportion of the voting power to control the entity’s decisions

Question 123

What do plaintiffs need to establish to demonstrate that a group of stockholders exercises control collectively?

Answer 123

They must establish that they are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement—to work together toward a shared goal.

Question 124

What does a minority shareholder have to show to establish that a stockholders in a group exercising collective control is connected in some legally significant way?

Answer 124

To show a legally significant connection, the minority shareholder must allege that there was more than a mere concurrence of self-interest among certain stockholders and there must be some indication of an actual agreement, although it need not be formal or written

Question 125

What is the entire fairness standard?

Answer 125

the transaction must be entirely fair to the entity, both in the price paid and the procedures followed.

Question 126

When does the entire fairness standard apply?

Answer 126

The standard applies to transactions in which the entity is dealing with the controlling investors (self-dealing) or in which the controller receives a non-ratable benefit

Question 127

When it is determined that the entire fairness standard does not apply, what standard usually does apply?

Answer 127

The business judgement rule

Question 128

T/F: The entire fairness standard applies to a transaction between the entity and its controlling investor even if independent directors or an independent committee made the decision on the entity’s behalf, but not if the board and the disinterested shareholder made the decision in the required manner

Answer 128

True

Question 129

What does “non-ratable” mean?

Answer 129

means the controller did not share the benefit pro-rata with the other shareholders

Question 130

If the entire fairness standard applies, what does the controlling shareholder have the burden of proving?

Answer 130

the controlling shareholder has the burden of proving that the transaction was entirely fair to the corporation

Question 131

Under the entire fairness standard, how can the shareholder shift the burden of proof back to the corporation?

Answer 131

(1) the vote of an independent board or board committee to approve the transaction on behalf of the corporation, or
(2) the affirmative vote in favor of the transaction by a majority of the minority shareholders of the corporation

Question 132

Under the concept of fairness, what does the principle of fair dealing encompass?

Answer 132

embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained

Question 133

Under the concept of fairness, what does the principle of fair price encompass?

Answer 133

relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock

Question 134

What are the elements to establish a safe harbor for avoidance of the entire fairness standard in a merger?

Answer 134

(1) The controlling shareholder should announce in advance the deal it wants and promise the minority shareholders that nothing bad will happen to them if they don’t accept it,
(2) An independent board or committee should approve the deal, and
(3) A majority of the disinterested should shareholders vote in favor of the deal.

Question 135

In controlled buyouts, when will the business judgment standard of review be applied?

Answer 135

the business judgement standard of review will be applied IF AND ONLY IF:
(1) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
(2) the Special Committee is independent;
(3) the Special Committee is empowered to freely select its own advisors and to say no definitively;
(4) the Special Committee meets its duty of care in negotiating a fair price;
(5) the vote of the minority is informed; and
(6) there is no coercion of the minority.

Question 136

T/F: If a vote of the shareholders is “coerced,” it has no effect

Answer 136

True.

Question 137

What three tactics have Courts identified as coercive?

Answer 137

(1) It is coercive to combine a transaction that shareholders will obviously want to approve with a second transaction they would not approve alone.
(2) It is coercive to propose an undesirable transaction in a context where its rejection would have even worse consequences for the entity and the shareholders.
(3) It is coercive for the board to refuse to take some action the shareholders want until the shareholders approve some action the board wants.

Question 138

What is the duty-to-coinvestors rule?

Answer 138

all investors owe fiduciary duties to both the entity and their coinvestors

Question 139

What is a freeze out?

Answer 139

strategy in which a majority shareholder exercises control in a manner that distributes all profits to the majority shareholder and non to the minority