Corporations Law Outline
Corporations Law Outline
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Corporate Federalism
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Forming a Corporation
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Corporate Authority
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Close Corporations
Close Corporations
Courts may look to two things to define a corporation as close
o Integration of ownership and management
o Number of stockholders and the nature of the market for the
stock
Due to the illiquid nature of the investment in a close corporation,
courts are more tolerant of deviations from the norm
Hobby Lobby Stores, Inc. v. Burwell
o Rights of a close corporation are derivative of individual rights
corporation is a legal fiction
Must protect the rights of the underlying stakeholders by
inferring those rights on the corporation
Alignment of Shareholder Control
Shareholder Voting Arrangements
Straight voting
o One share equals one vote for one director
o Directors with most votes are elected
Cumulative Voting
o One share equals one vote for every open director position
o May cumulate all of your votes for one position
Classified Voting
o Divide voting stock into two or more classes, each of which is
entitled to elect one or more directors
Limitation Devices on Shareholder Voting
Voting Trust
o Convey legal title of stock to a trustee pursuant to the terms of
an agreement
o Shareholder becomes a beneficiary of the trust, entitled to
receive dividends
Irrevocable Proxy
o Shareholder gives proxy to vote shares to someone else
o Cannot be revoked for the specified life of the proxy
Vote Pooling Agreements
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Shareholder Authority
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Voting
What can shareholders vote on?
Elect/remove directors
o With or without cause unless articles say otherwise
o Directors must be given notice and opportunity to meet
accusation
Approve proposed amendments to the articles of incorporation
o But cannot propose
DGCL 109 Propose and approve amendments to the by-laws
o Articles may allow the directors to adopt, amend or repeal
bylaws, but this does not take it away from the stockholders
Approve significant transactions
Approve conflicted transactions
When can shareholders vote?
Annual meetings
o Date specified in the by-laws
Special meetings
o DGCL 211. Meetings of Stockholders
Special meetings of stockholders may be called by the
board or by any person authorized in the articles or the
bylaws
o MBCA 7.02
Called by an member of the board, owners of 10% of stock
or anyone authorized in the articles
Meeting requirements
o Shareholders must be given notice of all meetings in which they
are entitle to vote
o Record date is set only shareholders of record on that date
can vote
o MBCA 7.04. Action without meeting
Action requiring a meeting can be taken without one if
written consent by all shareholders entitled to vote on the
action
Articles can allow for consent by minimum number of votes
required
How can shareholders vote?
In person at the meeting
Vote by proxy
o Give consent for someone else to vote on your behalf
Shareholder Voting Dynamics
Costs of shareholder informing themselves is typically outweighed by
the expected returns from informed voting
o Collective action problem
Structuring Corporate Combinations
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o DGCL
Voting Requirements
Majority of Ts outstanding shares must approve the
merger
Only Ps board must approve the merger (Ps
shareholders do not own shares in the subsidiary)
Appraisal Rights
Ts shareholders have appraisal rights if the market
out exception does not apply
Ps shareholders do not have appraisal rights
(3) Statutory Share Exchange
o Target shareholders receive Purchasers shares in exchange for
their stock T becomes a subsidiary of P
o MBCA
Voting Requirements
Majority of Ts outstanding shares must approve
P shareholders only vote if there is a dilutive share
issuance
Appraisal rights
Ts shareholders may seek appraisal unless the
market exception applies
Ps shareholders do not have appraisal rights
o DGCL
Does not recognize the statutory share exchange
(4) Sale of Assets
o Target sells assets to Purchaser in exchange for P stock or other
consideration
o MBCA
Voting Requirements
Majority of Ts outstanding shares must approve the
sale
P shareholders only vote if there is a dilutive share
issuance
Appraisal Rights
Ts shareholders have appraisal rights if there is no
market exception
P shareholders do not have appraisal rights
o DGCL
Voting Requirements
Majority of Ts outstanding shares must approve the
transaction
Appraisal Rights
No appraisal rights
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Duty of Care
Board Decisionmaking
Duty of Care
Board of Directors owes a fiduciary duty of care to the corporation and,
through the corporation, the shareholders
o Must act in the corporations best interests
o Must exercise reasonable care in making decisions and in
overseeing the corporations affairs
Business Judgment Rule
Presumption that in making a business decision, the directors of a
corporation acted:
o (1) On an informed basis
o (2) With a rational business purpose
In order to rebut these presumptions, the plaintiff must show
(respectively):
o (1) Gross negligence
Want to protect incentive to take risks
o (2) Waste
Must show the transaction wholly lacks consideration
If the plaintiff rebuts either, the board cannot show entire fairness
because (1) shows lack of fair process and (2) shows lack of fair
outcome
o However, board can show that the transaction caused no harm
Smith v. Van Gorkom
o Rebuttable presumption that a boards business decision is
fully informed, made in good faith and in the best interests of
the corporation
Statutory Exculpation of Directors
Provision in the articles of incorporation can reduce directors personal
liability for violations of the duty of care (not loyalty)
o Want to preserve incentive for directors to take risks
o Want to fairly limit damages relative to the directors culpability
DGCL 102. Contents of Certificate of Incorporation
o (b)(7) Articles may contain provision eliminating or limiting
personal liability of a director to the corporation/stockholders for
breach of fiduciary duty, but may not eliminate liability for:
Breach of duty of loyalty
Acts or omissions in bad faith
Intentional misconduct or violation of law
Improper personal benefits
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Indemnification
State corporate statutes allow for the articles, by-laws, or private
contracts to provide for indemnification of the directors by the
corporation
o State statutes are either permissive, mandatory or
comprehensive (both)
Insurance
D&O policies what two separate but integral parts
o (1) Reimbursement to the corporation for its lawful expenses in
connection with indemnification of the director/officer
o (2) Coverage of claims against corporate directors/officers in
their corporate capacity
Board Oversight
Duty of good faith is an extension of the duty of loyalty
o Breached by a conscious disregard of duty to take action to fulfill
a fiduciary duty (Stone)
Board of Directors has a duty to the corporation to make good faith
efforts to ensure that adequate corporation information and reporting
systems exist
o Level of detail of the systems oversight is a question of business
judgment
o Only applicable to the monitoring of employee conduct, not
business risk
Lack of good faith can be shown by:
o Sustained or systemic failure to establish a reasonable
information and reporting system
o Failure to investigate or respond reasonably and adequately to a
red flag
DGCL 141. Board of Directors
o (e) Director (or committee designated by board) is protected in
relying in good faith upon the records of the corporation, or upon
such information presented to the corporation by any of its
officers, employees, committees, or any professional or expert
Graham v. Allis-Chalmers Manufacturing Co.
o Absent cause for suspicion (red flag), there is no duty upon
directors to install and operate a corporate system of espionage
to ferret out wrongdoing
Directors are entitled to rely on the honesty and integrity
of their subordinates until something puts them on
suspicion
In re Caremark International Inc. Derivative Litigation
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Duty of Loyalty
In General
Managers must put the Corporations interests before personal
interests
o It is presumed by courts that managers are:
Disinterested
Independent
To allege breach of Duty of Loyalty, must show:
o (1) Interested Party (Manager, Director, Officer); or
o (2) Must show that party is incapable of making an independent
judgment
Cleansing Interested Director Transactions
DGCL 144. Interested Directors
o An interested director transaction will not automatically be void
solely because of the interest if either:
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o Once they obtain this threshold, they can commence a shortterm merger without any opposition or judicial review
Tender Offers will be subject to a process-based voluntariness review
o (1) Offer has to be subject to a non-waivable requirement that is
approved by a majority of the minority
o (2) Controlling shareholder must promise to effectuate
immediately a short-form merger at the same price as the tender
offer
o (3) Controlling shareholder must made no retributive threats
(coercion)
o (4) Controlling shareholder must permit the independent
directors on the board time and authority to react to the tender
offer, hire their own advisors, and make a recommendation
In re Pure Resources Inc. Shareholders Litigation
o Tender offers are subject to a voluntariness review - requires
full disclosure and lack of coercion
Must still give deference to shareholder decisions that are
voluntary and informed
o Shareholders ability to decline tender offers does not remove all
threats of structural coercion
Prisoners dilemma, informational advantages, etc.
Shareholder Litigation
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