Business Enterprises Cheat Sheet

8/3/2019 Business Enterprises Cheat Sheet

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WHAT IS AGENCY?...................................................................................................................................................4

What are the three elements necessary to form the agency relationship?............................................................4Gorton v. Doty..................................................................................................................................................................4

Consent .................................................................................................................................................................4

Control..................................................................................................................................................................4

Action on behalf of the principal...........................................................................................................................4

PARTNERSHIP............................................................................................................................................................5

UPA............................................................................................................................................................................5UPA 29 43........................................................................................................................................................5

RUPA Articles 6 (601-603), 7 (701-705), and 8 (801-807.............................................................................5

DISSOLUTIONUNDERTHE UPA 29................................................................................................................................5DISSOLUTIONUNDERTHE RUPA 601-603..................................................................................................................5

Sharing of Losses..................................................................................................................................................5

UPA v RUPA Profits/Losses.................................................................................................................................6

Buyout Agreements................................................................................................................................................6

VALUINGANENTERPRISE.................................................................................................................................................6Valuation problems:..............................................................................................................................................6Solutions to valuation problems:..........................................................................................................................6

UPA 29 Dissolution Defined.............................................................................................................................6UPA 30 Partnership not Terminated by Dissolution.........................................................................................6

UPA 31 Causes of Dissolution...........................................................................................................................7

UPA 32 Dissolution by Decree of Court............................................................................................................7

UPA 33 General Effect of Dissolution on Authority of Partner........................................................................7

UPA 34 Right of Partner to Contribution from Co-partners after Dissolution.................................................8

UPA 35 Power of Partner to Bind Partnership to Third Persons after Dissolution.........................................8UPA 36 Effect of Dissolution on Partner's Existing Liability............................................................................9

UPA 37 Right to Wind Up..................................................................................................................................9

UPA 38 Rights of Partners to Application of Partnership Property.................................................................9

UPA 39 Rights Where Partnership is Dissolved for Fraud or Misrepresentation..........................................10

UPA 40 Rules for Distribution.........................................................................................................................10

UPA 41 Liability of Persons Continuing the Business in Certain Cases.........................................................11

UPA 42 Rights of Retiring or Estate of Deceased Partner When the Business is Continued..........................12RUPA.......................................................................................................................................................................12

Article 6 Partner Disassociation.........................................................................................................................12

RUPA 601 Events Causing Partner's Dissociation.........................................................................................12

RUPA 602 Partner's Power to Dissociate; Wrongful Dissociation.................................................................13

RUPA 603 Effect of Partner's Dissociation.....................................................................................................14

Article 7 Partners Disassociation When Business Not Wound Up....................................................................14

SECTION 701. PURCHASE OF DISSOCIATED PARTNER'S INTEREST.......................................................14

SECTION 702. DISSOCIATED PARTNER'S POWER TO BIND AND LIABILITY TO PARTNERSHIP..........16

SECTION 703. DISSOCIATED PARTNER'S LIABILITY TO OTHER PERSONS.............................................16

SECTION 704. STATEMENT OF DISSOCIATION............................................................................................17

Article 8 Winding Up Partnership Business.......................................................................................................17RUPA 801 Events Causing Dissolution and Winding up of Partnership Business.........................................17

RUPA 802 Partnership Continues After Dissolution.......................................................................................18RUPA 803 Right to Wind Up Partnership Business........................................................................................18

Page v. Page...................................................................................................................................................................18Prentiss v. Sheffel...........................................................................................................................................................18Kovick v. Reed...............................................................................................................................................................18

1933 SECURITIES ACT............................................................................................................................................20

RULE 11 OMISSIONSAND MISSTATEMENTSINTHE REGISTRATION STATEMENT...................................................................20RULE 12 INVOLVES MATERIAL OMISSIONSAND MISSTATEMENTINTHE PROSPECTUS..........................................................20

Registration Requirements..............................................................................................................................................20

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Registration Statements .................................................................................................................................................20Exemptions from 33 Registration Requirements...........................................................................................................20

1934 EXCHANGE ACT.............................................................................................................................................21

RULE 10B -- MATERIAL MISSTATEMENTS/OMISSIONS INVOLVING SALEORPURCHASEOFA SECURITY..................................2110b-5 Cause of Action Elements.........................................................................................................................21

Omissions as False Statements.......................................................................................................................................21

Materiality......................................................................................................................................................................21Fraud-On-The-Market Theory............................................................................................................................21

Defenses ........................................................................................................................................................................21

INSIDERTRADING.........................................................................................................................................................21Tippee Liability (Dirks)..................................................................................................................................................22Howey Test....................................................................................................................................................................22

SARBANESOXLEY ACT OF 2002......................................................................................................................23

LIMITATION ON DIRECTORS LIABILITY......................................................................................................24

DELAWARE 102(B)7 CONTENTSOF CERTIFICATIONOF INCORPORATION.............................................................................24Business Judgment Rule Criteria....................................................................................................................................24

RIGHTTO INDEMNIFICATION...........................................................................................................................................24Del. 145..........................................................................................................................................................................24

DYNAMICS OF SHAREHOLDER VOTING.........................................................................................................25

Limited Number of Matters............................................................................................................................................25

PROXY........................................................................................................................................................................25 Proxy Process......................................................................................................................................................25

Proxy Fraud........................................................................................................................................................2514(a) of 1934 Exchange Act.........................................................................................................................................25

DEL. 149(A) PROXY SOLICITATION..........................................................................................................................25SHAREHOLDER PROPOSALS GROUNDSFOROMISSION......................................................................................................25

Section 14a of 1934 Exchange Act......................................................................................................................25

Proxy Solicitations Absent Single Majority Shareholder....................................................................................25

SHAREHOLDER INSPECTION RIGHTS.................................................................................................................................26

CLOSELY HELD CORPORATIONS......................................................................................................................27

VOTING.......................................................................................................................................................................27ABUSEOF CONTROL......................................................................................................................................................27

Control Devices are Key.....................................................................................................................................27

Fiduciary Duties Between Shareholders in Close Corps....................................................................................27Two Approaches:...........................................................................................................................................................27

Freeze Outs.........................................................................................................................................................27Massachusetts Test for Freeze Out.................................................................................................................................27

Deadlocked Shareholders (Smith v. Atlantic Properties)...................................................................................27

Delaware Standard for Shareholders Fiduciary Duty......................................................................................28

Exit Mechanisms in Close Corporations.............................................................................................................28

TRANSFER OF CONTROL.....................................................................................................................................29

TWO ISSUES CONTROL PREMIUMAND SALEOF CORPORATE OFFICES................................................................................29

Sale of Corporate Assets.....................................................................................................................................29Minority Shareholders Entitled to Protection from Abuse, Not Control Premium.............................................29

Sale of Assets to Create a Control Premium.......................................................................................................29

Selling Corporate Offices as Part of Control Premium......................................................................................29

CORPORATE COMBINATIONS...........................................................................................................................................301. MBCA & de facto mergers.............................................................................................................................30

2. Voting & Appraisal rights in Corp. Combinations.........................................................................................30

3. How a corporate combination occurs.............................................................................................................30

4. Appraisal Rights What are they?................................................................................................................30

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What triggers a minority shareholders appraisal rights?................................................................................................31Who gets appraisal?........................................................................................................................................................31

5. Appraisal Procedure (Del)..............................................................................................................................31

6. Types of Corporate combinations...................................................................................................................31

7. De Facto merger.............................................................................................................................................31De Facto Merger Doctrine..............................................................................................................................................31

Del. 311 Sale or Merger..........................................................................................................................................32

Standard for de facto merger..........................................................................................................................................32Freeze-out mergers.........................................................................................................................................................32

Delaware test for freeze-out mergers.........................................................................................................................33

Majority Shareholder Duties...............................................................................................................................33Fairness Test for Mergers...............................................................................................................................................33

Doctrine of Independent Legal Significance.......................................................................................................33

TAKEOVERS.................................................................................................................................................................34Voting rights of non-voting preferred stock........................................................................................................34Outline of director duties in takeover context.....................................................................................................34

Structure of tender offer......................................................................................................................................34

Defensive measures:............................................................................................................................................35

Duty to Protect Shareholders in Takeover Bid (thru corp.)................................................................................36

Reasonable Defensive Measures.........................................................................................................................36

Board Role for In-Play Corps.............................................................................................................................36Demand Requirements...................................................................................................................................................37

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WHAT IS AGENCY?

R3A 1.01 AGENCY DEFINED

Agency is the fiduciary relationship that arises when one person (a "principal") manifests assentto another person (an "agent") that the agent shall act on the principal's behalf and subject to theprincipal's control, and the agent manifests assent or otherwise consents so to act.

What are the three elements necessary to form the agencyrelationship?

Consent by both parties to the relationship

Control of the agent by the principal

Action by the agent on behalf of the principal

Gorton v. DotyAn agency relationship results from one persons consent that another will act on his behalf andsubject to his control and the other persons consent so to act

P sued D based on Ds lending the car to a coach under the theory that the coach was Dsagent

met Consent, Control, and Act on Behalf of P

court found for P

Consent

means consent to enter in a relationship, not the explicit consent to be agent and principal.

As you saw from your readings, in many cases, the parties may not intend to be agent andprincipal but still may accidentally enter the relationship

Control

means that the principal has the power to control the agent.

Because of this control, the agent is in effect stepping into the shoes of the principal.

Because agents act as the alter-egos of principals, principals are liable for the acts of theiragents done within the scope of the agents authority.

Action on behalf of the principal

This introduces us to the concept of fiduciary duty.

An agent is expected to put the principals interests ahead of his or her own interests.

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PARTNERSHIP

UPA

UPA 29 43.

Under the RUPA, a partner may dissociate and the remaining partners must determine

whether to continue or to wind up the firm.

RUPA Articles 6 (601-603), 7 (701-705), and 8 (801-807

DISSOLUTION UNDER THE UPA 29

29- The dissolution of a partnership is the change in the relation of the partners caused by anypartner ceasing to be associated in the carrying on as distinguished from the winding up of thebusiness.Typically called dissociation.

Dissociation may be wrongful (contrary to the pship agreement) or not wrongful.

Dissociation under the UPA always causes dissolution of the firm.

Dissolution is not the same as termination.

Remaining partners wind up and may decide to form a new partnership to carry on the

business of the old partnership.

DISSOLUTION UNDER THE RUPA 601-603

Unlike UPA, dissociation under 601-603 gives the remaining partners a choice:

Article 7 All partners choose to continue pship and buy out dissociating partners

interest (less any damages caused by wrongful dissociation).

Note that in a partnership at will, the dissociating partner may force a liquidation by

providing notice of that partners express will to withdraw as a partner. 801(1).

Article 8 Partners wind up business and terminate.

Sharing of Losses

General rule: 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 common enterprise.

Exception: Where one partner contributes the money capital as against the others skill andlabor . . . Neither party is liable to the other for contribution for any loss sustained.

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UPA v RUPA Profits/Losses

UPA all equal unless agreement

RUPA all Profits equal and losses proportional to investment, absent agreement

Buyout Agreements

VALUING AN ENTERPRISE

In all buyout agreements, price and valuation is critical.Most of the time, you want to sell your interest (stock, share, membership, pship interest) atmarket value.

Valuation problems:

No market.

Minority interest.

Control premium.

Solutions to valuation problems:

Hire an appraiser.Agreement should provide mechanism for selecting an appropriate appraiser because its

hard to do in the middle of a knock-down, drag-out fight over control.Agree on formula.

See the liquidated damages provision inPav-Saver.May use some average of recent incomes, revenues, profits, cash flows, etc.

Book value.Net worth, total sum of owners equity interest in the firm less liabilities, assets minus

liabilities.Liquidation value (asset value).Going concern value.Discounted cash flow.Many other models.

Role of court or appraiser is to determine which model best approximates the value ofthe firm.

UPA 29 Dissolution Defined

The dissolution of a partnership is the change in the relation of the partners caused by anypartner ceasing to be associated in the carrying on as distinguished from the winding up of thebusiness

UPA 30 Partnership not Terminated by Dissolution

On dissolution the partnership is not terminated, but continues until the winding up ofpartnership affairs is completed

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UPA 31 Causes of Dissolution

Dissolution is caused:(1) Without violation of the agreement between the partners,

(a) By the termination of the definite term or particular undertaking specified in theagreement,

(b) By the express will of any partner when no definite term or particular undertaking isspecified,(c) By the express will of all the partners who have not assigned their interests or sufferedthem to be charged for their separate debts, either before or after the termination of anyspecified term or particular undertaking,(d) By the expulsion of any partner from the business bona fide in accordance with such apower conferred by the agreement between the partners;

(2) In contravention of the agreement between the partners, where the circumstances do notpermit a dissolution under any other provision of this section, by the express will of any partnerat any time;(3) By any event which makes it unlawful for the business of the partnership to be carried on or

for the members to carry it on in partnership;(4) By the death of any partner;(5) By the bankruptcy of any partner or the partnership;(6) By decree of court under section 32.

UPA 32 Dissolution by Decree of Court

(1) On application by or for a partner the court shall decree a dissolution whenever:(a) A partner has been declared a lunatic in any judicial proceeding or is shown to be of unsoundmind,(b) A partner becomes in any other way incapable of performing his part of the partnershipcontract,

(c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on ofthe business,(d) A partner willfully or persistently commits a breach of the partnership agreement, orotherwise so conducts himself in matters relating to the partnership business that it is notreasonably practicable to carry on the business in partnership with him,(e) The business of the partnership can only be carried on at a loss,(f) Other circumstances render a dissolution equitable.(2) On the application of the purchaser of a partner's interest under sections 28 or 29:(a) After the termination of the specified term or particular undertaking,(b) At any time if the partnership was a partnership at will when the interest was assigned orwhen the charging order was issued.

UPA 33 General Effect of Dissolution on Authority of Partner

Except so far as may be necessary to wind up partnership affairs or to complete transactionsbegun but not then finished, dissolution terminates all authority of any partner to act for thepartnership,(1) With respect to the partners,(a) When the dissolution is not by the act, bankruptcy or death of a partner; or(b) When the dissolution is by such act, bankruptcy or death of a partner, in cases where section

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34 so requires.(2) With respect to persons not partners, as declared in section 35.

UPA 34 Right of Partner to Contribution from Co-partnersafter Dissolution

Where the dissolution is caused by the act, death or bankruptcy of a partner, each partner is liableto his co-partners for his share of any liability created by any partner acting for the partnership asif the partnership had not been dissolved unless(a) The dissolution being by act of any partner, the partner acting for the partnership hadknowledge of the dissolution, or(b) The dissolution being by the death or bankruptcy of a partner, the partner acting for thepartnership had knowledge or notice of the death or bankruptcy.

UPA 35 Power of Partner to Bind Partnership to Third Personsafter Dissolution

(1) After dissolution a partner can bind the partnership except as provided in Paragraph (3).

(a) By any act appropriate for winding up partnership affairs or completing transactionsunfinished at dissolution;(b) By any transaction which would bind the partnership if dissolution had not taken place,provided the other party to the transaction(I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice ofthe dissolution; or(II) Though he had not so extended credit, had nevertheless known of the partnership prior todissolution, and, having no knowledge or notice of dissolution, the fact of dissolution had notbeen advertised in a newspaper of general circulation in the place (or in each place if more thanone) at which the partnership business was regularly carried on.(2) The liability of a partner under Paragraph (1b) shall be satisfied out of partnership assets

alone when such partner had been prior to dissolution(a) Unknown as a partner to the person with whom the contract is made; and(b) So far unknown and inactive in partnership affairs that the business reputation of thepartnership could not be said to have been in any degree due to his connection with it.(3) The partnership is in no case bound by any act of a partner after dissolution(a) Where the partnership is dissolved because it is unlawful to carry on the business, unless theact is appropriate for winding up partnership affairs; or(b) Where the partner has become bankrupt; or(c) Where the partner has no authority to wind up partnership affairs; except by a transactionwith one who(I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of

his want of authority; or(II) Had not extended credit to the partnership prior to dissolution, and, having no knowledge ornotice of his want of authority, the fact of his want of authority has not been advertised in themanner provided for advertising the fact of dissolution in Paragraph (1bII).(4) Nothing in this section shall affect the liability under Section 16 of any person who afterdissolution represents himself or consents to another representing him as a partner in apartnership engaged in carrying on business.

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UPA 36 Effect of Dissolution on Partner's Existing Liability

(1) The dissolution of the partnership does not of itself discharge the existing liability of anypartner.(2) A partner is discharged from any existing liability upon dissolution of the partnership by anagreement to that effect between himself, the partnership creditor and the person or partnership

continuing the business; and such agreement may be inferred from the course of dealing betweenthe creditor having knowledge of the dissolution and the person or partnership continuing thebusiness.(3) Where a person agrees to assume the existing obligations of a dissolved partnership, thepartners whose obligations have been assumed shall be discharged from any liability to anycreditor of the partnership who, knowing of the agreement, consents to a material alteration inthe nature or time of payment of such obligations.(4) The individual property of a deceased partner shall be liable for all obligations of thepartnership incurred while he was a partner but subject to the prior payment of his separate debts.

UPA 37 Right to Wind Up

Unless otherwise agreed the partners who have not wrongfully dissolved the partnership or thelegal representative of the last surviving partner, not bankrupt, has the right to wind up thepartnership affairs; provided, however, that any partner, his legal representative or his assignee,upon cause shown, may obtain winding up by the court

UPA 38 Rights of Partners to Application of PartnershipProperty

(1) When dissolution is caused in any way, except in contravention of the partnership agreement,each partner, as against his co-partners and all persons claiming through them in respect of theirinterests in the partnership, unless otherwise agreed, may have the partnership property appliedto discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the

respective partners. But if dissolution is caused by expulsion of a partner, bona fide under thepartnership agreement and if the expelled partner is discharged from all partnership liabilities,either by payment or agreement under section 36(2), he shall receive in cash only the net amountdue him from the partnership.(2) When dissolution is caused in contravention of the partnership agreement the rights of thepartners shall be as follows:(a) Each partner who has not caused dissolution wrongfully shall have,I. All the rights specified in paragraph (1) of this section, andII. The right, as against each partner who has caused the dissolution wrongfully, to damages forbreach of the agreement.(b) The partners who have not caused the dissolution wrongfully, if they all desire to continue

the business in the same name, either by themselves or jointly with others, may do so, during theagreed term for the partnership and for that purpose may possess the partnership property,provided they secure the payment by bond approved by the court, or pay to any partner who hascaused the dissolution wrongfully, the value of his interest in the partnership at the dissolution,less any damages recoverable under clause (2a II) of this section, and in like manner indemnifyhim against all present or future partnership liabilities.(c) A partner who has caused the dissolution wrongfully shall have:I. If the business is not continued under the provisions of paragraph (2b) all the rights of a

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partner under paragraph (1), subject to clause (2a II), of this section,II. If the business is continued under paragraph (2b) of this section the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have thevalue of his interest in the partnership, less any damages caused to his co-partners by thedissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the

court, and to be released from all existing liabilities of the partnership; but in ascertaining thevalue of the partner's interest the value of the good-will of the business shall not be considered.

UPA 39 Rights Where Partnership is Dissolved for Fraud orMisrepresentation

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of oneof the parties thereto, the party entitled to rescind is, without prejudice to any other right,entitled,(a) To a lien on, or a right of retention of, the surplus of the partnership property after satisfyingthe partnership liabilities to third persons for any sum of money paid by him for the purchase ofan interest in the partnership and for any capital or advances contributed by him; and

(b) To stand, after all liabilities to third persons have been satisfied, in the place of the creditorsof the partnership for any payments made by him in respect of the partnership liabilities; and(c) To be indemnified by the person guilty of the fraud or making the representation against alldebts and liabilities of the partnership.

UPA 40 Rules for Distribution

In settling accounts between the partners after dissolution, the following rules shall be observed,subject to any agreement to the contrary:(a) The assets of the partnership are:I. The partnership property,II. The contributions of the partners necessary for the payment of all the liabilities specified in

clause (b) of this paragraph.(b) The liabilities of the partnership shall rank in order of payment, as follows:I. Those owing to creditors other than partners,II. Those owing to partners other than for capital and profits,III. Those owing to partners in respect of capital,IV. Those owing to partners in respect of profits.(c) The assets shall be applied in order of their declaration in clause (a) of this paragraph to thesatisfaction of the liabilities.(d) The partners shall contribute, as provided by section 18 (a) the amount necessary to satisfythe liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process,refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the

relative proportions in which they share the profits, the additional amount necessary to pay theliabilities.(e) An assignee for the benefit of creditors or any person appointed by the court shall have theright to enforce the contributions specified in clause (d) of this paragraph.(f) Any partner or his legal representative shall have the right to enforce the contributionsspecified in clause (d) of this paragraph, to the extent of the amount which he has paid in excessof his share of the liability.(g) The individual property of a deceased partner shall be liable for the contributions specified in

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clause (d) of this paragraph.(h) When partnership property and the individual properties of the partners are in possession of acourt for distribution, partnership creditors shall have priority on partnership property andseparate creditors on individual property, saving the rights of lien or secured creditors asheretofore.

(i) Where a partner has become bankrupt or his estate is insolvent the claims against his separateproperty shall rank in the following order:I. Those owing to separate creditors,II. Those owing to partnership creditors,III. Those owing to partners by way of contribution.

UPA 41 Liability of Persons Continuing the Business inCertain Cases

(1) When any new partner is admitted into an existing partnership, or when any partnerretires and assigns (or the representative of the deceased partner assigns) his rights in partnershipproperty to two or more of the partners, or to one or more of the partners and one or more third

persons, if the business is continued without liquidation of the partnership affairs, creditors of thefirst or dissolved partnership are also creditors of the partnership so continuing the business.

(2) When all but one partner retire and assign (or the representative of a deceased partnerassigns) their rights in partnership property to the remaining partner, who continues the businesswithout liquidation of partnership affairs, either alone or with others, creditors of the dissolvedpartnership are also creditors of the person or partnership so continuing the business.

(3) When any partner retires or dies and the business of the dissolved partnership is continued asset forth in paragraphs (1) and (2) of this section, with the consent of the retired partners or therepresentative of the deceased partner, but without any assignment of his right in partnership

property, rights of creditors of the dissolved partnership and of the creditors of the person orpartnership continuing the business shall be as if such assignment had been made.

(4) When all the partners or their representatives assign their rights in partnership property to oneor more third persons who promise to pay the debts and who continue the business of thedissolved partnership, creditors of the dissolved partnership are also creditors of the person orpartnership continuing the business.

(5) When any partner wrongfully causes a dissolution and the remaining partners continue thebusiness under the provisions of section 38(2b), either alone or with others, and withoutliquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of

the person or partnership continuing the business.

(6) When a partner is expelled and the remaining partners continue the business either alone orwith others, without liquidation of the partnership affairs, creditors of the dissolved partnershipare also creditors of the person or partnership continuing the business.

(7) The liability of a third person becoming a partner in the partnership continuing the business,under this section, to the creditors of the dissolved partnership shall be satisfied out of

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partnership property only.

(8) When the business of a partnership after dissolution is continued under any conditions setforth in this section the creditors of the dissolved partnership, as against the separate creditors ofthe retiring or deceased partner or the representative of the deceased partner, have a prior right to

any claim of the retired partner or the representative of the deceased partner against the person orpartnership continuing the business, on account of the retired or deceased partner's interest in thedissolved partnership or on account of any consideration promised for such interest or for hisright in partnership property.

(9) Nothing in this section shall be held to modify any right of creditors to set aside anyassignment on the ground of fraud.

(10) The use by the person or partnership continuing the business of the partnership name, or thename of a deceased partner as part thereof, shall not of itself make the individual property of thedeceased partner liable for any debts contracted by such person or partnership.

UPA 42 Rights of Retiring or Estate of Deceased PartnerWhen the Business is Continued

When any partner retires or dies, and the business is continued under any of the conditions setforth in section 41 (1, 2, 3, 5, 6), or section 38(2b) without any settlement of accounts as betweenhim or his estate and the person or partnership continuing the business, unless otherwise agreed,he or his legal representative as against such persons or partnership may have the value of hisinterest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amountequal to the value of his interest in the dissolved partnership with interest, or, at his option or atthe option of his legal representative, in lieu of interest, the profits attributable to the use of hisright in the property of the dissolved partnership; provided that the creditors of the dissolved

partnership as against the separate creditors, or the representative of the retired or deceasedpartner, shall have priority on any claim arising under this section, as provided by section 41(8)of this act.

RUPA

Article 6 Partner Disassociation

RUPA 601 Events Causing Partner's Dissociation

A partner is dissociated from a partnership upon the occurrence of any of the following events:(1) the partnership's having notice of the partner's express will to withdraw as a partner or on alater date specified by the partner;(2) an event agreed to in the partnership agreement as causing the partner's dissociation;(3) the partner's expulsion pursuant to the partnership agreement;(4) the partner's expulsion by the unanimous vote of the other partners if:(i) it is unlawful to carry on the partnership business with that partner;(ii) there has been a transfer of all or substantially all of that partner's transferable interest in thepartnership, other than a transfer for security purposes, or a court order charging the partner'sinterest, which has not been foreclosed;

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(iii) within 90 days after the partnership notifies a corporate partner that it will be expelledbecause it has filed a certificate of dissolution or the equivalent, its charter has been revoked, orits right to conduct business has been suspended by the jurisdiction of its incorporation, there isno revocation of the certificate of dissolution or no reinstatement of its charter or its right toconduct business; or

(iv) a partnership that is a partner has been dissolved and its business is being wound up;(5) on application by the partnership or another partner, the partner's expulsion by judicialdetermination because:(i) the partner engaged in wrongful conduct that adversely and materially affected the partnershipbusiness;(ii) the partner willfully or persistently committed a material breach of the partnership agreementor of a duty owed to the partnership or the other partners under Section 404; or(iii) the partner engaged in conduct relating to the partnership business which makes it notreasonably practicable to carry on the business in partnership with the partner;(6) the partner's:(i) becoming a debtor in bankruptcy;

(ii) executing an assignment for the benefit of creditors;(iii) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidatorof that partner or of all or substantially all of that partner's property; or(iv) failing, within 90 days after the appointment, to have vacated or stayed the appointment of atrustee, receiver, or liquidator of the partner or of all or substantially all of the partner's propertyobtained without the partner's consent or acquiescence, or failing within 90 days after theexpiration of a stay to have the appointment vacated;(7) in the case of a partner who is an individual:(i) the partner's death;(ii) the appointment of a guardian or general conservator for the partner; or(iii) a judicial determination that the partner has otherwise become incapable of performing thepartner's duties under the partnership agreement;(8) in the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of atrust, distribution of the trust's entire transferable interest in the partnership, but not merely byreason of the substitution of a successor trustee;(9) in the case of a partner that is an estate or is acting as a partner by virtue of being a personalrepresentative of an estate, distribution of the estate's entire transferable interest in thepartnership, but not merely by reason of the substitution of a successor personal representative;or(10) termination of a partner who is not an individual, partnership, corporation, trust, or estate.

RUPA 602 Partner's Power to Dissociate; WrongfulDissociation

(a) A partner has the power to dissociate at any time, rightfully or wrongfully, by express willpursuant to Section 601(1).(b) A partner's dissociation is wrongful only if:(1) it is in breach of an express provision of the partnership agreement; or(2) in the case of a partnership for a definite term or particular undertaking, before the expirationof the term or the completion of the undertaking:(i) the partner withdraws by express will, unless the withdrawal follows within 90 days after

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another partner's dissociation by death or otherwise under Section 601(6) through (10) orwrongful dissociation under this subsection;(ii) the partner is expelled by judicial determination under Section 601(5);(iii) the partner is dissociated by becoming a debtor in bankruptcy; or(iv) in the case of a partner who is not an individual, trust other than a business trust, or estate,

the partner is expelled or otherwise dissociated because it willfully dissolved or terminated.(c) A partner who wrongfully dissociates is liable to the partnership and to the other partners fordamages caused by the dissociation. The liability is in addition to any other obligation of thepartner to the partnership or to the other partners.

RUPA 603 Effect of Partner's Dissociation

(a) If a partner is dissociated from a partnership without resulting in a dissolution and winding upof the partnership business under Section 801, the partnership shall cause the dissociatedpartner's interest in the partnership to be purchased for a buyout price determined pursuant tosubsection (b).(b) The buyout price of a dissociated partner's interest is the amount that would have been

distributable to the dissociating partner under Section 807(b) if, on the date of dissociation, theassets of the partnership were sold at a price equal to the greater of the liquidation value or thevalue based on a sale of the entire business as a going concern without the dissociated partnerand the partnership were wound up as of that date. Interest must be paid from the date ofdissociation to the date of payment.(c) Damages for wrongful dissociation under Section 602(b), and all other amounts owing,whether or not presently due, from the dissociated partner to the partnership, must be offsetagainst the buyout price. Interest must be paid from the date the amount owed becomes due tothe date of payment.(d) A partnership shall indemnify a dissociated partner whose interest is being purchased againstall partnership liabilities, whether incurred before or after the dissociation, except liabilities

incurred by an act of the dissociated partner under Section 702.

Article 7 Partners Disassociation When Business Not Wound Up

SECTION 701. PURCHASE OF DISSOCIATED PARTNER'SINTEREST.

(a) If a partner is dissociated from a partnership without resulting in adissolution and winding up of the partnership business under Section 801,the partnership shall cause the dissociated partner's interest in thepartnership to be purchased for a buyout price determined pursuant to

subsection (b).(b) The buyout price of a dissociated partner's interest is the amount thatwould have been distributable to the dissociating partner under Section807(b) if, on the date of dissociation, the assets of the partnership were soldat a price equal to the greater of the liquidation value or the value based ona sale of the entire business as a going concern without the dissociatedpartner and the partnership were wound up as of that date. Interest must bepaid from the date of dissociation to the date of payment.

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(c) Damages for wrongful dissociation under Section 602(b), and all otheramounts owing, whether or not presently due, from the dissociated partnerto the partnership, must be offset against the buyout price. Interest must bepaid from the date the amount owed becomes due to the date of payment.(d) A partnership shall indemnify a dissociated partner whose interest is

being purchased against all partnership liabilities, whether incurred before orafter the dissociation, except liabilities incurred by an act of the dissociatedpartner under Section 702.(e) If no agreement for the purchase of a dissociated partner's interest isreached within 120 days after a written demand for payment, thepartnership shall pay, or cause to be paid, in cash to the dissociated partnerthe amount the partnership estimates to be the buyout price and accruedinterest, reduced by any offsets and accrued interest under subsection (c).(f) If a deferred payment is authorized under subsection (h), the partnershipmay tender a written offer to pay the amount it estimates to be the buyoutprice and accrued interest, reduced by any offsets under subsection (c),

stating the time of payment, the amount and type of security for payment,and the other terms and conditions of the obligation.(g) The payment or tender required by subsection (e) or (f) must beaccompanied by the following:(1) a statement of partnership assets and liabilities as of the date ofdissociation;(2) the latest available partnership balance sheet and income statement, ifany;(3) an explanation of how the estimated amount of the payment wascalculated; and(4) written notice that the payment is in full satisfaction of the obligation to

purchase unless, within 120 days after the written notice, the dissociatedpartner commences an action to determine the buyout price, any offsetsunder subsection (c), or other terms of the obligation to purchase.(h) A partner who wrongfully dissociates before the expiration of adefinite term or the completion of a particular undertaking is notentitled to payment of any portion of the buyout price until theexpiration of the term or completion of the undertaking, unless thepartner establishes to the satisfaction of the court that earlier payment willnot cause undue hardship to the business of the partnership. A deferredpayment must be adequately secured and bear interest.(i) A dissociated partner may maintain an action against the partnership,

pursuant to Section 405(b)(2)(ii), to determine the buyout price of thatpartner's interest, any offsets under subsection (c), or other terms of theobligation to purchase. The action must be commenced within 120 days afterthe partnership has tendered payment or an offer to pay or within one yearafter written demand for payment if no payment or offer to pay is tendered.The court shall determine the buyout price of the dissociated partner'sinterest, any offset due under subsection (c), and accrued interest, and enterjudgment for any additional payment or refund. If deferred payment is

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authorized under subsection (h), the court shall also determine the securityfor payment and other terms of the obligation to purchase. The court mayassess reasonable attorney's fees and the fees and expenses of appraisersor other experts for a party to the action, in amounts the court findsequitable, against a party that the court finds acted arbitrarily, vexatiously,

or not in good faith. The finding may be based on the partnership's failure totender payment or an offer to pay or to comply with subsection (g).

SECTION 702. DISSOCIATED PARTNER'S POWER TO BIND ANDLIABILITY TO PARTNERSHIP.

(a) For two years after a partner dissociates without resulting in a dissolutionand winding up of the partnership business, the partnership, including asurviving partnership under [Article] 9, is bound by an act of the dissociatedpartner which would have bound the partnership under Section 301 beforedissociation only if at the time of entering into the transaction the otherparty:

(1) reasonably believed that the dissociated partner was then a partner;(2) did not have notice of the partner's dissociation; and(3) is not deemed to have had knowledge under Section 303(e) or noticeunder Section 704(c).(b) A dissociated partner is liable to the partnership for any damage causedto the partnership arising from an obligation incurred by the dissociatedpartner after dissociation for which the partnership is liable under subsection(a).

SECTION 703. DISSOCIATED PARTNER'S LIABILITY TO OTHERPERSONS.

(a) A partner's dissociation does not of itself discharge the partner's liabilityfor a partnership obligation incurred before dissociation. A dissociatedpartner is not liable for a partnership obligation incurred after dissociation,except as otherwise provided in subsection (b).(b) A partner who dissociates without resulting in a dissolution and windingup of the partnership business is liable as a partner to the other party in atransaction entered into by the partnership, or a surviving partnership under[Article] 9, within two years after the partner's dissociation, only if thepartner is liable for the obligation under Section 306 and at the time ofentering into the transaction the other party:

(1) reasonably believed that the dissociated partner was then a partner;(2) did not have notice of the partner's dissociation; and(3) is not deemed to have had knowledge under Section 303(e) or noticeunder Section 704(c).(c) By agreement with the partnership creditor and the partners continuingthe business, a dissociated partner may be released from liability for apartnership obligation.(d) A dissociated partner is released from liability for a partnership obligation

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if a partnership creditor, with notice of the partner's dissociation but withoutthe partner's consent, agrees to a material alteration in the nature or time ofpayment of a partnership obligation.

SECTION 704. STATEMENT OF DISSOCIATION.

(a) A dissociated partner or the partnership may file a statement of dissociation stating the nameof the partnership and that the partner is dissociated from the partnership.(b) A statement of dissociation is a limitation on the authority of a dissociated partner for thepurposes of Section 303(d) and (e).(c) For the purposes of Sections 702(a)(3) and 703(b)(3), a person not a partner is deemed tohave notice of the dissociation 90 days after the statement of dissociation is filed.

Article 8 Winding Up Partnership Business

RUPA 801 Events Causing Dissolution and Winding up ofPartnership Business

A partnership is dissolved, and its business must be wound up, only upon the occurrence of anyof the following events:(1) in a partnership at will, the partnership's having notice from a partner, other than a partnerwho is dissociated under Section 601(2) through (10), of that partner's express will to withdrawas a partner, or on a later date specified by the partner;(2) in a partnership for a definite term or particular undertaking:(i) within 90 days after a partner's dissociation by death or otherwise under Section 601(6)through (10) or wrongful dissociation under Section 602(b), the express will of at least half theremaining partners to winding up the partnership business, for which purpose a partner's rightfuldissociation under Section 602(b)(2)(i) is an expression of that partner's will to wind up thepartnership business;

(ii) the express will of all of the partners to wind up the partnership business; or(iii) the expiration of the term or the completion of the undertaking;(3) an event agreed to in the partnership agreement resulting in the winding up of the partnershipbusiness;(4) an event that makes it unlawful for all or substantially all of the business of the partnership tobe continued, but a cure of illegality within 90 days after notice to the partnership of the event iseffective retroactively to the date of the event for purposes of this section;(5) on application by a partner, a judicial determination that:(i) the economic purpose of the partnership is likely to be unreasonably frustrated;(ii) another partner has engaged in conduct relating to the partnership business which makes itnot reasonably practicable to carry on the business in partnership with that partner; or

(iii) it is not otherwise reasonably practicable to carry on the partnership business in conformitywith the partnership agreement; or(6) on application by a transferee of a partner's transferable interest, a judicial determination thatit is equitable to wind up the partnership business:(i) after the expiration of the term or completion of the undertaking, if the partnership was for adefinite term or particular undertaking at the time of the transfer or entry of the charging orderthat gave rise to the transfer; or(ii) at any time, if the partnership was a partnership at will at the time of the transfer or entry of

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the charging order that gave rise to the transfer.

RUPA 802 Partnership Continues After Dissolution

(a) Subject to subsection (b), a partnership continues after dissolution only for the purpose ofwinding up its business. The partnership is terminated when the winding up of its business is

completed.(b) At any time after the dissolution of a partnership and before the winding up of its business iscompleted, all of the partners, including any dissociating partner other than a wrongfullydissociating partner, may waive the right to have the partnership's business wound up and thepartnership terminated.In that event:(1) the partnership resumes carrying on its business as if dissolution had never occurred, and anyliability incurred by the partnership or a partner after the dissolution and before the waiver isdetermined as if dissolution had never occurred; and(2) the rights of a third party accruing under Section 804(1) or arising out of conduct in relianceon the dissolution before the third party knew or received a notification of the waiver may not be

adversely affected.

RUPA 803 Right to Wind Up Partnership Business

(a) After dissolution, a partner who has not wrongfully dissociated may participate in winding upthe partnership's business, but on application of any partner, partner's legal representative, ortransferee, the [designate the appropriate court], for good cause shown, may order judicialsupervision of the winding up.(b) The legal representative of the last surviving partner may wind up a partnership's business.(c) A person winding up a partnership's business may preserve the partnership business orproperty as a going concern for a reasonable time, prosecute and defend actions and proceedings,whether civil, criminal, or administrative, settle and close the partnership's business, dispose of

and transfer the partnership's property, discharge the partnership's liabilities, distribute the assetsof the partnership pursuant to Section 807, settle disputes by mediation or arbitration, andperform other necessary acts.

Page v. Page

A partnership may be dissolved by the express will of any partner if the partnership agreementspecifies no definite term or particular undertaking- Distinguish from Meinhard no exclusivity of control of the information (equal participants

in the business); Pship agreement was at the end and then he was looking to compete;bargaining powers of the brothers is equal to build a new business

Prentiss v. SheffelUpon dissolution of a partnership, a former partner may bid on the partnership assets at a judicialsale- Court held that it was ok because no wrongful purpose and D failed to prove harm

Kovick v. Reed

Joint adventurer is not entitled to recover from lost capital from another who invested his labor,each loses what they contribute

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Important because it stands for the minority rule; rejected in the RUPA 401(f)

UPA/RUPA apply once a partnership is formed, even if accidental

How do you apportion loses when one party contribute labor and the other contributescapital?

Each loses what they contributed and applies because Reed did not contribute a penny of

capital

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1933 SECURITIES ACT

Deals with Original Issue of Stock

RULE 11 OMISSIONS AND MISSTATEMENTS IN THE REGISTRATION

STATEMENTDs: Signer of Registration, Accountants, Attorneys, etc. who prepared it (BarChris)

Defenses: Due Diligence/Reasonable Reliance or Negative Causation

RULE 12 INVOLVES MATERIAL OMISSIONS AND MISSTATEMENT IN THE

PROSPECTUS

Ds: Sellers (broker, dealers, & other soliciting offers to purchase (Pinter)

Defenses: Not Material

Registration Requirements- Every non-exempt issuer must file a registration statement- Issuer may on sell securities after SEC allows registration to become effective- SEC does a facial review of all registrations

Doran v. Petroleum Management Corp. Offerees need to access to information in order toevaluate LP interest

Registration Statements

Detailed disclosure of financial structure of the security and risks factors

Exemptions from 33 Registration Requirements- Private placement no more than $1M- Private placement no more than $5M if sold to 35 or fewer buyers- Private placement more than $5M if sold to 35 or fewer sophisticated buyers

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1934 EXCHANGE ACT

Deals with Secondary Market Transactions

RULE 10B -- MATERIAL MISSTATEMENTS/OMISSIONS INVOLVING SALE OR

PURCHASE OF A SECURITY

It shall be unlawful for any person, directly or indirectly, by the use of any means orinstrumentality of interstate commerce or of the mails, or of any facility of any national securitiesexchange--***

(b) To use or employ, in connection with the purchase or sale of any security registered on anational securities exchange or any security not so registered, *** any manipulative or deceptivedevice or contrivance in contravention of such rules and regulations as the Commission mayprescribe as necessary or appropriate in the public interest or for the protection of investors.

10b-5 Cause of Action Elements- Misrepresentation or omission- Of Material Fact- Made with Scienter (knowing intent to deceive)- Upon which plaintiffreasonably, detrimentally relied (FOTM)- Causing (FOTM)- Actual DamagesFOTM applies to reliance in class action suitsKowal v. MCI Comm. Corp.

Omissions as False Statements

- Special relationship (Chiarella)- Duty to Update

Materiality

An omitted fact is material if there is substantial likelihood that a reasonable shareholder wouldconsider it important on how to vote, does not have to change their decision (TSC/Basic)

Fraud-On-The-Market Theory

- Efficient market- Misleading statements will defraud buyers/sellers- Even if they do not directly rely on the statements

Defenses

- Any showing severing the link and price paid/received- Truth in the market

INSIDER TRADING

Corporate Insider who is in possession of material non-public information must disclose theinformation before trading on it.

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Tippee Liability (Dirks)- The tipper violates a fiduciary duty to firms SHs in giving the tip; and- The tippee knew or should have known of that breach

Howey Test- Investment- In a common enterprise- For a profits- From work of third party

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SARBANESOXLEY ACT OF 2002

Applies to publicly traded corporations

General provisions:

- Auditor independence- Audit committees of outside, disinterested directors- Prohibition on loans to corporation insiders- Certification of financial reports- Accountant and attorney professional standards- Required monitoring systems to detect corporate fraud- Compensation not directly regulated

- Executive prohibited from trading during blackout periods

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LIMITATION ON DIRECTORS LIABILITY

Breaches of Duty of CareUnnecessary expenses and legal fees

DELAWARE 102(B)7 CONTENTS OF CERTIFICATION OF INCORPORATION

Limit liability of a director to the corporation or its stockholders for monetary damage for breachof fiduciary duty as a director, provided that such provision shall not eliminate or limit theliability of a director:i for any breach of the directors duty of loyalty to the corporation or its stockholdersii for acts or omissions not in good faith or which involve intentional misconduct orknowing violation of the lawiiiiv for any transaction from which the director derived an improper personal benefit

Business Judgment Rule Criteria- Informed- Good faith- Rational- Independent

RIGHT TO INDEMNIFICATION

Del. 145

(a) good faith(c) provides for indemnification on merits or otherwise (Waltuch)(e) may advance fees (Citadel)

(f) permits broader indemnification; must be consistent(g) permits insurance for indemnification

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DYNAMICS OF SHAREHOLDER VOTING

Limited Number of Matters

- Elect directors- Fundamental transactions

PROXY

Proxy Process

- Board sets date of annual meeting- Board fixes record date- Board selects its preferred slate of directors/issues- Proxy solicitations are drafted and filed wit SEC- SEC reviews solicitations

- Must fully disclose major issues- Identification of shareholders

- Mailing of solicitations

Rosenfeld reimbursed proxy fees control v. policy

Proxy Fraud

14(a) of 1934 Exchange Act

- Misrepresentation or misleading omission (Borak)- Material fact (Mills)- In a proxy solicitation- Causing

- Damages

DEL. 149(A) PROXY SOLICITATION

SHAREHOLDER PROPOSALS GROUNDS FOR OMISSION

Section 14a of 1934 Exchange Act

Rule14a-8(i)(1) Test for propriety (SEC v. Transamerica)Rule14a-8(i)(2)Rule14a-8(i)(3) Proposal violate proxy rulesRule14a-8(i)(4) Proposal contains personal grief (Austin v. Con Edison)Rule14a-8(i)(5) Proposal not signif. (5%) related to companys business (Lovenheim pate)Rule14a-8(c)(6) Matter beyond firms control (Dole health care system)Rule14a-8(c)(12) Submitted prior without much support

Proxy Solicitations Absent Single Majority Shareholder

Looking proxy solicitations, if there is no single majority shareholder (such as the problem onpage 555), does finding materiality automatically get causation (like the Supreme Court said in

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Mills)?This question focuses on the issue left open in Mills -- the Mills materiality standard focuses onwhether the defect in the proxy solicitation "has a significant propensity to affect the votingprocess." This satisfies the causation element as well if plaintiffs can show the defective proxy

solicitation was an essential link in accomplishing the transaction.The Supreme Court, in Virginia Bankshares, followed this analysis further. In VB, an 85%shareholder solicited proxies to approve a merger despite having no obligation to do so (theshareholder had more than enough shares to cause the merger regardless of what the minoritywanted). The proxy was allegedly defective. The Court held that even if the allegedly misleadingstatement were material, there would be no causation because the proxy solicitation was notnecessary or essential to accomplishing the merger.

Del. 141(a)- Corporation shall be managed by the BoD, not the SHs

- Decisions must be informed, good faith, and disinterested- Protected by BJR

SHAREHOLDER INSPECTION RIGHTS

Shareholders have a right to inspect corporate books and records

By Right

- Articles of Incorporation- Bylaws- Board Minutes

- Corporate financial records- Shareholder lists- Other corp. records, that affect the shareholders interest

By Demand Del 220

- Other Documents- Shareholders Lists

- Written demand under oath stating proper purpose (Pillsbury v. Honeywell)- By stockholder of record (Sadler v. NCR)

Shareholders bears the burden for showing proper purpose for other documents.

Corporation bears the burden for showing proper purpose for SH lists

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CLOSELY HELD CORPORATIONS

VOTING

Voting pools (Ringling Bros./Estrada)

Sterilizing the Board (Clark v. Dodge, two SH/pharmas)

ABUSE OF CONTROL

Control Devices are Key

- Stock classes with varying voting power (Stroh; Stuparich)- Super-majority voting requirements (Smith v. Atlantic Properties)- Prohibition on director interference with shareholder voting (SWIB)- Cumulative voting (Ringling Bros.)- Class voting for director slots- Voting trust

- Irrevocable proxies- Vote pooling agreements (Ringling, Clark)- Shareholder agreements (Ramos)- Forced sale agreements (Jordan)- Transfer restrictions

- Prohibition on transfer- Right of first refusal- Valuation provisions and formulae

- Sale on death, bankruptcy, or incompetence

Fiduciary Duties Between Shareholders in Close Corps.

Two Approaches:

Massachusetts like partners owe each other fiduciary duty of loyalty, good faith, & candor(Wilkes; Donahue; Smith)Delaware no fiduciary duties owed, bargain for protection (Nixon)

Freeze Outs

Majority or control group uses control to force out minority on disadvantageous terms(Sugarman)

Massachusetts Test for Freeze Out

1. Minority pleads and proves prima facia case of breach of duty ofgood faith2. Control group must demonstrate a legitimate business purpose3. Minority must then show a less harmful alternative

Deadlocked Shareholders (Smith v. Atlantic Properties)

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Delaware Standard for Shareholders Fiduciary Duty

Nixon bargain before buyingJordan v. Duff & Phelps Fiduciary duty to disclose merger or abstain from trading; OmissionDuty to Speak because of special relationship with employee

Exit Mechanisms in Close Corporations

- Articles or bylaw provisions- Involuntary dissolution under statute (Alaska Plastics, divorce)- Appraisal rights in merger, sales of all/substantially all assets or de facto merger- Equitable remedies for breach of fiduciary duty by majority to minority (Pedro v. Pedro,

Stuparich (whiny slacker twins)

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TRANSFER OF CONTROL

TWO ISSUES CONTROL PREMIUM AND SALE OF CORPORATE OFFICES

(1) Payment of control premium.- Why does it exist?

o Majority share.o Control share.

o When might a majority not give control? (Smith v. Atlantic Properties)

- When does the controlling shareholder keep the premium?- When do minority shareholders share in the premium.- Sale to looters. (cf. Perlman)(2) Sale of corporate offices- Distinguish from sale of stock (Essex)- Staggered boards versus classified boards (Essex)

Sale of Corporate Assets

Frandsen v. Jensen-Sundquist Agency, Inc.Sale of a corporate asset does not trigger right of first refusal, unlike a merger- Merger: target shareholders get cash or other value and target is extinguished.- Sale of assets: target shareholders remain but get cash or other value; acquiror walks with the

asset.

Minority Shareholders Entitled to Protection from Abuse, NotControl Premium

Zetlin v. Hanson HoldingsThose who invest the capital necessary to acquire a dominant position in the ownership of acorporation have the right of controlling that corporation, it has long been settled law that, absent

looting of the corporate assets, conversion of a corporate opportunity, fraud or other acts of badfaith, a controlling shareholder is free to sell . . . that controlling interest at a premium price . . .- Minority shareholders are entitled to protection from abuse, not sharing in a control premium

for which they did not pay.

Sale of Assets to Create a Control Premium

Perlman v. FeldmannWhen is a minority SH entitled to share in control premiums- Feldmanns $3 premium over book included two components:- Ordinary control premium hes allowed to sell this.

- Ability to control allocation of steel in a tight market (Korean War) appropriation ofcorporate opportunity.

- Newport could have used higher profits to expand business and penetrate other markets.- Could have consolidated local market.

Selling Corporate Offices as Part of Control Premium

Essex Universal Corp. v. Yates

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When buying controlling interest is demanding seats on the board as part of the transactionillegal- Yates owns 28% of Republic, agrees to sell to Essex (at premium).- Sale agreement requires Yates to have board members resign one at a time while the other

board members replaced them with Essex nominees.

- Yates tries to back out claiming it would be illegal to deliver the Essex dominated boardrequired by the sale agreement.

CORPORATE COMBINATIONS

1. MBCA & de facto mergers

- Current MBCA (enacted 1999 & adopted by a growing number of states) attempts to provideshareholders with appraisal and voting rights regardless of how the transaction is structured.

- In other words, current MBCA replicates the de facto merger doctrine discussed in Farris.

2. Voting & Appraisal rights in Corp. Combinations

Many of the issues in corporate combination law revolve around the rights of shareholders inboth the target and the acquirer to vote on the combination and force their corporation to buy outtheir shares at a (hopefully higher) fair market value.- Voting rights- Appraisal rights

3. How a corporate combination occurs

Initial contactHow initiated (informal, open, secret, in-play, market test) Compare Essex v. Yates andSmith v. VanGorkom

Negotiations (due diligence & valuations)

Merger AgreementBoard approval- Fiduciary duties apply to ensure boards are protecting shareholders.

o Note countervailing incentives of boards

What happened to the Glen Alden board and management?

Employed/ retained by new entity.

Major concern that target board/management gives away targetshareholder value so management can retain positions in new entity.

Fiduciary out clauseShareholder approval (Remember: shareholders get to vote)1. Fundamental change in corporation structure/governance (change to articles, dissolution sale

of substantially all assets)2. Directors3. Shareholder proposalsConsummation

4. Appraisal Rights What are they?

When a corporation combines with another so as to lose its essential nature and alter theoriginal fundamental relationships of the shareholders among themselves and to the corporation,

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a shareholder who does not wish to continue his membership therein may treat his membershipin the original corporation as terminated and have the value of his shares paid to him . . .What triggers a minority shareholders appraisal rights?

- MBCA (1999): merger, short form merger, sale of assets, some charter amendments- Del 262: merger, short form merger

o

Delaware does not provide appraisal rights for a sale of assets.Who gets appraisal?

1. Merger MBCA Shareholders of Target entitled to voteDel 262 All shareholders of Target, usually Acquiror shareholders unless:1. Whale-minnow merger (Farris) or2. Market out (p.715) under present Delaware law, appraisal is not available if theshares relinquished are (i) listed on a national securities exchange or (ii) held of record by morethan 2000 stockholders and if the shares received have similar characteristics (e.g. voting anddividend rights). Del. 262(b)(1).2. Short form merger

Shareholders ofsubsidiary only3. Sale of assetsMBCA shareholders ofseller onlyDel No appraisal rights

5. Appraisal Procedure (Del)

1. Dissenting shareholders must(a) give written notice of intent to dissent before shareholders meeting;(b) must vote against proposed transaction.2. Corporation must notify dissenting shareholders of their appraisal rights.3. Dissenters must tender share to corporation and demand payment.

4. Dissenters must then sue for appraisal.5. Dissenters bear all then costs and only receive payment after final order.

6. Types of Corporate combinations

- Statutory merger- Triangular merger- Sale of Assets / Asset Acquisition

7. De Facto merger

De Facto Merger Doctrine

Farris v. Glen Alden Corp.de facto merger doctrineP:

(1) This transaction, despite being structured as a purchase of 100% of list assets for a 75%interest in GA, is really a merger.(2) If the transaction is really a merger (a de facto merger) then it was required to satisfy thestatutory standards for mergers:(a) Proxy solicitation defective (14 and Rule 14a-9)

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(b) GA shareholders had a right of dissent/appraisalD:

311 and 908 explicitly provide for these transactions and do not permit appraisal:

Del. 311 Sale or Merger

311 The shareholders of a business corporation which acquires by sale . . . Or exchange all orsubstantially all of the property of another corporation by the issuance of stock, securities orotherwise shall not be entitled to the rights and remedies of dissenting shareholders.

908 The right of dissenting shareholders . . . shall not apply to the purchase by a corporation ofassets whether or not the consideration therefore be money shares or bonds or other evidences ofindebtedness of such corporation. The shareholders of such corporation shall have no right ofdissent from any such purchase.Ct:(1) Legislature couldnt have really meant it (just a committee report).

Activist court. No evidence that legislature intended the same thing as the committee thatdrafted the legislation.Huh?(2) This transaction is different because here the minnow (GA) is swallowing the whale(List).(3) Its still a de facto merger.

Standard for de facto merger.

(1) Look to both terms of agreement and to consequences of the transaction and to thepurposes of the provisions of corporate law said to be applicable.(2) [Ignore every explicit statutory provision permitting the corporation to structure a

transaction to avoid appraisal rights](3) Where steps (1) & (2) show that the transaction would so fundamentally change thecorporate character . . . and the interest of the plaintiff as a shareholder therein . . .

Hariton v. Arco Electric Inc.Equal Dignity Doctrine choose whichever form of transaction

Sale of assets & dissolution of seller ( 271 & 275)OrStatutory Merger ( 251)

Freeze-out mergers

o

Also known as squeeze-out mergerso Freeze-out mergers are a tool for a controlling shareholder to gain 100% ownership and

get rid of the minority shareholders.

Weinberger v. UOPThe plaintiff in a suit challenging a cash-out merger must allege specific acts of fraud,misrepresentation, or other items of misconduct to demonstrate the unfairness of the mergerterms to the minority.

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- Board member were on both sides of a deal, kept information from target board members,intended to reap benefits (acquiror)

Delaware test for freeze-out mergers

- Entire fairness

o Fair dealing + fair priceo Duty of loyalty:

Director (individually or through another entity she controls) may notengage in self-interested transactions with the corporation or itsshareholders unless:

(1) Directors self interest is fully disclosed to, and approved by, amajority of disinterested directors or if required shareholders, and/or

(2) Transaction is entirely fair to corporation / shareholders at time ofexecution.

and/or almost all statutes and judicial standards use the disjunctive,but almost al courts hold that proper approval or ratification merely shifts

the burden to the plaintiff to prove that the transaction was not fair,making the conjunctive more accurate.

- Burden shiftingo Fair dealing

o Fair price

Valuation methods.

Majority Shareholder Duties

Distinguish Massachusetts shareholder fiduciary dutiesCoggins duty of loyalty & good faith by virtue of being majority shareholder

Delaware no-shareholder fiduciary dutiesWeinberger duty of loyalty & good faith by virtue of being director

Fairness Test for Mergers

CogginsPlaintiffs hold non-voting stock

o fairness test

(a) merger was for legitimate business purpose, and(b) that considering the totality of the circumstances it was fair to the minority

Delaware courts hold that a business purpose relating to the majority shareholders business wassufficient.

Doctrine of Independent Legal Significance

RauchDoctrine of Independent Legal Significance --HaritonRCA/GE merger did not trigger the buyout clauseRauch argues de facto merger, merger would not likely happen with a high buyout price

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TAKEOVERS

Takeovers occur 2 ways:

- Buy stock - Negotiate deal with managers

o Tender Offer

o Negotiated acquisition

- Acquiror indifferent to form of transaction- Managers incentives to maintain control or sell out at high price.- Takeover law is aimed at counteracting those negative agency incentives.

Voting rights of non-voting preferred stock

Statutory rightso Amendment of articles of incorporation will adversely affect or alter the structure or

rights of preferred shares. (non-Del)o Del. 151(a) requires all rights of preferred stock to be expressly stated in articles of

incorporation and courts will not imply voting rights where they are not specified.Contractual Voting Rights stated in Articles

o Amendment to articles adversely affects preferred stock

o Merger, reorganization, sale of assets

o Non-payment of dividends to preferred for a specified period

o Dividend preference

o Liquidation preference

Outline of director duties in takeover context

o Pre-bid

o

Defensive measures adopted in a decision by the board before a hostile bid.o BJR

o Responses to bid

o Defensive measures

o Put company in play

o Unocal

o Revlon

o Actions while company is in play

o Revlon

o Paramount

Structure of tender offero Open market acquisitions up to 5%

o Schedule 13D filing concurrent with tender offer

o One-step / single tier / single stage

o Two-tier

o Front-end & back end equal:

o I will buy any shares tendered for $x until I receive tenders for 51% of shares.

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After buying 51%, I will cause co. to merge and remaining target shareholderswill get $x in back end of merger.

o Front-end loaded

Tender offer to buy 51% for $x/share, promise to cash out remainingshareholders at $x-$y/share on back end.

Coercive.Basic Delaware cases:

Unocal:-- Enhanced BJR for defenses adopted in response to unsolicited offer.

Moran: upholds poison pills that discriminate against acquiror

Revlon:-- Maximize shareholder value if company is in play. Triggered by board decision to putcompany in play or effect a change in control. At that point, boards only duty is to maximize

shareholder value and must ignore other constituencies.o Many state statutes (not Del.) expressly permit the board to consider other constituencies

Paramount v. Time Warner:-- corporate combination in effect and to achieve long-term corporate goals does not triggerRevlon. Unocal EBJR applies.

Paramount v. QVC: total loser Paramount nearly screws up again. Paramount loses case but ultimately wins thewar. Rule: once company is in play, the target board cannot incur contractual duty to prefer onebidder over another in violation of its fiduciary duties.

Unitrin v. American General:-- board may adopt any defensive measure within the range of reasonableness so long as it isnot draconian.

Defensive measures:

Poison pills (Shareholder rights plans)- Flip in provision (right to buy target shares at half price upon triggering event)- Flip over provision (right to buy acquiror shares at half price upon back end merger)- Redemption of pillsCorporate machinery

- Staggered board- Good cause requirement for director removal- Supermajority voting requirementsCorporate restructuring- Finance extraordinary dividend with debt (eliminate overcapitalization)White knight / defensive mergers / lock upsPac man Its so crazy that it just might work. Not so much.Crown Jewels, self-tenders, leveraged recapitalizations & other scorched earth actions

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Issuance of stock to Employee Stock Ownership PlanGreenmailDel 203 (statutory protection on back-end mergers)Golden Parachute / Employment AgreementsAcquire competing company to create antitrust problems

Interfere with acquirors financing

Cheff v. Mathes- Corporations are allowed to selectively discriminate SHs- Analagous to proxy fight- Director did perform an analysis of potential acquiror

Duty to Protect Shareholders in Takeover Bid (thru corp.)

UnocalRule:(1) Del 141(a) requires board to man

Business Enterprises Cheat Sheet

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