users.wfu.edu · Web viewEarlier Cases - both involve state laws a. Belloti (1978) - Cs can spend $...

BusOrg – Palmiter (Fall 2012)Module II Notes (chapters 3-5)

Linda Boss NOTES – 9/4/12

Corporate History (see Slide 2)o In order to understand corporate law, it’s important to know

corporate law history, because it’s the origin of the tension between federal and state governments, and public vs. private law.

o Corporate history mirrors US history somewhato Dartmouth College Case

Supreme Court determines whether corporation set up by charter is a product of private law or public institution

Court decides it’s a little bit of both. o 1830s: General incorporation statutes ariseo 1890: Sherman Antitrust Act: first federal intervention in state

corporate law. o 1899: Delaware steps in when NJ gets a little tight with corporate law;

wins “race of laxity”o 1933-34: federal disclosure/fiduciary rules arise. o 1980s: Takeover wave.

Response to conglomerates (one company in diverse industries)

Broken up – corporations become more focusedo 2002: Sarbanes-Oxley Act: Congress regulates again: corporate

governance aspects of the state law. Internal Affairs Doctrine

o The key element of US corporate law Most countries don’t have this rule We allow this: focus on private ordering.

o United States says that we leave corporate law to the states; the state where the corporation is incorporated is the law that governs the internal affairs of the corporation

o This allows for consistency; ease of planning corporate structure and making business decisions.

Effect of internal affairs doctrineo States are left competing for corporations to “come to” their state

(that is, file their incorporation papers and pay fees)o This is known as the “race of laxity”o Delaware ‘wins’ over time, being the most flexible and easiest state to

incorporate in with arguably the best corporate law for businesses (management and shareholders).

Quiz Notes (see Slides 5-6)


o 1. Corporations are artificial beings created by and modifiable by the legislature AND contracts that cannot be unilaterally amended by the legislature

o 2. False. However, corporations can be subject to legislative TERMSo 3. B. The reservation of rights gives the legislature the power to

amend or appeal the corporate act at any time and all domestic corporations will be subject to any amendment of repeal.

o 4. True: early state legislative enactments said that corporations could only do one specific thing based upon the charters given.

o 5. A. New Jersey allowed a corporation to have different subsidiaries operating in other states. This created the ability for great corporate power. Ultimately, Woodrow Wilson thought this was a bad idea and created more regulation. This opened the door for Delaware.

The derivative suit began in late 1800s (Massachusetts was home of corporate law principles) and was the creation of a court of equity

In the 1960s-70s, shareholders could get rid of board of directors.

o 6. True. o 7. True. o 8. A. It’s not B because of the business judgment rule.

Foreign Corporations and how regulated (see Slide 8)o Contract/tort law is governed by law of the state where the events

occurredo Internal affairs are governed by the law of the state where the

corporation is incorporated. Pseudo-foreign Corporate Law

o Pseudo-foreign corporation is where you are incorporated in another state, but all of your headquarters, offices, employees, shareholders, directors are in a different (same) state.

o Debatable whether this choice of law rule is constitutional

Linda BossNOTES – 9/5/12

Vertical Federalism: Federal View of Corporate Lawo The company is always going to be subject to federal law despite

where it’s incorporated. o Question is whether federal law exists, or in its absence federal law

has deferred to state McDermott v. Lewis (see slides 10-11)

o After the recapitalization, the shareholders who would have been subject to DE law are now subject to Panamanian law – which allows parent corporation’s voting shares to be held by subsidiary.


o Thereafter, the parent corporation (its Board controlling the vote) owns 10% of the DE subsidiary, and basically has these shares in its pocket. Too much power. This is illegal in DE due to this problem.

o It’s legal in Panama. o The corporation is incorporated in Panama; internal affairs doctrine

says that law is the law that governs internal affairs; it’s OK and the DE court isn’t going to stop it, even though it’s illegal in DE.

o DE would rather keep the internal affairs doctrine stable than uphold its own law. Creates flexibility so corporations still want to come to Delaware. It creates revenue/income for Delaware.

Constitution and Internal Affairs Doctrine (see Slide 12)o Due process and commerce clause create constitutional

considerations w/ regards to the internal affairs doctrineo Same issue w/ full faith and credit clause

Pseudo-Foreign Corporations (see Slide 13)o There are very few cases where the internal affairs doctrine doesn’t

appear to be fully recognized. o Wilson

CA requires cumulative voting; UT allows straight voting Cumulative voting: You can take all your votes and put

all your votes for one person on the Board. Helps minority representation. You’re guaranteed (if you have enough shares) one Board member mathematically.

Straight voting: Every board position is determined by a separate majority vote. You’ll be outvoted every single time.

UT corporation which does all business in CA; all shareholders in CA, etc.

CA said no due process issue b/c it applies only to pseudo-foreign corporations. You know where the center of gravity is; only one state can be center of gravity; so there’s no inconsistency or different outcome issues.

o Vantage Venture Partners Delaware gets a similar case. CA requires separate class voting; DE has single class voting. Opposite result from Wilson. DE says you have to go w/

internal affairs doctrine despite being pseudo-foreign corporation.

o Reconcile the cases (see Slide 14) Delaware likes internal affairs doctrine; CA likes regulating its

people. Delaware respects artificial entities. Delaware could be writing for public corporations; whereas CA

is writing for smaller corporations.


CA might say there are exceptions and different regulations depending.

Dates are very different. Not a common conflict. CA says no constitution problems; DE says they’re bound by

the constitution to respect the internal affairs of the corporation.

Takeover Waves & Statutes (see Slides 17-19)o 1st generation statutes: response to hostile takeovers. Requiring

“fairness” reviews. Takeovers must be a fair price to shareholders. Edgar v. MITE: can’t do that. Shareholders decide what’s fair,

not the state statute. Violates commerce clause by imposing limits on free trade of shares in control markets.

o 2nd generation statutes: Indiana passes law regulating domestic corporations within the state that are incorporated in the state.

CTS v. Dynamics: Court says this is constitutional States have always regulated their domestic affairs

o 3rd generation: you can’t merge w/ a company for 2 years if you acquire a company: merger moratorium

Wisconsin/Delaware have these laws. The law is a little corrupt: it protects the board Judge Easterbrook says yes, it’s dumb and corrupt, but it’s

constitutional so he can’t change it. States will change these statutes when they learn corporations

are leaving because of them. “Incorporation-Based Private Ordering” (see Slide 22)

o incorporation-based; where you file your piece of papero private ordering: corporation orders relationship between

management and shareholders; balance relationship themselves. o “race of laxity”: laxity isn’t bad. It’s just flexible. Shareholders and

boards may both like this system. Why Delaware is “winning” the race? (see Slide 22-24)

o Delaware’s statute is amended frequently, but only w/ 2/3 vote from legislature. Not easy to amend.

o Bar committee on corporate law recommends amendments to statute, which legislature agrees w/ usually because they’re experts.

o Delaware’s Chancery court has judges that are experts in corporate law; they hear cases without a jury and they hear them FAST

o Decisions go right to supreme court if appealed. o Corporations choose Delaware because they know exactly where they

stand and what they’ll get. That’s why it’s more than the statute; it’s the whole system.

Debate: Two scholars disagree as to whether this is a good system


o one thinks Delaware is screwing the shareholders over; other thinks that Shareholders wouldn’t put up with Delaware doing this, they would just leave if it was that bad.

o Other theory: ‘vertical corporate federalism’: Delaware responds to pressure from the Feds. DE keeps corporate law modern and balanced. If there’s a hint Fed is going to step in and do something, DE responds quickly and says they’ll handle it.

DE isn’t competing against other states, it’s trying to keep the Feds out.


The purpose of the corporationo This is tone of doing business, treating shareholders

Will not find in corporation’s papers first: Modern articles, bylaws do not identify corporate purpose

Sam’s Club vs. CostCo (compare “feel” in stores)o Ford Motor Case

Does a corporation serve a number of constituencies or only the shareholders?

Ford is extremely charitable w/ regards to his company and how it is run: couple shareholders are upset about his long term plan to expand the corporation and withhold special dividends to implement these plans.

Dividend Challenge Supreme Court says the purpose of the corporation is to

maximize profits for shareholders Orders Ford to pay the special dividends

Vertical integration challenge Supreme Court uses BJR to say that they can’t stop Ford

from implementing his plan to expand his business Supreme Court says “judges are not business experts” Ford has proven he’s capable of running a successful

company; they’re not going to make judgment calls for him.

Reconcile the two decisions: Look at the parties; Dodge brothers are a direct

competitor Ford had a bit of a monopoly. Could play into decision.

o Other constituency statutes (see Slide 13) These statutes say that BJR may include lots of considerations ‘best interest of corporation’ could include more than

maximizing shareholder wealth.


Can consider effect on employees, creditors, societal implications, environment, communities, etc.

Long term vs. short term plans: both are OK. ‘other pertinent factors’: catchall phrases. MAY is the keyword: nobody HAS to include these

considerations under BJR.



Dodge v. Ford Motor Recapo The BJR is not going to protect the business when you are withholding

from your shareholders or investors. o Black letter law on paying out dividends: Board has discretion, unless

using wrong reasons. can’t withhold for mostly charitable reasonso What do you learn: Always say “I am maximizing shareholder value

by…” and then say what you’re going to do with the dividends you’re withholding and reinvesting in the company

o If you have a plausible reason why withholding dividends will increase shareholder wealth, you’re golden in court. BJR.

o {notes do not include lessons from case for (1) corporate lawyering and (2) role of judges in guiding corporations’ role in society

Corporate Charityo Legality

ALI Principles says you can give away money as a corporation. This is not law, though.

MBCA § 3.02(13): A corporation can make donations for the public welfare or for charitable, scientific, or educational purposes.

Statutorily within the corporation’s power to give away money. IRS § 170: Charitable contributions & gifts

IRS penalizes if you give away more than 10% of your taxable income. After that, you cannot deduct.

Theodora Holding Corp. Where does the judge get this ‘reasonableness’ notion?

He makes it up. Makes up limitations on the corporation. The corporation is the product of the judicial mind

IRS code is a useful guidelines w/ regards to reasonable. o Propriety/Fiduciary Duties

Armand Hammer Case Sets up a museum in his name to house his things; uses

corporate money. Court says within fiduciary duties. Not unreasonable.

Delaware court says shareholders, if you don’t like it, do your job and get him out of there.

Could plausibly maximize shareholder wealth; public museum and business publicity

Unless it’s obvious you’re putting money in your personal pocket and helping only yourself, court will likely say ‘reasonable’


o Shareholder Role Shareholders don’t really have any say in whether corporation

can give to charities and what amount and to whom This is accepted as part of the corporate landscape

Your role as a lawyer in the corporationo Marketplace Theory

Justice Potter Stewart As a lawyer, you’re bound to tell the client about the law, the

repercussion of not following the law, and letting your client make any ethical or moral judgments.

o Independence Theory Chancellor Bill Allen As a lawyer, you have to have your own moral bearing. You are

an independent actor. You can leave and not go along with anything you think is unethical. You are a human and legal counselor.

o Interdependence Theory Professor Richard Painter As a lawyer, you should consider yourself part of a decision

making team and stay involved, even if judgments are being made you wouldn’t ethically or morally agree with.

Try to change everyone’s mind.


← Mary Wolfe← NOTES – 9/11/12


←← Exogen hypo discussion:

Is it lawyer’s role to be giving business advice? Cost-benefit analysis

o Liability v. savings from using solvent o PR

Importance of being inside v. outside counsel - how does this impact role?

←← Corporate Political Action

Citizens United reflects divided SCOTUS Argued as a narrow case – Souter believed court had political agenda 2 important lines of cases:

o Bellottio Austin – decided 6-3 in 1990

What was SCOTUS understanding of corporation? o Creature of state law o Person: natural rights o Contractual arrangement

“Don’t worry about the rich; they’ll take care of themselves. They always have” – Truman

o money finds a way of doing what it wants (w/ good lawyers) Tillman Act – 2 USC § 441b (1907)


o a) in general unlawful for corporation to make contribution or expenditure in connection w/ any federal or primary election

Contribution: direct donation to candidate Expenditure: indirect support

o Why are expenditures different? Less possibility of corruption If contributions, pays for travel, staff, ability to produce ads,

etc. greater possibility of quid pro quo o Bans campaign contributions by banks, corps., or labor unions

Extends to officers and directors Exception to limited liability

o Pushed through by investors (shareholders) to prevent corporate corruption

Decreases profits May support politicians shareholders don’t support Managers using for private purposes

Fed. Election Campaign Act (FECA) (1974)o Caps on individuals, parties, PACs o But permits corporate giving

“soft money” contributions to political parties (voter registration, issue ads)

Corporate PACS that solicit voluntary contributions for SH’s, Ds, Os, Ees,

Issue ads and think tanks Corporate PACs can contribute to candidate / Disclosure

requirements Bipartisan Campaign Reform Act (2002)


o Limits “soft money” No giving by corporations, labor unions Caps individuals (now at $2500)

o Regulates ads that refer to candidates None by corporations 60 days before election 30 days before primary

The Precedent o First Nat’l Bank of Boston v. Bellotti (US 1978)

Referendum to increase tax rates on high-income people doesn’t actually affect bank

State prohibition against corporations and banks (and their PACS) speaking on referendum not related to business

Court finds ban unconstitutional; corporations are persons, can’t prevent speech because of identify (unless powerful reasons) Violation of 1st amendment – prevents corps. from doing this

Sh protection not enough of justification: corporate democracy protects SHs

Shareholders can vote out board Can sell stock Shareholder derivative suit breach of fiduciary

duty? NOTE: Politically active corporations may spend

too much time ingratiating selves w/ partyo Austin v. Michigan Chamber of Commerce (US 1990)

MI has law prohibiting corporations from contributing to local elections

Perfectly lawful to regulate corporate campaign contributions in elections & does not violate 1st amdmt

Concern for corruption / concern that large $ distorts political process

Corporations as state creatures so states can regulate them


←← Citizens United v. FEC ← Facts:

Citizens United is a non-profit corporationo Non-profit corp: has some kind of social purpose, get tax breaks,

w/e money earn goes back to interest claim to be public interest corporation

Created a documentary highly-critical of Clinton Speech by non-profit in form of documentary movie

← Issue: McCain-Feingold prevents movies like this being expressed 30 days before primary election

Narrow construction (non-electioneering, movie, non-profit)? Overrule Austin? Note:

o Individuals could do this o Groups could do this o Political NP could do this o Nonprofit (funded by for-profit corporations) cannot o For-profit corporations cannot

Citizens United eliminates fine distinctions b/w types of corporations o SCOTUS wants to make easy for law students

Chris EdwardsNOTES – 9/12/12


1. Two contradictory sources of precedent – pre CUa. Bellotti –can’t regulate speech due to identity of person (corporation). b. Austin – First amendment does not prohibit regulation of for profit

corporation that is giving money in support of state candidate. 2. Kennedy’s opinion as an attempt to simplify the law

a. Avoids the line drawing between political corporations, political corporations that get money from FP Corporations, and individuals collectivized as a corporation

b. To do so, SCOTUS redefines the issue in the case to overrule Austini. Fear of corporate money is not enough to justify corporate

rules. 3. Holding of CU

a. Any attempt to distinguish a speaker on the basis of its identity violates the first amendment.

i. Kennedy points out media exception as unfair to other corporations

b. Direct contributions are still not allowed – the anticorruption interest is still compelling. Accepts Buckley argument.

c. Independent Expenditures – “all people use money from the economic marketplace”

i. If the wealthy can buy a candidate, why shouldn’t wealthy corporations be able to do so?

ii. Not as direct as giving money to a campaign – no evidence that the corruption effect is the same here.

d. Disclosure requirementi. Corporations have to come forward and identify themselves

1. Only Thomas thinks that this chills speechii. Court says that this does not chill speech.

iii. Raises the question – can congress require corporations have a line item for their expenditures on political contributions.

e. Shareholder protection from speech


i. Kennedy says that shareholders can exercise exit rightsii. “procedures of corporate democracy”

1. Probably can’t amend the bylaws – usually for procedures and not for specific point

2. Shareholder could bring a derivative suit – it would more than likely be unsuccessful and lawyers rule 11 sanctioned.

4. How the justices see the corporationa. Kennedy – sees the corporation as a kind of a natural person.b. Roberts – the authorized spokesman of a corporation is a human –

corporation has the rights to speak through that human, just as a natural person

c. Scalia – corporations are a contractual arrangement – nexus of contracts in which shareholders delegate decisions to board/management. “That’s the deal.”

d. Stevens – corporations are a social construct – “creatures of law, not members of society.” This decision allows managers to use “other people’s money”.

5. Effectsa. Half of outside money in 2012 election was “dark money”

i. Twice as much as previous midterm cycleb. US Chamber of commerce is procorporation - largest dark money

spender. i. 6 of top 7 donors are dark.

6. End resulta. Corporations can give money to political corporationsb. Neither have to spendc. What’s the difference between a PAC and SuperPAC?

i. PACs are affiliated with corporationsii. SuperPACs are independent

d. SuperPACs existed before 2010 – but they became supercharged when corporations started to influx $$$


Citizens United wrap-up: good business decision to be politically involved? Most thought it was a good decision, but assumed so because everyone does

it. Think about whether a corporation should contribute? PACs remain subject to corporation PAC rules. Only funded by individuals. You still can’t make contributions to candidates.

Disclosure/Securities Laws Any disclosure has to be disclosed fully and honestly


How much are you involved? How much will it help the corporation and in what way?

You can keep quiet and not open this door to disclose fully and honestly. State law doesn’t require anything to be told to shareholders unless they

want to inspect the corporation’s ‘books’ and have a reason to do so. Corporate PACs

o No public contributionso Corporation affiliated

Campaign PACso Created when someone decides to run. Can be individually donated

to. Non-Corporate PACs

o Not affiliated w/ corporation. Individuals/public can donate. SuperPACs

o Unaffiliatedo Only exist for certain ideas or theories (campaigns that love animals,

e.g.)o Not subject to corporate/campaign PAC rules and responsibilitieso Disclosure says “paid for by [PAC]” (“Republican Governors for NC”)

Business Repercussions of political contributions Know your role as the legal counsel: provide a legal view of the issue and the

impact on shareholders. Do the shareholders want the corporation to donate politically?

Should you support both candidates? We already lobby—why not do this as well?

Take-away: Corporate donations aren’t kept secret. We already know.


Chris Edwards


9/4/12

Exam Format:← Finish Modules 1-4 by End of Sept. (midterm 1)

Set aside 2-3 days to pick up midterm Have determined amount of time / probably 50 ?’s over 90 minutes nothing but a number 2 pencil / closed book

← Modules 5-6, 10 by Late Oct., Early Nov. Self-scheduled again

← Module 7-9 before exams begin ← Final Exam

Open note 24-hour / Self-scheduled

←←← Corporate Federalism:

US corporate law history Internal affairs doctrine

o Regulation of foreign corp.o Choice of law rules


o Pseudo-foreign corp. Federal abstention “Race of laxity” – states over time fight to be more “open”

o DE wins race State that best anticipates ordering needs of corporations Particularly public corporations

o Race to bottom or top? ←← U.S. Corporate Law Timeline:

1800: State legislative special chartering o Dartmouth College case

SCOTUS resolves fundamental ?: is corporation a product of private law (K b/w parties) or public institution?

Yes. K and state created entity. o General incorporation statutes (1830s)

Submit articles of incorporation to become incorporated Subject to certain rules Limited to companies w/ big capital needs Eliminates corruption b/w businessmen and legislators

Campaign issue now – what should gov’s role in biz be? 1850:

o Sherman Anti-Trust Act (1890):


Robber baron era Federal intervention into corporations

o DE GCL (1899) NJ getting regulatory, so DE gets more lax to attract NYC corp. DE derives 25-30% of state revenues from incorporation fees

and franchise taxes 1900:

o Federal securities laws (1933, 1934) Fiduciary duties & disclosure rules in place not enough Centerpiece of FDR New Deal Public corp. have to disclose in ways specified by fed gov in

ways specified by fed gov Mandatory Spread t/o world

1950: o takeover wave (1980s)

changed way corporations organized in U.S. huge economic shift

2000o Sarbanes Oxley Act (2002)

Response to melt-down after dotcom bubble bursts Internal controls reform

←


← Corporation – Private Property or Social Institution? Dartmouth College v. Woodward:

o Facts: State wanted to take over Dartmouth, decide board of trustees. Board says self-perpetuating corporation.

o Issue: Interference by state of NH w/ K or something w/in state’s police powers?

o Holding (Marshall): Corporations are creatures of state law. Corporations are an understanding, K, b/w people who

formed corp. and state. Cannot change those Ks. Every state corporate statute begins w/ clause reserving power to amend

corporate statutes ←← Corporate Law Quiz: ← 1) Corporations are:

a) artificial beings created by and modifiable by legislature b) contracts that cannot be unilaterally amended

← 2) General corporations could only be formed by special legislative enactment until 1830s when NY enacted a GCL.

We <3 capitalists & entrepreneurs. Early general incorporation statutes had a lot of terms.

← 3) State corp. statutes can be amended (and thus change corp. rights) b/c of :← b) reservation of rights – see MCBA § 1.02

§ 1.02 Reservation of Power to Amend or Repeal The [name of state legislature] has power to amend or repeal all or part of this Act at any time and all domestic and foreign corporations subject to this Act are governed by the amendment or repeal.

Domestic corporation: incorporated w/in state’s jdxn. (domestic to state) Foreign corporation: incorporated w/out state’s jdxn. (incorporated outside

state)


← 4) Early corporate statutes distrusted corporate power – placing limits on corp. purposes, activities, and capitalization. – True ← 5) NJ passed the first “liberal” corporate law that:

a) allowed corporations to own stock in other corporations (permitting holding companies)

switch in ideology “liberal” is now conservative right o free market

derivative suit developed in courts of equity probably MA ← 6) NJ lost its “lead” to DE when NJ Gov. Woodrow Wilson re-regulated NJ corps. – True ← 7) The takeover wave of 1980s was a response to the “conglomeration” of the 1960s. – True

US emerging from post-oil embargo doldrums Correction of organization of large biz in US Instead of one co. having lots of diff things, seen more efficient for ea. co. to

focus on their section of market ← 8) Hedge funds (private investment pools – rich people & institutions) have been successful in pressuring managers to generate high returns for shareholders. Hedge funds rely on:

a) institutional investors (mutual funds and pension funds) to vote for their proposals

30% of Amer. capital held in institutional investment funds enlist support of other capitalists not B b/c of BJR

o BJR as huge barricade to successful lawsuit ←← Regulation of “foreign corporations”

Suppose a corp. is in biz or selling doughnuts o Inc. in DE


o Locates retail outlets in CA o HQ’d in NC o Gets capital from investors in FL

Suppose corp.: o Sells bad doughnuts in CA

Governed by CA b/c site of incident Tort law

o Prevents shareholders from voting in FL DE law governs Deed in NC, harm in FL Why should corp choose how their wrong is governed?

DPC Consistency Eliminates controversy re: choice of law

Internal affairs doctrine BUT FL may want to protect their investors

Pseudo-foreign corp. Unconstitutional?

Yes. Capitalist country. Certainty & predictability for management

trumps shareholder protections. In securities law, federal law preempts state law


←← Chris Edwards

← 9/5/12 ←← Internal Affairs Doctrine

Federal courts have essentially left to states EXCEPT where Congress acts State law as a product sold to corporations Internal affairs doctrine : whatever state corporation is incorporated in, that

state law governs internal affairs o Internal affairs are relationships among officers, directors,

shareholders, etc. Foreign corporation: how do they do business in U.S.?

o Has to register in state o Recognized in state as foreign corporation o Attributes recognized by internal affairs doctrine

←← McDermott v. Lewis (Del. 1987)

2 corporations: o one incorporated in DE

McDermott – public corporation Sets up subsidiary – McDermott Int’l that becomes parent

corporation, incorporated in Panamao transaction being challenged: recapitalization

public shareholders allow shares to be converted into McDermott Int’l


McDermott Int’l now owns McDermott DE Hold some of McDermott DE but 92% of McDermott DE held

by Int’l Effectively being reincorporated outside US

10% of McDermott DE’s shares held by parent company o issue: part of what subsidiary owns is shares in the parent o parent company and its board controls some of its own voting shares o 10% of shares effectively owned by board itself o Under US corporate law that is illegal

Cannot set up a company where voting shares are held by the subsidiary b/c board effectively creates shares they never paid for

o Incumbency guarantee/ takeover defense Original shareholders sue b/c illegal under DE law

o Under internal affairs doctrine, the parent is now governed by Panamian law

o Turn to law of parent company o This is allowed under Panamian law

DE wants to uphold internal affairs doctrine o Weighing this “appalling” practice & internal affairs doctrine, internal

affairs doctrine wins o Shareholders approved this recapitalization o Wise, practicable, and equitable choice

Wise: Less confusing Practical: easy rule for business and law Equitable: yes, if view corp. as private K


o Application is not just conflicts law due process implications Commerce clause: to avoid forum-shopping and avoid diff

result if complaint filed in other states Full faith & credit clause: decision that must be respected by

every other jdxn. ←← Constitutional Dimensions:

What is a pseudo-foreign corporation? Compare Wilson (Cal. App. 1982) and Vantage Venture Partners (Del. 2005)

o Wilson: All of Biz takes place in CA Incorporated in UT CA Shareholder protection rule: for corporations that are not

publicly traded, there must be cumulative voting Cumulative voting: can pool all votes for one person

Utah has straight voting – plurality voting CA says constitutional to apply CA law

If every state had similar statute, wouldn’t matter because only applies to pseudo-foreign corp.

Only one state can be center of gravity so not hard to predict

Doesn’t apply to public corp. o Vantagepoint Venture v. Examen Inc.

Pseudo-foreign corporation Incorporated in DE Most of its assets, payroll, sales, and shareholders in

CA Shareholder voting:

CA requires separate class voting DE “single class” voting

o DE <3’s internal affairs doctrine & corporations DE might be writing to public corporations No exceptions to this in DE

o CA <3’s to regulate its people Anomaly Few states regulate same way

←← Federal Oversight of State Corporate Law

State antitakeover Statutes


1st Generation (1970s) 2nd Generation (1980s) 3rd Generation (Post CTS)

Response to hostile TO State securities law “fairness” review ex) IL

Mgmt lobby Domestic corp. Voting rights Ex) IN

Mgmt. (SH input) Incorporation-based Merger moratorium Ex) WI, DE Amanda (7th Cir. 1989)

1st Generation: o Fairness review: is tender offer a fair price?

Price to be offered in truly uncoerced transaction Goes to state Securities regulator

o IL Antitakeover Statute: if most of shareholders in state, SCOTUS said you cant do that

Edgar v. MITE (1982): this violates DP. Too much burden on interstate commerce. Not limited to IL statutes.

2nd Generation:


o ok to regulate domestic corporations (inc. in state) o pushed through by management lobby o only affects internal affairs of domestic corps.

different set of voting rights for s’holders not going to let anyone who acquires control block to have

voting rights unless legitimate acquisition o CTS Corp. Dynamics (1987):

SCOTUS not in biz of regulating internal affairs of business This kind of manipulation is OK even tho implicates internal

affairs Powell = last corporate lawyer on SCOTUS Free market system depends on certainty created by internal

affairs doctrine Accepted part of biz landscape for States to create corps.,

prescribe their powers, define their rights 3rd Generation:

o Amanda (7th Cir.) May be contrary to economic best interest State has to learn in long-run that this is a bad idea Constitutional but will impact ability of biz to raise capital States compete to offer corp. codes attractive to firms

Corps. move to states that provide the most protection Markets will solve this

Ex) PA ← State Competition


Race to the bottom or top? “Incorporation-based private ordering”

o private organization b/w mgmt. and s’holders of rights and duties o solidify bargain via incorporation, deciding where to incorporateo can change state of incorporation relatively easily

Race of laxity: competition among states to provide lax set of ruleso May be good for shareholders o Doesn’t mean state preference for management as against

shareholders o More private choice

Why has DE won it? o DE statute amended frequently o First-starter in amending corp. statute & other states follow suits o To get amendment thru legislature, need 2/3 vote o Usually only amended when recommendation from state bar

committee on corporate law o DE legislature & bar very interested in making corp

$$$$$o judiciary

chancery court: 5 judges, no jury all corporate law cases decides rapid style chosen on basis of corp. law credentials


huge corpus of case law predictability

SC: 5 justices No immediate appellate court

Cary (former SEC chairman) – DE winning race to bottom o Shareholders being disadvantaged

Winter (2d. cir judge, former Columbia Attn) – winning race to top o If shareholders were being disadvantaged, s’holders would leave

corps, wouldn’t invest Roe – keeps law modern, responds to federal pressure

o Balance b/w shareholder and management interestso “vertical corporate federalism”

not competing against stateso ensuring feds stay out not just statute, but whole structure of DE

(courts, legislature, bar association) why would public co incorporate in another state?

o Special need & ask state legislature to accommodate

←← Chris Edwards

← 9/6/12

← Corporate Social Responsibility


← Who does corporation serve? Private property

o Max profits Social institution

o Employment o What constituencies are served?

Managers Communities Society in general Environment

← Dodge v. Ford Motor Co. Business Story: Ford is founded in 1902. Henry Ford has this brilliant idea –

make cars on assembly line & bring down cost of owning car to make part of everyday life. Ford owns great bulk of shares. Doubles sales every year. Most successful company in the country. Ford is getting America addicted to cars – almost singlehandedly redrawing landscape of country.

Ford’s plans: o Continue to reduce price of cars

Semi-eleemosynary / Charitable Paying workers well - (only available to white men, w/

family, Christian) reducing car prices

o vertical integration iron ore mining manufacture & sale

if had invested in Ford in 1902, would have earned 60% returns every year Advice if Ford’s lawyer:


o Fiduciary duty - shareholders delighted w/ returns o Special dividends as extra o Business judgment rule

Holding: o Dividend Policy:

Violates fiduciary duty to cut special dividends Organized and carried out for the profit of stockholders Directors must act to that end Does not extend to nondistribution of profits among to

stockholders to devote to another purpose o Vertical Integration:

Judges should not interfere in proposed expansion of Ford Motor Co.

Plans for long future, competition up to company Capable of managing its own affairs “The judges are not business experts”

BJR o Dodge Bros. competitors

Anagnorisis: moment of recognition or discovery o Why not go to federal court under Sherman Anti-Trust?

Federal court <3 corp. (would be stretch to say dividend policy is act of monopolization)

Property (SWM) v. Social Institution (CSR) Non-shareholder constituents:


o Assume Ford has new plans: Drop wages to $2/day – market rate Raises price of Ford cars by 20% and market will bear it.

o Can employees and customers complain under modern “other constituencies” statutes?

ALI principles of corporate governance Corporation should have its objective w/ view to

enhancing corporate profit and shareholder gain Statutes in 1970s & 1980s

PA Biz Corp. Law: May consider best interests of corporation by examining:

Effects on various groups incl. SH, empl, suppliers, customers, creditors, communities

Short-term and long-term interests of corp. Resources, intent, and conduct of any person

seeking to acquire control of corp Any pertinent factors No – gives directors wide discretion

Adam Stoddard9/10/12

A. Rules on CSR1. ALI Principles of Corporate Governance §2.01 The Objective & Conduct of the Corporation (NOT ACTUAL LAW)

Subject to §(b), objective should be to enhance profit & shareholder gains

Even if profit & shareholder gains not advanced, in the conduct of its business:

o is obliged to act within boundaries of lawo may take into account ethical considerations reasonably

regarded as appropriate to responsible conduct of businesso may devote reasonable amt of resources to public welfare,

humanitarian, educational, & philanthropic purposes2. Board has discretion on whether to pay dividends, but must make decisions

for purpose of maximizing shareholder wealtha. Dodge v. Ford - stops Ford from withholding dividends

i. stated interest not to grow company "too big"ii. corporation is social institution; still has responsibility to shareholders

b. Lawyers should frame board decisions this wayB. Corporate Charity

1. Legality


a. MBCA §3.02(13) - Cs have general power to: make donations for public welfare or for charity, science, or education

b. IRS §170(b)(2)(A) - Cs can only deduct 10% of incomec. Directors may only give reasonable gifts to charity

i. IRC is guide - % allowed for deduction

ii. (Theodora Holding - boys camp charity)2. Propriety (Fiduciary Duties) - gift that helps directors allowed?

a. Even if gift helps directors, as long as it helps Cs too & is reasonable, then OK (Kahn - gift to build museum)

3. Shareholder rolea. No law requiring shareholder vote on charitable giftsb. Can bring suit to police "reasonableness" requirement

4. Role of Lawyera. Morals of Marketplace -only say what law is

i. no moral judgments, "the law is..."ii. other lawyer always ready to do this if you won't

b. Duty of Independence - must be independent actori. lawyer can refuse to go along with immorality

c. Lawyer Interdependence - member of teami. lawyer must stay involved but try and influence


Adam Stoddard9/12/12

1. Regulationsa. Tillman Act - bans Cs & unions from contribution or expenditures to

advocate election/defeat of clearly identified candidatesi. contribution - $ directly to candidateii. expenditure - $ not directly to candidate (usually buy ads

for/against)iii. Directors/Officers can be held criminally & civilly liable

b. Federal Election Campaign Act (1974) - limits expenses on campaigns by:

i. Individuals ii. Parties iii. PACs


a. funding solely from voluntary individualsb. disclosure requirements

c. McCain-Feingold - bans ads in broadcast media that clearly identifies candidate

i. 30 days before primary electionii. 60 days before general electioniii. limits soft $

d. a. Supreme Court understanding of Cs (3 diff. ideas)i. Cs are creature of state lawii. Cs are people with natural rightsiii. Cs are contractual arrangement b/t individuals

2. Earlier Cases - both involve state lawsa. Belloti (1978) - Cs can spend $ against state referendum

i. Cs are people and can contribute to marketplace of political ideas

ii. Ban on Cs from spending on state referendum violates 1st Amendment

a. If shareholders not happy, they can vote out board or sell shares

b. Austin (1990) - C's can't spend on state campaigns i. Ban on Cs spending for state campaigns constitutionalii. Cs have so much $ that it will skew campaignsiii. Idea that Cs are creatures of state law and can be heavily

regulated3. Citizen's United (2010) - Cs are people and can't be banned from political

speech a. Non-Profit wants to show documentary against Hillary near election

i. b. Ban of Cs from broadcast ads 30 days before primary unconstitutional

i. Citizen's United has C donorsc. Disclosure requirements from broadcast ads are constitutional

users.wfu.edu · Web viewEarlier Cases - both involve state laws a. Belloti (1978) - Cs can spend $...

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