THEORY OF RACE TO THE BOTTOM

DISNEY CASE / STOCK OPTIONS

LIQUIDATION TRANSACTION
CAPITAL APPRECIATION V. RETURN OF INITIAL CAPITAL

BUSINESS ASSOCIATIONS OUTLINE

I. LAW OF AGENCY
AGENCY (FROM REVIEW)
 an agency is a consensual, fiduciary relationship between the principal & agent (need consent & control)
o principal: person whom the is to be taken for
o agent: person doing the action
 agents owe duty to principal to act in principals’ best interest over & above their own
 an agency is not a contract - - but must involve some matter of business where someone undertakes to transaction some business of manage
some affair
 creditor-debtor relationships may evolve into principal-agent relationship where creditor overtakes & controls the operations of its debtor
 individual contractor v. master-servant relationship (pg 2)
o individual contractor: own separate business unit & acting for their own account (interest)
o servant: “respondent superior” employer is responsible/liable
o §§ 219, 228, 229 // IRS 87-41
EXPRESSED AUTHORITY
 agent’s authority can be expressed or implied (by the principal)
o expressed authority: grant of authority from principal to the agents - - can be verbal or written
o implied authority: authority that an agent possess that is “necessary” for the agent to complex their task
APPARENT AUTHORITY
 three party relationship between principal, agent & a third party
 not an actual grant of authority, but it appears as if there has been some grant of authority (to a third party)
1. CREATION OF AGENCY
a. Overview/Introduction:
i. an agency is a consensual, fiduciary relationship between the principal & the agent
1. agent must act in the principals best interest over and above the agent’s own self interest
ii. 2nd Restatement of Agency § 1
1. an agency indicates the relation which exists where one person act for another
2. principal is the person for whom the action is to be taken
3. agent is the person doing the action
a. agent has a fiduciary duty to the principal [§229(2)(a-j)] duties
4. to create an agency, you need: consent and control
iii. (3) principal forms of agency:
1. the relation of principal & agent
2. the relation of master & servant
3. the relation of employer/proprietor & independent contractor
iv. NO CONSIDERATION Gorton v. Doty: P sued D for the injuries of her minor son in a car accident where D was the owner of the car and loaned it
to someone else (not a party in the case) – is D liable for P’s injuries? (is there principal/agent relationship bt D & the driver)
1. the “agency” relationship results from the manifestation of consent by one person to another that the other shall act on (1) his behalf and (2) subject to his
control and (3) consent by other to act
2. RULES
a. the relationship between a principal and an agent must involve some matter of business (only where)
someone undertakes to transact some business or manage some affair for another by their authority -
- that’s where a principal / agent relationship arises.
b. It is not essential to the existence of authority that there be a contract between principal and agent or that the
agent promise to act as such (Restatement, Agency, §§ 15, 16, pp. 50-54), nor is it essential to the
relationship of principal and agent that they, or either, receive compensation (Restatement, Agency, § 16, p.
53).

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 c. “agency” is the relationship which results from the manifestation of consent by one person to another that
the other shall act on his behalf and subject to his control, and consent by the other so to act.
d. agency” indicates the relation which exists where one person acts for another. It has these three principal
forms: (1) The relation of principal and agent; (2) the relation of master and servant; and (3) the relation of
employer or proprietor and independent contractor.
e. Consideration § 16: the relation of principal & agent can be created even when there’s no consideration  an agency does not equal a
contract
f. Manifestations of consent § 15: there must be a manifestation by the principal & consent from the agent.
v. CREDITOR/DEBTOR RELATIONSHIPS Gay Jenson v. Cargill: P sued D for losses that occurred when W defaulted on the contracts
made with P (they didn’t get their money). D/creditor loan to W/debtor & agreed that D has some control over W’s operations. Is D
liable for repayments of W’s debt to P? (is there an agency-principal relationship bt the creditor and debtor)
1. RULE: a creditor who assumed control of his debtor’s business may become liable as principal for the acts
of the debtor in connection with the business
i. (General rule) A security holder who merely exercises a veto power over the business acts of his debtor
by preventing purchases or sales above specified amounts does not thereby become a principal. However,
if he takes over the management of the debtor's business either in person or through an agent, and directs
what contracts may or may not be made, he becomes a principal, liable as a principal for the obligations
incurred thereafter in the normal course of business by the debtor who has now become his general agent.
The point at which the creditor becomes a principal is that at which he assumes de facto control over the
conduct of his debtor, whatever the terms of the formal contract with his debtor may be.
b. Agency is the fiduciary relationship that results from the manifestation of consent by one person to another
that the other shall act on his behalf and subject to his control, and consent by the other so to act.
c. In order to create an agency there must be an agreement, but not necessarily a contract between the parties.
Restatement (Second) of Agency s 1, comment b (1958). An agreement may result in the creation of an
agency relationship although the parties did not call it an agency and did not intend the legal consequences
of the relation to follow.
d. The existence of the agency may be proved by circumstantial evidence which shows a course of dealing
between the two parties.
e. When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to
have consented to the agency since one cannot be the agent of another except by consent of the latter.
2. LIABILITY OF PRINCIPAL TO THIRD PARTIES IN CONTRACT
A. POWER/AUTHORITY OF THE AGENT
i. LIABILITY OF PRINCIPAL TO THIRD PARTIES Mill Street Church v. Hogan: D (church) hired A (agent) to paint. X needed assistance and
hired Plaintiff as he has in the past while being employed by D. P was injured on the job & sued D even though D did not directly hire P.
1. Did X(agent) have the authority to hire P? ( Which would make the church/D liable to P for his injuries)
2. D would be liable under Workers Compensation Act which covers every person that’s either lawfully or unlawfully employed in
the service of an employer under any (express or implied) contract of hire AND all helpers/assistants of employees whether paid
by the employer or employee if employed with the (constructive or actual) knowledge of the employer.
3. RULE: Implied Authority is actual authority circumstantially proven which the principal actually intended
the agent to possess and includes powers that are practically necessary to carry out the duties delegated (by
the principal)
a. ratification § 82: affirmance by prior acts
b. expressed authority can be oral or written

B. APPARENT AUTHORITY- LOOK AT SECTION 7 AND 8 (V. ACTUAL AUTHORITY)

i. when a third party creates a relationship between the principle and agent
1. actual authority: the agent actually does have the expressed authority to stuff on behalf of the principle.
ii. BURDEN OF PROOF Lind v. Schenley Industries: Employee (P) sues Corp. (D) because he wanted to receive his pension plan as
promised to by his leader K (3rd Party) when he promoted him. However, only executives of the corp. are authorized to promote. Can
P recover lost wages from D because he relied on K’s promotion? (K didn’t actually have any authority to hire him, but P believed he
did)

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 1. Apparent Authority § 8: power to affect the legal relations of another person by transactions with third party’s
2. Creation of Apparent Authority § 27: how apparent authority is analyzed.
3. Compensation structure
4. Whether its power of attorney, by law, granted orally, resolution, prove t by seeing if one of those granted authority
5. RULE: apparent authority arises when a principal acts in a manner to convey the impression to a third
party that an agent had certain powers which he may or may not actually possess.
a. apparent agency’ as ‘the power to affect the legal relations of another person by transactions with third
persons, professedly as agent for the other, arising from and in accordance with the other's manifestations to
such third persons.’There is some uncertainty as to whether or not the third person must change his position
in reliance upon these manifestations of authority,
i. Actual authority’ means, as the words connote, authority that the principal, expressly or implicitly, gave
the agent. ‘Apparent authority’ arises when a principal acts in such a manner as to convey the
impression to a third party that an agent has certain powers which he may or may not actually possess.
‘Implied authority’ has been variously defined. It has been held to be actual authority given implicitly by
a principal to his agent. Another definition of ‘implied authority’ is that it is a kind of authority arising
solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. It
is this concept that is called ‘inherent authority’ by the Restatement. In many cases the same facts will
support a finding of ‘inherent’ or ‘apparent agency’. Usually it is not necessary for a third party
attempting to hold a principal to specify which type of authority he relies upon, general proof of agency
being sufficient
b. The third party must only establish that there existed a principal-agent relationship
i. They do not have to show what authority they relied on
c. Apparent Authority = Inherent Authority § 8A: authority that is derived solely from the agency relation & protects people harmed by
or dealing with that agent

iii. PRINCIPAL’S ACTIONS Three-Seventy Leasing v. Ampex Corp:370 (P) sought damages from Ampex (D) for the sale of computers
which P & Ampex employee, Kays, agreed upon. Did Kays have the apparent authority to sign the sale agreement with P that would
make D liable?
1. RULE: an agent has apparent authority sufficient to bind the principal when the principal acts in such a
manner as would lead a reasonably prudent person to suppose that the agent had the authority he appears
to exercise
a. absent knowledge of the agent’s limited authority by 3 rd party will not bar a claim of apparent
authority (that limitation will not bar a claim)
b. note: apparent to the third party (what it looks like to the third party because of how the principal hired the agent)

C. AGENCY BY ESTOPPEL // NECESSITY

i. IMPOSTER AGENT Hoddeson v. Koos Bro: imposter salesperson sells furniture to P in a furniture store (D). Is D liable to P even
though the imposter was not an agent for D? (yes)
1. “where a proprietor of a place of business by his dereliction of duty enables one who is not an agent to act conspicuously and to
ostensibly transact the proprietor business with a patron in the establishment, the appearance being of such a character as to lead
a person of ordinary prudence ... to believe that the imposter was in truth the proprietor’s agent & in such circumstances the law
will not permit the proprietor to avail himself of the imposter’s lack of authority and escape liability for the consequential loss.”
2. Principal is liable for the acts of imposter agents if a reasonably prudent person would believe that the
imposter is actually an of the principal.

3. SERVANT V. INDEPENDENT CONTRACTOR

A. OVERVIEW:
I. INDEPENDENT CONTRACTOR V. EMPLOYEE/SERVANT
1. independent contractor act on their own account whereas an employee acts on behalf of the employer.
2. exception: in all hazardous activities the person who hired the independent contractor may also be liable.
ii. Relevant Statutes:
1. MASTER, SERVANT & INDEPENDENT CONTRACTOR § 2
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 2. MASTER’S LIABILITY FOR SERVANT TORTS § 219
3. DEFINITION OF A SERVANT § 220
4. GENERAL STATEMENT (ABOUT SERVANT’S CONDUCT) § 228
5. KIND OF CONDUCT W/IN SCOPE OF EMPLOYMENT § 229
III. §§ 219, 220, 228 & 229 work together to help courts determine & analyze whether there is a master-servant relationship or an
independent contractor relationship

b. MASTER-SERVANT RELATIONSHIP Humble Oil v. Martin: unoccupied car rolled off Y’s gas station that got its gas from D/Humble Oil and hit the
Martins (P) walking on the street bc of Y employees negligence. Is D liable for Y’s negligence if they have the power over Y’s daily business? D argued it
was a “dealer”/“vendor” relationship with Y.
i. A master is liable for the torts of his servants (§ 219)
ii. § 219 When Master is Liable for Torts of His Servants
1. (1) A master is subject to liability for the torts of his servants committed while acting in the scope of their employment.
2. (2) A master is not subject to liability for the torts of his servants acting outside the scope of their employment, unless:
(a) the master intended the conduct or the consequences, or

(b) the master was negligent or reckless, or

(c) the conduct violated a non-delegable duty of the master, or

(d) the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent
authority, or he was aided in accomplishing the tort by the existence of the agency relation

§ 220 Definition of Servant

(1) A servant is a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance
of the services is subject to the other’s control or right to control.

(2) In determining whether one acting for another is a servant or an independent contractor, the following matters of fact, among others, are
considered:

(a) the extent of control which, by the agreement, the master may exercise over the details of the work;

(b) whether or not the one employed is engaged in a distinct occupation or business;

(c) the kind of occupation, with reference to whether in the locality, the work is usually done under the direction of the employer or by a
specialist without supervision;

(d) the skill required in the particular occupation;

(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;

(f) the length of time for which the person is employed;

(g) the method of payment, whether by the time or by the job;

(h) whether or not the work is a part of the regular business of the employer;

(i) whether or not the parties believe they are creating the relation of master and servant; and

(j) whether the principal is or is not in business.

§ 228 General Statement

(1) Conduct of a servant is within the scope of employment if, but only if:

(a) it is of the kind he is employed to perform;

(b) it occurs substantially within the authorized time and space limits;

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 (c) it is actuated, at least in part, by a purpose to serve the master, and

(d) if force is intentionally used by the servant against another, the use of force is not unexpectable by the master.

(2) Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized
time or space limits, or too little actuated by a purpose to serve the master.

§ 229 Kind of Conduct Within Scope of Employment

(1) To be within the scope of employment, conduct must be of the same general nature as authorized, or incidental to the conduct
authorized.

(2) In determining whether or not the conduct, although not authorized, is nevertheless so similar to or incidental to the conduct
authorized as to be within the scope of employment, the following matters of fact are to be considered:

(a) whether or not the act alone is one commonly done by such servants;

(b) the time, place and purpose of the act;

(c) the previous relations between the master and servant;

(d) to extent to which the business of the master is apportioned between different servants;

(e) whether or not the act is outside of the enterprise of the master or, if within the enterprise, has not been entrusted to any servant;

(f) whether or not the master has reason to expect that such an act will be done;

(g) the similarity in quality of the act done to the act authorized;

(h) whether or not the instrumentality by which the harm is done has been furnished by the master to the servant;

(i) the extent of departure from the normal method of accomplishing an authorized result; and

(j) whether or not the act is seriously criminal.

c. INDEPENDENT CONTRACTOR Hoover v. Sun Oil Co: P was injured in a fire that was caused by the negligence of B’s gas station employee. P sued
Sun Oil (D) who owned the station operated by B. Can D be held liable for P’s injuries because of the negligence by B’s employee? court looks at the
level of: (1) control, (2) discretion & (3) independence
i. sun oil (D) not liable for B’s negligence because it does not have control over the service station’s day-to-day
operations.

d. IRS Rev Rul. 87-41: set out the 20 factors for determining employment status of tax payer
i. Instructions: when a person is required to comply with another’s instructions about when, where and how they’re
supposed to work (considered an employee).
1. Creates a right to require compliance
ii. Training: training a new employee by using an experienced employee and requiring them to attend meetings or other
methods to show how you should be performing the service
iii. Integration: shows direction and control by owner of the business

4. APPARENT AGENCIES
a. RIGHT TO CONTROL Miller v. McDonalds Corp: P was injured at a McDonalds that was owned by 3K. P sued McDonalds alleging
that 3K is McDonalds agent.
i. 3K & McDonalds have a licensing agreement & franchising agreement controlling certain aspects of the operations at the
McDonalds
ii. court discusses the APPARENT AGENCY RULE: one who represents someone else is his servant/agent and thereby causes a 3 rd person
to rely on the care or skill of such apparent agent is subject to liability to the 3 rd person for any harm caused by the lack of care or skill
of the one appearing to be a servant/agent [as if her were such]

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 b. RULE: operation of a restaurant by a franchisee is consistent as a matter of law with finding an agency. An agency
relationship necessarily requires that the principal and the agent be separate entities.
i. RULE- “One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely
upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care
or skill of the one appearing to be a servant or other agent as if he were such.”
ii. the right to control (regardless of whether or not it’s exercised) is enough to establish agency.
c. examples of apparent agencies includes McDonalds & Uber

5. TORT LIABILITY & SCOPE OF EMPLOYMENT

A. RST § 219 WHEN A MASTER IS LIABLE FOR THE TORTS OF HIS SERVANTS
i. when servant is acting “within the scope of their employment”

B. RST §§ 228, 229 KIND OF CONDUCT W/IN SCOPE OF EMPLOYMENT

i. authorized conduct (either in nature or incidental)
ii. 10 factors considered when determining if the conduct is within the scope.
6. § 228 General Statement
(1) Conduct of a servant is within the scope of employment if, but only if:
(a) it is of the kind he is employed to perform;
(b) it occurs substantially within the authorized time and space limits;
(c) it is actuated, at least in part, by a purpose to serve the master, and
(d) if force is intentionally used by the servant against another, the use of force is not unexpectable by the master.
(2) Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized
time or space limits, or too little actuated by a purpose to serve the master.

a. EMPLOYEE NEGLIGENCE Bushey v. U.S.: seaman caused a boat to tip after a mistake he made because he was drunk. Court is trying to
determine whether the seaman was acting within the scope of his employment.
i. Must establish a principal-agent (“master-servant”) relationship before creating respondent superior (where a
principal is liable for his agent)

b. DETOUR V. FROLIC Joel v. Morrison: servant was driving a cart provided by his master and caused injuries to P. was the servant acting
within the scope of his employment?
i. Yes, if servant was on route as a detour.
ii. No if servant was on route for a frolic (for fun)
iii. RULE: master is only liable where the servant is acting in the course of his employment
iv. example: UPS driver goes to McDonalds to get food & accidentally hits someone. Is UPS liable?
1. 2 Blocks  prob a detour
2. 8 blocks  prob a frolic (bc it’s further away)

c. INTENTIONAL CONDUCT / / “PRESENTLY INTERFERING” Manning v. Grimsley: professional baseball player threw a ball into the
crowd was and the ball hit P. Is baseball club negligent/liable for player’s battery?
i. Where P seeks to recover damages from an employer for injuries resulting from an employee’s assault, it must be shown
that the employee’s assault was in response to plaintiff’s conduct which was presently interfering with the employee’s
ability to perform his duties successfully.
1. presently interfering  anything that would affect or prevent an employee from performing their job
2. D argued that the heckling from the bleachers annoyed/insulted the player, but did not constitute as “conduct” & that those
words did not “presently” interfere with players ability to perform his duties  court disagreed, whatever player was doing on
the field was all a part of his employment therefore was “presently interfering”
3. Court said that a jury could reasonably find that the assault was not a mere retaliation for past annoyance, but was a response
to continuing conduct which was “presently interfering” with player’s ability to pitch in the game  battery count against the
baseball club was submitted to a jury.
ii. RULE: principal is responsible for the intentional torts of the agent

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 d. ACTS DONE DURING EMPLOYMENT Western Union v. Hill: P sued D/employer as a principal of the employee who assaulted P.
Employee was drunk when P came into his office. Employee was guilty for the assault, but D was not liable for agent’s assault bc it was
his own personal desires
i. the act done by the servant WITHIN the scope of employment v. the act done DURING his employment.
1. RULE: if the assault is made growing out of, or being related to, the business then the corporation would be liable,
but if the assault committed was clearly a motive or purpose was solely to satisfy own personal desires ( and
not in furtherance of the business of defendant) then liability rests with agent NOT the master.

E. OVERVIEW OF PRINCIPAL-AGENT RELATIONSHIP:

i. an agent binds a principal when an agent is authorized to act
1. either expressed or apparent authority
ii. when an agent act within the scope of employment and causes some harm then principal is bound for liability in a tort

7. FIDUCIARY OBLIGATIONS OF AGENTS & THEIR PRINCIPALS

A. DUTIES DURING AGENCY (“IN TERM DUTIES”):
I. RST § 388 DUTY TO ACCOUNT FOR PROFITS ARISING OUT OF EMPLOYMENT
1. profits arising or in connection with transactions conducted by him on behalf of the principal is under a duty to five
such a profit to principal.
II. RST § 380 DUTY OF GOOD CONDUCT
1. an agent is subject to a duty to not conduct himself with such impropriety that it disrepute (“brings shame”) upon
the principal [or business].
2. if personal relationships are involved, the agent has a duty to not act in a way that would make continued friendly
relations with the principal impossible.

b. PROFITS MADE BY AGENT Reading v. Regem: D wore uniform provided by P while assisting with deliveries - - P wanted the profits
that D earned bc he was wearing his uniform.
i. examples:
1. B employs A to take care of his horses. A rents out the horses to various people without B’s knowledge. A IS liable
to B for the profits/sums he received in respect to renting the horses.
2. Policeman diverts traffic to assist with a burglary  the crown would have a right to the money paid to him by the
burglars
ii. Rule: if a servant uses his master’s time or property then he is accountable for the profits he makes by such use.
1. The crown was entitled to the D’s profits because of D’s duty

c. DUTY OF LOYALTY (WHERE THERE ARE COMPETING INTERESTS)

i. Food Lion v. ABC Inc.: undercover TV reporters get jobs at a supermarket to secretly film other employees in the supermarket so they
can expose them/air it on ABC. Did TV reporters breach their fiduciary duty/who do they owe a duty of loyalty to?
1. ABC & Supermarket are both principals to the TV reporters therefore making the TV reporters agents.
2. ABC’s interest in exposing supermarket is a competing interest
3. TV Reporters breach of duty (to supermarket) occurred when they began secretly recording the employees in the supermarket -
- NOT when they were initially hired.
4. HYPO: there would still be a breach by the reporters even if they weren’t also agents of ABC bc of their interest in exposing the
supermarket.

II. TORT OF DISLOYALTY:

1. Disloyal conduct by an employee has been considered tortious in three (3) circumstances:
a. applies when an employee competes directly with her employer either:
i. on their own or
ii. as an agent of a rival company
iii. ex: employee uses current employer’s resources during business hours to develop a rival company
b. when the employee misappropriates their employer’s profits, property, or business opportunities

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 i. ex: when employee bought parts for employer at prices above market value from company that was
partly owned by the employee - - would not have been breached if employee disclosed the interest to
employer
c. when the employee breaches her employer’s confidences
i. ex: when employee used employer’s trade secrets after forming a competing business

8. INTRODUCTORY & PERVASIVE CONCEPTS

a. FIDUCIARY DUTY BT PARTNERS
i. Meinhard v. Salmon (pg. 50): joint venture partners came together to lease a building for shops & offices. D partner entered into
an agreement with another businessman to purchase surrounding property as leasehold that was only successful bc of the joint
venture. Did D breach a fiduciary duty to P/partner?
1. RULE: some acts are forbidden to those who are bound by a fiduciary duty
a. “many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to
those bound by fiduciary ties.”
2. The fact that D/partner was in control of exclusive powers of direction makes his duty of disclosure to P/Partner
more important since disclosure is the only opportunity for the powers to be equalized - - partners owe a
fiduciary duty to each other and act as one entity.
ii. RULE: partners are bound by obligations to each other and cannot separate individual interests from the
interests of the partnership
1. any benefit one partner acquires must be communicated to the other.
iii. Add notes from the book:
1. corporate opportunity doctrine forbids partners from seizing for themselves opportunities that are rightfully
considered to belong to the partnership unless they seek & receive permission from the other partners.
2. modern day fiduciary duty of loyalty (note 5) includes:
a. to account to the partnership and hold as trustee for it any property, profit, benefit derived from the partner
b. refrain from acting on interest that would be adverse to the interest of the partnership
c. refrain from competing with the partnership
3. partnership agreement may:
a. modify or change the duties owed to each other
b. parties are free to contract around the statutes/fiduciary duties they don’t want to be bound to

B. OVERVIEW OF SECURITY
i. Statutory definition of “security” is very broad - - it includes:
1. any note, stock, treasury stock, bond, debenture, evidence of indebtedness
2. certificate of interest or participation in any profit-sharing agreement ... investment contract, voting trust
certificate...
3. not every fraud based on the payment of money is a security, plaintiff must first establish that a security was
involve in order to demonstrate any violation of the securities laws.
ii. HOWEY TEST/SECURITY IN CONTRACTS SEC v. WJ Howey (1363): issue is whether certain transaction constituted
“investment contract” within the meaning of the Securities Act of 1933.
1. INVESTMENT CONTRACT [under Securities Act] means a contract, transaction or scheme where a person invests
his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or the
third-party [regardless of whether or not the shares in the enterprise are evidenced by formal certificates or
nominal interests]
a. form was disregarded for substance & emphasis was placed upon economic reality.
B. HOWEY TEST:
I. INVESTMENT OF MONEY
II. IN A COMMON ENTERPRISE
III. WITH PROFITS TO COME SOLELY FROM THE EFFORTS OF OTHERS

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 iii. SECURITY IN AN INTERNET COMPANY SEC v. SG Ltd (1367): are virtual stocks a security if there is no physical
presence in the U.S.? court applies the “howey test” to determine ...
1. horizontal (looks at all investors across the board) v. vertical analysis
2. ex: crypto is not a security - - doesn’t meet the standards
a. you invest money
b. there is a common enterprise
c. but there’s no profit making based on the efforts based by others - - it’s based on demand & supply

c. MATERIALITY Basic Inc. v. Levinson (690): emergent transaction was occurring (company acquiring the other). Suit was
being brought by shareholders
i. RULE: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would
consider it important in deciding how to vote
1. the materiality requirement is fulfilled if there is a substantial likelihood that the disclosure of the omitted fact
would been viewed by the reasonable investor as having significantly altered the “total mix” of information
made available
a. “total mix” of information [very broad] can include industry-specific information, company-specific information ...
ANY information that is relevant
2. does the investor NEED the information in buying, selling or holding the investment?

II. CORPORATIONS

1) BACKGROUND & HISTORY OF BUSINESS ASSOCIATIONS (pg 1-21)

A) “CORPORATION” (Trustees of Dartmouth v. Woodward): it is an “artificial person” existing in the contemplation of law
i) a corporation has its own powers (§3.02: General Powers): the artificial nature of a corporation that enjoys the same
rights as an individual
(1) ex: sue & be sued in corporate name, corporate seal, making & amending bylaws, purchase or lease (...) real or
personal property, to sell & convey any part of property .... make payments or donations
ii) (Louis Liggett v. Lee)- - in the supplemental cases - - discusses the fear of monopoly ...
(1) CORP: Shareholders  BOD  Company
(2) Shares Outstanding:
a. what is the corp authorized to sell? how many shares? voting powers?

2) CORPORATIONS-FORMATION & FINANCES

a) Role of Corporate Lawyer (117)
i) seek to protect against future risks
ii) provides guidance on how to avoid future litigation

b) FORMATION OF A CORPORATION (121)

i) Promoter/Incorporator: a person who starts the corporation
(1) they incorporate the business and do the original organizing of the documents & then hand it to the BOD who will
then take over the business and set up the entity.
II) PROMOTER LIABILITY O’Rorke v. Geary (121): promoter was acting on behalf of a corporation “to be formed” [not
yet created] - - language “yet to be formed” was added to protect promoter from liability
(1) RULE: promoter may be found liable if they’re not careful (or negligent) and where they sign contracts on
behalf of the corporation to be formed
(2) “principal signatory” bc they have contractual liability

iii) AVOIDING LIABILITY: promoters/incorporators may remove legal liability through (best to worst)
(1) Novation: effectively removes the promoters from any contractual liability by agreement of the corporation and
counterparty of the original contract to remove the incorporator (or principal) from the chain of responsibility
(a) needs consent from all three (3) parties
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 (2) Indemnification: can indemnify an incorporator, but they would still be subject to liability
(a) corp can indemnify the incorporator but must have to resources to do so
(3) Ratification: corporation can ratify any contracts that were previously enacted by the incorporator - - incorporator
could still be subject to liability
(a) corporation is accepting the authorization of the agent (make the agreement official)
(b) corporation must be in existence when agent is acting in an unauthorized manner
IV) CORPORATE ENTITY Old Dominion v. Lewisohn (127): D/incorporators created P/company. D granted rights into P/Company, sold
their shares and then cashed out  P/Company became a publicly owned corp
(1) RULE: once you have a corporation, the corporation & its identity are fixed, does NOT matter that the
shareholders above are changing... has nothing to do with the liability, rights and privileges that corporate
entity itself has is what’s relevant
(a) Promoters do not owe a fiduciary duty to the new shareholders because the corporate entity has already
been established (no new fiduciary duty arise to the new shareholders)

C) DEFECTIVE INCORPORATION
I) DEFECTIVELY INCORPORATED ASSOCIATION Cranson v. IBM (137): lawyer fails to file the articles of incorporation,
but the corporation functions like a corp.
(1) court views the defective corporation as a valid entity because everyone (the corporation & its creditors) were
acting as if the corporation was in existence
(2) Doctrine of De Facto v. Doctrine of Estoppel to Deny the Existence
(a) De Facto: corporation is established by
(i) existence of law authorizing it
(ii) good faith &
(iii) actual use or exercise of power
(b) Estoppel to Deny Existence when a person has dealt with a corporation that has been defectively incorporated,
that person may be estopped from denying the existence of the corporation
ii) “inadvertent partnerships” a partnership formed when there is an association of two or more people to carry on as co-
owners of a business for profit
(1) where incorporation is defective, the “co-venturers” have arguably formed a partnership - - passive co-ventures may
be liable for debts incurred on behalf of the partnership
(a) similar to the liability of a promoter

2) CAPITAL FORMATION (A FIRST LOOK) (142) // “ACCOUNTING BASICS”

a) DEBT V. EQUITY:
i) equity: when a corporation sells equity to investors it is selling ownership interests.
(a) (3) general types: (1) common stock, (2) preferred stock, & (3) convertible stock
(b) common stock: benefits: voting rights, economic rights - - cons: last to collect if corporation goes bankrupt
(c) preferred stock: enjoy some priority over common stock, corporations will sometimes grant pfd the right to collect dividends
(d) convertible stock: pfd stock that may be converted to common stock, very commonly used in venture capital transactions
(e) overview: equity is the 3 types of stocks, ownership %, voting rights, & dividends/gains
ii) debt: corporation enters into a contract to borrow money that it promises to repay with interest over a set period of time
(1) different forms include: line of credit, promissory note, commercial paper, bond, debenture (unsecured)
(2) an expectation of repayment
(3) fee = interest
(4) comes from lender who is from outside the corporation
iii) BOD gets to decide the classes/types of stocks & the level of rights/privilege each class has

B) BALANCE SHEETS: IDENTIFIES THE ASSETS OF A CORPORATION & SET FORTH THE SOURCE OF FUNDS FOR THOSE ASSETS
- - MUST BALANCE (ASSETS = LIABILITIES)
I) balance sheet is “corporate selfie” // a snapshot of co. at a certain point in time
II) ASSET: WHAT THE COMPANY OWNS & HAS AVAILABLE TO USE

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 (1) LEFT
(2) LONG TERM V. SHORT TERM (ASSETS)
(A) fixed assets or long term = real property, buildings, equipment
(B) current assets or short term (12-month cycle) = accounts receivable (money owed to the co.), cash, credit
(I) bc of depreciation, management has discretion to determine which accounting rule to follow
III)LIABILITY: MONEY OWED TO THIRD PARTIES (CREDITORS)
(1) RIGHT
IV) “SHAREHOLDER” EQUITY: PORTION THAT THE SHAREHOLDER HAS IN THE COMPANY (% OWNERSHIP)
(1) RIGHT
V) RETAINED EARNINGS: PROFITS THAT ARE NOT PAID OUT AS DIVIDENDS
(1) RIGHT

C) INCOME STATEMENT:
i) income statement is prepared for a “period of time” generally one year
II) REVENUE:
(1) NET SALES - - WHAT THE COMPANY MAKES
III) EXPENSES:
(1) COSTS OF GOODS, DEPRECIATION, SELLING & ADMINISTRATIVE EXPENSES, OPERATING INCOME
IV) REVENUE MINUS EXPENSES = NET INCOME

2) LIMITED LIABILITY & ULTRA VIRES

a) Piercing the Corporate Veil
I) OVERVIEW:
(1) Purposes for Establishing a Corporation:
(a) to protect the personal assets of shareholders &
(b) limit liability for the shareholders
(2) courts occasionally permit the “corporate veil” to be pierced, but it must establish: (difficult to pierce)
(a) fraud or
(b) in the interest of justice
(c) typically occurs when shareholder has a commingling of their personal assets with their business assets
(commingling of the bank accounts, failure to observe formalities, treat business of a personal extension of
themselves & vice versa) - - there’s no clear line or division between the personal side of the shareholder &
the corporate side ...
(3) also applies to LLCs
II) ESCAPING PERSONAL LIABILITY Walkoyszky v. Carlton (157): ind. stockholder in 10 corporation (D) was sued by P
who was injured he got hit by a taxicab - - taxi was owned by a corporation that was owned by D
(1) law permits the incorporation of a business for the purpose of enabling proprietors to escape person liability
however it is limited by the courts when necessary to prevent fraud or to achieve equity
(a) “piercing the corporate veil”
(2) MBCA § 6.22 LIABILITY OF SHAREHOLDERS

III) INSTRUMENTALITY RULE East Market St. v. Tycorp Pizza Inc. (165): P wanted to hold D personally liable for breach
of a lease & damage to the leased premises (leased by D’s incorporated corporation)
(1) INSTRUMENTALITY RULE: if the corporation is so operated as a mere instrumentality (or alter ego) of the
sole/dominant shareholder & a shield for their activities (that are against public policy) then the corporate entity will
be disregarded, and the s/h & corporation will be treated as the same
(a) immaterial whether the sole or dominant shareholder is an individual or another corp.
(2) to pierce corporate veil under instrumentality rule, the (3) requirements are required:
(a) scope of control [complete domination]
(b) the scope of control used to commit the fraud [the control was used by D to commit the fraud]
(c) control & breach of duty must be the proximate cause of the injury incurred [causation]
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 IV) INTERNAL AFFAIRS DOCTRINE Iceland Telecom v. Info Systems Corp (171): board members didn’t know they were
board members & no stockholder meeting took place.
(1) RULE: no single factor alone can pierce the corporate veil, but all of them taken together will pierce the corporate
veil
(2) INTERNAL AFFAIRS DOCTRINE ESTABLISHES THAT THE LAW OF THE STATE OF INCORPORATION WILL GOVERN
ALL MATTER RELATING TO INTERNAL AFFAIRS OF THE CORPORATION

V) PECKING ORDER Costello v. Fazio (179): partners withdrew money and then converted their partnership into a
corporation when they were losing money ...
(1) RULE: the pecking order to collecting assets when a company goes into bankruptcy:
(a) debt secured creditors take first
(b) debt unsecured creditors take next
(c) equity preferred shareholders
(d) equity common shareholders

B) ULTRA VIRES
i) OVERVIEW: outdated concept that corporations were limited to whatever activity the corporate charter permitted then to
engage in
(1) example: corporation filed to be a railroad manufacturer then all they could do was manufacture railroads
(2) MBCA § 3.02 modern approach now, corporations can be established for any lawful purpose
ii) Wiswall v. Greenville & Raleigh Plank Rd. Co. (186): company wanted to buy horses to do deliveries but it exceeded
their powers (example of how ultra vires limited the activities in which the company could engage in)

C) CORPORATE RESPONSIBILITY
I) IMPLICIT EXPECTATION OF VALUE AP Smith v. Barlow (190): Co. gave a donation to Princeton University although
not specifically authorized to do so. S/H filed suit for declaratory judgment claiming that the donation was
unconstitutional.
(1) s/h object to the donation bc (1) loss of value, (2) lower profits, (3) s/h expectation to increase value of share, & (4)
not authorize in AOI (however is permitted by state law)  donation was not unconstitutional
(2) there is no statutory expectation for BOD to increase shareholder stock value – there is no statute authority,
(ROI- return on investment) if they donate to the university then society has benefitted and it is permitted.
(a) there is only an exchange (bt s/h & corp) of cash (s/h  corp) for stock (corp  s/h) - - no contractual
relationship
(b) contractual relationship would be created by; MMA, consideration, an offer & acceptance.
ii) Adams v. Smith (196): BOD paid the widows of 2 corporate officers & s/h objected the payments & sought an injunction
to stop payments. s/h argued there was no exchange (widows will not give anything back to the corporation)
(1) there is no value return from the widows to the corporation (payments made to widows without consideration)
(a) corporation should recover the payments made to the widows - - introduction to derivative lawsuits
iii) Dodge v. Ford Motor (199): dodge (minority s/h of Ford) sued to reinstate the special dividends after Ford decided to stop
payments
(1) Shareholders ARE proportionate owners of the corporation, but the profit is and remains for the corporation.
(a) corporation is its own separate entity, they get to decide how to spend it
(2) the powers of directors are to be employed for that end. The discretion of directors is to be exercised in the choice of
means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the
nondistribution of profits among stockholders in order to devote them to other purposes.

3) MANAGEMENT OF CORPORATIONS
a) Corporate Structure (215):
i) CORP SHAREHOLDERS (on top)
(1) BOARD OF DIRECTORS: the corporation is managed & under the director of the board of director (by design)
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 (a) have the authority to act on behalf of the company
(i) but the authority only exists when they act as a body - - no single director has the authority to bind a
company (unless they were granted that authority)
(2) OFFICERS (below the BOD)
ii) Corporate Requirements:
(1) QUORUM REQUIREMENTS: a number/percent of the BOD that will bind the corporation
(a) typically, a majority (51%) or an otherwise stated number (has to be higher than the majority)
(b) quorum is listed in the AOI or Bylaws (if absent, then it’s 51%)
(c) statues § 2.02(a) [mandatory requirements] v. §2.02(b) [discretionary requirements]

(2) ARTICLES OF INCORPORATION (“AOI”) & CORPORATE BYLAWS

(a) ARTICLES OF INCORPORATION PUBLIC ACKNOWLEDGEMENT OF THE CORPORATION
(i) EXTERNAL/PUBLIC FACING INFORMATION ABOUT THE CORPORATION
(b) BYLAWS INTERNAL RULES OF OPERATION § 2.06
(i) INTERNAL & PRIVATE TO THE COMPANY
(c) LEVEL OF AUTHORITY: STATUTES  ARTICLES OF INCORPORATION  BYLAWS

B) BOARD OF DIRECTORS (“BOD”)

i) BOD Requirements:
(1) must operate through paper
(2) must hold AT LEAST one meeting a year &
(3) must document their actions so it’s on corporate record
ii) the power of the board of directors comes from the statute “statutory power”
(1) business shall be managed by the board of directors
iii) Charlestown Boot v. Dunsmore (217): shareholders elected individual to work with directors. BOD ignored
shareholder-elected individual. can s/h compel BOD to listen to individual?
(1) shareholders are not authorized by statute to add another officer to work w/ BOD & they cannot compel
them to bc of the lack of authorization
(a) they would only have the authority to compel if expressed in bylaws or articles of incorporation
iv) Auer v. Dressel (220): special meeting was requested by majority shareholders, but president of corp didn’t follow
through with the request. Bylaws for this company permits shareholders to request a special meeting
(1) because the bylaws permit shareholders to request a special meeting, it becomes mandatory for the president to
comply with the request
v) Campbell v. Loews (224): president v. largest shareholder  president has the authority to call a special meeting via
the bylaws
(1) Directors are not permitted to intentionally miss a meeting so that quorum is not met.

c) Board Meetings (236)

i) Bylaws or Articles of Incorporation will set the number of directors necessary for BOD.
ii) most states permit BOD to take action w/o a meeting if all directors consent to action through writing (MBCA §8.21)
iii) Annual Meetings v. Special Meetings
(1) both require (1) call, (2) notice, (3) quorum & (4) sufficient vote [to constitute an act of the board]
(2) to call a special meeting, must state the purpose for calling it
(3) 1 annual meeting is required a year for BOD.
iv) Staggered Boards (235): when only a number of board members are elected a year (at the annual meeting)
(1) as opposed to all corporate directors being elected at every annual meeting.

D) BOARD COMMITTEES: (240)

I) EXAMPLES:
(1) Audit Committee
(2) Compensation Committee

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 (3) Executive Committee
(4) “At-Hawk” Committee – created for a specific purpose
(5) Special Litigation Committee (used in derivative suits)
ii) the BOD of directors is permitted to create committees to help them evaluate and assess decisions/actions to be taken
iii) they can create any committee they deem necessary
iv) also entitled to rely on the opinions of third parties - - their job is to be well-informed
(1) ex of experts/third parties: accountants, economists ...
e) Board Composition & Officers (243 & 249)
i) Corporate Officers do not have statutory authority, their authority comes from bylaws.
ii) “apparent agency” protects corporate officers (such as VP) bc whatever power the public believes the VP has will protect
them

4) DUTY OF CARE (257)

A) OVERVIEW // FIDUCIARY DUTY OF DIRECTORS
i) duty of care requires corp officers & directors to act “with the care that person in a like position would reasonably
believe appropriate under similar circumstances” §§8.30(b), 8.42(a)
II) FOUR BROAD DUTIES OF CARE:
(1) ATTENDANCE & ATTENTION
(2) DUE DILIGENCE
(3) RATIONAL BASIS
(4) MONITOR & OVERSITE
III) WHEN ANALYZING: (1) IS THERE A DUTY? & (2) WAS THE DUTY BREACHED?
B) ATTENDANCE & ATTENTION Francis v. United Jersey Bank (262): D/Director (largest shareholder) stopped being active in
the BOD while grieving her husband – can she be liable for the actions of her son? court said yes.
(1) RULE: directors need to have a rudimentary level of understanding of the business operations - - a nominal
director doesn’t exist because directors have a legal responsibility & failure to attend meetings (& stay informed)
violates the duty of care
(a) under a continuing obligation to keep informed about the activities of the corporation
(b) cannot be shielded by being a “dummy directors” & cannot just be “an ornament - - directors cannot shut their eye to corporate
misconduct and then claim that because they not see the misconduct they did not have a duty to look

c) Duty to Monitor
i) Bates v. Dresser (257): D/President was sued by P/Receiver for money that was stolen bc P believed that D breached his
duty to monitor bank affairs. D/President was informed/warned twice regarding the conduct ..
(1) financial income statements are “accurate” v. “presented fairly”
(a) accuracy implies correctness whereas “fairly” is boarder & can be misinterpreted bc number can be manipulated
(b) “accurate” & “correct” are no longer used anymore, “presents fairly” is broader & used more often

ii) DUTY TO MONITOR & OVERSEE BUS OPS In re Caremark Derivative Litigation (269): directors’ failure to monitor
thousands of employees.
(1) RULE: corp management must have a system in place to get information from the lowest level of the corp to
the highest level of corp management in a timely basis in order to make a decision on corrective actions
(a) “timely basis” is determined by the “reasonable person”
(b) the system must allow management to be informed in a timely basis
(c) “attempt in good faith to assure that corporate information & reporting is adequate”

d) Decision Making & Business Judgement Rule (275)

i) IF A DECISION MADE BY AN OFFICER OR DIRECTOR IS PROTECTED BY THE BUSINESS JUDGMENT RULE (“BJR”)
THEN THAT IND. CANNOT BE HELD LIABLE FOR BREACH OF DUTY OF CARE.
(1) This is because business judgment is a standard of liability that is less demanding than the relevant standard of care
(2) so long as one acts in such a way so as to avoid inflicting unreasonable harms on others (ex: non-negligent
manner) then they have satisfied the relevant standard of [“liability”]
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ii) BUSINESS JUDGMENT RULE Shlensky v. Wrigley (276): can majority shareholders decide what time the baseball team
should be playing their games?
(1) RULE: there is a presumption that business directors are making decisions in the best interest of the
company. (aka, the business judgment rule)
(2) BOD is not limited to only financial decisions - - also authorized to make decisions that are nonfinancial
iii) absent some showing of “fraud, illegality, or a conflict of interest” the business judgment of directors shall not be
disturbed

iv) DUTY OF DUE DILIGENCE (PROCESS OF MAKING A DECISION) Smith v. Van Gorkom (281): P/shareholders are suing CEO
after a decision to approve merger because they believed the decision was uninformed - - court held for P bc decision was uninformed
(1) RULE: corporate management has a due diligence duty & must be reasonably informed before making a
decision
(a) if they are found to have failed to exercise due diligence & take a vote that is contrary to the best interests of the
shareholders, then they will be found responsible for breaching their duty.
(b) However, some states have enacted a “liability shield” that protect the BOD from any errors that they
make with respect to their duty of care  they will not be liable for any omission under the duty of care
(i) only applies to duty of care (does NOT apply to the duties of loyalty)
(2) (page 300): liability shield: directors do not have liability for breaching a duty of care.

v) RATIONAL BASIS AmEx v. Kamin: shareholders disagreed with a decision made by the BOD (s/h wanted to save 8M in
taxes) - - however, the record indicated that there was a rational basis for why they acts the way they did (9/28)
(1) BOD need to have a rational basis for their decisions - - decisions do not need to be perfect or profitable (can be
incorrect)
(2) courts will not interfere w/ BOD’s discretion unless it be made first to appear that they were acting in bad
faith or dishonesty
(a) not enough to allege an imprudent decision was made by BOD.
(3) Care Mart Duty – directors have a duty of oversight and this duty must be accurate (the directors must take
time to inform themselves and have systems in place so they can inform themselves)
vi) Miller v. AT&T: P wanted AT&T to recover debts from DNC. P alleged that BOD were violating laws, not just that they
were making a bad decision.
(1) business judgment rule does not protect the BOD from being able to violate federal laws/statutes.
(2) MBCA § 2.02 LIABILITY SHIELD IN THE AOI PROTECT BOD FOR BREACHES OF DUTY (ONLY IF THE CLAUSE IS
INCLUDED)
VII. DECISION –MAKING AND THE BUSINESS JUDGMENT RULE
(A) MINORITY DISCOUNT V. CONTROL PREMIUM – WRIGLEY CASE ON 276 THEY WILL NOT SECOND GUESS THE
BOARD OF DIRECTORS
(B) THE STANDARD OF LIABILITY THE BUSINESS JUDGMENT RULE PROVIDES THAT COURTS GENERALLY WILL NOT
SECOND GUESS DECISIONS MADE BY CORPORATE BOARDS OF DIRECTORS WHICH REFLECT THE EXERCISE OF
REASONABLE BUSINESS JUDGMENT EVEN IF THOSE DECISIONS VIOLATED THE RELEVANT STANDARD OF
CONDUCT
(I) THE BUSINESS JUDGMENT RULE THUS MAKES IT DIFFICULT FOR SHAREHOLDERS TO HOLD DIRECTORS LIABLE
FOR BAD BUSINESS
(II) DIRECTORS CAN TAKE INTO CONSIDERATION NON ECONOMIC FACTORS
vii) In re Walt Disney Co. Derivative Litigation (302): President was hired & then fired in less than a year. President
received a 30M severance package. P shareholders allege that 30M was a waste of corp funds
(1) Rational Basis: did the board make an informed decision?
(a) hired an expert & compensation expert was used to value the president
(b) also, no bad faith or negligence
(2) contractual payment cannot be constituted as waste - - judge decides what is considered waste

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 viii) DUTY TO MONITOR REVISITED Stone v. Ritter (320)
(1) doctrinal shift that the “duty to act in good faith” is not a part of the DUTY OF LOYALTY (three (3) fiduciary
duties to only two (2))
(2) DUTY OF CARE &
(3) DUTY OF LOYALTY

5) DUTY OF LOYALTY
A) OVERVIEW // FIDUCIARY DUTIES OF LOYALTY
I) FIVE BROAD DUTIES OF LOYALTY:
(1) SELF-DEALING
(2) CORPORATE OPPORTUNITY
(3) EXCESSIVE COMPENSATION
(4) COMPETING WITH THE CORPORATION
(5) CONTROLLING SHAREHOLDERS
II) DUTY OF LOYALTY APPLIES TO BOTH DIRECTORS & CONTROLLING SHAREHOLDERS

B) SELF-DEALING TRANSACTIONS
i) “for himself & against the corporation”
(1) Ex: landlord who wants his corporation to rent from him - - getting rent money & making the corp overpay
ii) INTERESTED TRANSACTIONS Globe Woolen v. Utica Gas (329): 2 companies entered into negotiations, D was director
of both co. & convinced P/Co. to enter a contract what would leaded to losses for P Corp. D had a conflict of interest
(1) an interested transaction is when a person is on both sides of the transaction & therefore has interest on both sides.
(2) “curing the transaction” - - can be cured by disclosing the information to corporate management taking a
vote by either bring information to corporation & let the corp decide what’s in their best interest
(a) (1) disinterested BOD or
(b) (2) a majority vote of the shareholders (after full disclosure)
(c) or take it to court for approval
(d) disclosure allows every shareholder will be fully informed
iii) MAJORITY VOTE & BOD DUTY Gilder v. PGA Tour: PGA passes a new rule banning a specific kind of golf club - - P wanted
to prevent the rule from being enforced. Alleged cannot be enforced because there wasn’t a majority vote bc 4 BOD members were
also PGA players
(1) courts may intervene to prevent of annul conduct on the part of directors’ fiduciary duty
iv) DEADLOCK Marciano v. Nakash (342): there was a 50/50 vote one whether or not the money company got was a loan.
(1) DEADLOCK: A SPLIT VOTE
(2) Equity v. Gift: equity would need to be paid in dividends whereas a gift there’s no repayment, interest or dividends
(a) Loans require repayment and incur interest // corporations act in paper
(b) Dividends are a return on investments (equity)
(c) Corporations do not repay equity unless its agreed upon
v) INTRINSIC FAIRNESS TEST (“Entire Fairness Test”) (348) : WHEN THERE’S A TRANSACTION WITH AN INTERESTED
DIRECTOR, THE INTEREST PARTY MUST DEMONSTRATE:
(1) utmost good faith,
(2) most inherit fairness of the bargain &
(3) fairness of price
vi) Cookies Food Products. Lakes Warehouse (348)
vii) NOTE: all business decision fall into either the intrinsic fairness test or business judgment rule depending on whether
there is an interested party on both sides of the transaction.
(1) Doesn’t matter if you’re a majority or minority shareholder ... still need to use intrinsic fairness if u have any interest
(2) Pg. 342 – 348 (1)Board Approval (2) Shareholder Approval, (3) Fairness at the time of Approval

C) USURPATION OF CORPORATE OPPORTUNITIES

i) Overview: (1) line of business test, (2) reasonable expectations, & (3) consideration of fairness (most difficult & broad)
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 ii) LINE OF BUSINESS TEST V. EXPECTANCY/INTEREST TEST Guth v. Loft (359): G/Def bought shares for himself & his
own company using P’s money & prevented P from acquiring that company.
(1) RULE: corporate officers & directors are not permitted to use their position of trust & confidence to further
their private interest.
(a) safest route when an opportunity is presented (whether directly or indirectly) is to disclose it to the bod
(2) LINE OF BUSINESS TEST: AN OPPORTUNITY IS W/IN A CORP’S LINE OF BUSINESS WHERE A CORPORATION IS
ENGAGED IN A CERTAIN BUSINESS AND THE OPPORTUNITY PRESENTED:
(a) embraces the activity
(b) Corp has fundamental knowledge (of the contents of the opportunity)
(c) practical experience
(d) ability to pursue (financial position)
(e) and is consistent with the expansion of the corporation
(3) INTEREST OR EXPECTANCY TEST: ONLY THOSE PROJECTS IN WHICH THE CORPORATION HAS AN ACTIVE
COMMERCIAL INTEREST OR EXPECTANCY
(a) “INTEREST” refers to the projects the corporation has an existing contractual right
(b) “EXPECTANCY” refers to projects under unsecured contracts with likelihood of maturing into contractual rights
in the future
(c) defines corporate opportunity by reference to current activities of the firm (as opposed to future)
iii) CORPORATE OPPORTUNITY DOCTRINE Northeast Harbor Gold Club v. Harris (369):D/President of Club was approached
twice to purchase property neighboring the club. D purchased in her own name w/o consulting BOD but told them after. Club/P sued D for usurpation
of corp. opportunity to purchase that property
(1) corporate opportunity doctrine recognizes that a corporate fiduciary should not serve both corporate &
personal interests at the same time - - needs to be fair & equitable
(2) DISCLOSURE!!!!!!! IS KEY!!!!!!! disclosing to only a few members with no paper record or vote is not sufficient
to cure the transactions.

D) COMPETING WITH THE CORPORATION

i) FIDUCIARY DUTY OF EMPLOYEES & DIRECTORS Lincoln Stores v. Grant (379): opened a competing hardware store &
stealing the pricing information to use in the competing store
(1) employee duty comes from agency law (agent’s duty to put principal’s interest over & above their own)
ii) Duane Jones v. Burke (384): Def worked at advertising agency but grew to dislike the founder of agency. Def opened
their own new agency taking a good amount of their employees & their customers.
(1) conduct of the individual defendants as officers, directors, and employees fell below the standard required by the
law of one acting as agent or employee of another.
iii) “ORDINARY EMPLOYEE” Dalton v. Camp (390): D was an ordinary at-will employee that was delegated his
responsibilities by management. D quit and took one of P Company’s clients. Did D breach his fiduciary duty?
(1) this court held that as an ordinary employee you are only bound to act in good faith & with due regard to the
interests of employer (employee-employer relationship) without more, there isn’t enough to establish employee’s
obligation as a fiduciary (not the majority approach)
(a) no evidence to suggest that employee’s position resulted in “domination & influence” on the employer.

e) EXECUTIVE COMPENSATION (393): easy for the BOD to award themselves a high compensation package, but courts don’t
really get involved.
i) the standard of review is the same as any business decision  business judgment rule
ii) courts are mindful of protecting packages under the rational that corp. director need to pay it to attract talent
iii) different forms of compensation:
(1) stock options
(2) loans
(3) bonuses
iv) need to pay executives coming in & pay them going out

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6) CORPORATE DEMOCRACY-STATE LAW // SHAREHOLDER VOTING (399)
A) OVERVIEW/INTRODUCTION:
I) IN ORDER FOR ANY ACTION TAKEN AT A SHAREHOLDER MEETING TO BE VALID MUST MEET THE FOUR (4)
REQUIREMENTS:
(1) CALL: DECISION TO HOLD A MEETING IN THE FIRST PLACE
(a) bylaws provide for the annual meeting
(b) BOD, designated individuals, or owners in a set % may call special meetings
(2) NOTICE:
(a) “proper notice” can be no less than 10 days or more than 60 days in advance
(b) for special meetings, the notice must include the purposes of the meeting
(3) QUORUM: MAJORITY VOTE (OR HIGHER IF STATED IN AOI OR BYLAWS)
(4) SUFFICIENT VOTE: MORE FOR A PROPOSAL THAN AGAINST THE PROPOSAL
ii) ARTICLES OF INCORPORATION: the public acknowledgment/notice of the corporation & its stocks. Includes information about the
(1) classes of stock
(2) par value of the stock
(3) the number of stocks
iii) BYLAWS: internal rules of operations (more mechanical/operations) include information such as:
(1) powers the various officers have
(2) how they are to conduct themselves
(3) procedural stuff (like meeting dates ...)

B) CLASSES OF SHAREHOLDERS/STOCK
i) Shareholders have a “bundle of rights” depending on their class (of stock) - - different classes of stocks means that
they have a “different bundle of rights”
(1) Ex: Class A v. Class B v. PFD Stock (look at Facebook class structure)
ii) the classes depend on what the BOD believe is in the best interest of the company at that point in time
iii) the determination of rights that are put into a stock is a function of bargaining power of the investor & company
(1) BOD has a lot of discretion in determining the rights & responsibilities they may want to put into a stock
(2) a high-profile investor may be able to dictate the terms in what they want in their stock certificate (ex. warren buffet)
(3) promoters/incorporators may be able to set up classes of stock initially, but typically BOD decided on more classes
of stock when corp is incorporated
iv) LEGAL BUT INEQUITABLE ACTIONS Schnell v. Chris-Craft Industries (402): s/h were unhappy with directors’ decision
to change the annual meeting from Dec 8 to Jan 11. - - was there an equitable reason for moving the annual meeting?
(1) RULE: inequitable action does not become permissible simply because it is legally possible
(a) strict compliance with corporate law or statute is not a defense if the action in itself is inequitable

c) CUMULATIVE VOTING
i) shareholders are entitled to cast votes equal to the number of share that they own multiplied by the number of
open director positions
ii) example: A owns 51 shares and there are 3 open director positions, so A has (51x3)= 153 votes to cast for the open
director positions
iii) other notes: cumulative voting & staggered boards, cumulative voting & the removal of directors, cumulative voting &
LLCs
iv) SIMPLE VOTING: MAJORITY VOTING

D) VARYING SHAREHOLDER RIGHTS

i) Lacos Land v. Arden Group (407): Principal S/H & CEO of P company proposed the idea issuance of a new class of
stock under the threat that S/H/CEO would oppose transactions that may be in company’s best interest.
(1) court holds that CEO & principal S/H was acting as a director & not a shareholder & as such has a duty to act
with complete loyalty to the interests of the corporation
(2) Note 2: Separating the Economic Rights from the Voting Rights

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 (a) Class A wouldn’t have voting rights, but superior rights to dividends whereas class B would have voting rights
but no rights to dividends - - this is not really practical, S/H of a publicly traded company will just sell their
stock when they’re unhappy
e) Additional Points:
i) classes of stock can be changed as business needs change
ii) treasury shares: company buys their stock back
(1) cannot receive dividends or vote on treasury stock
(2) buying back stock will increase the value of the company (bc it would result in less shares in the public market)

F) RIGHT TO INFORMATION
i) Sadler v. NCR Corp (415): shareholders wanted the shareholders list to get them to vote for their proposals - -
information is power in “proxy wars” - - this case is about accessing a shareholders list
(1) Historically, corporations kept the shareholders list on record.
(a) Nonobjecting Beneficial Owners (“NOBO”) List contains the names of those owning beneficial interests in
shares of a corporation who are given consent to the disclosure of their identity
(b) CEDE List: identifies the brokerage firms and other record owners who bought shares in a street name for their
customers and who have placed those shares in the custody of depository firms
(c) modern day // administrative shareholders list w/ technology: stock issued in a street name (in the name of the
investment firm) & then the firm reconciles WHO owns WHAT and the PERCENT
(2) “simplified shareholder lists” are kept by the corporation in their corporate offices & shared over registry
(i) the firm is the record keeper of the shareholders lists
ii) shareholders lists are important for:
(1) proxy fights or
(2) someone who wants to get access to the information
(3) courts will permit challengers to access those records (if they have a “proper purpose”)
(a) shareholders have a right to corporate information so long as the satisfy the standard of proper purpose
(b) proper purpose – a purpose that is economic in nature (NOT political, religious, or culture)
(i) economic in nature is somewhat limited because courts will not allow shareholder to second guess the
economic decisions of corporate management
iii) Haywood v. AmBase Corp (424): shareholders wanted to inspect documents regarding the CEO’s salary & corporation
denied the request.
(1) RULE: to access private corporate record, there must be a reasonable purpose.
(a) “reasonable”  business or financial
(2) look at 16.02 on pg 33 of BA statutes
iv) State ex re Pillsbury v. Honeywell (427): P bought shares of D corporation for the sole purpose of gaining access to D
corporation’s business affairs to convince BOD to act in some political way.
(1) P’s reasons were social, environmental, political & economic, but he framed his purpose socially (v. economically)
(a) note 2 (pg. 432) another case similar to this but the court there held that P did state a proper purpose to inspect
shareholder list because it was economic
(i) burden on corporation to show improper purpose
(ii) burden on shareholder to establish a proper purpose
(2) RULE: the power to inspect is the power to destroy therefore only those with “bona fide” interest [real or genuine
interest] in the corporation enjoy that power

G) PROXY CONTESTS/FIGHTS
I) OVERVIEW:
(1) PROXY VOTING IS WHEN SOMEONE IS VOTING ON YOUR BEHALF
(2) voting may occur either directly or indirectly (thru proxy or agency)
(a) proxies are permitting because it’s difficult to get shareholders all together in one place either because of the
dispersed ownership or dispersed geography

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 (b) proxy relationships are “agency relationships”
(c) now voting can be done electronically or by proxy
(3) goal of proxy contest is to get the most votes (for your proposal)
(a) shareholders may also “pool” their votes together to push an agenda - - comes up later...
(4) public relations elements of the proxy fights intersect with the legal elements of these same battles
ii) ACCESS TO CORPORATE RESOURCES Campbell v. Loews Inc. (436): P was seeking a preliminary injunction
restraining the defendant from using corporate funds, employees & facilities for the solicitation of proxies for the Vogel
group & from voting proxies so solicited
(1) “Management Group” has several advantages over shareholders including:
(a) access to corporate treasuries & can spend corporate money to solicit proxies
(b) can use the facilities & employees
(c) have a superior right to information
(2) “Insurgent Group” don’t have access or a right to the corporate treasury or other operations/facilities
(3) Management knows better the operations of the business (that’s why they have access) & shareholders do not
have a right to corporate treasury or resources (bc they’re not managing the operations of the company)
iii) REIMBURSEMENT (S/H) Rosenfeld v. Fairchild Engine & Airplane Corp (441): P brought stockholder derivate bc
Directors used expenditures from corporate treasury in order solicit stockholder support
(1) RULE: management can incur reasonable and proper expenses in defense of the company (from the
corporate machinery)
(a) shareholders only have a right to reimbursement IF they prevail ...
(i) a limitation on shareholders cause they have to use their own money upfront.
iv) VOTING BUYING & INFLUENCE Hewlett v. HP Company (446): allegation that HP engaged in vote buying
(1) determining vote buying allegation relies upon circumstantial evidence - - is there reasonable evidence of influence
or pressure? court found NO vote buying here
(2) RULE: shareholders must be allowed to exercise their vote freely without any influence (from corporate
management/BOD)

CLOSELY HELD CORPORATIONS & OTHER CLOSELY HELD ENTITIES

7) OVERVIEW
A) PUBLICLY HELD CO V. CLOSELY HELD CO.
I) PUBLICLY HELD: AVAILABLE MARKET & CAN SEE WHAT THE CO. IS TRADING (EX. GOOGLE, APPLE)
II) CLOSELY HELD:
(1) RELATIVELY SMALL # OF SHAREHOLDERS (TYPICALLY BT 1-12)
(2) NO AVAILABLE MARKET
(a) causes problems for shareholders because they have limited opportunity to sell their stocks
iii) Controlling S/H owns more than 51% or more ownership of shares - - can be a group or one person
B) EXIT STRATEGY:
i) When a shareholders buy into a closely held corporation, it is vital to consider the exit strategy
(1) once you buy-in, how do you cash out?
(2) Corporation is under NO obligations to buy back (or redeem) stock unless otherwise stated in the charter
(3) very important because there is not market for a CHC

c) Heightened FIDUCIARY DUTIES IN CLOSELY HELD CORPORATIONS (“CHC”)

i) In a CHC, when an opportunity arises, it must be brought to ALL of the shareholders ... not just some.
ii) FIDUCIARY DUTY IN CHC Donahue v. Rodd Electrotype Company (459): majority s/h in CHC purchased share from
3rd party & didn’t include the minority s/h in the opportunity to purchase
(1) there is a duty of loyalty among shareholders in a closely held corporation (like a partnership)
(2) “freeze outs”  controlling shareholder creating a “frustration to the reasonable expectations” of the
relationship

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 (a) Can apply to payment of dividends, corporate office, denial of employment opportunity, denying opportunity to
sell stock
(b) Profits are an expectation for shareholders (because you expect a return on your investment)
iii) McLaughlin v. Schenk (473): s/h wanted to exercise his options to buy stocks. the shareholder was also an employee &
he was discharged as an employee. court tries to determine what rights/privileges he can exercise.
(1) shareholders duty in a CHC may raise to the level of duty in a partnership.
(a) when analyzing “duty” the court will separate the different status an individual may hold in a closely held
corporation and analyze the “bundle of rights” under each position.
(b) “bundle of rights” for a shareholder is different than the bundle of rights of an employee.
(2) the standard of determining shareholder oppression is deciding whether it “frustrates the reasonable expectations” of
the relationship throughout the duration
(a) considerations:
(i) profits
(ii) equal rights (as the majority shareholders)
1. function of negotiation
(iii) dividends
(iv) employment
(v) exiting w/o hassle
1. expectation
(b) “reasonable expectations” is a function of bargaining power/process between the shareholder & the
corporation

D) SHAREHOLDER OPPRESSION (MAJORITY S/H DUTY TO MINORITY S/H IN CHC)

i) S/H oppression occurs when the majority shareholders prevent an opportunity from being extended to minority
shareholders (minority shareholders are not allowed to sell their stock)
(1) Courts will rule against majority shareholders when they find shareholder oppression
ii) REASONABLE EXPECTATIONS Meiselman v. Meiselman (482): father passed ownership to both sons (minority &
majority). majority s/h was “freezing out” the minority s/h (excluding him from meetings) & he was refused to access to
corporate information
(1) RULE: liquidation is permitted when necessary to the right & interests of the minority shareholder (if it falls
within their reasonable expectations of the relationship)
(2) Dissolution: the death of a company - - no longer authorized to do business
(a) the company will sell all their assets & distribute the remaining “pot of cash” to creditors.
(b) co. will usually “dissolve” when they’re in debt
iii) TRANSFER RESTRICTIONS // OPPRESSION Baur v. Baur Farms Inc (493): S/H in closely held corp. minority s/h was
bound to a transfer restriction forcing him to sell his shares at book value (which was outdated so very low compared to
FMV)
(1) courts in different jurisdictions may or may not enforce transfer restrictions
(2) takeaway: transfer restrictions may present the problem of oppression depending on the valuation method
agreed upon - - courts will look at reasonable expectations of the minority s/h to decide
(a) stream of income usually doesn’t matter unless using “net present value”
(i) FMV looks at the value of the shares today ...
(b) interest rates & net present value have an inverse relationship:
(i) higher interest, lower NPV
(ii) lower interest, higher NPV
iv) FRAUD & MISCONDUCT Gagne v. Gagne (503):

8) VOTING AGREEMENTS
A) OVERVIEW
I) VOTING (“SHAREHOLDER”) AGREEMENTS – GOVERNED BY CONTRACT LAW

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 (1) THE SHAREHOLDERS OWN THE SHARES (ECONOMIC INTEREST)
(2) shareholders have a right to enter into shareholder agreements & can agree as shareholders how they’re
going to vote their stock together

II) VOTING TRUSTS – REQUIRES FILING - - S/H WILL TRANSFER A STOCK TO A TRUST W/ A CERTIFICATE TO THE S/H
(1) THE TRUST (OR TRUSTEE) OWNS THE SHARES (ECONOMIC INTEREST)  “BECOMES SHAREHOLDER”
(2) S/H HAS THE RIGHT TO VOTE FOR DIVIDENDS (FOR A CERTAIN PERIOD)
(A) HOW TO VOTE IN WHAT CIRCUMSTANCES ...
(3) beneficiaries to a voting trust will receive the dividends
(4) on page 517: “a device whereby two or more persons owning stock w/ voting powers divorce the voting rights from the ownership, retaining to all intents & purposes the latter
(ownership) in themselves & the former (voting rights) to trustees ...”

III) PROXIES – GOVERNED BY AGENCY LAW (REVOCABLE)

(1) “AGENCY” PROXY IS ACTING AS AN AGENT FOR THE S/H
(a) no consideration needed
(2) proxy voting is a grant of a power to vote a stock a certain way consistent with the interest of the creditor
(a) usually an (1) employee relationship or (2) creditor relationship
(3) THE SHAREHOLDERS OWN THE SHARES (ECONOMIC INTEREST)
(4) “PROXIES COUPLED W/ AN INTEREST” - - IRREVOCABLE FOR A PERIOD OF TIME
(a) typically coupled (or supported) by an economic interest)

b) VOTING TRUSTS // FIRST RIGHT OF REFUSAL Ringling v. Ringling Bros (508): shareholders entered into an agreement to
vote together a certain way & one s/h failed to vote that way. The agreement held that where there was a disagreement it
would go to arbitration.
i) Is this a voting trust bc of the arbitration clause? Argument that the “arbitrator” would be the trustee bc parties are
bound to the arbitrator’s decision.
(1) court said no bc a trustee would have a continuing right to vote
(2) the voting power & economic interest are NOT separate (as it should be in a voting trust)
ii) First Right of Refusal: agreement that neither party can sell their stock without offering to another shareholder first.

iii) RULE: shareholders cannot agree as shareholders to vote & takeover anything that falls within the “province” of
the BOD
(1) against public policy & is unenforceable

c) PROXY COUPLED W/ AN INTEREST Ronnen v. Ajax Elec (522): an exchange of voting rights for a position on the BOD who
has access to all daily operations (agreement between siblings). N could vote on R’s shares & R would get a position on
BOD. R held an election w/o N present
i) This was a proxy couple with an interest (seat on the board, economic wellbeing of the company)  irrevocable
ii) Court held N had the right to vote the share to elect a BOD based on the agreement:
(1) “Ordinary changes”: director elections
(2) “Extraordinary sub matter: corporate mergers

d) ABERCROMBIE TEST (FOR VOTING TRUSTS) Lehrman v. Cohen (527): OG Common Stocks: AC & AL, New Stock: AD - -
L argued the creation of a new class of stock was creating a “voting trust”.. AD stock has voting rights only when there’s
deadlock between AC & AL
i) AD stock is not a common stock because it has an economic interest
ii) ABERCROMBIE TEST lays out the criteria for a voting trust (3 requirements):
(1) voting rights separated from the other attributes of ownership
(2) the voting rights granted are intended to be irrevocable for a definite period of time &
(3) the principal purpose of the grant of voting rights is to acquire voting control of the corporation

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 E) VOTING & QUORUM REQUIREMENTS FOR CONTROL
i) BYLAWS AS S/H AGREEMENTS Blount v. Taft (536): three families that held 41%, 41% & 18% of the shares, bylaws created an
executive committee (w/ one member from each family) & it stated that fulltime employees could be hired with unanimous consent of the executive
committee - - later meeting proposed amendment to delete that bylaw. P family disagreed & brought suit to enforce OG bylaws.
(1) bylaws may be considered a shareholder agreement

ii) QUORUM Gearing v. Kelly (541): case ab two s/h with equal shares who want control of the corp - -
director/shareholder intentionally did not attend meeting so there was no quorum, however they’re the ones who
brought suit
(1) effective corporate actions only exist where quorum is met - - an intentional act by director to not attend a
meeting knowing that it would frustrate corporate action should be discouraged by courts
(a) P here couldn’t bring suit bc of the “doctrine of clean hands” (for equitable relief, can only come to court with
clean hands”
(b) P acted intentionally so quorum was not met

iii) DECEIT & TRICKERY BY S/H Palisades v. Backer (544): B tried to take control of the BOD through deceit & trickery
by firing the new named CEO & director and appointing himself and changing bylaws to change quorum - - court said
the meeting amending bylaws is void.
(1) court will not sanction inequitable actions by corporate fiduciaries just because the acts are “legally
authorized”
(2) corporate acts are voidable when the board action is carried out by means of [affirmative] deception

9) SHAREHOLDER AGREEMENTS & DIRECTOR DISCRETION

a) RULE: shareholders agreeing as shareholders how they would be voting as directors in terms of compensation &
duration is not enforceable bc it’s infringing upon the province of the BOD EXCEPT WHERE
i) CHC & individual who are owner/operators of the corp &
ii) there’s no harm to a creditor or third party, then
iii) shareholder agreement to act as directors can be enforceable
b) courts allow the expectation as long as the shareholders are the only ones in the company & they’re not effect the interest of
any third party or creditor
c) SHAREHOLDER/DIRECTOR AGREEMENTS
i) NOT ALL BOD ARE ALSO S/H McQuade v. Stoneham (547): Shareholders entered into an agreement to do something
as directors, but not all BOD members were shareholders (not all BOD signed the S/H agreement)
(1) rule: stockholders may not agree among themselves to control the directors in the exercise of judgment vest in them
by virtue of their office to elect officers & fix salaries (pg 549)
ii) ALL S/H ARE ALSO BOD Clark v. Dodge (551): 2 directors on BOD & the two entered into a shareholder agreement ...
all shareholders are also directors
(1) Shareholders acting as shareholders can agree among themselves how they will act
(a) Shareholder’s predominate power is voting - - they are not authorized to run daily operations of the company
(that power is given to the BOD by statute)
(2) as the parties to the action are complete owners of the corporation there is not reason why the exercise of the
power & discretion of the directors cannot be controlled by valid agreement between themselves as long as
the interest of the creditors are not affected
(a) & it cannot impede on the director’s duty to the corporation
(b) there has to be unanimity between shareholders & directors (at 100%) then they can enter into
shareholder agreements that effectively takeover director decisions

d) Galler v. Galler (554): two brothers entered into a shareholder agreement that when one of them dies their family will control that equal
share. one brother dies & his wife didn’t receive the equal share (as the brothers had agreed upon) & evidence of a trust created by her
husband for her -

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 i) Holding: agreement bt brothers not enforceable (or void) because of the “undue duration” - - against public policy to
not have a duration
e) Somers v. AAA (561): 3 BOD & 2 Shareholders  S/H amended bylaws to change the number of directors from 3 to 2
(appointing themselves as directors)
i) the power to amend bylaws is vested in the BOD (by statute) unless otherwise reserved to the shareholders in the
articles of incorporation
(1) there must be constructive notice that the power is available
(2) here, that power was not reserved to the shareholders therefore their amendment to the bylaws was void

10) RESTRICTIONS OF TRANSFERS

A) GENERAL RULE: stocks/shares are freely transferable & can easily be transferred unless a company places a transfer
restriction
I) EXCEPTION: CORPORATIONS MAY PLACE RESTRICTIONS OF TRANSFER
(1) typically used in a CHC to avoid a situation where shareholders are forced into a business relationship with a
person they barely know
ii) MINIMUM STANDARD: all transfer restriction must be conspicuously noted on the share certificate
(1) some jx require that it also be listed in the article of inc. or bylaws
(2) must exercise some due diligence to figure out if there are any restrictions
iii) transfer restrictions are valid & enforceable if used to (MBCA §6.27 )
(a) maintain the corporation’s status when it is dependent on the number or identity of shareholders
(b) to preserve any relevant exemptions under the securities or
(c) for any other reasonable purpose
IV) TYPES OF RESTRICTIONS
(1) OPTION AGREEMENT
(A) RIGHT OF FIRST REFUSAL - - CORP HAS THE FIRST OPTION TO PURCHASE THE STOCK
(2) RIGHT OF REDEMPTION
(A) “BUY/SELL AGREEMENT” OBLIGATES THAT CORP OR ANOTHER SHAREHOLDER TO PURCHASE THE SHARES
(i) no obligation to buy-back stock unless there’s a redemption agreement
(B) “CALL” V. “PUT”
(I) CALL: company brings the stock back in
(ii) PUT: shareholder puts their stock on the company
(iii) articles of incorporation must have a redemption right to either “call” or “put:
(3) APPROVAL RIGHT
(A) NEED TO GET APPROVAL FROM CORPORATION FOR ANY TRANSFER
(4) TRANSFER PROHIBITION
(A) PROHIBITING TRANSFER TO A DESIGNATED PERSON OR CLASS OR PEOPLE
b) Louis Union Trust Co. v. Merrill Lynch (565): company has legal right to buy back the stock at book value – issue is figuring
out what price (book value v. market value - - what is the true value?)
i) court held that the transfer restriction is enforceable because s/h accepted the valuation at that time of agreement
ii) additional notes:
(1) book value is generally lower than fair market value
(2) example: book value would be how much I bought a house for v. market value is the sale history over the last 24
months (based on the cash flow)
c) Hartman v. BigInch Co (570): s/h agreement required the company to buy back the shares of any s/h who is involuntarily
terminated & the purchase must be made at “appraised market value on the last day of the year preceding the valuation”
i) “appraised market value”  dispute over the valuation method bc appraised market value cannot be equated to fair
market value.
ii) the restriction here can be enforced because the appraised market value of the shares is based on the market value of the
company & corresponds with the requirement of the s/h agreement

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 (1) discounts for lack of control and marketability cannot be taken into account in the calculation of the share’s value
in this compelled transaction (bc there is no sale of the open market) (575)
D) ANALYZING S/H OPPRESSION CASES (VIA TRANSFER RESTRICTIONS):
i) What is the real value for transfer purposes?
(1) Book Value?
(2) Net Present Value? or
(3) Fair Market Value?
ii) Documents will indicate how to value their company & courts will use that valuation
(1) Absent of such language (indicating what valuation method to use) the courts will default to fair market value

III. DUTIES OF CONTROLLING SHAREHOLDERS (CHAPTER 11)

3) FIDUCIARY DUTIES OF CONTROLLING SHAREHOLDERS

A) CONTROLLING SHAREHOLDERS GROUP OF SHAREHOLDERS WHO COMBINE VOTING POWERS & CONTROL THE COMPANY
(EX: CAN BE ON SHAREHOLDER WHO OWNS 75% OF THE COMPANY OR A GROUP WHO OWN MORE THAN 51% OF THE COMPANY)
I) DUTY TO ACT IN THE BEST INTEREST OF THE COMPANY &
II) A DUTY TO INFORM MINORITY SHAREHOLDERS OF ANY OPPORTUNITIES THAT MAY BE ARISING FOR THE COMPANY
iii) also, they cannot steal opportunities for themselves to the detriment of a minority shareholder (must inform minority
shareholders of opportunities
b) INTRINSIC FAIRNESS DOCTRINE Sinclair v. Levein (577): parent company & subsidiary company
i) INTRINSIC FAIRNESS INVOLVES BOTH (1) HIGH DEGREE OF FAIRNESS & (2) A SHIFT IN BURDEN OF PROOF
(1) controlling s/h has the burden of establishing that the transactions were objectively fair
(a) fair in price
(b) terms & performance obligations were fair
ii) SELF-DEALING ISSUE: must be demonstrated that parent is on both sides of the transaction & there was a detriment to
the shareholders - - here, subsidiary received payment of every share so the court applied the business judgment rule.
iii) BUS DEV: here no opportunities were denied to subsidiary so court again applies business judgement rule
c) SELF-DEALING Zahn v. Transamerica Corp (583): D Corp
d) Jones v. HF Co. (589)
i) Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner
detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must
benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.
ii) Look at pg 592 and 593

4) SALE OF CONTROL TRANSACTIONS (10/31)

A) MUST ANALYZE WHAT IS BEING BOUGHT FOR THE PRICE OF THE STOCK.
b) Zetlin v. Hanson (601) minority shareholders are entitled to protection against abuse but not entitled to inhibit the
legitimate interests of other shareholders
i) controlling shareholders get to keep the premium when selling the stocks they own.
c) Gerdes v. Reynolds (602) controlling s/h are free to sell stocks, but cannot sell or terminate it if it puts the principal
(corporation) in danger – look at pg 604
i) violates their fiduciary duty
ii) officers
d) Essex Universal v. Yates (608)
i)
e) Perlman v. Feldman (616) as a director/shareholder ... wherever there a market shortage, the opportunity does not
belong to the majority shareholder  it belongs to the corporation
f) Thorpe v. CERBCO (623) rights of a controlling shareholder v. the duties of the BOD
i) right to sell their controlling stock at a premium price (shareholder right)
ii) fiduciary duty of corporate director to act in the best interest of the corporation

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 (1) duty of loyalty required them to disclose, but there is the right to veto.

DERIVATIVE LAWSUITS (CHAPTER 20)

5) DERIVATIVE ACTIONS & INDEMNIFICATION OF OFFICERS & DIRECTORS (chapter 20)

a) Derivative v. Direct Suits
I) OVERVIEW:
(1) in a derivative lawsuit, the shareholder brings a lawsuit in the name of the corporation
(a) any monetary will go to the corporation, not the shareholder (bc the corp is the plaintiff)
(b) the shareholders judicial remedy for mismanagement or wrongful acts of directors, officers, or third
parties is by derivative or representative suit on behalf of the corporation - - principal remedy for minority
s/h who have been defrauded
(2) in a direct lawsuit, the shareholder has suffered an injury as a shareholder that is separate & distinct from any
injury done to the corporation - - s/h brings suit in their own name
(a) monetary recovery will go to the shareholder
(3) courts often find difficult to classify a plaintiff’s claim as an individual or derivative (ex: a suit to compel dividends)
(4) where shareholder derivative suits are brought, corporate resources must often be expended to defend against the
suits & pay for any result settlements.
ii) “TOOLEY TEST” Tooley v. Donaldson (1151): D entered into merger agreement w/ another corporation and used
extensions before tendering the offer. P S/H’s allege damages in time-value money
(1) DIRECT = DIRECT INJURY TO THE S/H V. DERIVATIVE = INJURY TO THE CORPORATION
(2) SIMPLIFIED TEST FOR DERIVATIVE SUITS:
(a) who was injured AND
(b) who receives the recovery
iii) DERIVATIVE SUITS & LLC’S Dinuro Investments v. Camacho (1157): 3 LLCs formed another LLC together. Member
of LLC suffered from damages due to the mismanagement of other LLC members - - here, the member couldn’t file a
derivative lawsuit
(1) derivative actions may also apply to LLC’s
iv) pg 1157 note 2

B) STANDING REQUIREMENTS
i) a shareholder must establish they have standing to bring a lawsuit on behalf of the corporation (derivative suit) by
establishing that
(1) they owned shares in the corporation at the time the wrong was committed (must meet contemporaneous
ownership requirement);
(2) they will continue to own shares in the corporation (continuous ownership); AND
(3) the interest of other shareholders are adequately represented (fair & adequate representative requirement)
ii) if any one of the prongs fails, then shareholder does not have standing to continue the derivative lawsuit
(1) the conflict: who has the authority to make the decision to proceed with the lawsuit?
(a) corporate management has the authority to commence, defend or control actions on behalf of the corporation
(b) courts have held that corp management has the authority except when there’s an “excuse” or “demand
futility”
iii) Grosset v. Wenaas (1166): s/h filed a derivative lawsuit after selling shares after a decision to merge - - court said no
standing, must own the stock throughout the entirety of the litigation
iv) Pg 1174 note 1

C) DEMAND REQUIREMENT (PG 1175)

i) demand must be made on the corporate management: shareholder has to make a demand (ex. demand letter to
sue X) but sometimes the demand is futile or excused when:
(1) BOD is interested in the transaction or

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 (2) they lack the independence
ii) Grabow v. Perot (1178):rule: shareholder must make a demand on the board of directors unless the demand is
excused, or the demand is futile
(a) when shareholder bypasses the demand requirement, they have to show some kind of bias of the BOD for
their demand to be excused/futile
iii) S/H PASSIVELY CONCEDING Levine v. Smith (1187) court established that when a shareholder makes a demand on
the BOD, they are passively conceding to the independence of the directors.
(1) when/if the BOD refuses a demand, the court will ONLY investigate whether that decision was made in (1)
good faith & (2) reasonableness
(a) did the BOD make their decision on an informed basis? (“business judgment rule”)
iv) UNIVERSAL DEMAND In Re PSE&G Shareholder Litigation (1190) shareholder must make a demand when making
any derivative claim
(1) The BOD has final say regarding ALL lawsuits, so often shareholders have a difficult time trying to persuade the
BOD
D) TAKEAWAYS/NOTES
i) demand excused: shareholder will go straight to court (paper is not a letter, the paper is a complaint)
ii) demand refused: shareholders may only challenge the decision process of the BOD (when corp management refuses
their demand to sue)
(1) BOD is presumed to be independent because if they weren’t independent then shareholder wouldn’t have even
sent the demand letter
iii) Some BOD create “special litigation committees” to create a perception of independence and distance

FINANCE AND ACCOUNTING

6) CORPORATE FINANCE (AN INTRODUCTION) (chapter 22)
a) Accounting Basics
i) AUDITORS Ultramares Corp v. Touche (1223): is D liable to P for being negligent in their auditing because P relied on
D’s certification issued to a contracted party (between D & other company) - - court held that financial statements
“presents fairly”
(1) RULE: auditor does not owe responsibility to a third party unless it’s contracted for
(a) auditors do not audit 100% of all financial transactions, they sample audit a small & certain percent
ii) Generally Accepted Accounting Principles (“GAAP”): general accounting rules on how to report & record financial
transactions
(1) First In First Out (“FIFO”) v. Last In First Out (“LIFO”)
(a) EXAMPLE:
(i) (8/1/22) book value = $300
(ii) (12/1/22) book value = $375
(iii) sale: $500
1. FIFO: $500 - $300 = $200 (profit) (bought in first on 8/1/22)
2. LIFO: $500 - $375 = $125 (profit) (bought in last on 12/1/22)
(2) management has the discretion to choose which GAAP principle to use
(3) the method followed (as determined by management) will indicate the profitability of the corporation

B) DIVIDENDS: PROFITS THE CORPORATION INCURS THAT IS PAID OUT TO SHAREHOLDERS

I) OVERVIEW:
(1) dividends come from the customer (the profits the company makes from the goods & services they provide)
(a) dividends are paid out to the shareholders (dividend is a pro rata “proportional” to the number of shares
owned)
(2) capital comes from the investors
(3) BOD has the power to declare dividends
ii) Payment of Dividents

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 (1) Retained Earnings: “first bucket” profits from customers
(a) dividends paid from retained earnings first
(2) Return of Capital: “second bucket”
(a) when retained earnings is exhausted ... take money from return of capital
(3) Capital Gains: “third bucket”
(4) return paid to the shareholders for their risk of investing in the company
(a) dividend amount is determined by the BOD

c) TESTS for determining if dividends have been declared properly - - whether company has sufficient property to distribute
dividends
i) MAKE SURE THE PAYMENT OF THE DIVIDEND IS NOT GOING TO IMPAIR THE COMPANY

II) SURPLUS PROFITS TEST: (PAR VALUE V. WHAT IS PAID) - - IS THERE SUFFICIENT RETAINED EARNINGS OR APIC
(1) RETAINED EARNINGS: HAS THERE BEEN ENOUGH PROFIT BUILDING UP TO PAY DIVIDENDS?
(2) ADDITIONAL PAID-IN CAPITAL (“APIC”) : ANY ADDITIONAL MONEY S/H PAID FOR STOCKS
(A) PAR VALUE IS $1 BUT S/H PAID $10 = THE $9 IS THE “ADDITIONAL” PAID IN CAPITAL
(3) PAR VALUE: ACTUALLY, VALUE OF THE STOCK
(a) not really used anymore, OG used to indicate how much legal capital the company has

III) SOLVENCY TEST (WILL PAYMENT OF DIVIDEND IMPAIR FUTURE OPERATIONS?)

(1) CASH FLOW CAN THE COMPANY PAY ITS DEBTS AS THEY COME DUE?
(2) BALANCE SHEET ARE THE ASSETS GREATER THAN THE LIABILITY?

D) CASES:
i) UNREALIZED APPRECIATION Randall v. Bailey (1239): can unrealized appreciation of fixed assets (real property in this
case) be relied upon for paying out/declaring a dividend
(1) “unrealized” because the property isn’t sold & the value of it can go up or down.
(2) however, the company can “lock in the gain” by selling the fixed assets (that has the appreciated value) &
collecting the profit then payout dividends from that profit
ii) Morris v. Standard Gas (1245): P filed an injunction to stop the payments of the dividends bc P thought dividends were
improper under the statute (based on his calculations the dividends were short)
(1) if there are sufficient retained earnings then management has the discretion to decide whether to payout the
dividends
(a) can look at previous or current fiscal years.
(2) note: cumulative stock or cumulative dividend  when dividends are not paid out and they accumulate

E) OTHER DISTRIBUTIONS/NOTES
i) Neimark v. MKS (1272): trying to determine is the company can responsibly make a dividend payment (whether there
has been enough profit to make distributions) - - court goes thru solvency & surplus tests.
(1) establishes the [in]solvency test & surplus test
(a) most jx look at retained earnings & balance sheet
ii) Additional Notes:
(1) REDEMPTION AGREEMENT: COMPANY AGREES TO BUY BACK THE STOCK FROM SHAREHOLDER (EITHER CALL OR
PUT)
(a) NO OBLIGATION UNLESS PREVIOUSLY AGREED UPON
(2) LIQUIDATION AGREEMENT (OR TRANSACTION)

f) Stock Subscriptions // Watered Stocks

i) watered stock: when a shareholder buys stock but doesn’t pay the full price (ex. buys $1,000 worth of stocks, but only
pays $800) the “discounted” is the watered stock

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 (1) Bing Crosby v. Eaton (1299): P wanted to recover the difference between par value of stock & the price paid for
stock
(2) if the company goes bankrupt, the shareholder will still be liable to the “watered” stock (ex. the $200 not paid)
(3) water represents the deficiency that’s not paid in
(a) Shareholder forgets to pay in
(b) company doesn’t invest
(c) company sells stock on payment plans
(i) sh is only at risk to their invested amount, they pay in what they agreed to buy the stock for

IV. OTHER ENTITIES

1) CHOICE OF ENTITY (chapter 22)

a) Choice of Entity
i) Formation/Management/Liability/Taxation/Transferability
ii) Types: Sole Proprietorship, Partnership, Limited Partnership, Corporation, Limited Liability Corporation, Limited
Liability Partnership, and Limited Liability Limited Partnership
iii) handout

2) SOLE PROPRIETORSHIP
A) OVERVIEW:
I) NO FILING, UNLIMITED LIABILITY FOR SOLE PROPRIETOR, NOT A TAXABLE ENTITY
b) Credit Associated v. Carlbom
i) sole proprietorship allows sole proprietor to operate under a different trade name
(1) not a separate entity, but allows for separate filing & separate name
c) when doing business with sole proprietor, you need signature of the individual.
d) There is no separate legal entity for a sole proprietorship

3) PARTNERSHIPS
A) OVERVIEW:
I) GOVERNED BY UPA
II) PARTNERSHIP: CARRYING ON A BUSINESS FOR PROFIT
(1) SECTION 6 OF THE UPA
III) PARTIES DO NOT HAVE A CONTRACT THEN THE UPA IS YOUR CONTRACT
(1) THE LEGISLATORS WILL APPOINT THE CONTRACT FOR YOU
(A) THIS IS THE DEFAULT SETTING
(2) ONE OF THE HARDEST THINGS OF A GENERAL PARTNERSHIP IS THAT THERE IS JOINT AND SEVERAL LIABILITY
(A) YOU ARE PERSONALLY LIABLE FOR OTHER PERSONS CONDUCT
(B) I OWE YOU A FIDUCIARY DUTY- PARTNERS OWE ONE ANOTHER A FIDUCIARY DUTY OF LOYALTY AND CARE
IV) BENEFITS OF A PARTNERSHIP
(1) VERY EASY TO ENTER INTO
(2) SINGLE LAYER OF TAXATION
(3) DOESN’T SEPARATE OWNERSHIP AND CONTROL, BOTH PARTIES HAVE EQUAL CONTROL OR CAN DECIDE HOW THEY
WANT TO APPOINT A MANAGEMENT COMMITTEE
(A) MANAGEMENT COMMITTEE DOES WHATEVER POWERS THAT YOU GIVE THEM FROM THE PARTNERSHIP, IT LOOKS
LIKE THE BOARD OF DIRECTORS MAKING DECISIONS ON BEHALF OF THE PARTNERSHIPS
B) CREATION OF A PARTNERSHIP // INADVERTENT PARTNERSHIP
i) Peed v. Peed: ex-husband & wife owned farm together, then got a divorce. Ex-wife wants profit from the sale of a cow –
entitled to the profits if it was a partnership
(1) partnerships can be formed orally or by conduct
(2) inadvertent partnership is easy to create - - if it produces a profits it’ll create a partnership
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 ii) Martin v. Peyton: P, F, & K loaned money to Co. - - did this create a partnership based on loan agreement? Debt v.
Equity. court said no partnership
(1) loan agreement: no indication of partnership
(a) interests was assigned to the CO.
(2) indenture: a security agreement to secure performance of the terms of agreement
(a) trustees acted as security
(i) security agreement to secure repayment of the loan
(b) collateral for performance of the agreement
(3) option agreement gives the option to enter a firm at a later date
(a) this was never exercised
(4) you have to follow the paper; a loan agreement establishes the terms of a debtor and creditor relationship
C) AUTHORITY DISTRIBUTION
i) Summer v. Dooley: agreement between parties to agree to the hiring of a third party. A partner hires someone else and
demands payment from his partner for employee’s salary although the partner objected to hiring the 3 rd employee
(1) A partner cannot bind the other unless there is an agreement between the two
(a) oral agreements are permitted
(2) the parties have to think ahead of time and make an agreement before conflict can arise
ii) LIABILITY OF PARTNERS National Biscuit v. Stroud: partner refused to pay a company the price of bread ordered by
his partner. (argued he wasn’t personally liable for the purchases made by partner)
(1) PARTNERS ARE LIABLE FOR EACH OTHER’S DECISIONS WHERE THE DECISION WAS AN “ORDINARY MATTER
CONNECTED WITH THE PARTNERSHIP BUSINESS”
(a) FOR THE PURPOSE OF ITS BUSINESS & W/IN THE SCOPE OF THE BUSINESS REGARDLESS OF ANY
DISAGREEMENT BT PARTNERS TO ACT/NOT ACT, THEY ARE BOTH STILL LIABLE TO THIRD PARTY
(i) ACTIVITIES W/IN THE SCOPE OF THE BUSINESS SHOULD NOT BE LIMITED
(2) WHEN THERE’S A THIRD PARTY INVOLVED THEY LOOK TO PROTECT (GENERALLY THE CREDITOR) THE THIRD PARTY
INTERST

D) TERMINATING A PARTNERSHIP
i) Page v. Page: P wanted to dissolve the partnership (at will v. term partnership) court says that partnership agreement &
history indicates that their partnership is “at will” so can be dissolved at will
(1) TERM PARTNERSHIP: a set term or length of time for a partnership to exist
(a) Joint Venture: a partnership for a specific undertaking and when specific undertaking is over, then partnership
is over; partnership for a purpose
(2) AT WILL: either partner can terminate at any time with limitations
(a) must fulfill fiduciary duties &
(b) termination must be in good faith
(3) at termination the company has to wind down, when it winds down they cannot engage in any new business
opportunities
(a) they need to liquidate all assets first and pay off creditors
(4) Modern Approach
(a) disassociation- they can disassociate from the partnership without resulting in a termination

4) LIMITED PARTNERSHIPS
A) LIMITED PARTNER V. GENERAL PARTNER
I) LP: MONEY/INVESTMENT PARTNER,
(1) PROVIDE MONEY
(2) LIMITED LIABILITY
II) GP: OPERATIONAL & MANAGEMENT PARTNER , A PARTNERSHIP AT WILL AND YOU CAN DISSOLVE IT AT ANY TIME
(1) MANAGE THE BUSINESS AND MAKE DECISIONS, THEY TAKE AN ACTIVE ROLE IN MANAGING THE ROLES
(2) TAKES ON ALL THE LIABILITY

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 b) Red River Wings v. Hoot (71): majority limited partner effectively become general partners when they attempt to takeover
company - - they gave up their shield of limited liability
i) majority LP acting with the GP are subject to the fiduciary duty of loyalty & care AND obligations of good faith
& fair dealing that are applicable to partners
ii) when a limited partner goes into a general then it triggers fiduciary duties
iii) majority LP owe fiduciary duty to minority LP
iv) Partnership agreement- this is a contract and the purpose is to establish the rights and performance obligations of the
parties. SO if someone fails to follow the agreement then they are in breach of contract and breach of loyalty.
(1) Note 1
c) Gateway Potato Sales v. GB Investment (78): RUPLA protects individual investors from liability of actions taken by the
entity UNLESS the investors take control of operations
i) If they take control of any operations then they can become liable
ii) Note 4
5) LIMITED LIABILITY PARTNERSHIPS
A) THE LIMITED PARTNER IS LIABLE FOR THEIR NEGLIGENCE OWN NEGLIGENCE & FOR THE NEGLIGENCE OF THOSE THEY
DIRECTLY OVERSEE
I)
& THE ENTITY IS LIABILITY FOR THAT PARTNER’S NEGLIGENCE
II)
CO-PARTNERS ARE NOT LIABLE FOR THE NEGLIGENCE OF THE LIMITED LIABILITY PARTNER
b) Megadyne Info Systems v. RON (89): a law firm is sued for the negligence of one partner
i) The entity itself is liable but the partners around are not liable as a general proposition, look at uniform 30C.

6) LIMITED LIABILITY COMPANIES

A) OVERVIEW:
I) MEMBERS  NOT PARTNERS - - MEMBERS ARE RESPONSIBLE FOR THEIR OWN ACTION IF THERE’S NEGLIGENCE, BUT
THEY ARE NOT RESPONSIBLE FOR THE NEGLIGENCE OF THEIR CO-MEMBERS
(1) & THE ENTITY ITSELF IS LIABLE FOR ANY NEGLIGENCE THAT MAY OCCUR WHEN CONDUCTING ITS BUSINESS
b) OPERATING AGREEMENT sets out the terms a party is bound to
i) LLCs incorporated by Articles of Organization (not incorporation)
ii) “... serve as contracts that set forth the rights, duties & relationships of the parties to the agreement”
(1) objective standard
c) Harbison v. Strickland: daughter sues mom for selling property she sold property to son lowering the value of co (violating their operating agreement)
i) MATERIAL ADVERSE EFFECTS: a term that is defined in the operating agreement [contract] that parties cannot amend
w/o consent of all the parties
(a) if not defined then, its whatever is material to the “reasonable person”
ii) operating agreement for an LLC cannot unreasonably restrict a members right to information, to eliminate a managers
duty of loyalty or to unreasonably reduce the duty of care (98)
iii) law of agency applies
d) MEMBER MANAGED( ALL GET A VOICE) V. MANAGER MANAGED LLCS( SELECT PEOPLE TO BE THE VOICE LIKE BOD)
In Re: Sky Harbor Hotel
i) PRESENTS 3 QUESTIONS
(1) . Whether a manager of an LLC owes common law fiduciary duties to the company.
(a) Court said yes bc the agency law applies on pg
(2) Whether a member of an Arizona LLC owes common law fiduciary duties to the company.
(a) Yes, as long as they are an agent of the LCC
(3) Whether an LLC’s operating agreement can lawfully limit or eliminate fiduciary duties
(a) Yes, Members owe fiduciary duties if acting as agents, and these duties can be limited by a valid operating
agreement, except for the implied covenant of good faith and fair dealing.
(b) Rst 205
ii) MEMBER MANAGER members of an LLC all owe a fiduciary duty
(1) all are agents of the LLC for the purpose of carrying on its business in the usual way

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 iii) MANAGER MANAGED members are not automatically agents where the power is vested in more than one person
(1) however, if management is vested in one or more managers, members are not automatically agents [bc of their
membership] except to the extent that authority has been delegated to them by the manager or the operating
agreement
e) operating agreements- this is a contract and the benefit is it provides limited liability may limit or eliminate fiduciary
duties [“common law duties”] except for good faith & fair dealing
f) You can “pierce the corporate veil” for a member of an LLC (Kaycee Land v. Flahive)
g) Unless otherwise decided, when all members withdraw the company must dissolve itself (§123(a)) (Lieberman v. Wyoming)
I) WITHDRAWAL OF MEMBERSHIP V. WITHDRAWAL OF CAPITAL CONTRIBUTION
(1) §120 ONLY GOVERNS INITIAL CAPITAL CONTRIBUTION [CASH & PROPERTY] however does not account for the
member’s value and contributions that are not capital
(2) §119 if the operating agreement does not provide, distribution shall be made based on the value of the contributions
made by each member to the extent they have been received by the LLC & have not been returned
(a) member argues that “contribution” is not clearly defined & does not account for the value of the member
(b) value may also include time, effort & stuff the member contributed to increase the value of the company
(3) to see if hes entitled to it check the operating agreement and then the statute
(a) he was entitled to 20,000 instead of 400, the company is resisting because an LLC is nothing more than a
contract company and they are free to determine how they want to allocate losses and give profits
(b) there is a high degree of flexibility into the agreement, you need filing and there is a cost associated
(i) only one layer of tax for an LLC unless they want to be treated
(ii) regular corporations have two layers of tax

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