Definitions
What is a closely-held corporation?
No more than 30 stockholders, shares subject to transfer restrictions, no public offerings, certificate of incorporation specifies that it is closely held
Del. Sects. 342 - 344
Name three things shareholders vote on
Electing directors (plurality default)
Amending Charter (Shareholders AND Board)
Amending Bylaws (Shareholders AND Board)
Merger (Shareholders AND Board)
Sale of Substantially All Assets (Shareholders AND Board)
Dissolution (Shareholders and Board)
What three components make up the duty of loyalty?
1. Duty not to compete
2. Duty to account to the business (share business opportunities)
3. Duty not to act with an adverse interest
This case created the Business Judgment Rule
Van Gorkom
When there is an alleged breach of a fiduciary duty and there is NO conflict of interest...
The Business Judgment Rule (start with the presumption that the business decision being complained about was a valid business decision)
What is Shareholder Oppression?
When the majority shareholders act in a way that unfairly prejudices the minority shareholders.
What is the difference between a shareholder voting agreement and a shareholder control agreement?
Shareholder voting agreements are generally upheld in the court. This is because it's simply an agreement among the shareholders to vote in a particular way on a particular topic. It gives groups of shareholders the ability to gain some power within the organization without moving beyond the bounds of shareholder rights.
Shareholder control agreements are generally NOT upheld by the court. A shareholder control agreement is generally the shareholder's attempt to take power away from the board by dictating exactly how the board should operate. Control agreements generally try to act in areas where they do not have power. Board control is a tenant of corporate law - as such, courts do not like when shareholders try and take that control.
What fiduciary duty cannot be waived?
Duty of good faith and fair dealing
"a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory render a director liable for losses caused by non-compliance..."
AKA: there needs to be a compliance protocol that is monitored!
In re Caremark
There is an alleged breach of fiduciary duty and there IS a conflict of interest present
Basic Framework (NOT BJR):
Presume the decision is invalid, the defendant's then have the burden to prove:
1. The decision was approved by a majority of informed and disinterested directors, and is valid under the resulting standard of review;
2. The decision was approved by a majority of informed and disinterested shareholders, and is valid under the resulting standard of review; or
3. The decision was fair to the corporation
What is an exculpation clause?
A clause in a corporation's articles of incorporation that limits the personal liability of a director or a stockholder for monetary damages based on a breach of fiduciary duty.
Specifically for any breach of the director's duty of loyalty, for acts not in good faith, and for improper personal benefit.
Del. Sect. 102(b)(7)
What is the Massachusetts approach to shareholder oppression?
Court first asks majority shareholders whether there was a “legitimate business purpose” for action. If yes, burden shifts to minority shareholder(s) to show that the business could have been done by less harmful means.
Leslie v. Boston Software Collaborative, Inc
What are the two components of fairness?
1. Fair Dealing
2. Fair Price
Created the standard for assessing good faith in BJR: intentional dereliction of duty
"Deliberate indifference and inaction in the face of a duty to act is...conduct that is clearly disloyal to the corporation."
Disney
BONUS: NAME THAT CASE (extra 100 points)
Established the two factors of the fairness test as utilized in the traditional conflicts framework
Valeant Pharmaceuticals
What are the three prongs of the Business Judgment Rule?
1. Defendants were grossly negligent in informing themselves about the decision;
2. Defendants did not act in good faith;
3. Decision was extremely clearly not in the best interests of the company
When may a shareholder remove a director?
Shareholders may remove with or without cause (unless a staggered board), in which case removal only for cause unless certificate otherwise provides
Del. 141(k)
What duty requires there be corporate compliance and oversight?
Duty of Care
Used Caremark to create two prongs:
(a) the directors utterly failed to implement any reporting or information system or controls; OR
(b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems
Stone v. Ritter
BONUS: What standard follows the answer to this question?
Was the decision approved by a majority of informed and disinterested directors?
If yes: presume transaction was a valid exercise of business judgment
If no: burden is on the plaintiff to show it was not, under one of the three prongs of the BJR
What are the two steps of Unocal?
Unocal First Step: In the face of inherent conflict, the directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's ownership. However, they satisfy their burden by showing good faith and reasonable investigation - proof of good faith and reasonable investigation if enhanced by use of independent directors
Unocal Second Step:This is an element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.
Use UNOCAL when assessing corporate take over decision
What is shareholder primacy?
BONUS (extra 100 points): What does Minnesota's corporate constituency statute say and how does that impact shareholder primacy?
Double BONUS (extra 200 points): What does DE say about shareholder primacy?
Theory in corporate governance that shareholder interests should be assigned first priority relative to other corporate stakeholders
BONUS: Minn. Stat. 302A.251 Subd. 5 states that directors may, when determining the best interest of the corporation, consider the interests of other beyond just the shareholders. This means that decisions that don't necessarily directly benefit the shareholders are not per se invalid/violations of a fiduciary duty
Duty of board is to maximize shareholder gains. (Ebay)
How can a corporation waive personal liability for board members who violate fiduciary duties?
An exculpation clause in the articles of incorporation!
"in controller buyouts, the business judgment standard of review will be applied IF AND ONLY IF:
(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and majority of the minority stockholders;
(ii) the Special Committee is independent;
(iii) the Special Committee is empowered to freely select its own advisers and to say no definitively
(iv) the Special Committee meets is duty of care in negotiating a fair price
(v) the vote of the minority is informed and
(vi) there is no coercion of the minority."
M & F Worldwide Corp. v. Kahn
When there is a conflict and no controlling shareholder...What question do you ask?
BONUS: If the answer to the question is yes, what standard is applied?
Ask if there is approval by a majority of informed and disinterested shareholders
If YES: evaluate under the business judgment review/waste standard