Biz Orgs Albert Roadmaps

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BIZ ORGS ALBERT- FALL 2009

ROADMAPS FOR ESSAYS

Contents
AGENCY..................................................................................................3
APPARENT AUTHORITY............................................................................................ 3
HYPOs...................................................................................................................... 3
PAULA THE PRODUCER HYPOS................................................................................3
RATIFICATION see p. 34 analysis questions and outline TRICK..........................5
PARTNERSHIP.........................................................................................5
RULES FOR DISTRIBUTION....................................................................................... 5
DERIVATIVE LITIGATION..........................................................................5
DUTY OF LOYALTY...................................................................................6
IN order to see if a vote is valid:..............................................................................6
MBCA 8.61(b) 1 = too scary minimum of disinterested directors has to be 27
Corporate Opportunity Doctrine Problems DELEWARE LAW....................8
Directors and officers cannot take for themselves opportunities presented to them
in their corporate capacity that:..............................................................................8
(1) The corporation is financially able to take advantage of................................8
(2) Are within the corporations line of biz and is of practical advantage to it.....8
(3) Is one in which the corporation has an interest or expectancy; and...............8
(4) By embracing the opportunity the officer or director would create a conflict
btwn his or her self-interest and that of the corporation......................................8
Corp Opp PROBLEMS............................................................................................... 8
BJR BURDEN OF PROOFNEED TO FIND IT ROCK SOLID.............................9
What two standards does the court identify?..........................................................9
Business judgment rule: Burden of Proof on plaintiff to rebut the BJR..................9
Intrinsic fairness: Burden of Proof on defendants to show transaction was fair to
Sinven.................................................................................................................. 9
MY UNDERSTANDING............................................................................................... 9
BAYER...................................................................................................................... 9
Wheelabrator .....................................................................................9
DUTY OF CARE......................................................................................................... 9

1
(1) Disclosure....................................................................................................... 9
(2) Duty of care.................................................................................................... 9
(3) DUTY OF LOYALTY............................................................................................ 10
2 PART STANDARD P. 372....................................................................................... 10
(1) challenged transaction btwn a corporation and its directors........................10
(2) challenged transaction btwn corporation and its controlling shareholder.. . .10
securities.............................................................................................11
Short Swing Profits...............................................................................12
STEPS.................................................................................................................... 12

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AGENCY

APPARENT AUTHORITY
You must always look at HOW the TP learned of the As alleged authority and ask whether P
reasonably can be said to have been the source of that knowledge

HYPOs
Paul owns an apartment building and has hired Ann to manage it.

Hypo #1

o P tells A to hire a company to cut grass


Actual authority P = bound
P would not be bound if she hired a landscaper to shape the
bushes into Edward Scissorhands shapes
A jury would be needed but cut the grass = simple

HYPO #2

Without express instructions, Ann hires a janitor to clean the building. Is Paul bound
by the employment contract with the Janitor?
Actual implied authority when youre a building manager you need a janitor
If the property manager wants something specific he needs to do it

EXAM IRAC

Yes, Paul is bound.

According to Restatement of _______ 2.02, an agent has actual authority to take action
designated or implied in the principals manifestations to the agent and acts necessary or
incidental to achieving the principals objectives, as the agent reasonably understands the
principals manifestations and objectives when the agent determines how to act.

Application In this case, when P hired A as property manager, he gave her a grant of
actual express authority. When Ann hired the janitor, it was an expression of the actual
authority under implied authority.

PAULA THE PRODUCER HYPOS


Paula the Producer HYPOS

Hypo #1

Paula = movie producer hired an assistant, Amy. Paula says to Amy, Go out and
hire a camera person

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o Amy has Actual Express Authority and Actual Implied Authority (to do
whatever is reasonable to get a camera guy)
Tom = camera person who is desperately looking for work, calls Paula. He says I
hear youre going to be making another one of your fantastic movies, Id love to work
for you
Paula detests Tom, but doesnt like to be the one to say no to anyone tells Tom I
would just love to work with you some time, but I have turned over to Amy the job of
hiring our camera person. Lets do lunch some day. By Now
o Tom = TP
o Paula speaks to Tom creating apparent authority in Amy
Manifestation of authority from Paula to Tom
(also actual authority to Amy manifestation of authority from
Paula to Amy)
Amy happens to be in Paulas office during this conversation. Upon hanging up the
phone, Paula turns to Amy and says, Do not, under any circumstances, hire
Tom. I cant stand him.
o Paula = limiting Amys actual authority
Amy has actual authority to hire a cameraman who is not Tom
Amy has apparent authority to hire a cameraman who could be Tom
Tom doesnt know about limitation Amy still has apparent authority

A week passes. Amy is having a hard time finding a cameraperson. She has lunch
with Tom, who convinces her that he would be perfect for the job and that he and
Paula will get along just fine. He also says that he needs a decision in a hurry
because of other opportunities. Amy cannot reach Paula. She offers the job to Tom,
who accepts.
When Paula hears of this, she fires Amy and refuses to honor the commitment to
Tom. Tom sues. Who will win?
o Tom wins
Paula = bound Tom doesnt know about limitation

EXAM

Tom wins.
o Actual authority definition
Actual authority, as defined in 2.01, is created by a principals
manifestation to an agent that, as reasonably understood by the agent,
expresses the principals assent that the agent take action on the
principals behalf
o Apparent authority definition.
Apparent Authority is the power held by an agent or other actor to
affect a principals legal relations with third parties when a third party
reasonably believes the actor has authority to act on behalf of the
principal and that belief is traceable to the principals manifestations.
o Limitations on actual authority are only binding on TPs who have notice
This case
Amy had authority to hire a cameraman

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Paula limited her actual authority by telling her not to tell Tom,
but she did not tell Tom of this.
o So Amy had apparent authority to hire Tom and Paula
is bound.

RATIFICATION see p. 34 analysis questions and outline


TRICK
EXAM-LAND

Agent neglects to mention that he did deal


o Talks about prospective deal (even though its already done)
P says that sounds great do it
o NOT ratification
o P must know that A acted fraudulently
Cant use ratification to make a contract valid that was not valid when
it was entered into
If P lacked capacity or was not in existence (pre-incorporation) the day
the contract was effected no contract not ratified

PARTNERSHIP
[EVERY EXAM

Creditor comes to 1 partner for pship debt


o Partner says Im happy to pay you my part, other partner owes x%, good luck
finding her
ANSWER = ALWAYS that 1 partner = liable for all of the debt
o Then the partner can go fight it out with other partners]

RULES FOR DISTRIBUTION


In settling accounts between the partners after dissolution, the
following rules shall be observed, subject to any agreement to the
contrary:
o (b) the liabilities of the partnership shall rank in order of
payment, as follows:
I. Those owing to creditors other than partners
II. Those owing to partners other than for capital and
profits
III. Those owing to partners in respect of capital
IV. Those owing to partners in respect of profits

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DERIVATIVE LITIGATION
If sues DIRECTLY we dont care about it from DERIVATIVE litigation
standpoint

DERIVATIVE FIRST QUESTION = was demand futile?

If demand = futile then excused sues


o Standard look to satisfy
Grimes in DE
Marx in NY
If demand is NOT excused was it made?
o If it was not made Marx Analysis Q4
o If it WAS made need to look at if demand was refused
If it was NOT refused BOD sues
If it was REFUSED look at whether refusal was wrongful
Not wrongful stop suit
Wrongful sues

IF makes demand . . .
BOD refuses demand
claims wrongful refusal
somehow gets past it
youre in the EXACT same spot that youd be if you had tried to argue
demand was excused

odd circumstance = if demand is made and it is NOT refused

NEVER HAPPENS
But hypothetically COULD happen
o You tell the BOD that theyre bad, they agree
o BOD sues itself and gives back all the money it stole
Corporation = made as whole as if you had brought the
suit

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DUTY OF LOYALTY
IN order to see if a vote is valid:
(1) make sure that there was a 141(b) quorum at the time of meeting
(need critical mass)
o Interested/non-interested doesnt matter
(2) on each individual vote have to characterize directors as interested or
not
o Look to see who is interested and who is not
(3) 144(a)(1)
o Requires majority of disinterested directors

Need quorum to have a good meeting then FORGET about quorum

Look around the room whoever is there you need a majority

HYPO

10 members of BOD
Corporation will buy a piece of property
o 5 = interested
o 5 = disinterested
For 141(b) quorum need 6 directors
o Doesnt matter whether theyre interested
o 141 Butts in seat
144(a)(1) need more than of the total # of disinterested directors needed to
approve
o Need 3/5 to say yes
o Of quorum 3 need to be disinterested and 3 have to say yes for transaction
to work
So if 6 people are there, and 5 are interested
o When they vote on transaction they cant approve it under 141(a)(1) b/c I
only have one disinterested director in house
Need at least 3 disinterested directors to be there and yes, 3 votes

HYPO #2

Transaction 9 interested, 1 disinterested


Still need 6/10 to be there for quorum
o 1 person = disinterested
o 1 person votes yes
If person = disinterested and votes yes passes under 141(a)(1)
1 person = majority
o 100% of disinterested votes
o So it passes
o

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MBCA 8.61(b) 1 = too scary minimum of disinterested
directors has to be 2
So if you have 9 interested, 1 disinterested
o And 1 votes yes
Wont work
Has to go to shareholders
Cant use option #1
o Use #2 shareholders need to approve it
If you cant prove #2
must go to #3 entire fairness doctrine in court HARD

CORPORATE OPPORTUNITY DOCTRINE PROBLEMS


DELEWARE LAW
Directors and officers cannot take for themselves opportunities
presented to them in their corporate capacity that:
[but just receiving it outside corporate capacity complete defense think of Bill
gates at Johnnys t-ball game someone approaches him b/c hes Bill Gates]

(1) The corporation is financially able to take advantage of


ONLY an opportunity if they can actually take advantage

(2) Are within the corporations line of biz and is of practical


advantage to it
Again if the opportunity = a far off a corporations field fact that
someone else could take advantage of it should not stop them
HERE
o Argument can go either way
Theyre in the biz of providing cell services
But can argue its not in their line of biz
Not in their line of biz b/c their true biz is
selling off

(3) Is one in which the corporation has an interest or


expectancy; and
Interest: something to which the firm has a better right
Expectancy: takes something which, in the ordinary course of things,
would come to the corporation
If officer bought land to which the corporation had a contractual
right the officer took an interest
If the officer took the renewal rights to a lease the corporation
had, the officer took an expectancy

(4) By embracing the opportunity the officer or director

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would create a conflict btwn his or her self-interest and
that of the corporation
FACTORS or ELEMENTS?
Court Martha Stewart case no single factor = dispositive
court must analyze it
Way to think about it
If answer to all of these questions is YES youre done it is a
corporate opportunity
If the answer to LESS than all of them is YES you have an
argument
If the answer to all of them is NO clearly not a corp. opp
o SPECTRUM see how many are present
COURT LOOKS AT ALL FACTORS

Corp Opp PROBLEMS


Evaluating whether investing in the shares satisfies the case-law definition of
a corporate opportunity
liable if you usurp a corp. opp
go through analysis see if it is or is not a corporate opportunity
o here they found it was
o contrast it with Martha Stewart

BJR BURDEN OF PROOFNEED TO FIND IT ROCK


SOLID

What two standards does the court identify?


Business judgment rule: Burden of Proof on plaintiff to rebut the
BJR
o If parent has not received benefit to exclusion of subsidiary

Intrinsic fairness: Burden of Proof on defendants to show


transaction was fair to Sinven
o Only applying this when the parent gets a different benefit than the minority
gets

MY UNDERSTANDING
(1) brings claim
(2) asserts BJR

(3) must rebut BJR presumption

(4) if successfully rebuts BJR then burden shifts must show intrinsic fairness

(5) if can show no harm, no foul burden shifts BACK to what else do you have?

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BAYER
BURDEN OF PROOF:

On directors/officers to prove good faith and inherent fairness


o If they can show entire fairness
THEN burden SHIFTS back to

WHEELABRATOR
DUTY OF CARE
(1) Disclosure.
The plaintiffs argued that the proxy material was materially misleading because it
didnt disclose that the board meeting lasted only three hours.

(2) Duty of care.


Even if (hypothetically) the board didnt exercise due care, the shareholders ratified
the merger after full disclosure. Thats enough to kill the claim.
o Even if there was a problem w/ length of time with meeting shareholder vote
extinguishes that
COURT even if there was a violation of duty of care (we dont
think there was) your shareholders approved it dismissed
Court accepts legal principle (not application) from
Smith v. Van Gorkum

(3) DUTY OF LOYALTY


Even if (hypothetically) the board violated its duty of loyalty in voting for the merger,
ratification changes the burden of proof. But nothing is simple here. The court sets
out a two-part standard:

2 PART STANDARD P. 372


(1) challenged transaction btwn a corporation and its directors
o If there is a shareholder ratification transaction = cleansed burden shifts
back to has to show waste
Classic conflict of interest transaction has burden of showing
breach of duty of loyalty
Can be satisfied by disinterested vote, etc.
Burden shifts back to has to show something else (i.e.
WASTE)

(2) challenged transaction btwn corporation and its controlling


shareholder
Burden shifts back to has to show its not fair
Controlling shareholders pick up SOME duties SOME of
the time

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Stone v. Ritter (Del. 2006) p. 396

s = bank failed to follow statute did not file acts required by the Bank
Secrecy Act

s we didnt know we didnt do it


you need to KNOW you didnt do it

SECURITIES
THRESHOLD ISSUE / FIRST LINE OF INQUIRY = see if you are dealing with a
SECURITY

o If what youre selling is NOT a security youre all done

o If what youre selling IS a security look to see whether there is an


exemption from the registration requirements available

If there is an exemption then you do not have to register it

some kinds of securities that NEVER need to be registered


exempt securities

If there is no exemption

Then look to see if you can sell it an exempt way

o Downside = ONE TIME TRANSACTION

CLARIFIED
o Securities laws definition of what constitutes a security and what
doesnt

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If you can prove that what youre buying is stock on list
How do you prove it?
o Those 5 factors (bond /stock /note /debenture /
warrant) (NOT SURE)
o If you can show 5 factors it is stock and youre
done
If you cant show 5 factors its not stock
Then you do investment contract analysis
If suit is for securities fraud
THRESHOLD QUESTION ALWAYS is it a security?
Laundry list
o Is it stock?
o Is it investment contract?
If you cant identify it as a security then you cant use remedies were about to
discuss
o EXAM IF YOU CANT SHOW ITS A SECURITY YOURE ALL DONE

ANALYSIS STEPS:

(1) do you have a security


o YES
(2) is it exempt
o If yes never have to register it
o IF NO not exempt then you say is there any way for me to sell this
security in an exempt transaction?
Exempt security = always
Exempt transaction = ONE TIME
You sell non-exempt security in an exempt way

Next time someone goes to sell it they either have to register it or find another exempt
way

SHORT SWING PROFITS


STEPS
(1) must be an issuer
(2) must be issued in 6 month period
(3) evaluate transactions
o Take all non-matchable transactions in 6 month period and throw away
If not matchable never matchable
o Then look at all matchable transactions
If we bought 100 shares
And sold 60 shares

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All we can do is match 60
o So we have 60 matchable matched
o 40 matchable left over
Have to watch them in 6 month period we
might get more matchable transactions could
be applied later

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