CORPORATIONS OUTLINE

1. FOUNDATIONS AND BACKGROUND

a. Default Rules. Most of Delaware corporate law is default rules, not mandatory. Mandatory laws may stifle innovation and create a
one-size-fits-all problem. On the other hand, some level of mandatory rules are needed in order to avoid a race to the bottom.
b. Why Delaware?
i. More than half of all publicly traded corporations are incorporated in Delaware for several reasons.
1. Specialized, experienced judges
2. Rich body of case law
3. Network externalities (i.e., the advantage of having so many firms already incorporated in the state)
ii. Being incorporated in Delaware is associated with a statistically significant share price premium. Because Delaware
controls an overwhelming share of the market, another state could dethrone Delaware only if it were to attract a critical
mass of corporations and gain network externalities, an almost impossible task.
c. Governing Documents
i. Charter/Certificate of incorporation
1. Less flexible--needs both shareholder and board approval to amend (mandatory).
ii. Bylaws
1. Governs day-to-day operations
2. More flexible--either shareholders or the board can amend the bylaws (but they cannot be amended to deprive
shareholders of the right to amend the bylaws, DGCL 109).
d. Features of a Corporation
i. Limited liability = Shareholders, directors, and corporate officers are not liable for corporate debts, BUT they do stand to
lose any assets they invested in the corporation as shareholders.
ii. Entity Shielding = Individual creditors cannot go after the corporation in order to satisfy these debts.
2. THE BASIC CORPORATE LAW PROBLEM
a. DGCL 141(a) : The business and affairs of a corporation are managed by a board of directors. This means that shareholders cannot
intervene in the daily management of the company. Their sole role in the company’s management is to vote on managers at the end
of the year.
i. The line between the two can be fuzzy, but it basically amounts to substance versus procedure. Are the shareholder
proposals trying to mandate specific substantive business decisions, or are they merely trying to define the process and
procedures by which those decisions are made? Purely procedural bylaws do not encroach on the board’s managerial
authority under 141(a).
1. Permissible procedural bylaws include those that fix the number of directors on the board, the number of
directors required for a quorum, and the vote requirements for a board action.
b. Agency Problems. The main challenge of corporate law is to mitigate agency costs between companies and shareholders, as well
as between large and small shareholders.
c. The Basic Partial Solutions
i. Fiduciary duties
ii. Shareholder voting
iii. Shareholder access to certain information under securities laws.
iv. Shareholders may sell their stock if unhappy with the management. This is problematic, however, because shareholders
who sell due to poor management will receive less for their shares. Selling a burned down barn analogy.
3. SHAREHOLDER VOTING
a. General.
i. Shareholders vote to:
1. Elect the board (DGCL 211(a));
2. “Organic” or “fundamental” changes, e.g., mergers (DGCL 251(c)), sale of all assets (DGCL 271(a)), corporate
dissolutions (DGCL 275(b)), charter amendments (DGCL 242(b)(1));
3. Advisory votes on executive compensation (Dodd Frank); and
4. Shareholder proposals, which typically propose to amend the bylaws.
ii. Schnell v. Chris-Craft Industries (p. 38: Directors tried to move up and change the location of the annual board meeting in
order to undermine a potential proxy fight. Directors followed bylaws in doing so. Issue is whether this is permissible.)
1. Rule: Corporate directors may not act with the sole purpose of obstructing shareholder action, even if the
methods are legally permissible. “An inequitable action does not become permissible simply because it was
legally possible.”
iii. Blasius v. Atlas (p. 42: Blasius, a hedge fund, wants to recapitalize. Atlas adds two board members in an emergency
meeting to protect its majority.)
1. Takeaway: Shareholders’ voting rights receive special protection. A board generally cannot undertake an action
with the primary purpose of interfering with shareholder voting, even if it acts in the good faith pursuit of the
corporation’s best interests.

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 2. Absent a compelling justification, such as a coercive action taken by a powerful shareholder against the
interests of a distinct shareholder constituency, such actions constitute a breach of the duty of loyalty.
a. No case has ever met this standard.
b. Voting Regimes
i. Plurality voting is the default rule under Delaware law. DGCL 216(3).
1. This means that in an election of 10 directors for 10 seats, each director is elected virtually automatically--even
if each receives one vote in favor and thousands against.
ii. But a majority of large firms uses majority voting which requires that the votes in favor be more than the votes against.
Candidates who fails to win a majority must submit their resignation to the board, but the board may choose not to accept
their resignation.
1. Here, “majority” means majority of shares present
c. Proxy
i. Proxy = an agent for a corporate shareholder that attends the corporation’s annual or special meeting and votes on the
shareholder’s behalf.
ii. Proxy cards = in advance of shareholder meetings, a corporation is required by the SEC to send proxy materials to all
shareholders regarding upcoming items for vote.
1. Proxy cards provide shareholders with the information necessary to make informed votes on issues important to
the company’s performance.
iii. Before any proxy solicitation commences, a corporation must file the proxy statement with the SEC. Sec Filing Rule 14-
6(a)(6).
iv. Proxy Access = the ability of shareholders to have one or more shareholder nominees included on the corporation’s
proxy card.
1. Default: No proxy access. (The SEC once tried to mandate proxy access, but the rule was struck down almost
immediately.)
2. Nevertheless, most Fortune 500 companies have voluntarily allowed some form of proxy access. Proxy access
is permitted under Delaware Law. See DGCL 112.
v. SEC Rule 14a-8 (“Town Meeting Hall” Rule) = Requires corporations to include certain shareholder proposals in the
corporation’s proxy materials
1. Procedural Requirements:
a. To be eligible to submit a proposal, a shareholder must have had owned at least $25,000 for one
year, $10,000 for two years, or $2,000 for three years in order to submit a proposal.
2. Bases For Exclusion (Question 9)
a. Violation of law (14a-8(i)(2) or related to ordinary business operations (14a-8(i)(7)).
i. Managers often exclude proposals under 14-a8(i)(7) or under 14-a8(i)(2) by invoking DGCL
141(a), which provides that the business and affairs of a corporation are managed by a
board of directors. This means that shareholders cannot intervene in the daily management
of the company. Their sole role in the company’s management is to vote on managers at
the end of the year.
1. The line between the two can be fuzzy, but it basically amounts to substance
versus procedure. Are the shareholder proposals trying to mandate specific
substantive business decisions, or are they merely trying to define the process
and procedures by which those decisions are made? Purely procedural bylaws
do not encroach on the board’s managerial authority under 141(a).
a. Permissible procedural bylaws include those that fix the number of
directors on the board, the number of directors required for a quorum,
and the vote requirements for a board action.
ii. To get around 14a-8(i)(2) and (7), shareholders often write proposals as precatory, rather
than binding.
b. Violation of proxy rule (14a-8(i)(3).
c. Conflicts with the company’s proposals (14a-8(i)(9)).
i. Whole Foods Article (Whole Food’s Board proposed a 7 and 5 proposal in order to argue
that the shareholder’s 3 and 3 proposal conflicted with an existing proposal and is therefore
excludable.
1. Some companies will run their own proposals so that the shareholder proposal
conflicts and is therefore excluded.
2. The SEC first accepted Whole Foods’s argument. But after realizing the
implications of this position, it reversed its stand, concluding that these proposals
do not conflict because a 3 and 3 and 5 and 7 proxy access can coexist--in other
words, voting on one does not mean voting against the other.
3. No-action letters are not binding, but the SEC almost always follows them.
d. The proposal has already been substantially implemented (14a-8(i)(10)).

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 vi. “3x3” Proposals = Shareholders that own 3 percent of the company for 3 years are able to run candidates to the board
and ask management to include in the corporation’s proxy materials.
1. Most commonly used shareholder proposal to allow for proxy access. Companies have some variation of this.
d. Quorum. By default, a majority of the total number of directors constitutes a quorum, and a vote by a majority of those present is
enough to pass a resolution. f 141(b).
1. Quorum = the minimum number of individuals needed at a meeting for its proceedings to be valid
e. Board of Directors
i. Default: All board seats are up for election every year
1. DIrectors may be removed during the year only for cause.
ii. Staggered Boards. Authorized by DGCL 141(d). As few as 1/3 of the board seats are up for reelection at a time.
1. Must be in a corporation’s charter either initially or by amendment (which requires shareholder approval).
2. Between elections, staggered board members may only be removed for cause. DGCL 141(k)(1).
3. Most companies who want a staggered board put this in tier charger because adding it later requires
shareholder approval and obtaining such approval is not easy.
4. Benefits of staggered boards: Stability; hard to make plans with a one year term; makes takeovers more
difficult.
5. Costs of staggered boards: Can create entrenchment.
f. Classes of Stock
i. By default, one share means one vote. DGCL 212(a).
1. Voting rights are determined on the record date 10-60 days before the actual vote.
ii. Dual class stock: But the company may authorize the issuance of dual class stock--share classes with different voting
rights. Today, dual class stock is prohibited with recapitalization but still allowed for IPOs.
iii. Preferred Stock: No voting rights but entitled to a dividend preference *the right to receive some specified minimum
amount of dividends before any dividends can be paid to common stockholders)
4. CORPORATE FIDUCIARY DUTIES
a. *Business Judgment Rule
i. The Business Judgment Rule is a presumption that in making a business decision, the directors or officers involved (i)
were reasonably informed, (ii) acted in good faith, and (iii) acted in honest belief that the action was in the best interests of
the company (i.e., they were disinterested).
1. This presumption may be rebutted by a showing that the officers or directors involved (i) were uninformed to the
level of gross negligence; (ii) acted in bad faith (i.e., with either a subjective intent to do harm or a conscious
regard for their duties); or (iii) acted out of self interest (and the transaction fails the entire fairness test).
2. Unless one of its elements is rebutted, the court merely looks to see whether the business decision made was
rational in the sense of being one logical approach to advancing the corporation’s interests. Only where a
decision lacks any rationally conceivable basis will a court infer bad faith and a breach of duty. In re PLX Tech.
b. *Duty of Loyalty
i. General
1. Definition. The duty of loyalty refers to the duty of corporate officers and directors to act guided by the best
interests of the shareholders. This is primarily concerned with self dealing transactions, i.e., situations in which
directors or officers appear on both sides of a transaction.
a. Divergent Interests. A director who focuses on the short term at the expense of the long term, such
that his interests diverge from the company, has breached fiduciary duty of loyalty. See PLX.
b. Bad Faith. A director or officer that is so negligent that his behavior amounted to a conscious
disregard of his duties, that is a breach of his duty of good faith, which is in turn a breach of the duty
of loyalty. Stone v. Ritter (p. 150)
2. *Entire Fairness Standard. Self dealing transactions do not constitute a breach of the duty of loyalty per se.
Rather, they are subject to the entire fairness test, under which the insider has the burden of showing the
transaction was entirely fair to the corporation and its shareholders. The insider must show, objectively, that the
transaction involved fair dealing and fair price.
i. Fair dealing relates to how the transaction was timed, how it was initiated, structured,
negotiated, and disclosed to the directors, and how the director and shareholder approvals
were obtained.
ii. Fair price relates to the economic and financial considerations of the proposed merger,
including assets, market value, earnings, future prospects, and any other elements that
affect the inherent value of the company’s stock. In a sale of a company, the board of
directors must demonstrate that the price offered was the highest reasonably available
under the circumstances.
b. This is the highest standard of review in Delaware corporate law.
3. No 102(b)(7) Shield. Firms cannot opt out of liability for duty of loyalty claims. DGCL 102(b)(7).

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 4. Sinclair Oil Corp. v. Levien (p. 73: Sinclair was the majority shareholder in Sinven and used its power to force
Sinven to pay out dividends in excess of earnings. Sinclair also caused Sinven to enter into contracts with its
subsidiary, which it later breached. Issue is whether these are self dealing transactions. )
a. The dividends do not trigger the entire fairness test because Sinclair received nothing to the exclusion
of minority shareholders--a pro rata distribution does not trigger the entire fairness test.
b. But the forming of a contract with its subsidiary was self dealing and therefore subject to the entire
fairness test.
ii. Officers and Directors
1. General Rule. In general, when an officer or director is on both sides of a given transaction, the transaction is
subject to the entire fairness standard and the burden is on the defendant officer or director to show it was
entirely fair.
2. Exception. If the transaction is approved by a majority of either (i) fully informed and disinterested directors or
(ii) fully informed and disinterested shareholders, the transaction is subject to the business judgment rule and
the burden is on the plaintiff. DGCL 144.
iii. Controlling Shareholders
1. General
a. General Rule. Controlling shareholders have a duty of loyalty to the minority shareholders only when
they are on both sides of the transaction (e.g., a take-private transaction in which minority
shareholders are bought out for cash). When this happens, the entire fairness test applies and the
controlling shareholder has the burden of showing the transaction was entirely fair. (They have no
duty of care towards minority shareholders.)
i. “Controlling shareholder” means a shareholder who either has a majority voting interest in
or who otherwise exercises control over the business affairs of a corporation.
b. Policy 1: In these situations, the entire fairness test serves as a backstop to the dual statutory
protections of a disinterested board and shareholder approval because both are potentially
undermined by the influence of a controller. That is, the controlling shareholder often holds a majority
of the corporation’s voting power (often via dual class stock), and he may exercise this influence over
the board.
c. Policy 2: Similarly, appraisal rights offer little protection because of rational shareholder apathy. That
is, for most shareholders, the information and other costs associated with finding out about a
proposed merger, determining whether the price is fair, knowing what is required to perfect appraisal
rights, and sending in a notice of objection are prohibitively high.
2. Exceptions
a. Weinberger v. UOP: In a merger involving a controlling shareholder on both sides of the transaction is
approved by a majority of fully informed and disinterested shareholders, the entire fairness test still
applies but the burden shifts to the plaintiff to show that the transaction was not fair.
b. Khan v. MFW: In a controller buyout, the business judgment rule will apply if and only if (i) the
controller conditions the transaction on the approval of a special committee AND the majority of
minority shareholders; (ii) the special committee is independent; (iii) the special committee is
empowered to freely select its own advisors and to say no definitively; (iv) the special committee
meets its 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.
iv. Summary of Standards and Burdens

c. *Duty of Care
i. General

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 1. Standard: Corporate directors and officers, in making decisions in their capacities as such, must exercise
informed, deliberate decision making based on all material reasonably available. The test here is whether the
directors or officers were grossly negligent. This is an objective standard based on the skills and expertise of
the director (e.g., law, financial analysis, etc.). There are two main ways to breach this duty:
a. Nonfeasance = Failing to perform the normal tasks of a director (such as learning about the
business, attending board meetings, reviewing financial statements and annual reports) or failing to
oversee the business (see Stone v. RItter)
b. Malfeasance = an affirmative action in a manner that breaches the duty of care such as bad faith or
self dealing
2. Limits on Monetary Damages (DGCL 102(b)(7)). The charter may include a provision eliminating or limiting
personal liability of directors (but NOT officers) for monetary damages for breach of fiduciary duty. Such a
provision cannot limit director liability for:
i. Breach of duty of loyalty;
ii. Acts or omissions not in good faith;
iii. Under Section 174 (related to unlawful dividends); or
iv. For any transaction from which the director derived personal benefit
b. A corporation with a 102(b)(7) provision is still subject to injunctive relief.
c. About 90 percent of Delaware firms have this provision.
ii. Bad Faith and the Duty of Care
1. In re Walt Disney Co. Derivative Litigation (p. 116: Disney hires new president with hella compensation. Within
a few years, he is fired without cause and walks away with an enormous severance package. Issue is whether
the decision was not entitled tp business judgment rule protection because of bad faith or gross negligence)
a. Rule: Although 102(b)(7) protects directors from liability associated with a breach of their duty of care,
it does not protect them against liability associated with bad faith acts.
i. Here, bad faith includes (without limitation) both subjective bad faith (i.e., fiduciary conduct
motivated by an actual duty to do harm) and an intentional dereliction of duty with a
conscious disregard for one’s responsibilities. Mere gross negligence does not constitute
bad faith.
ii. This is needed for two reasons: (i) this is needed to protect the interests of shareholders;
and (ii) Section 102(b)(7)(ii) denies exculpation for acts or omissions not in good faith or
which involve intentional misconduct of a knowing violation of the law.
b. Waste Standard: To recover on a claim of waste, a plaintiff must show that the transaction was so
one-sided that no business person of ordinary sound judgment could conclude the corporation has
received adequate consideration. A claim of waste will arise only in the rare, unconscionable case
where directors irrationally squander or give away corporate assets.
c. Court: The fiduciaries exercised due care here. The compensation committee and the board had
multiple meetings, consulted experts, negotiated with Ovitz for a lengthy period of time, and knew the
contents and reasons behind the employment agreement. Nor did they exercise bad faith in
approving this employment contract.
iii. In Mergers
1. Smith v. Van Gorkom (p. 84: CEO negotiated merger agreement. Board approved merger after two hours’
review. Management was not enthusiastic. Issue is whether the board breached their duty of care in approving
the transaction.)
a. Rule: In the specific context of a proposed merger, a board of directors has a duty to act on an
informed and deliberate manner in determining whether to approve an agreement of merger before
submitting the proposal to the stockholders.
b. Takeaway: A board can be liable for its decision making process if it wasn’t sufficiently deliberate and
well-informed.
i. This case caused a lot of uproar. Delaware courts were surprised, viewing this more
narrowly: Basically, you can’t sell your company on the basis of a two-hour meeting without
knowing that’s what the meeting will be about going into it.
iv. In Corporate Oversight
1. Stone v. Ritter (p. 149: Oversight case)
a. Rule: Directors can be liable for failure to engage in proper corporate oversight if they fail to
implement any reporting or information system, or, having implemented such a system, consciously
fail to monitor or oversee its operations.
i. In the absence of red flags, good faith in the context of oversight must be measured by the
directors’ actions to assure a reasonable information and reporting system exists--not by
second guessing after the fact the occurrence of employee conduct that results in an
unintended adverse event.

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 b.
[The failure to act in good faith may result in liability because the requirement to act in good faith is a
subsidiary element to the fundamental duty of loyalty. And since bad faith is required to establish
director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.]
i. Takeaway: The duty of good faith is part of the duty of loyalty.
d. Nevada Corporate Law Sidebar
i. General
1. Under Nevada law, the default rule is that both directors AND officers may be held liable only if their behavior
was so egregious that it involved both a breach of the duty of loyalty and intentional misconduct, fraud, or a
knowing violation of law. NRS 78.138(7). Thus, breaches of the duty of care or good faith, and even improper
personal benefits, are not actionable.
ii. Policy
1. General. Management’s interests are inherently in tension with shareholders’ interests. Thus, laws like
Nevada’s that are management-friendly tend to work to the detriment of shareholders. Shareholders react to
this by discounting the stock price. Delaware brands itself not as favoring managers, but as achieving a balance
between shareholders’ and managers' interests. As a result, Delaware firms enjoy a share price premium.
2. Optimistic Take: Nevada’s lax corporate law protects management and directors from frivolous shareholder
lawsuits. This is especially beneficial for small companies, for whom litigation costs represent a relatively higher
expense. This is also beneficial for firms with already-strong internal controls or who are disciplined by the
markets, and stand to gain less from the discipline of a strict legal regime.
3. Pessimistic Take: Nevada’s lax corporate law allows managers to extract large private benefits at the expense
of shareholders. This is supported by the fact that Nevada firms give accounting restatements much more often
than non-Nevada firms.
a. Research indicates that firms with a strong preference for management protections incorporate in
Nevada, while the firms that incorporate in Delaware are likely motivated by other reasons such as
Delaware’s network externalities.
b. Counter: The market penalizes managers for making self-serving choices, including choosing Nevada
law
4. Race to the Bottom/Top
a. Some worry that Nevada’s lax law could pressure Delaware into compromising the quality of its law to
remain competitive. They argue that Delaware’s competitive advantages--specialized judiciary, rich
body of case law, network externalities--are of limited use when competing against the certitude of
Nevada’s lax corporate law.
b. But if Delaware were to follow Nevada by degrading its corporate law, Congress might intervene,
given its market share. This threat of federal intervention puts the brakes on the race to the bottom.
(Nevada is less likely to trigger federal intervention because of its smaller market share.) The
Delaware corporate premium also deters Delaware from degrading its corporate law to favor
management.
c. Barzuza: This is less of a race to the bottom/race to the top phenomenon than it is market
segmentation. In other words, this is really about what types of firms choose lax or strict law. The
downside here is that this system permits the firms that need regulation the most to opt into a no
liability regime.
d. Some are concerned about a race to the bottom in state corporate law. But firms’ preferences for
liability protections vary; some have stronger preferences than others to shield their officers and
directors from liability.
5. Misc.
a. An alternative to degrading its corporate law would be for Delaware to offer firms a menu of corporate
law options--one lax and one strict. But doing so would impose costs--namely, a company choosing
the lax menu would send a strong signal to investors that they favor lax (i.e., management-favoring)
law, which would result in significant valuation discounts.
5. SHAREHOLDER LITIGATION
a. General
i. Direct lawsuit = when a shareholder is suing for damages that were done to the shareholder himself (e.g., suing
management for agreeing to a merger at too low a price)
1. Typically a class action suit
ii. Derivative lawsuit = allows shareholders to litigate a claim on behalf of the corporation that the directors refuse to litigate
1. Arises when shareholders suffer indirect harm only through their ownership of the company
2. Prior to bringing suit, the shareholder generally must first exhaust their intra-corporation remedies by making a
demand on the board of directors for redress (unless demand would have been futile, see Aronson).
iii. Determining which type of suit
1. Who suffered the harm?
2. Who should receive any benefit of recovery?

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 iv. Insurance and indemnification
1. For derivative claims, the company can indemnify only for the costs of legal proceedings, not the bill itself.
2. The company cannot indemnify for behavior that is not in good faith. DGCC 145(a).
3. Most companies indemnify to the maximum extent allowed by Delaware law.
4. D&O insurance policies don’t cover fraud.
b. Futility
i.Aronson v. Lewis (p. 161)
1. Rule: Stockholders wishing to bring a derivative suit must first make a demand for redress to the board of
directors, unless such a demand would be futile.
2. In determining futility, the Court of Chancery must decide whether, under the particularized facts alleged, a
reasonable doubt is created that (i) the directors are disinterested and independent or (ii) the challenged
transaction was otherwise the product of a valid exercise of business judgment.
a. It is not enough to allege that a director was nominated by or elected at the behest of those
controlling the outcome of a corporate election. Nor is ownership of less than a majority of a
company’s stock.
3. Barzuza: This is essentially a heightened pleading standard.
c. Disclosure Settlements
i. In Re Trulia Stockholder Litigation (p. 191)
1. Disclosure settlements will not be approved unless the supplemental disclosures address a plainly material
misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to
encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the
record shows that such calais have been investigated sufficiently.
a. “Plainly material” means that it is not a close call that there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote--that it significantly alters
the total mix of information available.
2. Disclosure settlements give fees for lawyers, but only disclosures for the shareholders. Since the shareholders
get essentially nothing, courts have to approve these settlements.
i. What facts are sufficient? Those that tend to show self interest, breach of fiduciary duties,
or that the fiduciaries are beholden to someone.
d. Attorneys’ Fees
i. Americas Mining Corporation v. Theriault (p. 181: Controlling shareholder directs Southern Peru to buy Minera, a
company whose stock he owns 99 percent, for an artificial $1.4 billion premium. Issue is whether $304 million attorneys’
fees are reasonable.)
1. Sugarland factors: (i) benefit achieved; (ii) difficulty and complexity of the matter; (iii) contingent representation;
(iv) sanding and ability of counsel; and (v) time and effort of counsel.
2. Under the common fund doctrine, a litigant or lawyer who recovers a common fund for the benefit of persons
other than himself or the client is entitled to a reasonable attorney’s fee from the fund as a whole.
a. This is needed because there is no real “client” in a derivative lawsuit.
3. In the controlling shareholder structure, the agency problem is between the controlling shareholder and the
minority shareholders.
6. MERGERS AND ACQUISITIONS
a. General
i. Approvals. Generally, both a corporation’s board and shareholders need to approve a merger. DGCL 251(b), (c).
1. Exceptions
a. Cash Deal, Small Deal (DGCL 251(f)): If The approval by shareholders of a surviving corporation is
not required if:
i. The surviving corporation’s charter is not amended through the merger; and
ii. The surviving corporation issues less than 20 percent of new shares in the merger.
b. Back End Squeeze Out (DGCL 251(h)--since 2013): The approval by the remaining target
shareholders is not required if:
i. The target is a public corporation (i.e., listed or > 2000 shareholders);
ii. The bidder acquires the otherwise requisite majority of shares in a tender offer for all of the
target’s stock pursuant to a merger agreement with the target (meaning, the bidder was up
front about its intent to merge); and
iii. The merger consideration is the same as the tender offer consideration.
c. Parent-Sub Short Form Merger (less important due to back end squeeze outs) (DGCL 253(a)): If
one of the constituent corporations (“parent”) already owns a least 90 percent of all classes of voting
stock of the other (“subsidiary”):
i. The approval of the subsidiary’s board is never required;
ii. The approval of the parent’s shareholders is not required if the parent is the surviving
corporation and its charter is not changed in the merger.

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 ii. Appraisal Rights.
1. General
a. Appraisal rights are generally available to shareholders of both corporations. DGCL 262(b).
b. To perfect appraisal rights, a shareholder must not vote in favor of the merger, must deliver a written
notice of objection before the vote, and must hold the shares through the effective date of the merger.
DGCL 262(a)-(d).
c. Shareholders who demand appraisal may only receive the value of their shares as appraised by the
court. DGCL 262(k).
2. Exceptions
a. Parent-Sub Short Form Merger: The Parent’s shareholders do not have appraisal rights. DGCL
253(c)-(d), 262(b)(3).
b. Market Out (DGCL 262(b)(1)-(2)): Shareholders
1. of a public corporation (listed or > 200 shareholders) or
2. whose approval vote was not required for the merger under DGCL 251(f)
ii. do not have approval rights if they receive as merger consideration shares of the surviving
corporation or shares of another public corporation.
iii. Tender offer = an offer to all shareholders to sell (“tender”) their shares to the bidder at the price announced by the
offeror.
1. Tender offers must be open for 20 business days. SEC Rule 14e-1.
2. While a tender offer is open, shareholders who already tendered may reverse their decision and withdraw their
shares. SEC Rule 14d-7(1).
3. An acquirer of 5 percent or more of a corporation’s voting stock must disclose this fact within 10 days after
crossing the 5 percent threshold. Williams Act.
iv. Asset sales
1. Occur when the target company transfers its assets individually to the acquirer. Generally have higher
transaction costs than a merger and require the liabilities be paid off before the asset purchase can proceed.
2. Hariton v. Arco Electronics, Inc. (p. 216; issue is whether a de facto merger--an asset sale that achieves the
same purpose as a merger--should be subjected to the same rules applicable to a merger.)
a. Rule: A sale of assets with a mandatory plan of dissolution and distribution is legal even if no
appraisal rights are given to shareholders.
b. Squeeze Outs and Going Privates
i. General
1. A squeeze-out or cash-out merger is a merger in which a controlling shareholder acquires complete
ownership of the corporation’s equity, thereby squeezing out the minority. These transactions are structured as
a merger between the controlled corporation and a corporation wholly-owned by the controlled corporation’s
controlling shareholder.
2. If the controlled corporation was previously publicly traded on a stock exchange, the transaction is also known
as a going private merger because the surviving corporation will no longer be public.
ii. Weinberger v. UOP (p. 241: Sigal wanted to acquire its remaining interest in UOP. It was willing to pay up to $24 per
share, but did not disclose this to the UPO board and instead acquired it at $21 per share.)
1. Takeaway 1: Entire fairness standard applies to self-dealing transactions such as this take-private merger. But
when a merger of this sort is conditioned on the approval of the majority of the minority shareholders, the
burden shifts to the plaintiff to show the transaction was not fair.
a. Court implies that the correct way to complete a transaction of this sort is to replicate an arms’ length
transaction.
2. Takeaway 2: Minority shareholders voting in favor of a proposed merger must be informed of all material
information regarding the merger for it to be considered fair.
a. This case does not mean that an acquirer in a self dealing transaction must always share his
reservation price. But when an acquiror insider is also on the board of the acquiree, and is privy to
that information, they must disclose this.
iii. Glassman v. Unocal Exploration Corp. (p. 256: Issue is whether a minority shareholder may challenge a Section 253
short form merger by seeking equitable relief through an entire fairness claim.)
1. Rule: Fiduciaries are not required to establish entire fairness in short form merger initiated under Section 253,
and the only remedy available to an objecting minority shareholder is appraisal. However, the duty of full
disclosure remains; when minority shareholders must choose between accepting the merger consideration or
seeking appraisal, they must be given all the factual information material to that decision.
iv. Khan v. MFW (p. 262)
1. Rule: In controller buyouts, the business judgment rule will apply if and only if (i) the controller conditions the
transaction on the approval of a special committee AND the majority of minority shareholders; (ii) the special
committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say

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 not definitively; (iv) the special committee meets its 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.
i. This is because when the controller irrevocably and publicly disables itself from using its
control to dictate the outcome of the negotiations and the shareholder vote, the controlled
merger then acquires the shareholder-protective characteristics of third-party, arm's-length
mergers, which are reviewed under the business judgment standard.
b. The special committee must function in a manner which indicates that the controlling shareholder did
not dictate the terms of the transaction and that the committee exercised real bargaining power at
arm’s length.
c. To show that a director is not independent, the plaintiff must show the director is beholden to the
controlling party or so under the influence that his discretion will be sterilized. Bare allegations that
directors are friendly with, travel in the same social circles as, or have past business relationships
with the proponent of the transaction are not enough to rebut the presumption of independence.
d. Under the business judgment rule, the claims against the defendants must be dismissed unless no
rational person could have believed that the merger was favorable to the minority shareholders.
2. This is a very important case. Ninety percent of transactions are done this way now because it is much more
efficient than having judicial review.
c.Sales of Control
i. In re Delphi Financial Group Shareholder Litigation (p. 285: Delphi had dual stock structure that allied Rosenkranz to
maintain a controlling interest through voting. Delphi’s charter provided that in the event of a merger, both classes would
receive the same consideration. Rosenkranz nevertheless negotiated a control premium for his shares. Issue is whether a
charter amendment excluding this transaction is enforceable.)
1. Court: To allow this amendment would be to render the charter rights illusory and permit Rosenkranz, who
benefitted by selling his control premium to the Class A shareholders at Delphi’s IPO, to sell the same control
premium in connection with this merger. (This is not to say Delphi Rosenkranz couldn’t have bought his control
premium rights from the Class A shareholders earlier.)
2. Where, as here, the controlling shareholder is not standing on both sides of the transaction, he has no duty to
act in the interests of minority shareholders and may act in his own interests.
a. He is not on both sides of this transaction because he, like the rest of the shareholders, is selling his
shares for cash.
7. TAKEOVER DEFENSES
a. Background and Policy
i. The Chicago school of thought argues that we shouldn’t allow takeover defenses because if managers aren’t doing their
job well enough, they should be replaced. By allowing these defenses, we are interfering with the market for corporate
control and creating entrenchment.
1. Counterargument: There is a collective action problem among shareholders, so this isn’t completely efficient.
b. Poison Pills
i. Definition. Stockholder rights plans, commonly known as “poison pills,” are defensive measures adopted by companies
to delay a hostile acquisition. When a hostile bidder acquires a designated amount of the target company’s shares
(typically 10 percent to 20 percent), rights automatically issue which allow all stockholders other than the acquiror to buy
newly issued shares at reduced prices, triggering a massive dilution of the value of the acquiror’s holdings.
1. To overcome this defense, a hostile bidder typically must either seek judicial relief invalidating the pill (or
requiring the target board to redeem it), or launch a proxy contest to elect a slate of directors who might redeem
the poison pill.
2. Poison pills can be put in the bylaws and therefore do not require shareholder approval.
3. Redeeming a poison pill does not require payment to shareholders.
4. Poison pills are used as a deterrent. No bidder will trigger this and be diluted, so they often try to convince
management to redeem this. And because poison pills can be issued so easily, they act as a deterrent even if
the corporation does not currently have a poison pill.
ii. Moran v. Household Intl. (Del. 1985) (p. 329)
1. Poison pills are allowed under Delaware law.
2. The poison pill does not restrict stockholders’ rights to conduct a proxy contest because an acquirer can run its
own directors who will accept the transaction and redeem the poison pill.
a. But firms with staggered boards who had adopted the poison pill were not vulnerable to this strategy.
This made staggered boards very unpopular, and as a result most firms in the S&P 500 do not have
them due to investor pressure.
iii. Types of Poison Pills
1. Flip in poison pill (most common today) = gives target shareholders (other than the bidder) the right to buy
shares in the target company at a discounted price.
2. Flip over poison pill = Gives target shareholders (other than the bidder) a right to buy shares of the acquiring
company at a discounted price.

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 3. Chewable pill = A poison pill that disappears if fair price criteria are met.
4. Slow hand pill: pill that may not be redeemed for a specified period of time after a change in board composition
a. These are not permitted under Delaware law because they entrench the current board by limiting the
ability of the new board to redeem the pill
5. Dead hand pill = A poison pill that may only be redeemed by the board that adopted it.
a. These are not permitted under Delaware law.
6. (6) No hand pill: pill that may not be redeemed by current or future boards for the life of the pill (usually ten
years) (not permitted in Delaware)
iv. ISS Voting Guidelines: Vote against directors if the company has in place a poison pill that (i) was not approved by
shareholders and (ii) that has a term greater than one year.
c. General: The Unocal Standard
i. Unocal v. Mesa Petroleum (Del. 1985) (p. 314: Mesa issues two-tiered tender offer--the first in cash and the second in
junk bonds. The structure pressured shareholders to tender even if the price was low because the second round of the
tender offer was junk bonds. Issue is whether Unocal’s discriminatory self tender (poison pill) to fight off this tender offer is
allowed.)
1. Rule: The board has the power and the duty to oppose a bid it perceives to be harmful to the corporate
enterprise. Therefore, when managers deploy defensive tactics against a takeover, the business judgment rule
applies if it can be shown that--
a. There was a cognizable threat to corporate policy; and
i. In Paramount v. Time (1989), and even more clearly in Unitrin v. American General (1995)
and Airgas (2011), Delaware courts made it clear that inadequacy of price alone, as
determined by the board (in good faith), constitutes a sufficient threat because it is a form
of substantive coercion. That is because a company’s stockholders may disbelieve the
board’s views on value, so they may mistakenly tender into an inadequately priced offer.
ii. In evaluating whether there was a cognizable threat, courts looks to the price offered
relative to outside evaluations, the structure of the offer and whether it is coercive, and
whether it would threaten the value of the company. The board must act in good faith after
a reasonable investigation.
b. The response was appropriate and proportionate to the threat posed and not motivated primarily out
of a desire to effectuate a perpetuation of control. If these requirements are not met, the entire
fairness standard applies.
i. Air Products & Chemicals v. Airgas (Del.Ch. 2011) (p. 365)
1. Rule: A staggered board-poison pill combination is permissible under Unocal’s
second prong because, while it makes gaining control of the board realistically
unattainable in the short term, it does not completely prevent the hostile acquirer
from gaining control of the board. Thus, it is not preclusive. In other words, as
long as obtaining control of the board at some point in the future is realistically
attainable, it is not preclusive.
a. This shows that Unocal is highly deferential because very few hostile
takeovers can last several years.
b. This made staggered boards very unpopular. As a result, most of the
S&P 500 no longer has staggered boards.
2. Unocal is highly deferential and has been construed broadly.
3. Importantly, Unocal is generally available to support a claim for monetary damages post closing. When a
transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the
disinterested shareholders, the business judgment rule applies to claims for post-closing damages. Corwin v.
KKR.
d. When the Breakup of a Corporation is Inevitable: Revlon
i. Revlon v. MacAndrews (p. 346: Pantry Pride is trying to acquire Revlon. Revlon seeks a white knight and treats them
preferentially, giving them certain financial data, agreeing to a lock-up option to purchase certain Revlon divisions at a
guaranteed price, and accepting a no-shop provision.)
1. Rule: When bidders make relatively similar offers or dissolution of the company is inevitable, the duty of the
board of directors changes from the preservation of the corporation to that of auctioneers seeking to maximize
shareholders’ benefit from the company’s sale. They bear the burden of proving they acted reasonably to seek
the transaction offering the best value reasonably available to shareholders. So while defensive tactics are
generally permissible, when used against one cash bidder over another, they do not receive business judgment
rule protection.
a. General. Basically every time shareholders are being bought out for cash (because the company is
being sold, is going private, etc.) that is a sale or a breakup of the company and Revlon applies.
b. Cash; Stock. If all the offers on the table are cash offers, then Revlon applies. But in the case of
stock deals, Revlon applies only if there is a change in control. In particular, Revlon does not apply if

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 the corporation is not broken up and was widely held both before and after the merger. But where the
acquiring corporation has a controlling shareholder who will also control the surviving corporation,
Revlon does apply.
2. In determining whether directors acted reasonably, courts consider both (i) the decision making process
employed by the directors, including the information on which the directors based their decision; and (ii) the
directors’ actions in light of the circumstances then existing.
3. Even in Revlon land, some defensive measures are permissible. For example, Lockups and Termination fees
are permissible if used t o encourage friendly bidders to come forward, but not to outright play favorites
with one bidder over another. There is some debate over the maximum percentage of the deal price that can be
promised as a termination fee.
4. Importantly, Revlon generally is not available to support a claim for monetary damages post closing. When a
transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the
disinterested shareholders, the business judgment rule applies to claims for post-closing damages. Corwin v.
KKR. But where the shareholder vote was not fully informed, Revlon still applies. In re PLX Tech.
8. HEDGE FUND ACTIVISM
a. Background
i. Hedge fund activism has emerged in the last 10 years.
ii. Hedge fund activists generally buy less than 10 percent of a company’s stock to avoid the short swing profits rule.
iii. Under SEC rules, persons who acquire 5 percent or more of a company’s stock have 10 days to disclose this along with
their intentions--taking over the company, intervening with management, etc.
iv. Instead of getting into proxy fights, management often settles with hedge funds at a specified number of board seats.
b. Corwin v. KKR (Del. 2015)
i. Rule: When a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the
disinterested shareholders, the business judgment rule applies to claims for post-closing damages.
c. In re PLX Tech, Inc. (Shareholders are suing for monetary damages post-transaction. Hedge fund activist director had received a tip
from Deutsche Bank that the buyer was willing to pay a certain price, but did not disclose this to shareholders. Issue is whether the
shareholder decision was fully informed, which turns on whether the directors breached their duty of disclosure.)
i. Holding 1: For Corwin to apply, the shareholder vote must have been fully informed; all information material to the
shareholder vote needs to have been disclosed. Here, Singer failed to disclose to the board that another buyer was willing
to pay a higher price for the company. This was a material omission, and therefore Revlon, not the business judgment
rule, applies.
ii. Holding 2: Absent divergent interests, the sale process here would have met the Revlon standard. The board combined a
narrow, pre signing canvass with a post signing market check. But the record here shows that Singer held a divergent
interest. He failed to disclose the tip that another buyer was willing to pay a higher price and caused the other directors
not to negotiate more vigorously with potential buyers. This amounted to a breach of his duty of loyalty.
iii. Takeaway: A director who focuses on the short term at the expense of the long term, such that his interests diverge from
the company, has breached fiduciary duty of loyalty. And 102(b)(7) will not shield him from monetary damages.
1. To show divergent interests, it is not enough for a plaintiff simply to argue in the abstract that a particular
director had a conflict of interest because he was affiliated with a particular type of institution that has particular
incentives or pursues a particular strategy. Rather, a plaintiff must prove by a preponderance of the evidence
that a director harbored a divergent interest (e.g., he failed to disclose some material fact to the rest of the
board).
9. INSIDER TRADING (NOT ON EXAM)
a. General
i. Some argue that it isn’t a good idea because insider trading would allow the stock price to more quickly incorporate
information.
ii. Insider trading carries criminal penalties.
b. Exchange Act 16(a) (p. 414)--these are the bright line rules
i. Corporate officer, etc. must disclose within 2 days of trading in the company’s securities
ii. Subsection (b) is the short swing profits rule.
1. This rule is why hedge fund activists generally do not hold more than 10 percent
c. O’Hagan: (Dorsey partner buys stock in Pillsbury ahead of a tender offer by his client. Issue is whether this is insider trading even
though he owned no fiduciary duty to the target):
i. Rule: If you trade on material nonpublic information in breach of a fiduciary duty of confidentiality, whether to the
shareholders or to the source of the information, that’s unlawful insider trading under 10b-5. Because O’Hagan owed a
fiduciary duty ot his employer, who owed a fiduciary duty to the buyer, he is guilty of insider trading.
1. Curtis: If the client had waived this fiduciary duty, this might not have been insider trading.
ii. In other words, if there is an implied duty of confidentiality, then trading on this information is a breach of fiduciary duty.
iii. If you have any sort of duty of confidentiality to the source of information (e.g., law firm, accounting firm, broker, etc.), then
trading on this information is a breach of fiduciary duty.
d. When is there no breach of fiduciary duty?

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 i. Overhearing a conversation on the street, finding information in the back of a cab, etc.
ii. If the 9/11 attackers shorted the market ahead of the attacks, that is not insider trading because they owned no fiduciary
duty--they were the creators of the information.

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