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A sole proprietorship is a business owned by one individual.

It=s an organization because:

- they are separate assets.

- the proprietor will not conduct business by himself.

An agent is a person who acts on behalf of a person called a principal. It is a consensual relationship and it depends and the factual setting.

- the manifestation by the principal that the agent shall act for him

- the agent=s acceptance of the agent of the undertaking

- the understanding of the parties that the principal is in control.

Restatement of agency ' 1.

The plaintiff employed Watrud as an accountant for many years even after she moved to another state. At one point she discovered that Watrud was giving money to her husband. She told me not to do it. He did it again. She sued the accounting firm.

Issue:

Was Watrud an independent trustee or a agent of the partnership?

Holding:

The factual pattern favors the agency, the plaintiff was paying the partnership for the services performed, and there was never a mention of the fact that Watrud was acting independently.

The plaintiff never acted unreasonably even though she was estopped from suing after the first warning not to give any money.

The partnership is liable for Watrud=s actions, and the case is remanded.

Definition of liability: when the acts are usually common or incidental to the job to be performed: because of the circumstances the court decided that the acts performed where within the scope of the employment.

A principal id disclosed if the third party knows that he acts on behalf of the principal and knows the principal identity.

A principal is partially disclosed when the third party does not know the principal identity.

A Principal is undisclosed if the agent purports to be acting on his own behalf. The principal will be liable for the agent=s authorized activities.

A master is a principal who controls or has the right to control the physical conduct of the agent.

A servant is an agent whose physical conduct is controlled by or the subject to the control of the principal.

Liability of principal to third party:

It depends on the authority:

- actual authority: a person reasonably believes that the agent has authority to act.

- implied.

- express.

- apparent authority

if the words or the conduct of the principal leads a reasonable person to believe that the principal has authorized the agent to act.

- agency estoppel:

Depending on the beliefs of third parties that the principal has a right to act.

- inherent authority

The agent binds the principal even though there is no authority whatsoever.

' 161: disclosed principal: there is a reasonableness criterion

' 194 undisclosed: no reasonableness criterion

- there is liability

- ratification: the principal affirms the agent=s conduct or engaged in conduct that was justifiable only if he had such intention.

- it is different from acquiescence.

- termination of agent=s authority:

Even if the authority has been said to be irrevocable it can be terminated at any time.

Liability of third party to principal

if the principal is liable to the third party then he third party is liable to the principal and not to the agent except when undisclosed.

Liability of an agent to the third party

- if he is undisclosed, then the agent is bound as well as the principal.

- if the principal is disclosed, the agent is not bound. If the principal is not bound then, the agent is bound.

- if the principal is partially disclosed, both are bound.

Liability of the agent to the principal:

- the agent is liable for any damages if acted without authority.

Liability of Principal to agent:

- the principal is under a duty to indemnify the agent for authorized payments.

Defendant made small inquiries to purchase a route of coin-operated music machines, he found a potential seller and made false representations of the business. Plaintiff bought the business and realized that the agent had lied as well as the seller did. He sued the sellers to get the money back. He won. After he sued his agent for false representation and to be indemnify for his loss while operating the business

Issue:

Can the principal obtain the money earned by the agent as well as obtain damages for his losses?

It does not matter that the plaintiff recovered some money from the third party as far as the duty of loyalty is concerned, he is entitled to obtain the profits made by the agent see Restatement ' 388.

Restatement Agency ' 407(1) entitles the principal to recover any damage caused by the agent=s fault.

Restatement Torts ' 910: a person injured by a party is entitled to recovered any damages for all harm legally caused by the tort.

He is also entitled to recover attorney=s fees as they were incurred due to the disloyalty of the agent.

A soldier used his uniform to drive a truck, the army discovered that and sued the third party to have the money back. He then sued the party that he was in relation with to recover the money.

An agent cannot recover any damages if he used his position to do something that was reprehensible.

The firm K.N. & K. had certain financial difficulties. One of the partners of the firm found several persons, the defendants to help the firm out. Negotiations went under way to decide if they were going to be a partnership with the loaners, Peyton Perkins and Freeman. They decided against it. The loan was secured through 3 different instruments: the agreement, the indenture and the option.

Issue:

Whether these instruments led to the formation of a partnership?

Holding:

The court decided that the three instruments did not amount to the formation of a partnership as the option left the possibility to join the firm as members. Thus inferred that the transactions did not amount to the creation of a partnership. All the instruments were meant to protect the loaners in case of non reimbursement.

Cragin and Malsbenden were working together, The latter gave some money and worked at the shop. Lupien entered into a contract with the shop in order to have a kit car. The plaintiff mostly had contact with Malsbenden and not Cragin who was seldom at the shop. Malsbenden had to buy a car to give it to plaintiff while waiting for his car to be completed as he sold his truck in order to pay for the car. Malsbenden was doing most of the business.

Issue:

Whether there is need of a written agreement to form a partnership for it to exist?

Holding:

No, the facts pertaining to the conducting of business amount to the fact that there was a partnership even though there was no formal agreement and Malsbenden was only interested in one part of the business and only as a banker. Thus, the court decided not on a formal agreement but on all the circumstances surrounding the business.

The formation of a partnership is not dependent on the intent of the persons to form a partnership but on the factual characteristics of the relation.

The test laid down by ' 102 UPA is@an association of two or more persons to carry on as co-owners a business for profit@

and NOT the four elements test: an agreement to share profits, an agreement to share losses, a mutual right of control or management of the business and a community of interest.

It is sufficient to prove that there is intent to share profits to show that a partnership exists.

UPA does not give an entity status to partnership but everything was based on the aggregate theory. Because of this aggregate theory, the partnership does not exist by itself, its existence depends on the partners. On the contrary, RUPA is perfectly clear, the partnership is an entity by itself and have all the rights and obligations of a real person.

However, RUPA applies the aggregate theory when dealing with liabilities; partners are personally liable for the debts of the partnership.

The case arises because plaintiff wants to recover $6000 for hiring an additional employee. The court below rejected his claim and granted him a legitimate partnership expense.

In the partnership agreement, it was agreed between defendant and plaintiff that if one of the partners could not work at the shop he could hire someone to do the job at his expense. Defendant being unable to work did hire a person at his own expense.

Plaintiff asked for the hiring of third person to which defendant objected. Plaintiff hired and after a year asked for the reimbursement of the expenses incurred for the hiring. Judgment was entered in favor of defendant stating that plaintiff had no right to ask for reimbursement as defendant refused the hiring.

Issue:

Is it necessary to obtain the agreement of the partners for certain transactions?

Holding:

The court based its analysis on the statute that it considered mandatory as opposed to permissive. As it is necessary to obtain the majority for this kind of decisions, the plaintiff could not be reimbursed of the costs incurred for defendant vigorously objected to the hiring. In fine, the court stated that if a partner did not do anything about the situation, the partner should be compelled to incur the costs. That was not the case in our case.

Question p.46: B & C should prevail according to ' 18 as a majority is needed. The same exists for RUPA.

Case law is divided on his subject.

UPA and RUPA decide in favor of voting when a problem arises.

Question p.49: The profits should be shared equally according to ' 18(a) UPA and ' 401(b) RUPA, unless it is otherwise provided in the partnership agreement.

Unless otherwise provided, a partner should be remunerated for services rendered for the partnership.

However, if the only participation of the partner is services, he should get a remuneration. Distinction to make:

- services on a day to day basis

- services for which skills and labor contributes to the capital assets of the partnership.

In the latter, the partner will have his capital increased and in the former, he will not.

If a services-only partner has been compensated for his services, he ought to contribute in the capital loss.

Each partner is liable to a partnership creditor for partnership obligations. But as between partners, he only contributes up to his share. Thus if he paid too much, he should be indemnified.

Indemnification: liability of the partnership.

Contribution: liability of the partner.

Joint venture:

Sometimes Partnership law applies, but when the result would be unfair, the courts will apply a special rule.

Plaintiff sued defendants for not paying a promissory note after the partnership fail to perform a contract entered into with plaintiff. Plaintiff gave his promise that he would not sue the partnership.

Issue:

Whether defendants had a right to oblige the partnership without the consent of the other partner?

Holding:

The court rendered a decision in favor of defendants as it was the partnership that was obliged and not the partners if the act was made for apparently carrying on in the usual way the business of the partnership. The act binds the partnership when the third party does not the limitation of authority.

RUPA ' 301 (1) essentially involves a kind of inherent authority.

Family Rapoport and Family Parnes into a partnership agreement where each family owned 50% of the interests. The Rapoport assigned 10% of their interests to the adult children and asked the other family to ratify the change in the partnership structure which they refuses stating that the agreement stipulated that this kind of changes could only be done through the consent of all the existing partners.

Plaintiff relied on par 12 of the agreement that only dealt with the assignment of interests and not the entry of new partners according to defendants.

Issue:

Whether the agreement was ambiguous and whether the agreement permitted the entry of new partners without the consent of all the existing partners?

Holding:

The court reversed the decision of the court below deciding that the agreement was unambiguous and thus not left to the jury to decide. Furthermore, par 12 does not stipulate in favor of entry of new partners in the partnership but only as the defendants contended that the partners could assign their interests to their adult children and did not transfer full partnership interest to their children.

Solving the problem of a creditor of one partner between common law and the UPA.

Under UPA, the procedure to have a partner=s interest for paying the creditor is a charging order. If not, the creditor cannot seize the partner=s property as in the partnership but only his personal property.

Salmon was the lessee of a property owned by Gerry. He formed then a partnership with Meihnard because he did not have the financial funds. The lease was for a term of 20 years and it would then revert to the owner. The owner was then the descendant of the original lessor. The owner wanted to sell all his property but did not find anyone to buy it. He then approached defendant who without consulting his partner entered into a contract to lease the entire property on behalf of the partnership. Plaintiff brought suit after being refused to have the property held in trust. Decision in favor of Plaintiff but he was held to 25% of the interest of the venture.

Issue:

Whether defendant had a fiduciary duty towards plaintiff?

Holding:

Defendant had a fiduciary duty toward plaintiff as a co-adventurer. The interest of plaintiff should be evaluated in relation tot he value of half of the entire lease.

Plaintiffs and defendant were in a partnership with two different properties in different locations. An action of dissolution and winding-up started in 1976. It was not a wrongful dissolution, there was no fault on either part.

Defendant asked for the sale of the property that the court allowed. The plaintiffs would then be able to bid at the sale to continue business.

This request was rejected by the court that ordered a dissolution of the assets in-kind. Thus the appeal.

Issue:

Whether a dissolution in-kind is permissible in case of silence of the partnership agreement?

Holding:

The default rules of the UPA does not provide for the distribution of the assets in-kind. Thus the court could not have ordered the in-kind procedure in the case at bar even though a court did but with a different fact pattern and certain elements: no creditors, the sale would be stupid as no other would purchase the assets, the in-kind distribution is fair to all partners.

The court here said there was no evidence that there were no creditors, that no other would buy the assets and that seemingly, the in-kind distribution would not be fair to all partners.

The court decided to distribute the assets to one of the partners who contributed to the partnership with an operating business and cash to the one who contributed cash. Sort of distribution in-kind.

 CHAPTER THREE: THE CORPORATE FORM

Plaintiff signed a contract as a president of a corporation to be formed with defendants in August 1979. The object of the contract was the renovation of apartments. Plaintiff subcontracted and the contract was not performed on time and was apparently of poor quality. The corporation was incorporated on November 1^st. Defendants proceeded with the arbitration procedure that was planned in the contract. Plaintiff then asked to be dismissed from the arbitration. The trial court decided in favor of plaintiff deciding that he was not personally liable.

Issue:

When is a promoter liable for the acts made on behalf of a corporation in formation?

Holding:

The Supreme court of Washington remanded the trial court=s decision stating that the general rule provides that a promoter is personally liable for the acts made on behalf of a corporation in formation. Then, it stated an exception to the general rule that is when the contracting party knows that the corporation is in formation and it consented to the hold the corporation liable for performance.

The evidence presented favored defendants: the court stated that the fact that the contract mentioned that it was contracted with a corporation in formation was not sufficient to prove that the promoter will not be held liable. The court also stated the silence does not mean acceptance.

The dissent said that the corporation ratified the contract basing his analysis on the evidence presented.

Quaker hill knew that the corporation was not formed yet but he urged the corporation to sign the contract. The court decided that the general rule could not apply as the contracting knew and accepted that the corporation would be solely liable if there was no performance.

They knew that the corporation was sot be formed, and thus the court applied the exception thus the promoter was not liable for the acts made before incorporation.

A corporation might take the acts made on its behalf before incorporation. The way to ratify such acts depends on the act itself. It might need the express approval of the board of directors but it can be implied.

The court stated that the relationship between a promoter and a corporation was governed by the law of agency. Thus the promoter is the agent of the corporation once formed. The court stated that the corporation is solely liable when it ratifies the agreement or when it benefits from the agreement. Nevertheless, for the promoter not be liable it is still necessary for the corporation to be formed, that the obligation is the corp=s obligation and that it ratifies the agreement.

Then, the court stated as there was no case law on the sharing of the liabilities that the law of agency was governing. Thus joint and several liability applies when both the promoter and the corporation are held liable.

A lease was signed between plaintiff and defendant while defendant was not incorporated yet. Plaintiff knew that the corporation was to be formed. Defendant signed a check for a lease but the day after, a letter arrived from defendant to repudiate the lease. Plaintiff sued Brunetti for breach of contract. The trial court decided that the corporation was not completely formed and thus Brunetti had to be held liable, it rejected the de jure corporation concept as there was a delay in the filing, it was a legal corporation, yet. But it also rejected the de facto corporation, and thus Brunetti was considered as a promoter.

Issue:

What are the requirements for a de facto corporation?

Holding:

A de facto corporation exists when there is a bona fide attempt to organize the corp. And that there was an actual exercise of the corporate powers. The concept of de facto corporation exists to prevent technicalities to destroy a corporation or to render a promoter liable for the acts made on behalf of the corporation.

The de jure corporation is the exception ( to what?) Not the rule. If the people do not do what is necessary to create the corporation, then the persons should not be protected by the corporation.

Plaintiff and defendants entered into a rental contract while the corporation was not incorporated yet. There was an error in the original articles of incorporation, thus the certificate was refused and defendant had to file new articles of incorporation. During this period, the lease was signed. The trial court decided in favor of plaintiff stating that de facto corporation did not exist anymore in the state of Oregon. Thus, he was personally liable for the acts made on behalf of the corporation as the corporation did not exist.

Issue:

Whether the common law concept of de facto survived the new statute and what would be the liability of a person in case he is not protected by the corporation entity?

Holding:

The court decided that because the Oregon Statute was modeled on the ABA model and that the comments to the model was de facto corporation did no longer existed, then under Oregon law, de facto corporation did not exist anymore.

It also went through the analysis of corporation by estoppel but did not decide if it survived the new statute or not. Apparently, the court would be very reluctant to apply estoppel because the defendant tries to shield himself from liability. But it did not decide if it applied leaving the discretion to the court below.

Then, it went on what would be the liability of the defendants if they are not protected by the corporate entity.

The court is relying on a case that decided that it is because the corporation was not perfectly formed that the person who signed the articles of incorporation should be held liable as a partner. It went on saying that the person should have taken an active part in the business. The liability that a person incurs if actively participating in the business is joint and several. According to the facts, defendant had an active part in the business, thus he could not avoid liability.

*Timberline rejects that when a corporation is not perfectly formed it is then a partnership.

In 1978, the corporation lost its corporate status, but in 1980, Jackson extended credit to the corporation. It sued in 1981 Flanagan=s widow. The court relied on Timberline and found that she did not actively participate in the business of the corporation.

Plaintiff was injured by a taxi cab in New York. Plaintiff sued the shareholder trying to pierce the corporate veil. Defendant moved to dismiss the complaint for there was no cause of action against him, motion granted by trial court. The appellate division reversed the decision on the ground that the cause of action was sufficiently stated.

Issue:

What are the requirements to pierce the corporate veil?

Holding:

To find the shareholder personally liable, it is necessary to show that one is using the control of the corporation to further its own agenda, upon the principle of respondeat superior. The law of agency must apply. Plaintiff lost on technicality. The complaint was not well formulated. The court stated that the fact that the corporation was undercapitalized and their assets intermingled did not suffice to show that there was no corporation. The plaintiff based his complaint on fraud and not on agency.

Dissent:

Criticize the defendant=s arguments. Talked about the policy behind the statute and how it should be applied in this case.

*The case was remanded, plaintiff amended his complaint and he won both at the trial court and in the appellate division.

Corporate entity will be ignored when the parent exercises dominion over the subsidiary. The rules of Agency apply: the subsidiary will be the agent and the parent will be the principal.

There are two broad exceptions to the independence of the two corporations: prevent fraud and when the parent controls and dominates the subsidiary.

Plaintiff died drowning in a pool leased by Seminole. Plaintiff brought an action against the corporation that they won. But the judgment was never satisfied. The plaintiff then sued the director of the corporation trying to pierce the corporate veil. The trial court found for plaintiff against defendant. Defendant appeals.

Issue:

What are the conditions to pierce the corporate veil?

Holding:

The court found for defendant on a technicality as defendant was not a party in the negligence action, the judgment could not be enforced. The alter ego doctrine applies when there is an abuse of the corporate privilege: no substantial assets, no real corporation, board of directors, used the premises of Cavaney for conducting business.

inadequate capitalization is only a factor to be taken into account for piercing the veil.

Under California law, undercapitalization is enough to pierce the corporate veil.

Polan formed two separate corporations, He dealt with Kinney to sublease a building. Polan signed in the name of the corporations. Then, he failed to pay the rent and Kinney corp sued the corporation where the verdict was rendered in favor of plaintiff. The corporations went into bankruptcy and he was unable to get the judgment applied. He then sued Polan wanting to pierce the corporate veil. The district court refused to do so applying the three-pronged test structured under Laya.

Issue:

Whether the corporation assumed the risk when dealing with the two corporations?

Holding:

The court reversed the judgment rendered by the district court. The Laya case established a two-pronged test where to pierce the corporate veil, the plaintiff must show that the distinction between the entity and the person does not exist anymore and that if an equitable result could be obtained with the existence of the corporation. The district court decided that Kinney showed that the two requirements were met, thus the corporate veil should be pierced. And the Court of Appeals agreed. But the district court decided against the plaintiff because it applied a third prong which says that when it is a money lender that is trying to pierce the corporate veil, then if it did an investigation, it assumed the risk. The district court decided that Kinney assumed the risk. The court of appeals decided that Kinney was not a money lender, that the third prong was permissive and not mandatory and that he did not assume the risk. They refused to decide if this third prong could be extended to other persons other than money lenders.

It is not because the corporation is not financially liable that the not original incorporator should be said to be a fraudulent.

Is a parent fraudulent if the subsidiary is undercapitalized? Yes, if it=s only purpose in creating the subsidiary is to fraud or escape a legal duty. But if there is a coverage in the form of an insurance that amounts to being properly capitalized even though the company does not have enough money accounting wise.

Pepper Source did not pay a bill owed to Sea-Land. Sea-land sued Pepper source and all corporations that Marchese, the incorporator, created stating that all the veils should be pierced and thus all the corporations would be liable for the debt because they were alter egos of Marchese. Sea-land moved for summary judgment that was granted on the fact that the Two prong test was met. Marchese appealed.

Issue:

Whether it is possible to grant summary judgment on a question of facts?

Holding:

The court in the 1991 case decided that even though the first prong of the test C unity of interest and ownership are not separateC was met but the second prongC promote injustice or show fraudC could not be decided on a motion and it needed to be shown via discovery or evidence. The evidence was not enough to prove it at the motion stage and it should have been left to the jury to decide.

The court in the 1993 case looked at the proof given by Sea-Land and decided that it carried its burden as it said in the first case. Thus the corporate veils were pierced for all the corporations.

For equitable subordination, which is a relief under bankruptcy procedures, the claimant must not meet tree elements:

- the claimant must have engaged in inequitable conduct,

- the conduct must have resulted in injury to the creditors or conferred an unfair advantage to the claimant,

- equitable subordination cannot be in conflict with bankruptcy laws.

Under lying that are tree principles, first principle no idea what this about; the subordination should be limited to the actual harm done, the third principle is the burden of proof, when there is a challenge, it is to the one who made the transaction, that has to show that it was made in good faith, the claimant must show his honesty and the validity of the claim.

Wheatley gave his promissory note to Ladd Estate, Liles and Westover entered into an agreement to guarantee the note in case Wheatley defaulted which he did. Thus, Ladd Estate did pay the promissory note and called upon Westover to reimburse the debt they paid upon the guarantee agreement. The plaintiffs in this action purchased all the common shares of a holder who was part of and signed the agreement. They sued ( pursuant to provision 57.040 ORS) to enjoin Ladd Estate to enforce the guarantee given by Westover on the grounds that this agreement was ultra vires. The case was dismissed in the court below stating that the agreement was enforceable, thus the appeal.

Issue:

Whether ultra vires doctrine can be applied where the act is actually ultra vires?

Holding:

The court held that the agreement was actually ultra vires but the statute provided that it would be upheld in those circumstances. The court stated that the agreement would not be enforced if the result would not be equitable, but that was not the case. It further said that because the purchased the common shares from someone who was part of the agreement, they were held to assume the risk, as they impliedly acquiesced to the guarantee.

The defense of ultra vires is barred under the statute even though the third party knew the act was outside the scope of the corporations but a shareholder of the corporation who is not an agent of it can enjoin from enforcing the guarantee.

Kings highway leased a theater to Marine repair. Then asked for the lease to be broken in court. The court decided in favor of defendant because the defense of ultra vires cannot be used either a sword or as defense in the sense of the provision used.

* The most famous case in corporate law.

Ford wanted not to distribute the dividends in order to benefit the employees. The Dodge brothers sued to compel the corporation to distribute up to 75% of the dividends. The trial court stating that the corporation owed half of the surplus cash derived from the profits made. The court above affirmed that of the judgment saying that the function of directors was to benefit the shareholders and not to benefit others because the ultimate goal of a corporation and its officers is to maximize profits.

The board of directors decided to donate $1500 every year because it was in the best interest of the corporation to do so. Some shareholders attacked this decision on the basis of the old common law rule that directors= role is to maximize profits. Thus a donation to someone for non profitable reason is against the Common law rule. The president of the corporation testified as to the reason of the donation. The shareholders did not attack this statement. They only stated that this decision was outside the scope of the certificate of incorporation and that the statute could not constitutionally apply to corporations created before the enactment of these statutes.

Issue:

Whether the board of directors can make ultra vires acts in the name of public policy?

Holding:

The court decided that the act was intra vires.

* a unanimous decision. Completely contrary to the Dodge case.

The role of directors to maximize profits cab be done against the interests of others such bondholders. The only way for the bondholders to be protected against such risks would be an act from the legislature or a special provision of the debenture.

Directors do not owe their duty to the shareholders but to the corporate entity. If a director does not have this in mind then he will not act in the best interest of the corporation.

The corporation chose one Osgood to help the directors to close up the affairs of the corporation. The directors never tried tow work with him and they even indebted the corporation further. The directors did not insure certain property either, and this property was consumed by fire.

Issue:

Could the shareholders impose someone to do the directors= job without their approval?

Holding:

the directors responsibility is limited by the by-laws. The management is made by the directors with officers that they duly appointed. The court said that the statute did not authorize the shareholders to appoint an officer without the approval of the directors. Thus any act of the corporation to appoint someone is null and void. No liability for the directors in this instance. The court further stated that the statute did not impose on corporations to get insurance for their property, as there is no legal duty nor by-laws duty, the directors were not liable because they refuse to insure the said property.

Distinction between the relationship between principal and its agent and the relationship between the board of directors and the corporation. The board of directors= powers are original and undelegated. The corporation cannot interfere with their decisions when in the normal course of business.

Class A stockholders requested in writing that the president summon a special meeting. The president did not do anything and the stockholders sued to compel him to have the special meeting. The trial court decided in favor of the stockholders.

Issue:

Was the stockholders= action warranted or forbidden by the by-laws?

Holding:

the by-laws imposed an expressed duty on the president of the corporation to call a special meeting if certain formalities were respected which they were in the instant case. The court when went on with the different grounds for calling the meeting that the shareholders advanced. The court said that all these grounds respected the by-laws and that it was because they were preferred shareholders that they could not ask for certain things. The fact that by-laws give powers to the board of directors to amend the by-laws does not mean that it retrieve completely the power from the shareholders, the agent should never be able to behave without the consent of the principal.

A director was removed for cause by the shareholders. The director sued stating that they could not. The court decided that the power to remove a director for cause was an implied one. The plaintiff argued that neither the statute nor the by-laws provide for the removal of directors for cause. The court answered that it had to be measured with the real damage that it could cause if there was no implied power. Thus, the corporation has the right to remove for cause.

The board of directors wanted to change the by-laws date for the general meeting from January 11^th to December 8^th. The shareholders as soon as they knew brought this suit to impeach the general meeting to be advanced for an earlier date. The chancery court rejected the claim on the basis it was too late. The chancery court stated that those maneuvers were intended to have the board of directors reelected as the shareholders would not have the time to have a proxy campaign to have the board of directors. But, the chancery court decided in favor of defendants.

Issue:

whether a board of directors is entitled to change the set date of the general meeting.

Holding:

The court decided that it was not because the statute allowed the board of directors to change the set date of the general meeting that this conduct was permissible. The court further said that in the absence of fraud or inequitable action, changing the date was permissible, thus upholding the decision in American Hardware, but the court further said that the claim was brought on time and that the shareholders were entitled to injunctive relief. At the same time, the court stated that the court will not interfere if the intent of the dissident shareholder is to have a proxy contest.

Blasius acquired 9% of the stock of Atlas. It then tried to increase the number of the directors on the board. To prevent that, the actual board decide to appoint two new members to the board. Thus the action by Blasius in the court. Blasius by filing a Schedule 13D disclosed that it wanted to take control of Atlas. After a proposal of recapitalization sent by one of the owners of Blasius, the board decided to add the two members.

Issue:

Whether a decision by the board of directors to increase the number of the directors is permissible.

Holding:

The court decided that the action of the board of directors to increase the number of directors is valid. It nevertheless decided the decision void and null, not because it was made in bad faith but because it is not in their option to do so, even though the board might be the wiser of the two.

It rejected the argument of the plaintiff wanting a rule of per se invalidity as being too broad. The way they took the action was not a wise as they had enough time to inform the shareholders that then would have been able to make a sound judgment. Thus, the action of the board is void because A it constituted an unintended violation of the duty f loyalty that the board owed to the shareholders@.

* Need a unilateral action by the board of directors to be applied + impending the franchise to the corporation.

The board of directors of Lunkenheimer to prevent take over by Condec Corp. decided to swap some of the shares in a subsidiary. The court said that the board of directors could not do that because their primary duty was to the shareholders. If they used their power for another purpose than the carrying of business, the decision has be to be declared void. This was an impermissible action by the board.

The dispute arose because of amendments made to the by-laws by the Miliken.

The plaintiffs received their shares through the death of a shareholder, and had 17% of the total shares of Miliken. The board decided to amend the by-laws to make sure that the shares would not be disseminated to unrelated persons as it is a family company by a General Option Agreement. The GOA was adopted by 75% of the shareholders except for plaintiffs. Then, they drafted the amendments and submitted them with proper disclosure for the shareholders to make a knowing judgment. Notice of the annual meeting with the proposed changes were mailed to the shareholders on March 14^th for the annual meeting on April 24^th. The amendments were approved by 78% of the shareholders. The Strouds filed a complaint alleging invalidity if the notice, the amendments and by-law 3. The court granted summary judgment for defendants and for plaintiffs stating that by-law 3 was unfair using the Blasius standard.

Arguments:

Defendants: The fairness test is only applicable if the board of directors breached its fiduciary duty of loyalty to the corporation, and they also contended that the amendments could sustain the exacting fairness test.

Plaintiffs: they argued that the matter was properly decided under Blasius Standard, because the amendments directly impinge on the shareholder franchise.

Issue:

Whether the amendments were properly approved and made?

Holding:

All the changes that were made to the by-laws were fair and proper, reversed the decision of the court of Chancery.

Rule of law:

The court first stated that there was no fraud in a decision of a board of directors if the informed shareholders voted on it and that the burden of proof is on the challenger. There was no breach of fiduciary duty, thus the burden shifted to the plaintiffs. Article (c) was not void or improper and the plaintiffs did not prove that the directors implemented such a provision Ato exclude all other candidates for office except certain persons.@ The court also rejected the application of Blasius stating that the case was circumvented to its specific facts even though it has some general applicable rules. The court rejected the contention that there was harm by by-law 3 as it was completely speculative.

Plaintiff filed a complaint against her corporation action and the board of directors when they adopted a recapitalization plan. Meyer, vice-president of finance and administration thought it would be in the best interest of Milacrom to recapitalize. They contacted First Boston Corporation and gave their goals to find the best way to do it at the end of 1985, in the beginning of 1986, Fits Boston gave them what were their objectives according to what Meyer told them of their goals. A special meeting was called for where the recapitalization was presented. The board decided to postpone its decision and met again a month later. They decided upon the recapitalization and the amendments to the certificate of incorporation being in the best interest of the corporation. Thus, they called the annual meeting on April 22^nd 1986 for the shareholders to vote on the recapitalization and the amendment. They sent a notice to the shareholders with the appropriate proxies explaining what were the risks and the advantages of adopting the plan and the amendment. Over 72% of the outstanding stock voted in favor of the plan. Williams then filed a complaint stating 5 separate claims: entrench Milicrom management, the recapitalization impermissibly creates disparate voting rights, violation of Delaware principles, failure to properly disclosed, coercion of the shareholders to vote in favor of amendment. Defendants were granted summary judgment in part, the court of chancery letting Williams to continue her claim on the entrenchment. The court finally in favor of defendants deciding that the recapitalization was a reasonable defensive measure.

Issue:

Whether the board did not act in the best interest of the corporation?

Holding:

The court affirmed the chancery court decision but on another basis.

Rule of law:

First, the court rejected the Blasius Standard. It based its analysis on Stroud 2, stating that the rule invented in Blasius can only apply when the board of directors took an action unilaterally to impede an unaffiliated majority of shareholders from expanding the board of directors or from electing new directors. Blasius is only applicable when the shareholders are not given a full and fair opportunity to vote.

Second, the court rejected the applicability of Unocal because it could only be applied when the board unilaterally adopts a defensive measure in reaction to a perceived threat, thus it reversed the decision of the court of chancery to apply the test, but the defendants met the requirement saying that it was a reasonable action by the board.

Third, the court applied the business judgment rule. This rule establishes a presumption that can be rebutted in showing that the board breached its fiduciary duties, then the burden shifts to the board to show that the transaction was entirely fair to the stockholders.

Thus, the court decided to apply Stroud 2. It then went into analyzing the majority of minority vote requirement and rejected it stating there was no such requirement under Delaware law.

Fairness of the majority vote on the minority: they refused to apply Technicolor saying that in that case there was no duty of care and thus the burden shifted to the defendants. Here, Stroud 2 applied, the court decided that the shareholders were fully informed, but the court stated that the board cannot shield itself behind statutory compliance if it involved the exception articulated in Stroud.

Dissent:

The dissent rejects the deferential standard of Stroud applied by the majority, it would prefer to apply Unocal. They said that the shareholders had no real choice in voting as of the warning given by the board in the proxies that the corp would be de-listed from NY stock Exchange.

The corporation never held an annual meeting in order to elect directors. The plaintiff filed a complaint to order the corp to hold this annual meeting and to void a letter of consent for the election of directors.

Issue:

Whether it is possible to elect directors pursuant to ' 228 of Del. Law that provides for the exemption of holding an annual meeting?

Holding:

The written consent of the majority to elect directors is only possible to fill vacancies until at the annual meeting proper election will be held.

Rule of law:

The argument that Section 228 can only apply when a small bound group of shareholders comprising a voting majority is rejected by the court. The court further says that this section only apply for the filling of vacancies and that it could not be used for the election of directors for the term specified in the by-laws. Thus, TSI could not go against the mandatory language of ' 221 that provides for an annual meeting.

* Baldwin v. Canfield: the directors have no authority to act except when assembled at a board meeting: old view.

* Gerard v. Empire Square Realty co: in closely held corporation, it would be foolish to follow the general rule, thus an act can be lawful even though no meeting as been held: modern view.

*** it is referred as the shareholder-acquiescence model.

* Holy Cross Gold mining & Nilling Co v. Goodwin: if it is customary for the directors to act individually, then the corporation will be bound by their action, especially if it is a majority.

The issue raised was that plaintiff wanted to insect some corporate books and records. Thomas and Betts are a competitive company of Leviton, dealing in the computer business. Thomas and Betts tried to negotiate for a joint venture but it never succeeded. Through negotiations with the former Vice-president of Leviton, Thomas and Betts acquired 29,1% of the outstanding shares of Leviton. Thomas and Betts knew at the time of the transaction that Leviton did not distribute dividends or follow the rule of GAAP. Harold Leviton was informed on the sale the day after it was concluded. Leviton refused to open an amicable relationship with Thomas and Betts. The CEO of Thomas and Betts reported to the board the strategy he will use to cultivate that relationship. Leviton let access to certain books and records but it was clear that he would prevent any take over by Thomas and Betts. Thus Thomas and Betts asked to inspect certain records on different grounds. The CEO of Thomas and Betts then offered to purchase the balance of all the stock of Leviton for $250 million threatening litigation if Leviton refused. Leviton formally refused the acquisition offer and the inspection request. Thomas and Betts thus filed a suit to compel Leviton to give access to the books. The court of Chancery rejected in part the claim and offered limited access to the books, thus this appeal.

Issue:

Under which circumstances can a shareholder ask to examine the corporate books?

Holding:

The Supreme court affirmed the decision of the court of Chancery.

Rule of Law:

Under ' 220, the shareholders can ask to examine the corporate books for a proper purpose. The court stated what were proper purposes. The court of Chancery had decided that asking for documents for waste and mismanagement was an improper purpose, the supreme court reversed that part of the decision stating that he fell in the category of reasons where a shareholder can use '220(b), but nevertheless, plaintiff=s claim failed because the court decided that plaintiff used it for an improper purpose. The court went then in saying that the shareholder had the burden of proof to show it had a proper purpose, the standard to be used is not preponderance of evidence but sufficiency of evidence. But the court then said that the findings of the trial court was more based on the credibility of the witnesses than on the standard used. The court found that it used the inspection provision to have leverage when the friendly overture to acquire the company failed. Plaintiff used an another purpose which was the equity method of accounting, the supreme court ruled that it was not a proper purpose under ' 220, because that had nothing to do with Leviton but with Thomas and Betts. The court upheld the limitation set up on the inspection, saying the trial court could with regard to ' 220 limit the scope of the inspection.

A shareholder can use ' 220 to see if there is any corporate wrongdoing. But it is rarely used in the context of derivative action.

* To know the names of the beneficial owners of the shares, the SEC passed NOBO ( rule 14b(c)), where it is required for brokers to disclosed the name of the beneficiaries if they do not object.

* Banks mostly use depositories and there is no beneficial owners on the records, the depository becomes the record owner.

The court rejected the view that a shareholder could not compel a company to compile a NOBO lit as it is a very helpful tool to inform the shareholders.

* The common law rule states that a shareholder has a right to inspect books and records if in good faith and it is in his interest. But, statutes have been passed and the general idea is that they supplement the common law rule.

* proper purposes: - to determine if the corporation is properly managed.

- to determine the condition of the corporation.

The Supreme court decided that a shareholder could bring a derivative action on the basis of violation of the proxy rules even though the section did not provide for it. It is because the shareholders were considered as a group and that the harm was done to the corporation.

**** Creation of a private right of action under rule 14a-9 of the Securities Exchange Act.

The action brought was based on the fact that a corporate merger was accomplished through the use of a proxy statement that was materially false or misleading.

The petitioners brought the suit a day before the meeting where the vote for the merger of Electric Auto-Lite company into Mergenthaler Linotype because the proxy was a misleading solicitation but the vote took place as they did not ask for a restraining order. For the merger to take place 75% of the votes should be positive, the three defendants had only 54% and they needed the votes of the minority shareholders. The district court on a motion of summary judgment on count 2 which stated that the merger should be set aside and proper relief should be awarded decided that the omission was material. But it needed a hearing on the issue of the causal connection between the violation and the injury. The district court found that the petitioners showed adequate causation from the fact that they needed the minority shareholders to have the mergers. The respondents appealed the decision and the court of Appeals affirmed on the issue of materiality but reversed on the issue of causation. The district court used a preponderance evidence test that is the Common Law fraud test. The court acknowledged that test but said that the right test was the fairness of the operation.

Issue:

Whether the private right of action under ' 14 and Rule 14a-9 provides for a fairness test instead of a preponderance of evidence test.

Holding:

The Supreme Court held that the Court of Appeals was wrong to use the fairness of the merger test. Vacated and remanded.

Rule of Law:

' 14 does not provide that the fairness test should insulate a whole category of violations of the proxy rules, it only provides for sanction of misleading or false statements in proxy solicitations. The court discussed the hearing findings that the omission was material. It further stated that it is not needed that the statement has an effect of the vote, what is needed to assert a cause action is to prove there was a material omission in the proxy solicitation.

The court ruled that because it is found that the proxy solicitation had misleading or false information that does not say anything about relief. The relief asked for, that the merger be set aside, is not provided in the Act, it only provides for the contract to be void. It thus only implied that the contract is unenforceable against an innocent party. The court stated that under Borak the merger should only be set aside if the court finds that it would be inequitable to enforce it. The court also stated that monetary relief is possible under ' 14 and ' 29. The court just said that there was a bunch of reliefs available and that it was for the district court to decide which one was adequate.

The court of Appeals decided that the standard to evaluate the materiality of the facts in deciding if there is a violation is all the facts that a reasonable person might consider important. But the supreme court reversed and embraced the decision of Judge Friendly in Gerstle that the standard to be used should be that there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.

** The standard used by the court of Appeals was too low and would detrimental to the private right of Action.

FABI started a freeze-out merger where the bank ( First American Bank of Virginia) finally merged into VBI, a fully owned subsidiary of FABI. VBI owned 85% of Bank and the rest was held by minority shareholders. Virginia Law only required that the vote should be made at the shareholders meeting and that a statement of information was circulated. In this instance, the directors issued proxies, all the shareholders voted on the merger except for plaintiff who withheld her proxy and who after the vote brought an action under ' 14 for misleading statements. Plaintiff pleaded two counts: solicitation of proxies in violation of ' 14 and rule 14a-9 of the blue Skies Law and breach of the fiduciary duties owed to the minority shareholders. A jury verdict was rendered in favor of Plaintiff and a similar action was brought in the federal courts by other minority shareholders, one of them having withheld his vote like plaintiff. They won on collateral estoppel as to liability.

The judgment was affirmed at the appellate level on the basis that because it was misleading statements they had a right to a relief even though the votes were unnecessary to operate the merger.

Issue:

Whether statements of belief or opinions that are untrue give rise to the action provided under ' 14 and Rule 14a-9.

Holding:

The Supreme court reversed the decision of the court of appeals that this kind of statements give rise to an action.

Rule of Law:

The Supreme court recognized that this kind of statements made by the directors are material to the decision made by the shareholder: they applied the substantial likelihood test. Such statements are material facts that can influence shareholders, but the court went on in saying that mere disbelief or undisclosed motive cannot fall with the scope of ' 14(a) and rule !4a-9. The Court approved petitioners= argument that if in the proxy solicitation there are accurate statements then it can render the misleading statement too unimportant to ground liability.

The court thus recognized that statements of beliefs or opinions expressed in the proxy solicitation are material facts that are substantially likely for a reasonable shareholder to consider when he will vote.

The second issue pertained to the causation of damages to be proven by a minority of shareholders whose votes were not required by statute law. The statute bars a shareholder to bring a suit against the transaction if he ratified such transaction after disclosure of material facts, so because they knew about the misleading facts, they were barred from any relief.

The court decided that the Sandberg case did not bar plaintiffs= action if they have lost their appraisal right or other remedy.

It explains the amendment made by the commission regarding rule 14a-8(d): exclusion of a proposal by a shareholder if the matter relates to the ordinary conduct of business, it prohibits exclusion of proposals with regard to substantial policy considerations. The court went on the new position of the SEC concerning equal employment policy proposal, the SEC has decided recently that shareholders could not get to management proxy material on that basis. The no-action letter was declared improper as not decreed under the procedure of the APA, the 2^nd Circuit reversed saying that the no-action letter was a legislative rule in the meaning of the APA.

A shareholder wanted to have as proposal in the proxy the cessation of manufacturing tobacco products. The company used rule 14a-8(c)(7) to omit it. The division said that it was not a matter relating to the conduct of ordinary business, and thus issued a no-action letter. The Commission upheld the division=s decision.

A shareholder wanted to implement a policy of human rights. The company used rule 14a-8(c)(5) to omit the proposal. The division decided that it was significantly related to the business and thus the company could not omit the proposal.

Same sort of proposal as in Philip Morris, the division issued a no-action letter, it was not in the ordinary course of business, and thus it could be omitted.

Roosevelt wanted to include in the proxy for the annual statement a proposal concerning the CFC and halons policy. Du Pont had publicly said that it would eliminate any manufacturing of these two substances as soon as possible. Du Pont refused to include the proposal and informed the SEC why it will omit the proposal. The SEC issued a no-action letter saying that Du Pont could not omit the first part of the proposal as it was in the ordinary course o business. The district court overruled that decision and stated that the two proposals pertained to matters relating to the ordinary business of the company. After that, Du Pont publicly said that they will eliminate such substances as of end-year 1995. Roosevelt appealed the decision.

Issue:

Whether there is a private right of action under rule 14a-8(c)(7) and whether the proposal is within the scope of omission of rule 14a-8.

Holding:

The court of Appeals affirmed the district court decision taking into account the new public release of Du Pont concerning the dead lines.

Rule of Law:

There is a private right of action under rule 14a-8 for shareholder=s proposal.

The two proposals related to matters within the ordinary course of business of the company.

Appeal from Wal-Mart which was ordered to pay the attorney=s fees of the plaintiff in the first instance.

History:

Plaintiff in the first instance brought an action against defendant to force to include a proposal in the proxy statement. The shareholders tried once in 1992, and Wal-Mart refused on the basis of rule 14a-8(c)(7) that allows a company to omit a proposal if it is related to matters concerning the ordinary course of business. The SEC agreed and issued a no-action letter. The shareholders resubmitted the proposal at the next annual meeting, and the defendant refused on the same basis. The shareholders brought an action arguing that it was different this time. The trial court ruled in favor and the defendant amended the proxy statement, the shareholders asked for attorney=s fees and the trial court granted them. The defendant only appeals on the award of the attorney=s fees.

Issue:

What are the requirements to award attorney=s fees?

Holding:

The court affirmed the decision of the lower court.

Rule of law:

Normally, attorneys= fees are awarded when there is contractual or statutory obligation, but the courts have created the common benefit rule where a substantial benefit has been given to the members of the class the winning party was represented. The court use the rule established in Mills v. Electro-lite. It is based on unjust enrichment. They ruled that the promotion of corporate suffrage concerning a policy issue confers a substantial benefit regardless of the fact that the proposal was defeated.

* case regarding equal employment policy: change of jurisprudence.

***Rule 14a-11 does only apply to election contests ( directors): it applies to solicitation of persons opposing a solicitation by persons with respect to election of directors; rule 14a-3 does not apply, solicitation can e made before any proxy statement has been furnished.

*** Sched. 14A: makes a distinction between what applies to rule 14a-11 and the other solicitations.

Derivative action brought by shareholders against the corporation that reimbursed the expenses incurred in the proxy contest. Both sides were reimbursed. One part was authorized by the old board of directors and the other part was authorized by the vote of a majority of shareholders. The contest was over the policies of the company and especially the contract of employment of one of the directors. The two courts below rendered a decision in favor of the corporation. The court below stated that the plaintiffs failed to show liability concerning specific expenditures.

Issue:

In which circumstances a corporation an reimburse expenditures incurred during a proxy contest.

Holding:

The court of Appeals of New York affirmed the decision of the courts below.

Rule of law:

A corporation can reimburse expenditures incurred during a proxy fight when the contest is based on policies and not on keeping management and control. The court distinguished Lawyer=s advertising Co v. Consolidated Ry., Lighting and refrigerating Co, stating that in that case the reimbursed was ultra vires because it was not authorized by the board and because it concerned the keeping of the control of the corporation.

* test: when the directors act in good faith in a contest over policy, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies.

The second issue was reimbursing the winning party: the shareholders have a right to reimburse winning contestants, with the caveat that it is under the court scrutiny.

**Concurrence:

The concurrence stated that the court was affirming the decision on the ground the plaintiffs failed to prove but that the court did not decided the more important issue at to what is the rule of law concerning the validity of corporate payment for proxy solicitations in addition of giving notice of the meeting and the questions to be voted on.

** Dissent:

The dissent said that the plaintiffs should not have lost on the ground that they did not structure their claim on separate items as to the expenditures that were ultra vires and those that were not. He rejected the policy and control and management distinction laid down in Lawyers= advertising as impracticable. And he stated that the expenditures of the winning contestants should only be reimbursed when there is a unanimous vote of the shareholders not of a majority of shareholders.

During the proxy fight, the plaintiffs brought an action and obtained an order from the court to order the corporation to reimburse expenditures on both sides.

The court decided that the test to be applied is not fairness but that the courts should only act when there is illegality or abuse of reasonable business judgment. The court should only determine if the decision of the shareholders to approve the reimbursement is reasonable and proper.

If a winning board of directors decide to have the expenditures reimbursed and if it is proven, then it is a prima facie of directors= self dealing.

Donahue was a minority shareholder in a closely held corporation. Rodd and Donahue were employees in Royal electro-type. Rodd became general manager and treasurer in 1946 while Rodd managed the plants. Rodd acquired 200 shares of the corporation and Donahue 50. Royal then purchased the remaining shares and Donahue and Rodd became the sole shareholders. Rodd sons succeeded him at he head of the corporation and certain negotiations went on as for the purchase by the corporation of the shares that Rodd still had after giving most of them to his sons. The negotiation went on for the buy by the corporation of 45 shares owned by Rodd. The price was fixed according to book and liquidated value. When the Donahues learned about the purchase by the corporation, they offered their own shares to the corporation on the same terms. But the corporation rejected their offer. The Donahues brought suit. The lower court rendered a decision in favor of defendant. The plaintiff argued that she was deprived of an equal opportunity to sell her shares and that the purchase of the shares was an unlawful distribution of the corporate assets.

Issue:

Whether there is an obligation by a corporation to buy the shares of a minority shareholder in a closely held corporation?

Holding:

The court reversed the decision of the lower court and rendered a decision in favor of the Donahues.

Rule of law:

- applicability of the decision only to closely held corporations!!!!!!

The court first defined what was a closely held corporation:

- a small number of shareholders,

- no market for the shares

- most of the shareholders in the management, direction, and operations.

Then it said the closely held corporation was like a partnership as for confidence, trust and absolute loyalty.

Thus shareholders have a duty of loyalty to one another: strict good faith standard: very restrictive. It is different from the duty of loyalty that the directors owed to the corporation ( good faith and inherent fairness standard).

The situation of a minority shareholder in a close corporation is completely different from the one of a shareholder in big corporation. He cannot wait passively as his investment might be his only source of revenue. Thus his only way out is to sell its shares to the corporation.

Regarding closely held corporation when the corporation decides to acquire its own shares, it must do with the utmost good faith and loyalty to the other shareholders. If the shareholder that sold his shares was a majority shareholder then there should be an offer to buy the other shareholders= shares.

If the shares are bought, it gives the seller a preferential distribution of the assets. Thus Donahues were entitled to relief.

Relief:

- Rodd may remit the money with interest

- or Rodd Electro-type may purchase Donahue=s shares at the same price without interest.

Ringling and Bailey entered into a voting agreement concerning the elections of directors with a clause stating that in case of disagreement Loos would be the arbitrator and his decisions would bind the two parties. Before the 1946 annual meeting, the two shareholders went into discussions as to which they will elect. They did not get to an agreement and because Haley was sick, her husband took her place. Haley indicated that he wanted an adjournment of sixty days but because of something that was done by Ringling, he and Mr. North voted against the motion. Ringling objected to the voting which was not in accordance with the decision of Mr. Loos. The election took place and the candidates proposed by Loos and others were elected. The haley- north group objected to the vote insofar as it elected Mr. Dunn. Ringling then brought suit.

The lower court rendered a decision stating that the voting agreement was declared valid as not in violation of any public policy and with lawful objects and purposes.

Issue:

Whether pooling agreement are valid?

Holding:

The court reversed on one part of the decision.

Rule of law:

The court first analyzed the agreement with regards to the powers given to the arbitrator. It concluded that the arbitrator was not empowered as a trustee, thus his decision would not be enforceable if the parties did not agree with his decision. But if one of the party decides to go with the decision, it binds the two parties.

The court also stated that the agreement did not empower one of the parties to cast the votes of the other one, they each vote on their behalf.

It rejected the argument of the defendants that section 18 of Del Corp Law applied as it would prohibit any agreements between shareholders to confer the voting rights to other shareholders.

The court then made a distinction between pooling agreements and voting agreements.

The court finally held that the failure of Haley to exercise her voting rights in accordance with the decision of the arbitrator was a breach of the contract.

The relief given was not the invalidation of the election but the nullity of the votes cast by Haley.

Stoneham purchased shares of the Giants and sold some of them to McGraw and McQuade. The three parties into an agreement stating that there would be no possible change in salary, or in the amount of capital...According to the agreement, the three had their position in the corporation. A few years later, Bondy replaced plaintiff in his position as treasurer. The two parties did not vote at that meeting and they did not respect the agreement as they should have used their best efforts to keep him in place. The court below refused to reinstate him as a director but he was awarded damages for wrongful discharge as Stoneham just wanted to get rid of him.

Issue:

Whether a contract is void because it compels to vote in certain way to keep in place certain persons?

Holding:

The court of Appeals reversed and dismissed the complaint as the contract was null and void.

Rule of law:

The court recognized that an agreement that has for purpose to divest the directors of their power to discharge an employee unfaithful to the corporation is against public policy.

It also stated that shareholders may not control the directors in their own functions.

But, it further stated that the shareholders may unite to elect directors but that does not extend to the control of the directors when fixing salaries or choosing employees.

The court used public policy to reject any obligation by McGraw and Stoneham towards McQuade.

The contract is null and void because it impeaches the directors to change officers and salaries or policies.

Plaintiff and another shareholder had an agreement where shareholder agreed to follow the decisions of plaintiff and to offer his shares to plaintiff before selling them to a third party. Then defendant entered into a contract with plaintiff allowing to purchase the shares of shareholder thus becoming majority shareholder. Under the terms, defendant had agreed to a passive board for the period of a year. Defendant breached this part of the contract. Plaintiff brought suit. Held for defendant as it was against public policy to provide for a passive board but not against policy to establish a course of action or a certain policy or to decide who they will choose as officers.

* Changes the rule in N.Y. as to agreement among shareholders: McQuade and Curtis are restricted to situations where the parties to the agreement are not the sole shareholders.

Clark and Dodge were the sole owners of the two defendant corporations. In 1921, they entered into an agreement where Clark was supposed to stay in office so long as he remained faithful to the business. Dodge as a counterpart was supposed to vote for Clark that Clark should receive one fourth of the net income and no unreasonable salaries should be paid to other officers.

Dodge failed to perform his part in the contract as he did not use his stock to keep Clark as a director and as he prevented Clark to receive his income due to unreasonable salaries given to other officers.

The court below rejected the claim under the McQuade standard as it froze the board of directors.

Issue:

Whether a contract between the sole shareholders to keep one of them as a director is void and null under the McQuade and Curtis rules?

Holding:

The court Reversed the decision of the court below and restricted the McQuade=s rule to a specific situation.

Rule of law:

The Court of Appeals based all its analysis on the fact that there should be a harm to shareholders to apply the stringent standard of McQuade and Curtis.

But where the directors are the sole shareholders, there is no reason to render an agreement providing for the election of officers void as it does not harm the public. Thus, the McQuade rule only applies when the shareholders who entered into an agreement restricting the choice of the board are not the only directors.

Action brought by B, agreement entered into by three corporations where one would manage the company for 19 years. The court held in favor of plaintiff distinguishing from Dodge v. Clark where the impingement was slight and unimportant. Agreement against statutory norm.

The defendants and the plaintiffs had a pharmaceutical company that was incorporated in 1924 in the state of Illinois, they each owned half of the outstanding shares. In 1845, each contracted to sell shares to one employee for $21.000. They promised to purchase the shares back if the guy=s employment was terminated and that if they sold their shares, the employee would get the same price as offered to the brothers. In 1961, one part of the family purchased back the employee=s shares.

In 1954, the brothers entered into an agreement to protect their families after their deaths. The wife of the brother who died asked for the terms of the agreement to be carried out but the son of the other brother told Emma ( the wife) that his father would not abide by the agreement. The son wanted to amend the agreement but Emma refused and brought suit for specific performance. The trial court ordered a decree of specific performance but the appellate court reversed as the agreement was deemed void because of the Aundue duration, stated purpose and substantial disregard of the provisions of the corporate act.@

Issue:

whether an agreement that has no duration and fix the salaries of officers for a certain number of years is void because of public policy?

Holding:

The Supreme court reversed the decision of the appellate court and remanded the case.

Rule of law:

The court first defined what a close corporation was: in which the stock is held in a few hands or in a few families.

The court then stated that the only way to protect the shareholders is to write a very extensive agreement stating the rights of obligations of each party.

If there is no apparent injury to the public, in the absence of a complaining minority interest and no apparent prejudice to creditors, there is no reason to void an agreement even though it technically violates the corporate law.

The court first analyzed the duration issue: the court interpreted it as meaning that the agreement would be in force as long as one of the parties is still living. Thus, the agreement cannot be void under the duration issue.

The court then said that it was not a voting trust but a simple voting agreement where the voting rights were not separated from the proprietary rights of the shareholders.

They based their entire analysis on another case Kantzler to decide the provision concerning the election of certain persons to certain offices: in that case, the provision was upheld even if it was for a fixed period.

Then, the court analyzed the provision concerning the support and maintenance to the families of the brothers after their death. The court said that in publicly held corporation, this kind of provisions would be void because it would violate the rights of the shareholders and would be ultra vires, but in close corporation where the only shareholders are also the directors there is no such problem, thus this provision was valid.

Rosegarden (couple) owned 80% of the stock and Wasserman 20%. Wasserman sued under an oral agreement providing for the election of each other as directors and they would each receive the same salaries. The trial court decided in favor of defendants and the appellate court reversed and applied the same rationale as in Galler.

The corporation, Zion and Kurtz entered into an agreement stating that without the consent of Zion, the corporation could engage in any business. Two transactions were then authorized by the board over Zion=s objections. Zion brought suit. The court held that there was nothing against public policy in this agreement even though the corporation failed to file the document stating that it was a close corporation. Thus, Zion won.

The two sole shareholders of a corporation entered into an agreement stating in relevant part:

- no action by stockholders should be taken without unanimous vote.

- directors should be elected by unanimous vote.

- no action by directors should be taken without unanimous vote.

- the by-laws could not be amended without unanimous vote of shareholders.

The minority shareholder brought suit to have the agreement declared valid and be enforced by majority shareholder.

The trial court struck down the first two by-laws and declared the two others valid.

Issue:

Whether the sole shareholders of a corporation can draft any kind of by-laws?

Holding:

Court modified the decision and invalidated by-laws 1, 2 and, 3.

Rule of law:

The court first stated that by-law 2 contravenes the state policy. It said that an agreement to vote for certain persons is not unlawful but to require unanimous voting for the election of a director would prevent event the election of a nominee.

By-law 1 is also invalid because it would permit a deadlock, no decision could be taken without the unanimous vote of the shareholders and it based its analysis on several provisions of the law requiring certain quorums for voting resolutions. It also stated that a unanimous vote can be held valid in certain conditions.

By-law 3 is also invalid as no action could be taken by the directors: it applies the idea of democracy. The board could not actually perform its duties. They rejected the argument of the dissent that even though the by-laws are invalid thy should be enforced against the two parties.

By-law 4 is valid as there is nothing against any statute about requiring unanimity for amending the by-laws. No public policy concern either.

Meacham did not go the meeting in order not to have quorum for the election of a director.

Then she wants to have the election set aside.

The court decided that the appellants could not ask to have the election set aside as they had in mind to have no election.

Donahue only controls when there is no legitimate corporate activity. The liability will ensue only if the wronged shareholder can show that there was a less harmful way to do the action.

The trial court set out 4 different fiduciary duties that are owed in a close corporation:

- act with degree of diligence, care and skill

- discharge duties in view of furthering the interests of one another.

- disclose relevant info

- not to use their position to gain advantage, privilege over another person.

In 1951, Wilkes acquired an option on a property, other persons were interested knowing that Wilkes was a good investor. Thus, Wilkes, Quinn, Pipkin and Riche formed upon the advice of a lawyer a close corporation in order to limit their liability. At the incorporation, it was understood, that each would be a director and each would participate actively in the activity, which was to be a nursing home. After a time, they were able to draw some money from the corporation on a regular basis in the form of a salary. By 1955, each drew $100. In 1959, Pipkin sold all his shares to Connor. In accordance with past actions, he also received the same amount of money as the three others. In 1965, some shares were sold to Quinn who had an interest in another corporation who wanted to operate a rest home on the property. Wilkes obtained a higher price than the price Quinn wanted to pay. Because of that, the relationship between the two deteriorated and it reflected on the others. In 1967, Wilkes gave notice that he wanted to sell his shares after their appraisal. At the meeting of the directors, salaries were determined and Quinn received an increase, but Wilkes=s salary was not determined. At the annual meeting, Wilkes was not reelected. The trial court decided that the different actions taken at the meeting were to have Wilkes out of management. His claim was dismissed.

Issue:

Whether the majority shareholders breached their fiduciary duty?

Holding:

The court reversed and remanded the case insofar as the damages were to be determined.

Rule of Law:

The court first said that it does not matter if they analyzed the issue under partnership law or under corporate law because it was a close corporation applying the holding of Donahue which said that the shareholders in a close corporation hold the same sort of duty to one another as partners in a partnership.

The court then analyzed one technique to deprive the minority of corporate functions:

- the freeze-out that is usually sustained a good device by the courts as the courts don=t want to interfere in the internal affairs of the corporation.

But sometimes it is necessary to hold against the majority officers as the reason for a minority shareholders to invest in a firm is to have an employment.

The court then applied the strict standard laid down by the Donahue court: the strict good faith standard. But the court rejected it because it would put limitations on legitimate actions. If a corporation can show a legitimate business purpose for excluding a minority shareholder, then the minority shareholder loses but the court went on in saying that the minority shareholder can rebut this legitimate purpose by showing that there were other less harmful action to arrive at the same result.

The court decided that the corporation did not even show a legitimate business purpose.

The second issue decided by the court was damages: Wilkes wanted the salaries that he would have received if he had not been cut out from management. The court said that because the salaries varied, and that the officers= duties varied as well it was not possible to grant that relief, it said that the trial court must on remand determine if the corporation had been dissolved during the proceedings.

Exergen was formed in 1980 by Pompei. The plaintiff was first a part-time employee of Exergen while also working at another corporation. In 1982, plaintiff resigned from the latter and became a full employee of Exergen. He purchased shares from the company from 1982 to 1983, thinking that it would ensure his employment. At one point, he was terminated.

Issue:

Whether the termination was lawful under the principles established in Wilkes?

Holding:

Wilkes does not apply

Rule of law:

The court rejected the Wilkes decision stating that the issue at bar was completely different. Here, the plaintiff was only an employee he was not an officer even though he was a minority shareholder. The court said there was no general policy regarding employment and acquiring stock.

Second, because he was able to resell his shares at a higher price and made profits on the sale, it was not a situation were the shareholders breached their fiduciary duties.

Wolfson purchased a land and had a mortgage on it. He gave a quarter interest to Smith, Zimble and Burke. When the corporation was formed, each received 25 shares of stock. In the by-laws, Wolfson included the 80% provision that meant that to vote on a resolution, the resolution needed 80% of the votes. Thus, each minority shareholder had a veto power. The land was then purchased by the corporation. The mortgage was finally paid and only $10000 of dividends were distributed even though the corporation retained $172.000 of profits, half in cash.

Wolfson wanted the profits to be used for the repairs and the improvements where as the other shareholders wanted the vote of dividends. Wolfson refused the distribution of dividends even after he was warned that it could result in a penalty tax by the IRS. The IRS penalized the corporation and Wolfson settled. But Wolfson continued refusing the distribution of dividends. The shareholder then brought a suit to determine the dividends, the removal of Wolfson as a director. The trial judge found against Wolfson and ordered that the board made a reasonable assessment of the dividends to be distributed, it affirmed the liability of Wolfson regarding the penalty tax. Wolfson and the corporation filed a motion for a new trial , the motion was denied, on the other hand the plaintiffs filed a motion to be awarded attorneys= fees which was also denied.

Issue:

Whether a provision that gives a veto to a minority shareholder is valid.

Whether there was a breach of duty in the fact that the shareholder continuously refused to vote a certain resolution?

Whether attorney=s fees should be awarded?

Holding:

The judgment is affirmed but modified concerning the assessment of the dividends.

Rule of law:

The court started by making a reference to the Donahue case where the court the said the majority shareholder may ask protection from the minority shareholder. The 80%protection has this effect. This provision is valid under the law. There will be no public policy considerations if the use of the provision is not abused. The court said that in order to determine if a shareholder has abused his power to veto, one has to relied on the Wilkes balancing test: Aweighing the business interests advanced as reasons for their action (a) by the majority or the controlling group and (b) by the rival persons or group.@ p 464.

As for the conduct of Wolfson: the court said that his continuous refusal to vote on dividends was beyond reasonableness: he breached his fiduciary duties toward the other shareholders, thus he is liable to the corporation to pay the penalty taxes: contrary to the duty of utmost good faith and loyalty.

Part 3 of aces not very interesting: dealing with the dividends and what the board his supposed to do.

The allowance of attorneys= fees is rejected because the trial judge had a discretionary power to award them.

*** there are only problems on a restriction on transferability when he shareholder cannot realize any value on the shares.

*** If a mandatory sale provision has been included, a shareholder cannot opt out even if the price is less than fair value if the requirements have been met.

A shareholder of the corporation contacted the corporation to sell his shares. Five days later he died. The corporation by-laws provided restrictions on the sale of the shares. It also provided restrictions on the transferability in case of the death of the shareholder. The corporation was notified of the death of Kaplan in February 1954, some days later the executor of the estate requested that the certificate of the shares should be issued to the executor. On March 4 1954, the corporation voted the acquisition of the said shares. The executor refused to sell the corporation because he considered that there had been transfer of the shares due to the death of the Kaplan. The executor again requested the transfer of the stock to his names but it was refused. Then, they brought suit to compel the corporation to accept surrender of the said shares. The corporation counterclaimed. The court of special term dismissed plaintiff=s claim and entered judgment in favor of the corporation. The appellate division reversed and entered judgment in favor of plaintiff deciding that the provision contained in the by-laws were void.

Issue:

Whether the transfer of shares is governed by property law or not?

Holding:

The court of Appeals reversed the judgment of the appellate division and reinstated the decision of the court of special terms.

Rule of law:

There is a general rule in property law saying that there should be no unreasonable restraint upon alienability, thus it is in conflict with the corporate law stating that there can be some restrictions on transferability. The court apparently favors the application of the property rule: but it said that the properly rule permits restrictions when there are reasonable and when there was the requisite notice of the restriction to the shareholder. In this case, Kaplan had notice and the restriction is reasonable as it does not prohibit the sale of shares. It gives the corporation a right to purchase the shares within 30 days when the shareholder is alive and within 90 when the shareholder dies. The court rejected the rational of the appellate division regarding the unfairness of the price: the argument of the appellate court would lead to extensive litigation. The court stated that to be invalid, it Amust be shown more than mere disparity between option price and current value of the stock.@ p 496.

a shareholder agreement was entered into that provided that the corporation may purchase the shares of a deceased shareholder for $75000, at the death of the shareholder, the shares were worth much more than that. The executors brought a suit of breach of fiduciary duty on the part of the corporation. Decision in favor of defendants because the agreement was entered into by all the shareholders in view of death of one of them.

The shareholders of the corporation entered into a buy-sell agreement providing that as long as all the shareholders were alive, there could not be any sale without the consent of all the shareholders. One of the shareholders wanted to sell, they refused. Held for the corporation because this kind of restrictions was permitted under Montana. It would not have been enforceable if the agreement was perpetual.

Conoco was a publicly held corporation that amended its by-laws to limit the percentage of shares that could be held by an alien corporation. Seagram wanted to acquire stock through a tender offer. The law permitted such restrictions but there are not applicable to shares issued prior to the amendment, except if all the shareholders voted for the restrictions.

*** There are three types of restrictions:

- first refusal: the shares must be offered first to the corporation or its shareholders on the terms offered by the third party.

- first option: the shares must be offered first to the corporation or its shareholders on the terms of the option.

- consent restraint: no transfer without the approval of the corporation board of shareholders.

Ingle wanted to acquire an interest in the corporation, instead he was offered employment. No conditions established on the form of the employment. Later, Glamore and Ingle entered into an agreement for the purchase of shares, one of the clauses stipulated that the corporation would repurchase the shares of Ingle if his employment was terminated for any reason. An another agreement was entered into when Ingle purchased more shares, the same clause was included. An another agreement was entered into when new stock was issued, same provision. Later, Ingle=s employment was terminated and the corporation used the provision to purchase the shares back.

Ingle brought suit upon breach of fiduciary duty and wrongful dismissal. The claim was dismissed by the lower courts.

Issue:

Whether being an employee and a minority shareholder prohibit dismissal at-will.

Holding:

The court affirmed the decisions of the courts below.

Rule of law:

Being a minority shareholder gives no right against at-will discharge. Because there was no evidence that there was a duration to the employment, the discharge was lawful. And because of the governing rule, the fact the there are fiduciary duties does not change the fact that his employment could be terminated at-will.

Gallagher purchased some stock from the corporation while he was employed. There was a mandatory buy-back provision, if the employment was terminated before a certain date, the shares would be bought back at book value, after that date, there would be an increase pro rata the profits. Gallagher was fired before the date and he was obliged to sell the shares at their book value.

He brought suit for breach of fiduciary duty, he did not contest the firing.

The trial court rendered a decision in favor of Gallagher, but the appellate court reversed and ordered payment of the shares at their book value.

Issue:

whether a corporation has breach its fiduciary duties in discharging an employee who was also a stockholder?

Holding:

The Court of Appeals affirmed the decision of the appellate division.

Rule of law:

the court first stated that the order to modify the order of the trial court was properly made as there was no reason for the court to interfere in the agreement entered into by the parties.

The court rejected the argument that the breach could be dissociated from the discharge.

The court then said that theses kinds of provision are designed for the purpose that the ownership stays within the control of the remaining corporate owners-employees. An allegation of unfairness is not enough to invalidate an agreement of that sort.

Dissent:

the dissent said that if Gallagher was only a shareholder, the corporation would be barred to act the way it did without a legitimate business reason.

a stockholder-employee could sate a claim of breach of fiduciary duty when there was a material conflict of interest.

Jordan had was employed in a firm where he owed stock. There was a buy-back provision with the precision on the price the shares would have: take the last estimate on December 31^st. Jordan decided to resigned and gave his resignation in November but it was agreed he would stay to have his shares evaluated with the December 31^st of the year not of the previous year. A little later, a merger was announced and the value of the shares increased dramatically. Jordan learned that when he gave his resignation, they already knew that there would be a merger but they did not tell him. He sued for breach of fiduciary duties toward a shareholder. The court held in favor of Jordan on the basis that the firm had acted in bad faith, they had a duty to disclose.

The two factions were at odds, the two parties brought suit. Held against the plaintiffs as if they would have be given relief, the result would be that it would accomplish what the defendants ( in a separate action with the same parties) are accused of. Thus, the best solution would be to appoint a receiver and not to dissolve the corporation.

Perkins and White formed a corporation in view of a having a contract with an oil company. The shares were divided 45% for Perkins and 55% to White. They elected Chapter S for tax purposes. White always refused to distribute dividends that became a problem as Perkins was still obliged to pay taxes to the IRS upon the profits of the corporation. White refused a number of proposal made by Perkins, two of them being: increase in salary and distribution of dividends. At s special meeting, on a motion made by White the board was increased to five members, Perkins lost his position as president and he finally lost everything. He instituted this action. The trial court found that the conduct of White was oppressive, that the company should declare dividends and that Perkins should receive payment of value of a ten-weeks salary.

Issue:

What are the conditions to have a corporation dissolved?

Holding:

The Supreme court reversed on the basis that the relief granted was inadequate as one relief is exclusive of the other.

Rule of law:

The court decided that the analysis of the trial court concerning the conduct of White was discretionary and it could only review the decision if it was plainly an error.

The court reversed on the ground that the relief granted was inadequate.

The Pritchards and Bairds formed a corporation whose activity was reinsurance broker. The Bairds

were minority shareholders and directors on the board but they resigned and sold the shares to the corporation. Thus the only member on the board were the Pritchards, father, sons and wife. After the death of the father, the only remaining member were the wife and the two sons. The corporation went into bankruptcy in 1975. An action was brought against the wife and the executor of the estate of the father for breach of duty of care.

During the management, the two sons who took over the management after the father=s death siphoned the assets of the corporation and described those operations as shareholder=s loans. So instead of showing liabilities, the balance showed assets. Before the father died, the money was put back into the account, as the father was actually doing the same but after the death of the father, the money lent was never put back in the account. The wife never took interest and never checked the accounts and the financial statements. Contrary to the customs of the industry, there was a commingling of the accounts, no differentiation between their account and the accounts of the ceding companies and the reinsurers.

The trial court rejected the characterization of the payments as loans because there was no reimbursement and no interests. The trial court also held Mrs. Pritchard liable of breach of duty of care and found that she Acould not be exonerate because she never made the effort to discharge any of her responsibilities as a director.@

Issue

Whether there is a requirement that the director has knowledge of the bad acts.

What are the requirements to incur liability as a director?

Holding:

The supreme court of New Jersey affirmed the judgment.

Rules of law:

The court established what were the requirements to incur liability:

the plaintiff must show:

- the director has a duty to the clients

- the director reached the duty

- and that the breach was the cause in fact of the loss.

The court then went on the analysis of each of these elements.

Duty to clients:

a director according to common law and statute law must discharge his duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.

- analysis of the duty with regards with the type of corporation at issue, the particular circumstances and the corporate role of the director.

One of the duties of a director is to attend board=s meeting, Mrs. Pritchard did not even do that.

The court went on listing the different duties of a director:

- duty to inquire,

- duty to seek counsel

- duty to monitor the financial books.

The court the went on overruling the decisions of three cases where bank directors were held not liable because they did not participate actively in the conversion of trust funds. Thus it rejects the requirement of knowledge.

The duty of Mrs. Pritchard is similar to the one of a bank director towards the depositors, she should have consulted the financial statements, thus by not doing so, and she breached her duty to the clients.

Causation:

The case here is liability for a nonfeasance, which is more complicated than an action. She might have objected and resigned. But the court considered that even if she had done that she would have been held liable.

The problem here is that the real cause of the loss is the acts of the sons not of Mrs. Pritchard but if she had taken drastic steps, the sons might have stopped their wrongful action, by not doing so. she was negligent.

**** Judge Learned Hand formula p 572 from the Barnes case. Andrews had breached his duty in not informing himself of the sate of affairs but was not held liable because the plaintiff had the burden to show that if he had been at the meetings Andrews would have been able to prevent the problems.

*** the burden to show cause in fact is on plaintiff, even under the modern view.

Directors have a duty to inform themselves before taking a decision. Gross negligence is sufficient to hold liable.

FTC consent decrees entered into 20 years before the case enjoined Allis and other companies to fix pricing. Allis and four employees pleaded guilty to indictment similar to the consent decree. There was derivative action against the board. Held for the directors because of the complex structure of the corporation. The board=s activities were to fix general policies.

*** not in accord with the modern view of the duty of the directors.

Motion brought by the shareholders of Caremark for the approval of settlement to be fair and reasonable.

Caremark has been convicted of violations of state and federal law through the actions of employees applicable to health care providers. Caremark entered into a plea agreement and agreed to reimburse public and private parties of their losses in the total amount of $250M.

Caremark contracted with physicians that sometimes recommended products of Caremark provided to Medicare recipients. Apparently those contracts were not prohibited by the ARPL ( anti-referral payments law).

Caremark issued guidelines as to contracts with physicians to its employees, these guidelines were updated every year with the help of lawyers.

The united Sates department of Health issued in 1991 a safe harbor regulation stipulating which would be the conditions not to violate the ARPL.

Guidelines were updated to be in compliance with the new regulation.

An investigation was initiated against Caremark=s predecessor. They investigate the contracts between Caremark and physicians.

Other agencies joined the investigation in 1992.

After the beginning of the investigation in 1991, Caremark tried to recentralize management and prohibited any payment of management fees to physicians.

The board took steps to stay in compliance with the law. It was then required that each contract should be approved by a regional officer

They took additional steps in order to have a better supervision of the contracts.

In 1994, an indictment was issued against Caremark, two of its officers, an employee and a physician who had received more than 1M to induce him in distributing a product.