*best* Ba Final Outline.docx

BA OUTLINE I.

AGENCY Issue – When does an agency relationship exist? And, whether the Agent has authority to act? Definition – An agency is a fiduciary relationship, which results from the manifestation of consent by one (1) person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. the principal has the power to instruct the agent and the agent must follow instruction a. CREATION i. Manifestation of desire by one person (principal) for another person (agent) to act on his behalf; ii. Subject to the control by the principal; and iii. Consent by the agent to do so -However, formalities aside, an agency may be established by mistake – OR without the intent to create an agency b. DUTY -Upon creation of an agency, the agent owes certain duties to the principal. These duties include: i. Duty of Loyalty a. An agent MUST act solely for the benefit of the principal in all matters connected with the agency b. Agent CANNOT: i. Compete with the principal in field/area of agency ii. Take conflicting duties iii. Must keep principal’s information confidential – DOC c. Consequences i. Principal can be held liable for the tortious acts of their agents and can be required to fulfill contract into which their agents have entered d. Policy i. Since the principal gains from the actions of another, principal should sometimes be held to answer for the costs inflicted by the agents c. AUTHORITY i. Actual Authority – Actual authority is established when the principal manifests consent for the agent to act. There are two (2) types of actual authority – Expressed and Implied i. Express – Express actual authority is conveyed by the principal, to the agent, either orally or written ii. Implied – Implied actual authority is depending on the role or job prescribed to the agent by the principal. Typically, an agent has implied actual authority to engage in any actions which are reasonably necessary to accomplish the given task

Apparent Authority – A principal may be liable for an agent who undertakes actions as a result of apparent authority. Apparent authority is established when a third (3rd) party REASONABLY believes that the agent had the principal consent to act. This reasonable belief is valid despite the giving of actual consent by the principal to the agent *Whether a third (3rd) party’s belief is “reasonable” is dependent on the surround circumstances iii. Ratification/Inherent Authority – Even absent authority by the agent to act, a principal may continue to be liable for the acts of their agent if the principal ratifies the non-authorized actions of the agent through inherent authority iv. Estoppel – A principal may also be held liable for the acts of an agent under the doctrine of estoppel a. Estoppel occurs when a third (3rd) party: i. REASONABLY believes that an agent is acting under the manifestation of the principal’s consent; and ii. The third (3rd) party DETRIMENTALLY relies on such belief d. VICARIOUS LIABILITY ● An employer will be held liable for the actions of their employers if the act was in the scope of the employment PARTNERSHIPS Issue – Was there a valid partnership formation? Was it for profit? Definition – A partnership is an association of two (2) or more people to carry on, as co-owners, a business for profit ➢ Types: o At-will – Free/open with no specified end or purpose o Term – For a specific term o Undertaking – For a specific purpose a. FORMATION ● The intent to create a partnership is NOT needed. That is, a partnership may be created accidently. In determining whether a partnership was established, the court considers actions and words of the parties b. PARTNERSHIP AGREEMENT Issue – Was there a valid partnership agreement? Was/were there an unwaivables waived? Rule – Relation among and between the partners and the partnership are governed by the partnership agreement. This agreement, although able to include any provision defined by the partnership, the agreement must contain certain unwaivable provisions. That is, the partnership agreement CANNOT: ● Vary the rights and duties of the partnership, unless emanating the duty to provide copy of statements to all partners ● Unreasonable restrict the right of access to books and records ● Eliminate DOL ii.

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● Unreasonably reduce the DOC ● Eliminate DGF and Fair Dealings ● Vary the power to disassociate a partner, unless varying the requirement that notice of disassociation must be in writing ● Vary the right of the court to expel a partner ● Vary the requirements to wind up the partnership business ● Vary the law relating to limited liability ● OR restricting the rights of 3rd parties c. PARTNERSHIP LIABILITY Rule – Who, within the partnership is liable? Rule – All parties are jointly and severally liable for all obligations of the partnership. Furthermore, since each partner is an agent of the partnership for the purpose of its business, any acts of one partner, which is carried out as part of the ordinary course of the partnership’s business, binds the entire partnership Special Rules ● If, however, the partner, although acting in the ordinary course of business o Did not have authority by the partnership to engage in the specific act; and o The person with whom the unauthorized partner was dealing with knew or had received some notice of the partners lack of authority, ● Then, the partnership is NOT liable ● If the act of the partner is outside the scope of the ordinary course of the partnership business, but the act was authorized by the other partners, then the partnership is liable. Authorization by the other partners may be in the form of a vote or a provision in the partnership agreement d. PARTNERSHIP DUTIES Issue – Did the partner(s) violate any of their duties to the partnership of other parties? Rule – Partnership duties include 1) Duty of Loyalty and 2) Duty of Care. In addition, partners are always required to act in Good Faith Exceptions – A partner does NOT violate any of his duties for engaging in conduct with advancing his own self-interest. A partner may lend money and engage in business with the partnership, so long as the right and obligations of the partner are the same as those who are not partners. (Cannot give yourself the deal you want) i. Duty of Loyalty Rule – Under the duty of loyalty, a partner must: ● Account for all partnership property as trustee; ● Refrain from adverse dealings; ● Refrain from competing with the partnership; ● Refrain from stealing partnership property, including money ii. Duty of Care

Rule – Under the duty of care, a partner shall avoid acting with: ● Gross negligence ● Recklessness ● Intentional misconduct ● Knowledge of violations e. OPPORTUNITIES FOR PARTNERSHIP Common Law (Case Law – Meinhard v. Salmon) – Joint ventures, like copartners, owe to one another, while the enterprise continues, the duty of finest loyalty. Essentially, don’t be immoral/dishonorable. If the judge thinks a person was not being honorable, they have violated their Fiduciary Duties. I.e., Misappropriation occurs when a partner is presented with the opportunity and doesn’t present it to the partnership f. PARTNERSHIP TERMINATION i. Dissolution Rule – Dissolution is when a partnership ends Issues – When can a partner leave a partnership? What happens to assets as a result? What is the order of payment to person interested? ● Ways in which dissolution can occur – RUPA § 801 o A partner at will disassociated and request dissolution o Partners for term/undertaking unanimously agree or o Half or more agree after a disassociation or o The term of undertaking expires o Event agreed to in the partnership o Unlawfulness o Court order, which may relate to practically, frustration of economic purpose, detrimental conduct of partner, or certain events arising ii. Disassociation Rule Disassociation is when a partner leaves the partnership. Disassociation does not always lead to dissolution. Disassociation may arise from: ● Express will to withdraw ● Agreed upon event ● Expulsion per the partnership agreement ● Expulsion by unanimity ● Court ordered expulsion ● Partner bankruptcy ● Death or incapacity ● Legal termination of partners existence (when a partner is a corporation) Wrongful Disassociation ● Partnership AT WILL can be wrongfully disassociated ONLY if violates the partnership agreement ● Disassociation is wrongful ONLY if: o It breaches a provision of the partnership agreement;

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o Before the end of the partnership’s TERM or UNDERTAKING, the partner withdrawals by will (unless following death or wrongful disassociation of another partner), or expelled by a court, or becomes bankrupt, or legally terminated ● Partner who wrongfully disassociate are liable to the partnership for damages caused by disassociation

CORPORATIONS Public v. Close (closely-held) ● Close Corporations o Generally ▪ Small number of Shareholders (usually about 21) ▪ No ready for market stock – Shares are more of contract ▪ Substantial majority shareholder participation in the management of the business entity o Shareholder Agreements ▪ Shareholder agreements are agreed upon by shareholders, stating their obligations and rights. They are generally valid, so long as not against public policy a. FORMATION i. Types a. Open b. Close ii. Articles of Incorporation/Charter Rule – The articles of incorporation or charter must include certain basic information about the corporation, such as: ● Name – Includes “corporation,” “company,” “incorporate,” “limited” ● Purpose – “To engage in any lawful activity” ● Number of shares ● Name and address of its registered agents ● Name and address of each incorporator b. GOVERNANCE i. Articles of Incorporation/Charter Rule – Although the charter is filed to incorporate, they need not spell out the manner in which the corporation is to be governed. a. Corporate Powers – In addition to specifying purposes, the articles of incorporation may also enumerate powers that the corporation possesses. Most states automatically grant all corporations broad powers, such as the powers to buy and sell property and to sue and be sued. Some states place restrictions on various corporate actions, including corporate loans to officers and directors. For a corporation with stock listed on a national securities exchange, federal law prohibits the corporation from making personal loans to a director or executive officer of the corporation

Amendments of Articles Rule – The Corporation can amend its articles with any lawful provision. The procedure for securing approval to amend the articles depends on whether the corporation has issued stock 1. No Stock Issued – If the corporation has not issued stock, the board of directors – or, if the board doesn’t exist, the incorporators – may amend the articles 2. Stock Issued – If stock issued, then corporations generally must follow a two (2) step approval process: 1) The board of directors must adopt the amendment to the articles; and 2) The board must submit the amendment to the shareholders for their approval by majority vote ii. Bylaws Rule – Contains provisions for managing the corporation, but cannot be inconsistent with the articles of incorporation – private internal rules. Including, how shares are issued, how elections are carried out, where meeting are held, and corporate officers and their duties ● The bylaws may contain any lawful provision for the management of the corporations business or the regulation of its affairs that is not inconsistent with the articles of incorporation. When there is a conflict between the articles and bylaws, articles control ● Generally, the board of directors adopts the initial bylaws. However, a majority vote by either the directors or the shareholders can adopt, amend, or repeal a bylaw c. ORGANIZATIONAL MEETING Rule – Once the articles of incorporation are filed, an organizational meeting is held at which the appointment of the officers, adoption of bylaws, and approval of contract may take place. When the incorporators held the meeting, election of the board also takes place d. CHARACTERISTICS OF CORPORATION i. Balance of Power – All corporations have the same general structure. All must have (1) Shareholder, (2) Officers, and (3) a board of directors ii. Limited Liability – One of the primary benefits of a corporation is limited liability. Parties to a corporation are only liable to the extent of their investment. As discussed below, this limited liability is occasionally overcome and certain officers and directors can be held liable personally liable for actions of the corporation – Piercing the corporate veil e. VALID ACTION? Issue – Whether the (proposed) action(s) taken by the (committee, shareholders, Board) was valid b.

Rule – In order for a corporate player to act, they must 1) have the power to do so; and 2) follow the appropriate process i. Board of Directors Definition – The Board of Directors manages and directs the management of the corporations business and affairs. The board also authorizes the officers and other corporate employees to exercise the powers possessed by the corporation a. Composition Requirements i. Number of Directors Rule – Traditionally, a board needed three (3) or more directors, but today a board can have as few as one director, regardless of the manner of shareholders. In its articles or bylaws, a corporation may permit the board to vary the number of directors ii. Qualifications for Directors Rule – A corporation CANNOT serve as the director of another corporation; a director must be a natural person. Unless required by the articles or bylaws, a director need not be a shareholder or resident of a particular state iii. Selection of Directors Rule – Shareholders select directors at annual shareholders meetings and may be elected by straight or cumulative voting and by one or more classes of stock b. Term of Directors i. Annual Terms Rule – Typically, a director serves for a one-year term that expires at the first annual meeting after the director’s election ii. Staggered Terms Rule – A director may serve for longer than one year IF the terms are staggered. With staggered terms, each year some directors are elected for multi-year terms. The main purpose is to limit the impact of cumulative voting iii. Holdover Director Rule – A director whose term has expired may continue to serve until a replacement is selected iv. Resignation Rule – A director may resign at any time by delivering a written notice to the board, its chair, or the corporation v. Removal Common Law – At common law, shareholders had the inherent power to remove a director. However, because directors were deemed to have an entitlement to their

offices, they could only be removed for cause based on substantial grounds (such as breach of fiduciary duty, fraud, criminal conduct, etc.) Modern Law – The current trend in most states and the RMBCA is to allow shareholders to remove a director with or without cause, unless the article provide otherwise 1. Meeting Requirements Rule – A director may be removed only at a meeting called for the purpose of removing the director, and the meeting notice must state the removal is at least one of the purposes 2. Voting Requirements Rule – A director who was elected by a particular voting class of stock can only be removed by that same class (or by court order) ● If cumulative voting is NOT authorized, then a shareholder vote removes a director if the number of votes for removal exceeds the number of votes against removal ● If cumulative is authorized, then a director may not be removed if votes sufficient to elect the director are cast against the directors removal c. Meeting Requirements i. Types of Meetings Rules – The board of directors may hold regular or special meetings. A director is only entitled to notice of a special meeting. A director may waive notice of a meeting at any time by a signed written waiver. In addition, a director’s attendance waives notice of that meeting unless the director promptly objects to lack of notice ii. Presence at Meeting Rule – A director is not required to be physically present at a meeting. A meeting may be conducted through a conference call or any other means that allow each director to hear the other directors during the meeting iii. Action Without a Meeting Rule – A board may act without holding a meeting by unanimous written consent to the action d. Voting Requirements i. Quorum Rules Rules – For the boards act at a meeting to be valid, a quorum of directors must be present at the meeting

Number of Directors – A majority of all directors in office constitutes a quorum, unless a higher or lower number is required by the action or bylaws 2. Presence of Directors – Unlike shareholders, a director must be present at the time that the vote is taken to be counted for quorum purposes. Presence includes appearances made using communications equipment that allows all persons participating in the meeting to hear and speak to one another ii. Voting Agreements Rule – Generally, an agreement between directors as to how to vote (i.e., a pooling agreement) is unenforceable. Each director is expected to exercise independent judgment. A director also may NOT vote by proxy e. Committees Rule – A board may take action through one or more committees i. Composition of Committee Rule – A committee may consist of two (2) or more directors ii. Selection of Committee Members Rule – Generally, a majority of the directors must vote for the creation of a committee and the appointment of a director to a committee iii. Committee’s Powers Rule – A committee may generally exercise whatever powers are granted to it by the board, the articles, or the bylaws. A committee may NOT: 1. Declare distribution, except within limits set by the board; 2. Recommend actions that require shareholder approval; 3. Fill vacancies on the board or its committees; or 4. Adopt, amend, or repeal laws f. Duties Issue – Based on the action(s) taken by the director(s), be brought against the director(s)? Rule – A director owes two (2) basic duties to the corporation – (i) duty of care, and (ii) a duty of loyalty. In discharging these duties, a director is required to act in Goof Faith and in a manner the director reasonably believe to be in the best interest of the corporation 1.

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Duty of Care Rule – Under Van Gorkum, a director has a duty to make decisions that are not 1) Grossly Negligent; 2) Reckless; or 3) Done with the intent to harm 1. Prudent Person Rule – Directors have a duty to act with reasonable care that a person in a like position would reasonably believe appropriate under similar circumstances. As an objective standard, the director is presumed to have the knowledge and skills of an ordinarily prudent person. In deciding how to act, the director is also required to use any additional knowledge or special skills that he possesses 2. Reliance Protection Rule – A director is entitled to rely on the performance of, as well as information, reports, and opinions supplied by the following person if the director reasonably believes them to be reliable and competent: i. Officers and other employees of the corporation ii. Outside attorneys, accountants, or other skilled or expert individuals retained by the corporation; and iii. A committee of the board of which the director is not a member 3. Breach of Duty of Care – BJR Rule – The business judgment rule is a rebuttable presumption that a director reasonably believed that his actions were in the best interest of the corporation. Generally, a court will not interfere with the business judgment of a director or officer without a showing of fraud, illegality, or conflict of interest i. Overcoming the BJR Rule – To overcome the BJR, it must be shown that: a. The director did not act in Good Faith; b. The director was not informed to the extent that the director reasonably believed was necessary before making a decision;

The director did not show objectively or independence from the directors relation to or control by another having material interest in the challenged conduct; d. There was a sustained failure by the director to devote attention to an ongoing oversight of the business and affairs of the corporation; e. The director failed to timely investigate a matter of significant material concern after being alerted in a manner would have caused a reasonably attentive director to do so; or f. The director received a financial benefit to which he was entitled, or any other breach of his duties to the corporation 4. Exculpatory Provisions in Articles – To protect from breach of DOC Rule – A corporation’s articles may include an exculpatory provision shielding directors from liability for money damages for failure to exercise adequate care in the performance of their duties as directors Typically, exculpatory provisions do not protect directors from liability for any breach of the duty of loyalty, for acts of omissions that are not in Good Faith, or for any transactions from which the director received an improper personal benefit Duty of Loyalty Rule – The duty of loyalty requires a director to act in a manner that the director reasonably believes its in the best interest of the corporation. Typically, a director breaches this duty by placing her own interest before those of the corporation 1. Conflict of Interest – Self-Dealings Rule – A director who engages in a conflict-ofinterest transaction with his own corporation, also known as self-dealing, has violated his duty of loyalty unless the transaction is protected under the safe harbor rule The NJR does NOT apply when a director engages in a conflict-of-interest transaction c.

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with his corporation. Additionally, a director must not profit at the corporations expense 2. Safe Harbor Rules – “Freshening” i. Standard for Upholding Transaction Rule – There are three (3) safe harbors by which a conflict-of-interest transaction may enjoin protection: 1) Disclosure of all material facts to, and approval by a majority of, the board of directors without a conflicting interest; 2) Disclosure of all material facts to, and approval by a majority of, the votes entitled to be cast by the shareholders with a conflicting interest; and 3) Fairness of the transaction to the corporation at the time of the commencement ii. Fairness of the Transaction Rule – The fairness test looks at the substance of the transaction to see if the corporation received something of comparable value in exchange for what it gave to the director. Interested directors who were on both sides of a transaction in question have the burden of establishing the fairness of the transaction iii. Effect of Safe Harbor Provisions Rule – Satisfaction of the safe-harbor defenses is NOT necessarily a complete defense, and some states instead hold that the burden of proof shifts to the party challenging the transaction to establish that the transaction was unfair to the corporation iv. Remedies Rule – A conflict-of-interest transaction that is found to be in violation of the safeharbor provisions may be enjoined or rescinded. In addition, the corporation may seek damages from the director v. Business Judgment Rule – (Triggered by “Freshening”/Safe-Harbor) vi. Rule – Approval of a conflict-of-interest transaction by fully informed disinterested directors triggers the BJR

AND limits judicial review to issues of waste or gift, with the burden of proof on the party attacking the transaction 3. Usurpation Rule – In addition to a conflict-of-interest, a director may violate his duty of loyalty by usurping a corporate opportunity rather than first offering the opportunity to the corporation i. Corporate Opportunity Rule – In determining whether the opportunity is one that must first be offered to the corporation, courts have applied the “interest or expectancy” test or the “line of business” test ● Under the “Interest or Expectancy” Test, the key is whether the corporation has an existing interest (e.g., an option to buy) or an expectancy arising from an existing right (e.g., purchase of property currently leased) in the opportunity. An expectancy can also exist when the corporation is actively seeking a similar opportunity - Broz ● Under the broader “line of business” test, the key is whether the opportunity is within the corporations current or prospective line of business 4. Competition with Corporation Rule – A director that engages in a business venture that competes with the corporation has breached their duty of loyalty iii. Good Faith Obligations Rule – In addition to owing Shareholders the duty of care and loyalty, directors have the obligation to act in Good Faith when making decisions on behalf of a corporation. As long as the duties are fulfilled and the directors acted in Good Faith, neither the corporation nor the directors will be liable to the Shareholders Directors are not liable to the shareholders for poor hiring choices so long as they act consistent with the duty of care, loyalty, and in Good Faith – Disney g. Indemnification & Insurance

Rule – When a director is involved in a legal action as a consequence of her rile as director, she may seek indemnification for expenses incurred as well as for any judgment or award declared against them. Indemnification may be (i) mandatory, (ii) prohibited, or (iii) permissive Insurance – A corporation may acquire insurance to indemnify directors for actions arising from services as a director. The insurance can cover all awards against a director as well as expenses incurred by her, even though the corporation could not otherwise indemnify the directors for such amounts ii. Shareholders a. Meeting Requirements Rule – There are two (2) basic types of shareholders meetings – annual and special. In addition, shareholders may express their collective will through written consent i. Annual Meeting Rule – A corporation is required to hold a shareholder meeting each year. Generally, the time and place of the meeting are specified in the corporate bylaws. The primary purpose of the annual meeting is to elect directors, but any business that is subject to shareholder control may be addressed ii. Special Meeting Rule – A corporation may also hold a special meeting, the purpose of which must be specified in the notice of the meeting. Generally, a special meeting may be called by the board of directors or shareholders who own at least 10% of the shares entitled to vote at the meeting iii. Notice of Meeting Rule – Shareholders must be given notice of either type of meeting. To properly call a meeting, the corporation must notify all shareholders entitled to a vote at the special meeting in a timely manner A shareholder may waive notice either in writing or by attending the meeting. Usually, notice must be given no less than 10 days and no more than 60 days before the meeting date The notice must include the time, date, and place of meeting b. Voting Requirements i. Voting Eligibility Rule – Typically, ownership of stock entitles the shareholder to vote. There are two (2) basic issues regarding shareholder voting – who the owner of the stock is and when such ownership is measured

Ownership – Generally, a corporation maintains a list of Shareholders who are entitled to vote Shareholder Voting Rule – The primary issue upon which shareholders are entitled to vote is the selection of the board of directors Shareholder approval is also required for fundamental corporate charges, such as charges to the articles or structural changes to the corporation Voting Power Rule – Typically, each share of stock is entitled to one vote. However, a corporation, through its articles, can create classes of stock that have voting power Quorum Requirements Rule – For a decision made at the shareholder meeting to be valid, there must be a quorum of the shares eligible to vote present at the meeting Voting for Directors Rule – Corporations may choose directors by cumulative voting is so provided in the articles 1. Cumulative Voting Rule – When more than one director is to be elected, corporations can allow shareholders to cumulate their votes and cast all those votes for only one (or more than one) of the candidates The effect of the cumulative voting is to allow minority shareholders to elect representatives to the board Example: -A owns 30 shares of X, Inc. -B owns the remaining 70 shares of X, Inc. -X, Inc. has three (3) directors -Without cumulative voting, A is unable to elect any of the three (3) directors because B owns a majority of the shares. However, with cumulative voting, A can elect at least one director by casting all of her 90 votes (30 votes X 3 directors) for one director 2. Staggered Terms Rule – Typically, all directors of the corporation are elected manually. However, some corporations provide for the election of fewer than all of the directors, thereby staggering the terms of the directors, which 1.

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provides for some continuity on the board from election to election. The main purpose for the staggered terms is to limit the impact of cumulative voting Proxy Voting Rule – A shareholder may vote in person or by proxy. A proxy vote must be executed in writing and delivered to the corporation or its agent A proxy is revocable unless it expressly provides that it is irrevocable and the appointment of the proxy is coupled with an interest Any act by the shareholder that is inconsistent with the proxy, such as attending a shareholder meeting and voting the shares, revokes the proxy Shareholder Proposals – Voting Together with other Shareholders 1. Voting Pool/Agreements Rule – Shareholders enter into a binding voting agreement, also known a voting pool, which provides for the manner in which they will vote their shares Under such an agreement, shareholders retain ownership of their stock. Such an agreement is a contract that may be specifically enforced. It does not need to be filed with the corporation, and there is not time limit 2. Management Agreements Rule – Generally, shareholders may agree to alter the way in which a corporation is managed even though the agreement is inconsistent with the statutory provisions * The court, for policy reasons, will decline things that are social policies – I.e., micromanaging Matters on which shareholders may agree are: - Elimination of the board of directors or restrictions on the discretions of powers of the board of directors; - Authorization or making of distributions; - Determination of who is a member of the board, the manner of selection or removal of directors, and the terms of office of directors - The exercise or division of voting power by or between the shareholders and

directors or by or among any of them, including director proxies - A transfer to one or more shareholders or other persons all or part of the authority to exercise corporate powers or to manage the business and affairs of the corporation; and - The manner or means by which the exercise of corporate powers or the management of the business and affairs of the corporation is affected c. Inspection of Corporate Records Right Rule – A shareholder has a right to inspect and copy corporate records, books, papers, etc. upon five (5) days written notice stating a proper purpose. As a litigant against the corporation, the shareholder also has a right to discovery i. Disclosure of Financial Statements Rule – To enable shareholders to make an informed decision when voting, publically held corporations that have issued securities are required to supply shareholders with an annual audited financial statement d. Suits by Shareholders – Direct v. Derivative Rule – A shareholder may bring a direct or derivative action against the corporation in which the shareholder owns stock How the action is characterized will affect the requirements for bringing suit and to whom any recovery is paid i. Direct Actions Rule – A shareholder may pursue two (2) basic types of direct actions: (i) an action to enforce shareholder rights or (ii) a non-shareholder action, the recovery from which is to the benefit of the indirect shareholder 1. Action to Enforce Shareholder Rights Rule – A shareholder may sure the corporation for breach of a fiduciary duty owed to the shareholder by a director or an officer Typical actions are based on the denial or interference with a shareholders voting rights, the board’s failure to declare a dividend, or the board’s approval or failure to approve a merger 2. Non-Shareholder Active Rule – A shareholder may sue the corporation on grounds that do not arise from the shareholders status as a shareholder Example:

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- A shareholder who is struck by a vehicle owned by the corporation and driven by a corporate employee may pursue a negligence claim against the corporation as the injured party of the corporation’s tortious conduct Derivative Actions Rule – In a derivative action, a shareholder is suing on behalf of the corporation for harm suffered by the corporation. Although the shareholder also may have suffered harm, recovery generally goes to the corporation Example: A shareholder may bring a derivative action to force a director to disgorge a secret profit earned by the director on a transaction with the corporation 1. Who May Bring Suit Rule – Generally, only person who is a shareholder at the time of the act or omission (or one who receives the shares through a transfer from such a shareholder) may bring a derivative action 2. Standing Rule – A set must have standing to bring a derivative action. To have standing, a shareholder must have been a shareholder (i) at the time of the wrong OR (ii) at the time that the action is filed and, regardless of when one became a shareholder, he must continue to be a shareholder during the litigation *Lastly, the shareholder must adequately represent the interests of the corporation 3. Demand Upon the Board Rule – The π in a derivative action must make a written demand upon the board, demanding that the board take action A derivative action may not commence until 90 days have passed from the date of demand Exceptions: i. Futility Exception Rule – A demand upon the board is not required if the demand would be futile Factors for determining futility include whether the directors are disinterested and independent and whether the transaction was the product of a valid exercise of BJR ii. Irreparable Injury Exception

Rule – The π may be excused from waiting a reasonable time for the board to respond to the demand if the delay would result in irreparable injury to the corporation *Effect of Board Rejection of Demand → BJR Rule – If the board specifically rejects the demand, then the rejection is tested against the BJR If there is a business justification for the rejection, then the π must establish that the board’s rejection was due to a lack of care, loyalty, or good faith to persuade the court to override the boards refusal e.

Shareholder Liability Rule – One reason the corporate form is favorable is that the investors in a corporation are subject to limited liability for corporate acts, and they are only at risk to the extent of their investment This principle of limited liability is subject to challenge, primarily with respect to shareholders of closely held corporations i. Piercing the Corporate Veil Rule – If a π can “pierce the corporate veil,” then a corporation’s existence is ignored, and the shareholders of the corporation are held personally liable Although courts are reluctant to hold a director or active shareholder liable for actions that are legally the responsibility of the corporation (even if the corporation has a single shareholder), they will sometimes do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the π An individual may be held liable for the acts of a corporation through the doctrine of respondeat superior if it can be proven that the individual used his control of the corporation for person gain ii. Types of Veil Piercings - Vertical Veil Piercing Rule – A way of holding shareholder personally liable for corporation obligations. To hold director liable, go through fiduciary duty or insider trading (or other avenues for liability) - Horizontal Veil Piercing

Rule – May be used to reach another corporation, which is owned by the same shareholders - Reverse Piercing Rule – Holding a corporation liable for the debts/liabilities of a shareholder

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Officers a. Types Rule – Typically, a corporation’s officers are composed of a president, secretary, and treasurer The RMBC does not specify which officers of a corporation must have, but it simply indicated that the corporate bylaws are responsible for delineating the officers of the corporation b. Selection Rule – The primary officers of a corporation are elected by the board of directors. These officers may in turn be empowered by the board of directors or the bylaws to select other corporate officers and employees c. Authority Rule – An officers authority can be actual, implied, or apparent - Actual authority is wielded by an officer is defined by the corporate bylaws or set by the board of directors - Implied authority is given to officers to carry out the necessary tasks of the officers duties by virtue of their status or position, so long as the matter is within the scope of ordinary business - Apparent authority is given when the corporation holds the officer out as having authority to bind the corporation to third (3rd) parties d. Duties Rule – Specific duties of an officer are defined by the corporations bylaws or set by the board The duties of care and loyalty that are imposed on the directors are also owed by the officers e. Liability Rule – As an agent of the corporation, an officer does not incur liability to third (3rd) parties merely for the performance of duties for the corporation Of course, an officer can be liable to a third (3rd) party of the officer has acted in his personal capacity (e.g., guaranteed a corporate loan) or has engaged in purposeful tortious behavior f. Indemnification/Insurance Rule – An officer is entitled to indemnification to the same extent and subject to the same restrictions as a corporate behavior. Similar insurance rues apply g. Removal Rule – An officer may be removed at any time without cause

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MERGERS & ACQUISITIONS a. MERGERS i. Definitions Rule – A merger is the combination of two (2) or more corporations such that only one (1) corporation survives. The surviving corporation may be created as a result of the merger, rather than existing before the merger, in which case the process is referred to as a consolidation ii. Procedure Rule – Although the business aspects of effecting a merger can be complex, the statutory procedure is simple To merge: (i) The board of each corporation must approve of the merger; (ii) The shareholders of each corporation must usually approve of the merger; (iii) The required documents must be filed with the state a. Shareholder Approval Rule – Shareholder approval requires a majority vote, meaning a majority of the votes cast, but the shareholders meeting at which the vote is taken is subject to a quorum requirement, which is usually a majority of shares entitled to vote b. Voting by Class Rule – If a corporation has more than one class of stock, and the amendment would affect the rights of a particular class of stock, then the holders of that stock class must also approve b. ASSET ACQUISITION Rule – The sale or other transfer of a corporation’s assets does not require approval by the shareholders or a board of a transferor corporation c. STOCK ACQUISITION Rule – A corporation may acquire stock in another corporation and thereby secure control of that corporation without going through the process of effecting a statutory merger The two (2) primary means by which a corporation can acquire stock in another corporation is by exchanging its own stock for that stock or by paying cash or other property for that stock d. Dissenting Shareholders Right to Appraisal Rule – A shareholder who objects to a merger or acquisition may be able to force the corporation to buy his stock at a Fair value as determined by an appraisal TAKEOVERS Rule – Occurs where an inherited corporation seeks to buy another corporation, but, the target corporations director, and some percent of their shareholders are refusing to do so a. WAYS IT CAN OCCUR i. Tender Offer

Rule – A tender offer is an offer to shareholders of a publically traded corporation to purchase their stock for a fixed price, which is usually higher than the market price Frequently used to affect a hostile takeover of a corporation – a takeover that is opposed by the current management of the corporation ii. Direct Stock Purchase Rule – A corporation may purchase stock in another corporation on the open market. Or make an offer to buy the stock from the current shareholders – tender offer iii. Proxy Fight/Contest Rule – When shareholders become unhappy with the operations of a corporation, they can use signed proxies in an attempt to pool voting power and force out member of the board of directors with whom they are unhappy b. TAKEOVER DEFENSES Issue – What defenses, if any, could the corporation implement in an attempt to remove the threat of a hostile takeover Rule – Typically, responses to a hostile takeover include: (i) a poison pill; (ii) white knight; or (iii) a staggered board of directors 1. Poison Pill – To block a tender offer/direct stock purchase Rule – A poison pill is a tactic used by companies to prevent or discourage a hostile takeover. A company targeted for a takeover uses a poison pill strategy to make shares of the companys stock look unattractive or less desirable to the acquiring firm -“Flip-in” Poison Pill – Permits shareholders, except those for the acquirer, to purchase additional shares at a discount -“Flip-over” Poison Pill – Enables stockholders to purchase the acquires shares after the merger at a discounted rate 2. White Knight – Defend Against Tender offer/direct stock purchase/Proxy fights Rule – A white knight is a targeted corporation attempt to avoid the hostile takeover by finding another corporation to merge with and who, in theory, is a better acquirer than the corporation attempting the hostile takeover 3. Staggered Board – Defense to a proxy fight Rule – In situations of a proxy fight to implement a takeover, a staggered board is an effective defense. This is because a staggered board implies a “For Cause” limit on removal of the board of directors c. UNOCAL STANDARD – BoD’s Defense Actions Permissible? Issue – Whenever there is a takeover defense and the BoD are trying to prevent the takeover, were the actions of the BoD permissible?

VI.

The main inquiry under the UNOCAL standard is whether the response to the takeover was truly in the best interest of the corporation and its shareholders Rule – Under the UNOCAL standard, to justify their response, the BoD must show: 1) The BoD reasonably perceived a threat; and 2) The response to such perceived threat was proportionate 1. Reasonably Perceived Threat Rule – To satisfy this prong, the BoD must show that they acted in good faith and conducted a reasonable investigation, which led to the refusal The board need not establish that a threat actually existed. Rather, the board must simply establish that they reasonably feared the takeover would not be in the best interest of the corporation 2. Proportional Response Rule – To satisfy this prong, the BoD msut show that the response was 1) reasonable, and 2) not be either coercive or preclusive -A response is coercive if it forces the shareholders to accept your deal or view -A response is preclusive when it prevents the shareholders from accepting any other offer d. INEVITABLE TAKEOVER Rule – Under Revlon, it was held that, when it is inevitable that a takeover is taking place, the BoD have the duty to obtain the best price possible for its shareholders. Any duty the corporation has to note holders is outweighed by the duty to shareholders. Actions by the directors that show anything other than maximizing price for shareholders of a violation of the BJR SECURITIES FRAUD & INSIDER TRADING a. SECURITIES FRAUD Rule – A securities fraud action requires fraudulent or deceptive conduct by the ∆ in connection with the sale or purchasing of a security Elements: i. Misstatements/Omissions Rule – The ∆ can engage in such conduct by (i) making an untrue statement of material fact, or (ii) failing to state a material fact that is necessary to prevent statements already made from being misleading ii. Materiality Rule – A ∆’s conduct must involve the misuse of material information. A fact is material if a reasonable investor would find the fact important in deciding whether the purchase or sell a security iii. Π’s Reliance Rule – A π must establish that they relied on the ∆’s fraudulent conduct. However, the ∆’s fraudulent conduct is not aimed directly at π, such as if the ∆ issues a press release, then courts have permitted the π to establish reliance by finding that the ∆’s conduct constituted a fraud on the market iv. Causation – Two Types – Must have BOTH for valid claim

Transaction Causation – If ∆ had not lied, π would not have purchased the stock b. Loss Causation – Once the public found out about ∆’s lie, the share price dropped v. Scienter Rule – A ∆ is not strictly liable for making a false or misleading statement or for negligently making a statement. Instead, the ∆ must make the statement with scienter – Intentionally or Recklessly b. INSIDER TRADING Rule – The mere possession of material information that is not public knowledge does NOT give rise to an insider trading liability; a person who has such insider knowledge does not incur liability UNLESS he also trades stick or other securities on the basis of such knowledge i. Possession as Use of Information Rule – In establishing that a person has traded on the basis of nonpublic information, a person is presumed to have traded on the basis of the information that he possessed at the time of the trade ii. Affected Traders Rule – There are four (4) types of traders who may be liable for failure to disclose information: a. Insiders – An insider is a director, officer, or other employee of the corporation who used non-public information for personal gain b. Constructive Insider – A constructive insider is a person who has a relationship with the corporation that gives that person access to corporate information not available to the general public. Such individuals include lawyers, accountants, consultants, and other independent contractors c. Tippees – A tippee is a person who is given information by an insider or constructive insider (the “tipper”) with the expectation that the information will be used to trade to the stock or other securities. The tipper MUST receive a personal benefit form the disclosure or intend to make a gift to the tippee To be liable, the tippee must have shown (or should have known) that the information was provided to him in violation of the insider’s duty to the corporation d. Misappropriators – A misappropriator is a person who uses confidential information in order to trade stock or other securities in violation of the duty of confidentiality owed to the corporation Example – Wenger as a law clerk iii. Requires Remaining Elements – Materiality, Scienter, π’s Reliance, and Causation a.