Glossary of DE Corporations 2006
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- Examples of 1st Prong of the Aronson Test
- i. Where Π can allege fact which suggest that a majority of the BOD has a direct financial interest in a challenged transaction;
ii. If Director will be materially affected, either benefit or detriment, by the challenged transaction in a manner not shared w/ the Corp and SH;
iii. Where a few self-interested members of the Board control or dominate enough of the other members to create a majority.
iv. Where Π’s allegations that directors failed adequately to oversee the employees are strong enough to suggest that there is a substantial likelihood of liability on the part of directors;
v. Relationship b/n an interested and non-interested director must be of a bias-producing nature.
- Examples under the 2nd prong of the Aronson Test
- i. Where the nature of the challenged transaction is so egregious that it cannot possibly be the result of a valid exercise of Biz Judgment, demand excused;
ii. Where transactions complained of constitute a gift or a waste of Corp assets – creates a reasonable doubt that the challenged transaction was the product of a valid exercise of biz judgment;
iii. Test for finding waste of Corp assets is whether the consideration received by the Corp was so inadequate that no person of ordinary, sound biz judgment would deem it worth that which the Corp paid.
- SPECIAL LITIGATION COMMITTEE (SLC)
- 1. BOD may appoint a committee of independent directors (SLC) to determine whether the derivative litigation is in the Corp’s best interest.
a. SLC must be truly independent.
b. A stay of discovery and other matters is available pending completion of the investigation and recommendation by the SLC.
2. If SLC determines that derivative action should not be pursued, it can sell a dismissal
- In determining whether to grant the SLC’s motion to dismiss, the Court must determine:
- a. Whether SLC acted:
ii. In good faith, and
iii. Has shown a reasonable basis for its determination that the action should be dismissed; and
b. Whether the Court, exercising its own Biz Judgment, agrees that the action should be dismissed.
4. Decision to terminate derivative litigation on basis of recommendation of an SLC is based on application of the BJR. Π bears the burden of rebutting the presumption by demonstrating the SLC’s decision was not the product of an independent, good faith, reasonable investigation.
a. It turns on whether a director is, for any substantial reason, incapable of making a decision w/ only the best interests of the Corp in mind.
- SETTLEMENT OF CLASS ACTIONS AND DERIVATIVE SUITS; ATTORNEYS FEES
- 1. Court must approve settlements of class and derivative actions as well as the award of any attorney’s fees to Π’s attorneys.
2. Court must determine whether or not the proposed settlement terms are fair, reasonable and adequate when weighed against the probability of recovery at trial on the asserted claims.
3. in exercising its Biz Judgment as to whether to approve or disapprove a proposed compromise, the Court has frequently considered such factors as:
a. probable validity of the claims;
b. apparent difficulty in enforcing the claims through litigation;
c. whether any judgment could be recovered;
d. the expense, delay and inconvenience of litigation;
e. the amount of the proposed settlement in contrast to the potential amount and collectibility of a judgment; and
f. the positions of the parties on the wisdom of the settlement.
g. The Court has also looked at other factors such as the diligence of Π’s counsel, the potential benefits of the proposed settlement to the Corp and its SH’s, the avoidance of burdensome litigation to the Corp, and the position of other SH’s as to the merits of the settlement.
- In considering whether to award attorney’s fees in a class action.
- the Court must be satisfied that the litigation has conferred some benefit on the Corp or its SH’s.
a. Benefit need not be monetary, it can be therapeutic, so long as it’s not speculative in nature;
b. Attorney’s fees can be awarded even if the claim is mooted. To establish a right to fees in a mooted claim, Π must show that:
i. The benefit was causally related to the complaint filed,
ii. The complaint was meritorious when filed, and
iii. Δ acted to benefit the Corp prior to judicial resolution of the suit.
c. Size of Fee awarded – Court focuses on the size of the benefit achieved for the class or the Corp. Fee is not based solely or primarily on the amount of time spent based on hourly compensation.
- DELAWARE’S JURISDICTION – applies to DE corps & any other state’s attempt to apply their other law when DE law applies.
- 1. THIS YEAR CASE LAW : Over a Corp’s Internal Affairs
a. Internal Affairs Doctrine
i. Only the State of Inc has the authority to regulate the Corp’s internal affairs.
1. applies to those matters pertaining to relationships among or b/n the Corp and its officers, directors, and SH
ii. State law of DE governs the internal affairs of DE inc Corps.
- DELAWARE’S JURISDICTION: Over Directors and Officers - Long Arm Statute 10 Del. C. § 3114
- i. Any person who accepts appointment or election as a director of a DE Corp impliedly consents to jx of DE Courts and to appointment of Corp’s DE registered agent as his agent for service of process.
ii. § 3114 also applies to certain high ranking officers of a DE Corp, e.g., CEO, COO, President, CFO, Chief Legal Officer, Controller, Treasurer, CAO, any other officer ID’d in SEC filings as a highly compensated executive officer or any officer who was consented to be ID’d
iii. Application of the Long Arm Statute is limited to actions against Directors and officers for acts or omissions related to their capacity as such.
1. not for tort liability
iv. § 3114 satisfies minimum contacts.
v. Service procedure:
1. serve registered agent w/ summons and complaint;
2. w/in 7 days of service the Register in Chancery or Prothonotary sends by registered mail copies of summons and complaint to each director or officer at
(a) Corp’s principal place of biz and
(b) Director’s residence address as shown on records of Sec of State or last known address.
- INDEMNIFICATION AND ADVANCEMENT [§ 145] – COI OR BYLAWS. IF NOT, THIS IS DEFAULT RULE.
- 1. § 145 governs indemnification by Corp of their past and present directors, officers, agents, and employees in matters arising out of their involvement w/ the Corp. Attorney’s fees, costs, and judgment. Payment of legal expenses.
- Permissive Indemnification – indem. For corporate & 3rd party actions.
- a. Third Part Actions a SH or some other 3rd party - § 145 provides indemnification against any threatened, pending or completed action, suit or proceeding (other than an action brought by, or on behalf of, the Corp) whether Civil, Criminal, Administrative, or Investigative as follows.
i. Corp may provide indemnification against expenses (including attorney fees), costs of settlement, damages or fines if the officer or director acted “in good faith and in a manner he reasonable believed to be in or not opposed to the best interests of the Corp, and, with respect to criminal action pending or proceeding, had no reasonable cause to believe his conduct was unlawful.” [§ 145(a)]
- Permissive Indemnification – indem. For corporate & 3rd party actions. 2
- b. Corp Actions – Indemnity for Derivative actions – limited.
i. Corp may provide indemnification against expenses (including attorney fees) in connection w/ the defense or settlement of such an action if the officer or director acted “in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corp.”
ii. But the Corp may not provide indemnification where the director or officer is adjudged liable to the Corp, unless permitted to do so by the Court. Corporation is bringing suit against you for harm done to corporation. You can’t get paid money from the corporation for doing something wrong to the corporation. So you only get litigation expenses. But, the Court may award you those fees but not to be counted on. [§ 145(b)]
- Mandatory Indemnification
- Where officer or director is successful on the merits in his or her defense of an action under either § 145 (a) or (b), the Corp must provide indemnity against expenses. [§ 145(c)]
a. Success must be based on the merits or otherwise. OR OTHERWISE means indemnity is required even when success is based on a technical defense (i.e. you win on a Motion to Dismiss. The only requirement is that the dismissal of the case must be w/out prejudice.
i. Partial success may justify partial indemnification.
- Expanded Indemnification Rights –
- permissive indemnification for matters other than success on the merits in defense of an indemnifiable action, may be made mandatory by COI, Bylaws, and/or K. Usually “fullest extent under DE law.”
5. Agents and Employees – Corp may indemnify them but not mandatory. Decision whether to indemnify them may be made by any person authorized by the Corp to make the decision – it need not be made by BOD
- Expenses may be advanced provided indemnitees give an undertaking to repay all sums advanced is it is ultimately determined that he is not entitled to indemnity.
a. Distinct and separate right from indemnification and must be specifically provided for in the COI, bylaws or some other K or BOD decision
b. Advancement may be made mandatory.
- Fees for Fees
- § 145 does not require a Corp to pay legal fees and expenses incurred by indemnities who are forced to bring suit against the Corp to enforce his rights under § 145. However, he is entitled to such fees if COI, Bylaw or agreement mandates indemnification to the fullest extent of DE law, he is entitled to fees, costs, and expenses incurred.
8. Rights of indemnity inure to benefit of his heirs, executors and administrators
9. Corp may purchase Insurance in lieu of, or in addition to, indemnification
- RIGHT TO INSPECT THE STOCKLIST AND THE STOCKLEDGER
- 1. Stocklist – Corp has affirmative duty to maintain Stocklist
a. Inspection of Stocklist – SH has right to inspect the Corp’s Stocklist [§ 220]
i. Right to inspect permitted for both record and beneficial owners who own stock either through a voting trustee or a nominee who holds stock of record on behalf of such owner.
- RIGHT TO INSPECT THE STOCKLIST AND THE STOCKLEDGER: Exercising the right –
- 1. SH must deliver a demand to Corp
(a) In writing,
(b) Under oath swear / affirm but no notary requirement,
(c) Stating a proper purpose, and
(d) Where SH is other than a record holder, documentary evidence of beneficial ownership along w/ statement of authenticity.
2. Corp must respond to SH w/in 5 days.
- RIGHT TO INSPECT THE STOCKLIST AND THE STOCKLEDGER: Burden of proof
- iii. Burden of Proof – If SH Π has established the proper form and manner of demand, burden is one Corp to establish that SH’s purpose is improper.
- Proper Purpose
- iv. Proper purpose depends on facts surrounding the demand.
v. Proper purpose is one reasonably related to that person’s interest as a SH. Examples
1. Proxy solicitation to oust management;
2. Purchase additional shares from other SH’s;
3. Communicate w/ other SH’s;
4. Tender Offer;
5. Encouraging Appraisal demands;
6. Any doubt on whether SH has proper purpose for exercising statutory right to inspect must be resolved in favor of inspection.
vi. SH having no idea what he would do w/ Corp’s Stock ledger is not proper purpose.
- When SH validly exercised his right to inspect
- Corp must allow him to inspect all docs available to them, including:
1. Stocklist w/ addresses;
2. Daily x-fer sheets;
3. Computer Tapes;
4. Depository Nominee Breakdown;
5. Beneficial Ownership List (NOBO list)
- Enforcement of Right to Inspect Stocklist
- – If Corp refuses inspection or doesn’t respond w/in 5 days, SH may apply to Chancery for order compelling inspection
i. Court action is Summary Proceeding. Burden on Corp to establish that SH failed to satisfy requirements of § 220.
ii. Discovery in Stocklist Demand Cases
1. Corp can take discovery into SH’s status and purpose for inspection;
2. Financial ability to wage tender offer if that is stated purpose;
3. Discovery into strategy in Proxy fight prohibited;
4. Discovery into legality of stock acquisition
1. Prematurity of Demand;
2. Lack of Proper Purpose;
3. Lack of authority;
4. Unclean Hands.
- a. Corp is required to prepare a list of SH’s entitled to vote at least 10 days prior to SH meeting
b. Stockledger must be available for inspection at Company’s principal place of Biz or on an electronic network accessible by SH during the 10 day period.
- BOOKS AND RECORDS DEMAND – more difficult. Can get if record or bene owner.
- 1. SH entitled to inspect and copy Corp books and records if they have and state a Proper Purpose for such inspection. If Corp is unwilling to permit such inspection following receipt of a proper demand, SH may seek summary relief from Chancery. Right to Inspect may not be limited by COI or Bylaws.
a. Inspection of Books and Records – Right to inspect is permitted to both record and beneficial owners who own stock either through a voting trustee or a nominee who holds stock of record on behalf of such owner.
- The Demand
- Statute requires that SH of record seeking to inspect books and record of the Corp make his demand in writing.
a. Member of a Membership Corp has right to inspect books and records;
b. Demand must be under oath;
c. Demand must include documentary evidence of SH beneficial ownership of stock;
d. Demand must state the purpose for which inspection sought; and
e. Must be delivered to Corp’s principal place of biz or the office of its registered agent in DE.
3. Failure to comply w/ these procedural requirements will result in denial of inspection rights.
4. SH may authorize his attorney or agent to seek and make the inspection on his behalf. – this authorization should be contained in a power of attorney or other writing and should be attached to or submitted with the demand.
- Proper Purpose for Books & Records
- 5. Proper Purpose – Purpose reasonably related to such person’s interest as a SH.
a. It includes
i. Inquiry into possible management misconduct;
ii. Challenge to executive Compensation;
iii. Valuation of Stock;
iv. Determine reason for nonpayment of dividends;
v. Investigation of the possibility that the BOD may have acted wrongly in rejecting the SH’s demand that the BOD cause company to pursue a claim.
b. Fact that SH is biz competitor of Corp does not, alone, defeat SH’s right of inspection.
c. Proper v. Secondary purpose:
i. If SH has a proper purpose, fact he may have secondary purpose irrelevant.
ii. However, proper purpose must be the primary purpose. It cannot be a ruse to accomplish an improper purpose which is in fact SH’s primary purpose.
- Inspection of Subsidiary’s Books and Records
- SH may inspect provided that the Corp (i) has actual possession of such books and records, or (ii) the Corp could obtain such records through the exercise of control over such subsidiary.
a. Subsidiary defined as any entity, directly or indirectly owned, in whole or in part, by the Corp and over the affairs of which the Corp directly or indirectly exercises control.
i. Control exists for purpose of subsidiary when Corp either owns 50% of subsidiary’s stock or when SH establishes that the Corp is exercising actual control over the subsidiary’s conduct.
b. Exercise of Control – Once subsidiary status is established, SH must demonstrate that the Corp either has actual possession or is able to exercise its power or control to cause the subsidiary to produce its books and records.
i. Control for purposes of inspection requires – an actual ability on the part of parent Corp to exercise control and thereby cause the subsidiary to produce its docs that are not in parent’s possession.
c. Upon demonstrating that the parent Corp can exercise actual control over the production of subsidiary’s docs, such control is subject to 2 additional requirements:
i. SH’s inspection would not constitute a breach of an agreement b/n the Corp or subsidiary and a person not affiliated w/ the Corp; and
ii. Under applicable law they are entitled the right to deny the Corp access to such books and records upon demand by the Corp
- Burden of Proof for Books & Records
- a. If SH demands inspection of books and records rather than Stocklist, SH, not the Corp, has the burden of establishing that his purpose is proper and that he is otherwise entitled to the books and records.
b. Burden satisfied upon showing by preponderance of evidence that there is a credible basis to find Probable Corp wrongdoing – SH doesn’t have to prove actual wrongdoing itself
- Scope of Production for Books & Records
- a. Limited to that which is Essential and Sufficient to achieving the stated purpose.
b. Court will not permit a fishing expedition into all Corp books and Records.
c. Court has discretion to impose appropriate limitations.
- § 220 Proceedings
- if Corp refuses the demand or fails to respond w/in 5 biz days, SH may commence summary proceeding in Chancery to compel the demanded inspection
a. Scope of proceeding limited to 3 issues:
i. Whether Π is a SH;
ii. Whether Π made proper demand; and
iii. Whether the requested info is reasonably related to Π’s interests as SH.
b. Limited discovery – limited to depositions.
c. If investigating mismanagement – whether SH is entitled to inspect books and records of company depends on whether there is a clear indication of wrongdoing.
10. Common Law – SH also have Common Law right to inspect their company’s books and records, enforceable in Superior Court through issuance of writ of mandamus compelling Corp to permit the inspection
- APPOINTMENT (SOLVENT) OF CUSTODIAN OR RECEIVER (INSOLVENT) ON DEADLOCK OR FOR OTHER CAUSE
- 1. Appointed by Chancery
a. Custodian may be appointed for a solvent Corp or
b. Receiver may be appointed for an insolvent Corp.
2. When Appointment may be granted:
a. When SH are so divided at a meeting that they are unable to elect directors whose terms have expired; or
b. The Corp is deadlocked, i.e., where BOD disagrees and SH are equally divided so that they cannot break the deadlock on the BOD, AND the Corp’s biz is suffering or threatened w/ irreparable harm as a result of the deadlock; or
c. Corp has abandoned its Biz and has failed w/in a reasonable time to take steps to dissolve, liquidate or distribute its assets.
- APPOINTMENT OF RECEIVER FOR INSOLVENT CORPORATION
- 1. Upon application of any SH or Creditor, Chancery may appoint a Receiver for a Corp that’s insolvent.
2. If, in discretion of Court, a receiver is to be appointed, the receiver is given charge to marshal all assets of the Corp and to collect and resolve all its debts. Such power shall continue for as long as the Court deems necessary
- DISSOLUTION - Procedure
- 1. Resolution by BOD: we hereby dissolve the Corp.
2. Approval by Maj. of SH
3. Unanimous SH consent obviates BOD approval
4. File and Record Certificate of Dissolution pursuant to § 103
a. Name of Corp;
b. Date Dissolution was Authorized;
c. How dissolution was authorized;
d. Names and Addresses of Directors and Officers
5. Ceasing Biz is not Dissolution
- Dissolution - Status of Corporation
- 1. Corp is dissolved upon Cert of Dissolution becoming effective (usually on filing).
2. Corp usually continues for 3 years or longer for winding down biz uncluding litigation and distributions to creditors and SH. Period may be longer if Chancery directs;
3. Chancery, upon application by SH, Director, or Creditor, may appoint trustee or Receiver. Also applies to insolvent Corp.
- Dissolution - Claims
- 1. Notice of Dissolution w/ proof of claim procedure
2. if no claim procedure, Corp must make reasonable provision for all claims and obligations;
3. if there is failure to provide claims procedure or reasonable provision, Directors will incur personal liability.
- Dissolution - Forced
- 1. Chancery may order for Abuse, Misuse, or Nonuse of Corp powers;
2. Failure to Pau franchise will result in void status. May be revived by filing cert of renewal and revival and paying taxes in arrears.
- DISREGARDING THE CORPORATE ENTITY
- 1. Test for Piercing the Corp Veil for jx purposes requires a Factual showing by Π that the Corp has no independent reason for existence and that its sole purpose is to provide a means for doing the act and bidding of the individual.
2. It is easier to disregard a Corp entity for jx purposes than for the purpose of determining liability. To disregard a Corp entity for purpose of determining liability, Π must usually show Fraud or contravention of law or K. (Requires showing of Fraud or Alter Ego) Minimum contacts is also required.
a. Π must allege specific facts showing that the Corp is completely dominated and has no independent reason for existence. Mere control and even total ownership of on Corp by another is not sufficient. Nor is an individual as sole SH, Officer and Director sufficient to show that Corp is the alter ego of the individual.
- SPECIFIC FACTORS TO ALLEGE THE ALTER EGO THEORY
- 1. That the Corp has no independent reason for existence;
2. that the Corp’s sole purpose is to provide means for doing the act and bidding of the individual SH;
3. that the Corp was established by a foreign Corp solely for the purpose of utilizing the State’s laws;
4. That the Corp was established by a foreign Corp to assist them in marketing products w/in the state while avoiding direct activity;
5. That the Corp has the same stock ownership and BOD as its parent;
6. That the Corp was established to carry out a plan of the sole SH;
7. That the books and records of the Corp are held and controlled by its alleged alter ego;
8. That the Corp was established to perpetuate a fraud;
9. That the Corp represented itself to the public as its alter ego;
10. That proper Corp formalities have not been observed.
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