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Key Things to Remember About Partnerships: A. Partnerships can be formed out of conduct (no formal filing req) B. When formal, PA is governing document C. PA can be crafted or tailored to fit needs of partners D. Partnership statute "gap filler" for provisions not covered in PA E. RUPA does, however, contain provisions that cannot be waived (§103) F. Do not forget to contemplate exit strategy for partners dissociating
New Investors/Adding Partners (Partnerships): I. RUPA §401(i) states a person may become a partner only with the consent of all of the partners (RUPA is default so can change requirement in PA) II. RUPA §306(b) states the new partner is not liable for debts in existence prior to his joining the partnership
Types of Entities, Sole Proprietor: I. No protection from personal liability if entity sued II. No formal filing requirements III. Single individual IV. No legal separation between owner and business V. Personally liable for business's obligations (liable for employee activities) VI. The proprietorship and individual taxed as single entity -- file an individual income tax return
Types of Entities, Corporation: I. Allowed to participate in management/decision-making and still protected from personal liability II. Intangible structure that comes into existence with the filing of paperwork III. Separate legal entity; corporation can sue, be sued, pay taxes, buy goods, produce services, and own property IV. Created and recognized by state V. Separate legal entity from its shareholders VI. Shareholders' risk limited to share ownership/investment
Types of Entities, Corporation: Small Closely Held Corp: I. Few shareholders II. Shares not publicly traded III. Officers/directors/shareholders usually one and the same
Types of Entities, Corporation: Large Publicly Traded Corp: I. Many shareholders II. Shares publicly traded III. Officers/directors/shareholders usually all different people IV. Pooled resources V. Centralized management -- expertise VI. Free transferability of ownership (can buy and sell shares freely) VII. Subject to double taxation 1. Corporate earnings 2. Dividend payments
Types of Entities, General Partnership: I. No protection from personal liability if entity sued II. No formal filing requirements III. Unlimited liability: joint & several liability IV. Can be formed whether intend to or not V. Profits and losses flow directly to individual partners -- not a separate entity VI. Profits allocated accordingly and taxed by individuals
Types of Entities, Limited Partnership: I. If general partner, no protection from personal liability if entity sued II. Limited liability III. Requires at least 1 general partner who has personal liability and management control IV. Limited partner only provides $ and is not personally liable but prohibited from management participation V. Must comply with LP statute
Types of Entities, Limited Liability Partnership (LLP): I. Allowed to participate in management/decision-making and still protected from personal liability II. No personal liability beyond partnership III. Requires "statement of qualification" filing IV. Generally choice for law/accounting firms
Types of Entities, Limited Liability Corporation (LLC): I. Allowed to participate in management/decision-making and still protected from personal liability II. Benefits of corporation and partnership III. Entity of choice for many small businesses IV. Limited liability for all members V. Not subject to double taxation VI. Requires filing a "Certificate of Organization" VII. An operating agreement is prepared (similar to corporate by-laws)
3 Types of Financial Statements, Income Statement: I. Revenues - Expenses = Net Income II. Matching Principle: match expenses to revenue when incurred III. Captures what has happened, revenues generated and expenses incurred, for a given period of time (usually 1 year)
3 Types of Financial Statements, Cash Flow Statement: I. Cash Flow = Profit after tax (net income) + Depreciation - Investment II. Tracks company's financial status in terms of cash flow in and out of business III. Items that did not result in actual cash outflow may be recorded as expense on income statement (GAAP principle) IV. Example #1: credit card. Expense v. outlay of cash; Example #2: cost of asset over useful life; pro-rates asset cost and recognizes portion of cost evenly over useful life
3 Types of Financial Statements, Balance Sheet: I. Assets - Liabilities = Owner's Equity (net worth) II. Company's financial health at a particular point in time III. Balance sheet always balances (double entry system) IV. Every transaction must hit balance sheet in 2 places to keep quotation balanced V. Assets: Cash, Accounts Receivable, Inventory, Equipment
Sarbanes-Oxley Act: I. Enron fiasco was push that had this new law created II. Deals with publicly-traded companies III. Federal requires financial reporting info disseminated to shareholders IV. Corporation (issuer) issues financial statements to SEC and these are given to investing public/shareholders
Agency Principles, In General: I. No control -> less oversight -> less liability II. Only requires consent (actual or apparent authority to enter into transactions) to form P/A relationship
Agency Principles, Agency: I. Agency refers to the legal relationship (a fiduciary relation based on trust) whereby the agent is authorized to act on the principal's behalf. An agency relationship is formed when there is a manifestation of consent. II. Agent's conduct binds principal when the relationship is formed and the agent is acting within the scope of his agency (requires legal authority over agent) III. Types of Authority: 1. Actual Authority is a direct manifestation from the principal to the agent a. Express: Principal tells agent that agent is empowered to act on principal's behalf in accomplishing some task b. Implied: Includes tasks reasonably necessary to get the expressly assigned job done 2. Apparent authority is a manifestation from the principal to the 3rd party a. Stems from manifestations b. Look at how principal has "held out" agent to 3rd party
Agency Principles, Employer/Employee Context: I. Control -> More involved relation -> more liability (vicarious liability) II. Requires consent and control to form E/E relationship III. If you are a boss over an employee, you are responsible for the employee's on-the-job conduct based on control over agent's conduct. IV. Employee must be acting within scope of employment
Agency Principles, Franchisor/Franchisee: I. Control -> More oversight -> more liability (liable for negligent conduct) II. Requires consent and control to form F/F relationship III. If you control how the franchisee runs his business, then you are liable for his mistakes/conduct IV. Des not require an explicit agreement stating there is a F/F relationship; look at substance of relationship over written agreement
2 Ways to Infuse Capital into Business Entity, Borrowing/Debt: I. Riskier II. A loan the business is legally obligated to repay III. A fixed payment obligation IV. PROS: interest expense is tax deductible; good as long as have earnings to cover payment V. Loan covenants include either (1) giving creditors some measure of control OR (2) restrictions on way business operates to increase creditor's likelihood of getting paid VI. Personal guarantees allow creditors to come after the owners personally (not limited to business assets) VII. Balance Sheet -> cash increases, loans payable increases
Capital into Business Entity, Equity: I. More control II. Examples include shares given to investing parties OR investment that business receives for selling part ownership of business. III. PROS: no set payment obligations IV. CONS: relinquishes ownership; get smaller per share profits; dividends not tax deductible V. Balance Sheet -> cash increases, owner's equity (stock) increase
Attorney Settlement: Hayes v. National Service Industries: I. Issue: Does attorney have the authority to settle on client's behalf? II. Holding: attorney has authority to settle III. There was apparent authority because the principal (client) manifested to the 3rd party that Rogers (agent) was attorney for Hayes (client) IV. Also likely client gave attorney actual authority to settle in contract they had between themselves or in communications shared between one another
Franchise/Franchisee Liability: Miller v. McDonald's Corp: I. Issue: Did agency relationship exist between F/F? II. Holding: Yes III. Actual Agency "Right to Control" Test: Did Franchisor exercise control over the daily operations of the franchise? Did the franchisor have the right to control the method by which the franchisee performed his obligations under the agreement? IV. McDonald's had lots of control over franchisee -- manuals controlled much of the business requiring specificity in operations
Debt Obligations Upon Death: In re Estate of Fenimore: I. Suit arose because small pool of money will not satisfy all of decedent's obligations II. Order of claims paid on separate property: 1. Separate creditors 2. Partnership creditors 3. Owed to partners by way of contribution III. RULE: if agreement to share profits equally or share some portion of profits then there is evidence that a partnership has formed IV. A reminder that a partnership can be formed regardless of actual intent and emphasis that when money changes hands the terms and conditions for the exchange need to be clearly defined
Partnerships, In General: I. Partnership Agreement sets up relations among partners and how entity is run - gives partners flexibility to tailor agreement II. Partners are 2 or more people who carry on as co-owners of a business for profit III. Partnership law governs (1) legal relationship between partners, (2) partner's rights, duties, and obligations to partnership, and (3) partner's relationship to 3d parties IV. Dealings between partnerships and 3rd parties will not be located in PA because cannot restrict rights of 3rd parties V. Disputes/decisions among partners governed by PA/RUPA
Partnerships, PA Nonwaivable Provisions: The PA may not: 1. vary rights and duties except to eliminate duty to provide copies of statements to all partners 2. unreasonably restrict the right of access to books/records 3. eliminate the duty of loyalty, but may identify specific types of activities that do not violate the duty of loyalty 4. unreasonably reduce the duty of care 5. eliminate the obligation of good faith and fair dealing, but may prescribe standards by which performance of obligation is to be measured 6. vary the power to dissociate as a partner except to require notice to be in writing 7. vary the right of a court to expel a partner 8. vary requirement to wind up the partnership business 9. vary the law applicable to a limited liability partnership 10. restrict the rights of 3rd parties
Partnerships: Meinhard v. Salmon: I. Partners owe certain duties of loyalty to one another II. Cardozo found partnership existed between person providing expertise and person providing funding for project III. Found duty of loyalty breached because subject matter of new lease was an enlargement/extension of old lease IV. Cardozo stated by not telling partner he obstructed chance to compete for new lease
Liquidation of Partner Assets: Creel v. Lilly: I. Facts: NASCAR partner dies, widow demands liquidation of partnership assets II. PA mentioned termination and liquidation was NOT required III. UPA uses "aggregate theory" view -- partnership characterized by collection of its individual members so if partner dies or withdraws partnership ceases to exist IV. RUPA uses "entity theory" view -- allows partnership to continue even with departure of member because partnership is entity distinct from its partners V. Court applies RUPA view and partners could choose to continue partnership
Partnerships: Kovacik v. Reed: I. Facts: 1 partner contributes money and other partner contributes skill II. Agreement was to share profits equally and there was no mention of losses III. General rule: profits and losses are shared equally under RUPA IV. Exception: when 1 partner contributes money and the other contributes labor/skill then neither party is liable to other for contribution for any loss sustained V. Contrast with RUPA which states only losses are monetary losses and partner would be required to pony up his share of loss
Partnerships: Bohatch v. Butler & Binion: I. Facts: plaintiff fired for whistle-blowing II. Court held there was a breach of contract, but no breach of fiduciary duty III. Partners have FD to one another, but no duty to keep partner on partnership -- can expel partner so long as done in GF IV. Ethical duty to report, but cannot force partners to continue to keep partner on partnership
Corporations, Sources of Corporate Law: 1. Statutes -- 1/2 states have adopted MBCA including TX 2. Article of Incorporation: the document that brings the corporation into existence, filed with secretary of state 3. Bylaws: the internal operating document governing internal operating matters 4. Case law: if interpretation of statutes required 5. Federal statutes: publicly held companies have this additional overlay
Corporations, Where to Incorporate: I. General Principle: place where doing business; closely held businesses usually incorporate in state where do principal place of business II. Can incorporate business anywhere in the U.S. III. If incorporate in 1 jurisdiction and operate in another, subject to the laws of BOTH states IV. If operating nationwide, consider Delaware
Corporations, Incorporation Process: I. Requires filing Articles of Incorporation II. AoI is the primary document governing the corporation and is publicly filed to put the public on notice III. Bylaws are the internal operating document that set forth roles, set annual meetings, etc. AoI preempts any contrary provisions in Bylaws. IV. 2 most important parts of AoI are (1) mandatory provisions and (2) rights & privileges that come with shares of stock
Corporations, Articles of Incorporation: I. Mandatory Provisions: 1. Corporate Name 2. Number of authorized shares 3. Name of registered agent in state and initial registered office address 4. Corporation contact info -- name and address of each incorporator (who put together AoI) II. Optional Provisions 1. Names and addresses of corporate directors 2. Purpose for which corp organized 3. Provisions managing and regulating affairs of business 4. Par value for authorized share
Corporations, Pre-incorporation Transactions: I. All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under the MBCA, are jointly and severally liable for all liabilities created while so acting II. Promoter required to have actual knowledge corporation has not yet been formed -- AoI had not yet been filed III. Can only enforce a pre-incorporation contract upon other promoters if they are active participants under 2.04 IV. Once the corporation has been formed, the corp adopts the pre-incorporation liabilities if they take an affirmative act to adopt contract (ex. lease); corp. not liable until contract officially adopted or the corp receives benefits from the K V. After the corp has been formed and adopted the pre-incorporation liability, the promoter still remains liable unless novation occurs (a consent mechanism taking promoter "off the hook" when corp steps into shoes of liability and promoter steps out of liability)
Corporations, Secret Profit Rule: I. Usually comes into play with closely held corporations where the promoter is often a future shareholder II. A promoter acts upon the corporation's behalf and owes a fiduciary duty to corp (act in GF) a. Promoter cannot secretly profit from interactions with corp b. Promoter has a duty to disclose any profits made from transaction with the corp III. How is the profit calculated? a. If land purchased BEFORE party was acting as promoter: profit = price paid by corp - FMV of property b. If land is purchased AFTER party began acting as promoter: profit = price paid by corp - price paid by promoter
Corporations, Equity & Stock Share Concept: I. Can tailor rights, preferences, and privileges given to certain types of stock II. A corp's sale of its own stock is called an "issuance" a. Board may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corp, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corp. b. Authorized shares is the number of shares the corp may issue III. A corp is not required to issue all of its authorized shares IV. Shares that the corp actually does issue are called "issued shares" V. "Outstanding shares" are issued shares that the corp has not reacquired
Corporations, Common Shares: I. At a minimum, the AoI must prescribe at least one class of stock that provides for (1) unlimited voting rights and (2) rights to receive assets upon dissolution of corp II. Typically this is common stock which is subject to preferred share preferences III. AoI may authorize preferred shares of stock under §6.01(c) IV. There is no legal right to dividends -- the board makes the decision on whether dividends are given to shareholders
Corporations, Par Value: I. Relates to issuance price only; only corp must adhere to selling price established, subsequent sellers can sell stock for less II. Par value put in AoI III. Par value is the minimum price for which a corp can issue its shares -- is used to satisfy the corp's obligations by earmarking certain funds for specific purposes IV. Under the MBCA, most jurisdictions do not require PV designation, but most companies still set PV V. On the balance sheet, stated capital and capital surplus goes under Owner's Equity as two separate entries (cash for shares issued increases under assets side)
Corporations, Piercing the Corporate Veil: I. Ability to hold shareholder liable for corp's obligations II. Courts look at abuse of limited liability privilege to determine "unfairness" III. General Rule: shareholders not personally liable for corp's acts or obligations but there are some exceptions IV. Exception, PCV Rule: courts decline to recognize the concept of separate entity whenever recognition of the corporate form would extend the principle of incorporation beyond its legitimate purposes and would produce injustices or inequitable consequences V. 2 scenarios when PCV occurs is (1) breach of K or (2) tort: a. If corp does not have sufficient assets to cover obligation or claim, then party can go after shareholder's personal assets b. Usually occurs in the closely held context where there is a small corp with a small number of shareholders VI. Factors to determine whether PCV appropriate: 1. Failure to observe corp formalities 2. Commingling assets and affairs 3. Undercapitalization 4. Purposeful insolvency/funds siphoning 5. Nonpayment of dividends 6. Deception
Corporations, Piercing the Corporate Veil Analysis: I. Discuss factors + fundamental unfairness is dispositive element II. PCV is a subjective analysis
Corporations, Parent/Subsidiary Relationship: I. Parent corporation is a shareholder in the subsidiary corp II. Rule: plaintiff must show that parent dominated subsidiary so that they acted as a single economic entity -- justifies PCV and going after parent for subsidiary's actions III. Factors in Case
Corporations, Parent/Subsidiary Relationship: In re Silicone Gel Breast Implants Liability: I. "Alter Ego" exception to LL Rule: when a corp is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corp form may be disregarded in the interests of justice II. Requires showing parent controlled subsidiary -- showing of substantial domination III. Look at the totality of the circumstances factors: 1. parent and subsidiary have common directors or officers 2. parent and subsidiary have common business departments 3. parent and subsidiary file consolidated financial statements and tax returns 4. parent finances subsidiary 5. parent caused the incorporation of subsidiary 6. subsidiary operates with grossly inadequate capital 7. parent pays the salaries and other expenses of the subsidiary 8. subsidiary receives no business except that given to it by the parent 9. parent uses the subsidiary's property as its own
Corporations, Enterprise Liability (variation of PCV): I. Occurs when have controlling shareholder with # of different corporations II. Although technically separate, are commonly owned and, in reality, engaged in one enterprise together III. Courts treat as single entity for liability purposes
Corporations, Decision-Making Process: I. Shareholders select -> Board, who appoints -> Officers II. Shareholders are the presumptive owners of the corp through voting process III. Board of directors is NOT an agent of the corp, does not engage in day-to-day operations, but does focus on oversight, policy, and strategic planning of corp IV. Officers oversee day-to-day operations of corp, executes objectives of corp, and actions within their scope of authority can bind the corp V. Corporation voting: a. large publicly held corps = straight voting b. small closely held context = shareholder agreements + straight & cumulative voting
Corporations, Large v. Small Corporations: I. Large Corporations a. Board is highly skilled b. Officers remain separate from Board c. Shareholder powers include: 1. elect and remove directors 2. modify or amend bylaws 3. amend AoI 4. approve fundamental corporate changes d. Directors: 1. responsible for management of business and the corp's affairs 2. delegate mgmt to executive committees 3. involved in high level oversight 4. policy matters e. Officers: 1. duties set forth by directors or set forth in bylaws 2. run day-to-day operations 3. supervise employees 4. set tone and direction of company II. Small Closely-Held Corporations a. shareholder agreements: agreement to modify, adjust, restructure way in which corp will operate: 1. power to eliminate board 2. establish directors and officers 3. decide on division of voting power 4. designate authority to exercise corporate power
Corporations, Shareholder Voting Agreements: I. These types of agreements can provide for: 1. election of removal of directors (cumulative voting allowed) 2. amend bylaws/AoI (no cumulative voting allowed) 3. approve fundamental corporate changes, i.e., merger, selling assets (no cumulative voting allowed)
Corporations, Shareholder Meetings: I. §7.01 requires annual meetings II. §7.02 allows for special meetings (when special action required - merger, sale, etc.) III. §7.07 Record date: only SH of "record" may vote at annual or special meetings; Street Name Ownership: shares held in broker's name from whom you purchased the shares (where account held)
Corporations, Shareholder Proposals: I. SHs can weigh in on corp matters through this process II. Shareholder Proposals are recommendations to the Board to make corp changes. III. Can have proposals to amend bylaws, elect/remove directors, approve fundamental corp changes IV. Allows 1 proposal/yr per SH included in proxy statement V. If proposal meets criteria, mgmt is required to put proposal in proxy statements. Requirements include: 1. SH proposing must own at least 1% of stock for at least 1 yr 2. proposal must be in form of a resolution 3. proposal must be submitted 120 days before scheduled proxy statement mailing 4. proposal limited to 500 words in length VI. Grounds for exclusion include: 1. improper under state law 2. violates law (false or misleading) 3. violates proxy rules 4. personal grievance/special interest 5. not significantly related 6. beyond corp power
Corporations, Election of Directors: I. Straight voting: "plurality of voting" where top vote getters get elected. SH with majority of shares makes decision of who sits on Board II. Cumulative Voting: allows minority SHs to accumulate all of their votes and allocate them among a few or even one candiate a. Advantages: democratic and ensures Board representation for minority SH b. Disadvantages: increase partisanship and Board divisiveness. Process is complex/confusing and sometimes returns unexpected results c. Cumulative Voting Mechanics: i. an opt-in provision is required to institute CV ii. need express provision in AoI to elect CV iii. if intend to exercise CV must give SHs notice prior to meeting iv. CV = Shares owned * # of Directors to be elected v. [(N * S)/(D + 1)] + 1 = # of shares needed to elect one director N = # of directors S = total # of shares voting D = total # of directors to be chosen at election
Corporations, Proxy Solicitation Process I: I. Allows for publicly held corporations to weigh in on decisions without requiring SH to be present II. Corp votes on your behalf through proxy III. Facilitates voting process allowing SHs to exercise votes without having to be physically present during voting IV. A proxy is having someone else vote your shares in your place V. Record owner = who owns stock VI. Proxies are revocable usually at any time VII. Proxy Fraud: a. occurs under non-routine circumstances such as sale of company or merger when the Board's goals are not aligned with the SHs goals b. the Board tries to get SHs to vote in certain way by giving false/misleading statements c. Board cannot omit a material fact that makes solicitation false/misleading VIII. Shareholder vs. Voting Agreements: a. Shareholder agreements not specifically enforceable by court b. Voting Agreements are specifically enforceable by a court
Corporations, Proxy Solicitation Process II: I. Elements of a Proxy Fraud Action: (Intention of solicitor irrelevant and no proof necessary plaintiff relied on statement) 1. Proxy statement contains misrepresentation or omission 2. Omission or misrepresentation must be material in nature. Must have affected voting decision. "Material" if substantial likelihood that a reasonable SH would consider it important in deciding how to vote. 3. Causation: a. Transaction must have caused harm to SH, and b. Solicitation must be essential link to accomplishment of transaction. This means votes must be legally necessary to have transaction approved. II. Remedies: 1. Enjoining the voting of proxies that were fraudulently obtained 2. Enjoin SHs' meeting 3. Rescind transaction 4. Award money damages
Corporations, Fiduciary Duties of Directors & Officers: I. Director's Duties include the following: a. Duty of Care: 1. Requires attentiveness of fiduciaries in performing their decision-making/supervisory functions 2. Business Judgment Rule 3. BJR does not apply (not exhaustive list): i. corporate decisions lacks a business purpose ii. corporate decision is tainted by a conflict of interest iii. corporate decision is so egregious as to amount to a no-win situation iv. corporate decision results from an obvious and prolonged failure to exercise oversight or supervision
Business Judgment Rule: I. A common-law doctrine courts apply that presumes directors/officers carry out their functions in good faith, after sufficient investigation, and for acceptable reasons a. Deferential approach courts take when deciding whether directors met their duty of care (want to encourage risk taking) b. presumption that directors in performing their functions are honest and well-meaning, and that their decisions are informed and rationally undertaken c. courts do not decide whether a Board decision was "right or wrong." Will only weigh in if decision based on fraud, illegality, or conflict of interest II. BJR does not apply (not exhaustive list): i. corporate decisions lacks a business purpose ii. corporate decision is tainted by a conflict of interest iii. corporate decision is so egregious as to amount to a no-win situation iv. corporate decision results from an obvious and prolonged failure to exercise oversight or supervision
Corporations, Fiduciary Duties of Directors & Officers, Standards of Liability for Directors: I. Director is not liable to corp/SHs for any decision to take or not take action unless the party asserting liability establishes: 1. liability not precluded by AoI for action taken in compliance with 8.62/8.63 and 2. Conduct was result of: i. action not in GF ii. decision which director did nto reasonably believe to be in the best interest of the corp, or as to which the director was not informed under the circumstances iii. lack of objectivity iv. sustained failure of director to devote attention to ongoing oversight of business affairs or failure to make appropriate inquiry v. receipt of financial benefit director not entitled to II. Party seeking money damages has burden of proving harm to corp has been suffered and harm suffered proximately caused by director's challenged conduct III. Breach of Duty of Care occurs most often in the following scenarios: 1. Decision-making failure; assessment is context driven looking at (1) type of action being considered, (2) time restraints, (3) info that was reasonably available 2. Failure to monitor: i. board has duty of oversight, but degree required is context driven ii. if find board member grossly deficient in duty to monitor (failure to inquire), still need finding to show failure to monitor was proximate cause of losses. iii. Rule: need cause for suspicion before duty to implement monitoring system arises. 3. 2-part analysis: a. Breach of FD? b. Breach cause of corp losses?
Corporations, Fiduciary Duties of Directors & Officers, Duty of Loyalty: I. Requires directors/officers to make decisions in the best interest of the corp (not their own personal interest). Addresses conflicts of interests between director's personal interests vs. what's in the best interest of the corp II. Directors breach this duty when they divert corp assets/opportunities for personal gain III. Examples: 1. Self-dealing: director and corporation enter into transaction with terms unfavorable to corp 2. Usurpation of Corporate Opportunity: director seizes opportunity that corp likely would have taken
Fiduciary Duties of Directors & Officers, Usurpation of Corporate Opportunity: Northeast Harbor Golf Club: I. Court adopted the ALI test to determine usurpation II. Line of Business test: business opportunity which the corp is: 1. financially able to undertake is, from its nature, 2. in the line of the corporation's business and 3. is of practical advantage to it, 4. is one in which the corp has an interest or a reasonable expectancy, and 5. by embracing the opportunity, the self-interest of the officer/director will be brought into conflict with that of his corp III. ALI test: requires full disclosure prior to taking advantage of any corp opportunity and corp must formally reject opportunity before officer/director can take opportunity. a. Corp opportunity is an opportunity closely related to a business in which the corp is engaged and any that accrue to fiduciary as a result of his position within the corp. b. Full Disclosure + Rejection and either: i. rejection is fair to corp or ii. opportunity rejected by disinterested directors or iii. opportunity rejected/ratified by disinterested SHs
Fiduciary Duties of Officers & Directors, Usurpation of Corporate Opportunity: I. Line of Business Test II. ALI test III. Corporate Opportunity Doctrine: A. Corporate officer/director may not take business opportunity for his own if: 1. corp financially able to exploit opportunity 2. opportunity within corporation's line of business 3. corp has interest/expectancy in opportunity and 4. by taking opportunity B. But may take corporate opportunity if (weigh all factors): 1. opportunity presented to fiduciary in his individual capacity 2. opportunity not essential to corp. 3. corp holds no interest/expectancy in opportunity and 4. fiduciary has not wrongfully employed the corporation's resources in pursuing the opportunity
Fiduciary Duties of Directors & Officers, Duty of Loyalty, Conflicting Interest/Self-Dealing Transaction: I. Protocol set out in §8.60-.63: 1. must disclose nature of conflict to directors 2. remove self from decision making process/voting process II. If officer/director does NOT follow certain protocol, then court will make assessment on whether transaction others "fair" to corp (high level of scrutiny) a. Fairness test includes: 1. Fair deadling AND i. look at when transaction occurred ii. how transaction initiated iii. how transaction structure, disclosed to directors 2. Fair Price i. look at economics and financial considerations ii. look at market value of comparables iii. look at future prospects iv. look at dynamics involved in the negotiation process III. When officer/director does NOT disclose conflict, court will not apply the deferential BJR
Derivative Suits: I. When there is harm upon the corp, SHs, instead of corp, can bring suit II. Derivative vs. Direct Action: a. Derivative = suing on corp's behalf to enforce the corp's rights. SH required to produce bond or other security to ensure expenses. Corp is real party in interest. b. Direct = suing in own capacity to enforce your rights as a SH. Corp not honoring SH rights. III. Class Action: more efficient way to bring suit with numerous plaintiffs. Class representative asserting personal claims not on behalf of corp. IV. Requirements to file DS: 1. Must be SH at time misconduct occurred 2. Must have written demand on Board to take action. 90 day wait unless wait would cause irreparable harm 3. BoDs take action or file motion to dismiss 4. If SH still not happy can bring forth complaint. Must plead facts with particularity that: i. a majority of BoD not disinterested or ii. didn't make decision in GF after reasonable inquiry V. Corporation is nominal defendant VI. Damages awarded go to corp VII. Remedies: 1. Fiduciary liable to corp for realized profits 2. Fiduciary liable for lost profits and damages corp suffers 3. Fiduciary may be required to forfeit opportunity and make available to corp

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