1.

Forming a Corporation
a. Agency relationships can be spoken into being
b. Corporations must intend to form it and take formulistic step
c. File certificate of corporation filled with secretary of state (one page form and pay fee)
i. Name of the business (co, inc, ltd or company, incorporated, and limited) and reason for
including these is to express limited liability
ii. Locally registered agent (someone who can be sued)
iii. Purpose of the corporation (anything legal)
iv. Number of shares to be issued (clout proportional to denominator of shares)
1. Characteristics of shares
d. Just as the constitution governs over conflicting statutes, if the bylaws and certificate of
incorporation conflict, the certificate always wins
i. By law = made by board of directors OR shareholders
ii. Certificate = amendments after stock is issued generally require shareholder vote – most
important document and hardest to change
iii. Board of directors = electorate VS shareholders = constituents
2. Investors
a. Receive proof of ownership
b. For profit business (invest to make more)
c. Equity (shares, stock, preferred stock)
i. Residuary interest – first thing is to pay debts and money is left over then return this to
the investor due to claim
d. Debt (security interests, bonds, promissory notes)
i. return is being paid back and the interest
ii. priority
e. rules
i. found in cert of incorporation
f. what investors get
i. shareholders typically entitled to vote
ii. generally, one vote per share and more shares, equals more votes
g. what can shareholders vote on?
i. Cert of incorporation and any changes
ii. Board of directors (who runs the incorporation)
h. Computing equity
i. Number of shares owned divided by total number of shares outstanding = equity
ii. As company grows = up the number of shares
iii. Dilution = existing shareholders lose equity as more shares are issued & can be offset by
increase in value of company
3. Corporate Law
a. Role – governs internal structure, not external interactions
b. Constituents = shareholders (investors), board of directors (managers), and officers (executives)
c. DGCL – At least one director, one officer, one shareholder but NEED all three
d. Partnership – more flexible structure
e. Corporations – rigid structure (can be more appealing due to predictability and efficient
investment)
f. Mandatory rules that corporations must follow
i. Shareholders have right to vote who is on the board
ii. Board then appoints the corporation with officers (executive branch)
4. Limited Liability
a. Definition; investors cannot lose more than they invested in a corporation vs partnership which is
personal liability (can be much worse)
b. Personal liability can get everything you invested PLUS everything you own
c. Limited liability MAXED at what the corporation owns and you invested
i. LL stimulates investment by lowering RISK to the investor
ii. Relationship = But where do the loses get displaced to? Business partners (voluntary
contract) and tort victims (involuntary accident)
iii. Problem = No recourse against shareholders personally for breached contract & Might
not fully recover damages if corporations has insufficient fund
iv. Solution = negotiable favorable terms; conduct due diligence & mandatory insurance that
the corporation takes out and pays for
5. Piercing the Corporate Veil (how to attack limited liability)
a. Barrier between what you put into the corporation and your personal assets (line between
corporate business assets and personal assets of shareholders)
b. Once corporation is drained empty can they go after the shareholders
c. Discussion on not being over zealous with using this approach b/c of the requirements to
properly execute it
i. Motivation to go after the corporations who intentionally form themselves in manner via
many smaller companies to spread or reduce liability AND how do you remedy someone
screwed over? Its not always rights to go after the shareholders who are victims also
ii. Very rarely applies and plaintiffs rarely wins
d. Plaintiff may pierce the corporate veil by proving
i. Unity of interest (alter ego) between investor and corporation
ii. Fraud; intentional not just failure or accident
iii. Undercapitalization; insufficient funds left in business for anticipated expenses
e. Veil piercing expanded; in most jurisdictions, no bright line rule exists for piercing the corporate
veil, and courts look at the totality of circumstances to determine whether the corporation is an
alter ego of the shareholder or whether there is unity of interest and ownership between the entity
and the members
i. Factors; undercapitalization of the corporations at the time of its formation, disregard of
corporate formalities, use of corporate assets as a shareholders own assets, self-dealing
with the corporation, siphoning of corporate funds or stripping of corporate assets, use of
the corporate form to avoid existing statutory requirements or other legal obligations, a
shareholders impermissible control or domination over the corporation, and wrongful,
misleading, or fraudulent dealings with a corporate creditor
ii. Easier to defend against than prosecute; all you must show is you adhered to corporate
formalities
1. Execute the song and dance of treating the company and the investors as different
entities
2. No intermingling of assets
3. Separate records and books
4. Mandatory shareholder meetings
iii. Likely to lose against a
1. Public corporation
a. Too many investors = no unity of interest
b. Passive shareholders = no unity of interest / no action taken
c. Minority shareholders = no unity of interest / not in control
6. Corporate Purpose
a. Ultra vires doctrine; outside the power – shareholders can sue a corporations for acting outside
its stated purpose
i. Remedy = injunction
ii. A.P Smith Manufacturing case – made fire hydrants but wanted to make a charitable
contribution to Princeton university and shareholders rather have the money
1. permissible because it advances public policy
2. shows hard to win b/c courts interpret widely and NOW corporate attorneys know
from the outset of corporation formation just list the purpose as anything legal…
3. shareholders can still sue for illegality
7. The Business Judgment Rule
a. Distillation of fiduciary duties – duty of loyalty and care
i. Definition; in the absence of fraud, illegality, or self-dealing, courts will not disturb the
business judgment of corporations
b. Business judgment made by directors / officers
c. Shareholder lawsuit under corporate law – fraud is torts and illegality is criminal law
d. Threshold is self-dealing or dishonest business judgment
i. Business judgment is duty of care
ii. Self dealing is duty of loyalty
iii. Or look for torts / illegality
e. Wrigley case; no night games = no self dealing or duty of care – just a disagreement on the
business decision
f. Why have this rule? Doctrine of abstention
i. Avoid second guessing business decisions
ii. iPhone and Apple - protect innovation
8. Parties in a Corporation (can be in all these roles)
a. Shareholders; residuary financial interest, elect board of directors, limited role in business
i. Little control and no fiduciary duties (except for controlling shareholders)
b. Board of directors; strategic, important decisions (most do not work at company / meet
infrequently)(big picture decisions / long term); hire and fire officers
i. Generally 11-15; can be as few as 1
ii. ¾ are outside or independent directors (no day job at company)
iii. Inside or interested directors work at company
iv. Appoint and set salary for officers
v. Oversee officer performance
vi. Agents and subject to fiduciary (duty of loyalty and care)
c. Officers; day to day decisions
d. What stops repeated bad business decisions
i. Market forces (go out of business, be fired, takeover)
9. Duty of Care
a. Van Gorkom Case; Transunion (use to make railway stuff) and wanted to sell off railway
business – makes deal to sell to Pritzker
i. Sells goes through quickly
1. Shareholders sue and Van Gorkom alleged to got more out of deal
ii. Claimed violation of duty of care
1. Quick hand shake at opera and short meeting on the decision
iii. Court finds for plaintiff
1. Highly controversial
 2. Defense; board was not careless, but decisive
a. This is what you want in the board
b. Business did in fact tank
iv. Legislative response; Companies can alter certificate to make duty of care claims
impossible
1. Much harder to do now
v. But see Walt Disney Case; executive compensation awarded carelessly (most still lose)
1. Courts tend to defer to board decisions
vi. Francis Case
1. Widow served on board but did nothing and sons ran off with money
2. Can estate be held liable? Yes, but not under duty of care – so absence there was
no business judgements = NO protection of BJR
a. Very unlikely to get this set of facts – basically need AWOL
10. Duty of Loyalty
a. Much more feasible than duty of care
b. Common claim; self-dealing (enriched themselves) – not careless but enriching themselves at our
expense
c. Interested insider transaction
i. Board member/officer stands to gain from transaction
ii. Money going from company to that person or associates (salary though? Not all
situations illegal though – may beneficial) direct / indirect
1. The company is paying the CEO parents in a real estate deal – but this could just
be rent agreement between the CEO and parents for the start up = fact bound
analysis
2. A lot of these transaction are useful
iii. Corporate Opportunity
1. Money flowing into company and usurped the money / opportunity
2. Broz case; buying the radio license for yourself
11. Fiduciary Duty Analysis
a. Comes from the BJR; claim of violation of this duty
b. Plaintiff must both; identify the act and actor
i. Act; carelessness / self-dealing (ITT or corporate opportunity)
ii. Actor; director / officer / controlling shareholder
iii. Defeat BJR using act / actor (carelessness or self-dealing)
1. Money flowing out to this actor or intercepting money flowing in
c. Defenses to self-dealing claims (safe harbor rules)
i. Decision was ratified
1. Who can ratify? Board of directors (disinterested and properly informed
members)
2. Majority of shareholders
ii. Ratification triggers the BJR; P must show
1. Waste
2. Unfair transaction by controlling shareholder
iii. Decision was fair
1. Corporate opportunity and unable to show ratification = use Broz factors
a. Corporation did not have financial ability to compete for this opportunity
b. Not the line of business
c. Interest / expectation
 d. Position of conflict
2. Interested Insider; ask if price paid
a. Customary (Bayer case; CEO spouse sing in radio advertisement – normal
price and she was a qualified opera singer)
12. Director Elections
a. Shareholders are offered the choice of approving or not approving a slate of directors
b. Proxy contest;
i. statement – voting material,
ii. card – ballot
iii. substitute – somebody who votes your shares
c. if you want to challenge = requires own slate, proxy statements, and collect of proxies – very
expensive
i. who should pay for it? What is the analysis for this?
ii. Proxy expenses; law firm to review, mail. Meetings with key stakeholders
d. Under what circumstances would company reimburse proxy contests?
i. Levin and Rosenfeld; gives us the rules for this
1. A corporation cannot reimburse either party unless the dispute focused on policy
(easy to manipulate)
a. Incumbents = current board members
b. Insurgents = challenging the board members
2. The corporation is allowed to reimburse only reasonable and proper expenses
3. The corporation may reimburse incumbents whether they win or lose
a. Legally obligated to conduct this or mount defense = equitable to
reimburse them
4. The corporation may reimburse insurgents only if they win and only if
shareholders ratify that payment
13. Shareholder Proposals
a. Can bring a proposal before all the other shareholders of the corporation and they can vote on it –
rules have changed consistently
b. Congress has attempted to increase the ability of shareholders to discuss issues and broaden the
range of topics they can bring to vote
c. Still largely ineffective at fostering change (publicity campaign to embarrass management or
push them in a more mainstream view)
d. Corporations will reject many of these proposals
e. Proposal Requirements
i. Should come from long term, major shareholder
ii. Be precise
iii. Relate to a certain set of categories
f. Proposal exclusions (corporations can often find a way)
i. Relates to small area of the business
ii. Issue discussed before
g. Accepted proposals
i. Precatory; suggestions
ii. Structural is more likely to prevail (like can CEO and chairman be the same person)
iii. Proposals almost always lose
iv. Can be used as persuasive tool
14. Accessing shareholder lists
a. Local state law
 b. Federal security laws
c. If you are a shareholder in a corporation can you get access to contact information of the fellow
shareholders
d. Why would they need it?
i. Influence management (rally the gang)
ii. To send proxy materials
iii. Two options for a corporation under federal law;
1. Turn over the list of shareholders
2. Mail the materials themselves at the shareholders’ expense
iv. State law options
1. State law grants access to books and records
2. Shareholder must establish holding requirements (filtration requirements)
3. Shareholder must have a proper purpose (relates to financial enterprise of the
company)
15. Voting Control
a. Voting bloc creation; are voting agreements enforceable?
b. What kind of company are we dealing with?
i. Public – large and traded publicly
ii. Closely held corporation – small and shares not on public exchange
c. Once identified type of corporation – can directors agree to vote together?
i. Public; independent judgment in the best interest of the corporation – impartial and
disinterested – think of conflict creation
ii. Close; limited ability to exit so voter bloc creation and agreements are often allowed
iii. Exit options drive these differences
1. Very easy to exit a public corporation via selling shares VS closely held = there is
no market and if things go badly / hard to sell and leave. Control is centralized
and stuck together regardless and put in agreements ahead of time to minimize
risk and there are very few options
16. Mergers and Acquisitions
a. Combining companies through
i. Statutory merger
1. 251 of DGCL; Both parties come together to negotiate merger agreement and
information about what proportion of the combined entity is owned by each of the
original companies
2. Relatively civil
3. After a shareholder vote, the merger can be effectuated simply by filing the
merger agreement
ii. Acquisitions
1. Buying types
a. Asset - One company can acquire another company simply by buying all
or substantially all its stuff
b. Stock – the company becomes a subsidiary of the acquiring company
2. Currency types
a. Acquisition can be in exchange for cash or stock
3. Four way combinations + 1 above and can be treated differently
17. Dissenting shareholders right of appraisal
a. Not enough money or bad decisions; don’t agree with the merger
 b. Shareholders options; try to stop the transaction (almost impossible) and seek courts appraisal of
the value of the shares (think will be higher)
c. Jurisdictions have different rules for handling each of these acquisition types
i. 5 different ways of combining the companies
ii. Availability depends on state law and type of merger/acquisition and each can have
different combos for dissenters’ rights
iii. Companies may structure the transactions so they avoid the dissenters rights
1. This is unfair and can be key source of litigation
iv. De facto merger; transaction structure to avoid paying dissenters rights
1. Farris and Hariton case;
2. The parties had 5 different ways to conduct the transaction and they picked the
way that allowed them to avoid having to pay dissenters rights
3. Dissenters sues the company
4. Farris; approves dissenters rights
5. Hariton; dissenters rights not granted – equal dignity and deferring to the
legislature
a. Intensely formalistic (human made construct and no natural way of doing
this)
18. Involuntary Takeovers
a. Tender offer; offer to buy stock from the shareholders of a corporation
i. Williams act
1. Anyone we acquire 5% of a corporation has identify themselves to the SEC
a. ALERTS incumbents that someone is buying up shares
2. Anyone who makes a tender offer must make an elaborate filing with the SEC
a. Your purpose in acquiring the stock, your involvement with the company,
source of funding etc
3. If a tenderer raises the price that they are bidding for the shares during the tender
officer, they must raise that price for everyone
4. The tenderer must keep the offer open for at least 20 days
5. Privilege and entrench incumbent management; more true believers of the
corporation and not purely materialistic
b. Takeovers; the target will likely resists – when a board resists a takeover, there is a conflict of
interest
c. Is board allowed to spend money to resists?
i. BJR does not apply
ii. Heightened scrutiny; takeover is permissible but so too is resisting a takeover
iii. Cheff case; can board resist a takeover? Yes - When a board can demonstrate legitimate
business purpose to main cohesiveness of the workplace
iv. Unocal; How much can they spend; the board must show that the defensive measures
taken are proportionate to the threat
v. Revlon; at what point boards needs to stop fighting? At the point when the takeover
becomes inevitable – Revlon moment, changing from resisting the takeover to trying to
get the best deal
vi. Omnicare; when a board enters into agreements that conflict with its fiduciary duties; that
agreements are unenforceable
vii.