I.

Exam Set-up
a. Read the question first, then go back and read the narrative in order to know
what you’re looking for
b. Question 1 – four parts, 15 min. each, total 60 min.
c. Question 2 – total 90 min.
i. A is 20 min.
ii. B is 10 min.
iii. C is 60 min.
d. Question 3 – one part, 30 min. total
II. Generally
a. Legal consequences are not limited by the type of agency relationship
b. agent is liable if the principal doesn’t pay unless the agent disclosing that acting
as agent and identifies principal, get a contract with the principal that they will
pay
c. business and compensation are not required for an agency relationship to exist
d. have insurance
e. doesn’t require a written contract to form an agency relationship
f. there does not have to be specific intent for there to be an agency relationship
III. Control: the more control = the more likely to be responsible for their actions; person in
control has power to avoid problems
a. Doty – ownership of car manifested control
b. Cargill
i. Not control: financing, and can discontinue financing and can’t sell
dividends, enter to do audits,
ii. Control: call to instruct on how to run business, right of first refusal,
correspondence, criticism, strong paternal guidance, and name on forms
IV. Manifest assent
a. Doty – volunteering car manifests assent
b. Botticello – agency is not established by marriage or joint ownership alone, and
Walter was not Mary’s agent because she signed her own documents, and said no,
she accepted the checks because her husband was taking them
V. Act on Behalf
a. Doty – specifically agreeing to drive the car to the game showed that was acting
on behalf
VI. Restatement of the Law (Third) Agency: Agency is the fiduciary relationship that
arises when one person (a “principal”) manifests assent to another person (an “agent”)
that the agent shall act on the principal’s behalf and subject to the principal’s control, and
the agent manifests assent or otherwise consents so to act.
VII. Actual Authority - agent acts + on reasonable belief + on principal’s manifestations that
desires agent so to act
a. Express:
i. Mill Street v. Hogan
1. actual authority circumstantially proven
 2. when Hogan is told to paint the church
b. Implied:
i. Actual express authority includes powers that are practically necessary to
complete the project
1. has to be reasonable
a. asked to make lemonade then implied that can buy lemons,
but not implied that can buy a whole lemon crop
c. Scope: designated or implied in principal’s manifestations + acts necessary or
incidental to achieving objectives + reasonable understanding of objectives
d. Reasonable: reflects any meaning known by the agent or as a reasonable person
would act in the context
e. Ratification
i. all or nothing
1. i.e. ratify the whole contract or get nothing at all,
ii. requires active intent, not passive intent
iii. Express:
iv. Implied:
1. through acceptance of the benefits when it is possible to decline
the benefits.
a. Botticello – Mary did not ratify the option to buy by
receiving the rental payments, and by not doing anything
about the improvements on the land, because she was a
joint owner with her husband, she said no to the option to
buy, but her husband allowed the man to purchase and farm
on the land anyway, and Mary probably couldn’t overrule
her husband
2. e.g. Mary buys horse on behalf of Friedman, and Friedman rides
off on the horse,
3. through silence or inaction
4. by trying to enforce the K on one’s own behalf
v. by manifesting assent or by conduct
vi. retroactive actual authority
VIII. Apparent Authority – power held by an agent or other actor to affect a principal’s legal
relations with third parties when a third party reasonably believes the actor has
authority to act on behalf of the principal and that belief is traceable to the
principal’s manifestation
f. principal is disclosed
g. Mill St. v. Hogan
i. whether the agent reasonably believes because of present or past conduct
of the principal that the principal wishes him to act in a certain way or
have certain authority
1. Prior similar practices is one of the most important factors
2. Asked to paint the church = actual express authority
 3. Church allowing Hogan to hire Sam in the past = implied authority
to hire again to complete this project, because they never indicated
that he shouldn’t hire Sam, so church is on the hook to Sam for
worker’s comp when he fell off the ladder
h. Botticello – no apparent authority in this case, because Mary made her opinions
known to the buyer
i. third party reasonably believes the actor has authority to act on behalf of the
principal
j. not actual authority, authority the agent is held out by the principal as possessing,
an appearance upon which third parties come to rely
k. they look like they have the authority because of something the principal did
l. e.g. Dear Mac Alpine Publishing: I am going to be on a fishing trip and difficult
to reach for the next week. In my absence, Dean Norman Williams is in charge of
making any deals on my behalf about the Bridgeman Contracts Treatise
i. this is apparent, if Norman enters agreement then Mac Alpine can enforce
it
ii. Email to Norman: You have my satellite phone. Whatever you do, don't
finalize a deal with Mac Alpine without checking with me first. But
negotiate away. If I don't hear from you, I'll see you in the office on
Monday.
1. This is actual express
2. Mac Alpine did not see this e-mail, so the e-mail to Mac Alpine
creates Apparent Authority
3. If Norman enters into an agreement without consent, then
breaching fiduciary duty and Bridgeman can hold Norman liable
m. Ampex: Kays had apparent authority as a Salesman for Ampex, because Ampex
did not give any indication to 370 that Kays could not sign a binding agreement
for them and it is normal course of business for salesman to enter into contracts
for their business, so it is reasonable for 370 to think that Kays could enter into
the agreement, even though Kays knew that higher up had to sign, the salesman
would need to be trained to let the other party know that someone higher up needs
to sign, or need a signature block for someone higher up on the binding contracts
so the third party knows, but they didn’t in this case, so Ampex is bound by the
contract that Kays signed for them
IX. Inherent Authority - no authority given, but agent acting on behalf of principal, and
principal is not disclosed
n. when an agency question on the bar it is usually inherent agency;
o. E.g. owner of property who represents that another is owner and the third person
purchases on that belief when the owner could have easily informed the third
person
p. change in position means payment of money, expenditure of labor, loss or
subjection to legal liability
q. Watteau v. Fenwick –
 i. undisclosed principal; where anyone has been held out by the principal as
his agent, there is a contract with the principal by estoppel, however much
the agent may have exceeded his authority;
ii. Must prove that agent’s acts done in excess of agent’s agreement with the
undisclosed principal are ordinary for the business so as to be within the
reasonable scope of the agent’s authority
iii. Restatement Third: the undisclosed principal is liable if the principal,
having notice of the agent’s conduct and that it might induce others to
change their position did not take reasonable steps to notify them of the
facts
1. This is narrower than Watteau v. Fenwick, the defendants in
Fenwick might not be liable under this rule because they didn’t
know that Humble was purchasing cigars
iv. Watteau was liable to Fenwick for the cigars that Humble bought on credit
that Humble didn’t pay back and skipped town, even though Watteau told
Humble not to buy it, because Fenwick did not know that Watteau had
purchased the business from Humble, and Humble’s name was still on the
door so it looked like Humble was the only business owner, and Fenwick
did not know that Watteau had told Humble not to purchase the cigars, this
is not apparent authority because Watteau did not do anything to signal to
Fenwick that Humble had authority
r. Botticello – Mary is not an undisclosed principal because she is on title, so
purchaser from Walter should have checked title
X. Estoppel - not otherwise liable + other person changed position on belief that transacting
with person + intentionally or carelessly caused belief or knowing of such belief did not
take reasonable steps to notify of facts
s. Hoddeson – man impersonated a salesman and a lady purchased from the man,
the store was liable to the lady for not supervising the store sufficiently, even
though no receipt and no record of purchase, so businesses should always give
notice that they will receive a receipt; not apparent authority because the store did
not do anything to hold the man out, and not inherent because no relationship
between the impostor and the store, the store just breached a duty to supervise
XI. Partially disclosed principal
t. Atlantic Salmon
i. The agent indicates that working on behalf of a principal but the specific
identity is not disclosed makes the agent liable as well
ii. the third party does not have the responsibility to ask who the principal is,
the agent has the responsibility of disclosing their principal, although the
third party could run a credit check or do a business entity search,
iii. agent held himself out as agent for Boston Seafood Exchange, a business
that did not exist, and the agent wanted to not be liable as an agent for
Marketing Design, but the agent had not disclosed Marketing Design, so
the agent is liable
XII. Employer
u. Independent Contractor – employer is not liable for acts of independent
contractors
i. An Independent Contractor, 2nd Rest 220(2) is a person / entity who
agrees to carry out some task but is not subject to the principal’s
control in doing so.
ii. Hoover v. Sun Oil
1. test to be applied is that of whether the oil company has retained the
right to control the details of the day-to-day operation of the service
station; control or influence over results alone being viewed as
insufficient for agency relationship.
2. Sun owns the station, gives advice on all stages of the operation, and
Sun brand on company and uniforms, Hoover is not required to follow
the advice, and that is why it comes out differently from Humble, the
day to day operations are not being controlled like they were in
Humble.
iii. a principal who retains control over the aspect of the activity in which the
tort occurs is liable
1. if say something like that needs to be done at so and so a time =
probably not control
2. certain area that took control over like just the fireplace was real
important so directed that part of the construction, but the rest of
the construction was up to the contractor then any problems with
the fireplace installation process would cause the principal to be
liable
iv. the principal can be held liable if it employed an incompetent IC
1. hire a demolition person that doesn’t have a bond or insurance =
incompetent
2. if know that IC is not properly licensed,
3. hiring an independent contractor = check for a license
v. when the performance involves an inherently dangerous activity
1. e.g. I run a demolition business generally, and special portion that
takes the really dangerous stuff like the pyrotechnics, can’t say that
just independent contractor;
2. strict liability
3. e.g. sea world – fish are killing people; killer whale is inherently
dangerous; separate subsidiary that puts on the killer whale shows
= not padded from liability
4. e.g. can hire a lion = liable for the lion at the birthday party
5. Majestic: demolition used wrecking ball and caused a wall to fall
on the house of an adjacent property, the person who hired the
demolition person is liable even when demolition person does not
take special precautions for inherently dangerous activity, the
 person hiring should take control because going to be liable
whether take control or not
v. Employee – employer is liable for acts of employees
i. A Servant is generally defined in 2nd Rest 220 (1) as an agent
employed to perform services in the master’s affairs whose physical
conduct is controlled or is subject to the right of control by the
master.
ii. Humble: Humble was liable for the acts of Schneider’s employees.
Humble owned the gas station and repair shop, Schneider operated it and
leased it from Humble, Manis was the employee that worked on the car
that rolled down the hill and hit people, the parking break was not set.
Humble didn’t have control over the repair shop where the problem
occurred, but the court looked at the business as a whole. Schneider
appears to be working for Humble because Schneider never owns the
products being sold, Humble sets the hours of operation, Humble had
strict financial and operation supervision over the business, Schneider only
had control over hiring, firing, and wages for employees. The most
important controlling factor is that Humble could terminate the lease at
any time if Schneider did not comply.
iii. Must occur within the scope of employment
1. Ira Bushey –
a. If some harm is foreseeable then company is liable, even if
the particular type of harm was unforeseeable.
b. The farther away you get from the actual business and the
functions of the business the less likely the business will be
liable. The conduct must relate to employment.
c. In this case the sailor was on the ship and used the ship to
cause damage, so in the place of business and using
business equipment, so the business is liable, if he had been
in the bar doing something dumb, then the US Gov’t would
not have been liable
2. E.g. if Salem hires a thug as a security guard and give him a
weapon and he uses the weapon inappropriately then Salem likely
liable for that, because it is in the scope of employment
3. Manning: it is within the scope of employment when something
interferes with effectively executing duties and employee reacts to
it, the fan was heckling the pitcher, and the pitcher threw a ball at
the fan, it went through the protective net and hit the fan, throwing
at the fan is not in the job description, but the pitcher is on the job,
using the employer’s equipment, and something is interfering with
his course of employment that he reacts to, so the company is
liable as it is in the course of employment. The behavior was
substantially similar to his scope of employment.
XIII. Franchise
w. Holiday Inn
i. Controlling day to day operations is still the test
ii. Betsy Len had a license agreement with Holiday Inn to use its name and
business structure
iii. Betsy Len retained all rights to control the day to day operations of the
business, so only that company was liable for the slip and fall that
occurred from water draining from air conditioner, and not Holiday Inn as
a whole, because Holiday Inn was not in a position to maintain the air
conditioner because they didn’t have any control over the maintenance.
x. Mcdonalds
i. actual agency - right to control the method by which 3K performed its
obligations under the Agreement
ii. apparent agent - One who represents that another is his servant or other
agent and thereby causes a third person justifiably to rely upon the care or
skill of such apparent agent
1. Best Western: on their signs they have the different name of the
hotel with Best Western at the bottom in order to avoid any
apparent authority problems,
iii. Mcdonalds had a detailed manual for how 3K was to operate the business,
field inspectors went out to inspect for compliance, not complying could
result in loss of the franchise, so they had the right to control, and it was
more towards controlling the day to day operations, and currently there is
no distinction between having the right to control and actually controlling,
either way the franchisor will be liable for the acts of the franchisee.
y. Kellog contracts with Friedman to use Kellog’s name
i. Kellog controls the retail price, control display, store has to use kellogs forms,
sells as much cereal as possible = kellog doesn’t have enough control to
create agency liability
1. + can only sell Kellog cereal = not enough control to create agency
relationship
a. + uses kellog store outlet and kellog gets 10% of revenue =
still not enough control to create agency liability
i. + kellog mandates aisle maintenance the way they
want it, and if don’t maintain properly then end
relationship = agency liability now created
XIV. Fiduciary Duty – agent owes a fiduciary duty to the principal; Restatement (Second) 389
“Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as
an adverse party in a transaction connected with the agency without the principal’s
knowledge
z. duty of loyalty –
i. forbids compensation in any other form based on agent/principal
relationship unless the principal knowingly agrees
 1. tips belong to the principal, but the principal typically gives
consent to the agent to receive these
2. sometimes tips are not allowed – gov’t workers such as postal
service workers cannot receive tips, sometimes restaurants don’t
allow them,
ii. violation if agent receives a secret profit from the agency relationship
while performing a transaction secretly with the principal
1. e.g. principal and agent agree that agent will sell car for best price
possible, and agent sells it to 3rd party cousin in order to use it for
himself – agent dealing as adverse party,
2. e.g. work as employee at antique store, the owner doesn’t know
much about antiques, but the employee does, employee starts side
business to purchase the antiques for cheap from the business and
then sell the items that are worth a lot and keeps it for himself;
3. if agent discloses to principal then it is no longer secret, the
principal would then have to act or take the loss
4. Rash – employee for JVIC in charge of setting up scaffolding, has
separate business for scaffolding, JVIC does not know that
employee has separate scaffolding business, employee uses the
scaffolding business to set up scaffolding for JVIC and gets the
money to his business for the scaffolding, should have disclosed
that it was his business providing the scaffolding, if can show that
his business provided the best option then can mitigate damages,
but still a violation of the duty
iii. violation if agent uses her position to make a personal profit from
someone who has no relationship whatsoever with the principal
1. Reading: the sergeant used his uniform to smuggle items to a third
party that paid him well, that was a violation and the sergeant is
liable
a. The sergeant is currently employed by the crown, but if had
not been employed by crown probably still the same result
b. The crown did not give permission, if they had then this
would have been ok
2. Sully, the pilot that saved everyone in Hudson bay, is wearing
uniform and everyone treats him to all kinds of favors at the bar,
that is not requiring disgorgement because his own heroism got
him the favors, not the uniform, the heroism belongs to him and
not the airways,
3. Autobiography of war hero, pulls out old uniform to promote the
book, does not require disgorgement because his story is making
the money, not the uniform, the personal story is his own and
doesn’t belong to the military,
 4. Ceo writes about how he turned gc around, that does require
disgorgement because the story belongs to gc, gets gc’s
permission, even if he donates proceeds to charity, he had the
money before sending it to charity, so disgorgement required,
5. Michael Jordan licenses name to restaurant to attract customers, his
talent may or may not belong to the bulls, so be careful in writing
the contract,
6. Distinguished professor at Harvard should be clear that making his
own opinions as an expert witness and not representing Harvard,
and no disgorgement required if not using school assets to make
the opinion such as student research or school laptops,
7. Kickbacks – employee gets some money from an entity for
choosing that certain entity when searching for contractors to
perform a certain job for the employer, because it may not be the
best option for the employer and the employee is benefitting
secretly from the relationship with the principal
8. Restatement (Second) 404 - Liability for Use of Principal’s
Assets An agent who, in violation of duty to his principal, uses
for his own purposes or those of a third person assets of the
principal's business is subject to liability to the principal for
the value of the use. If the use predominates in producing a
profit he is subject to liability, at the principal's election, for
such profit; he is not, however, liable for profits made by him
merely by the use of time which he has contracted to devote to
the principal unless he violates his duty not to act adversely or
in competition with the principal.
a. Town & Country: employees quit house cleaning
business, started own house cleaning business and
contacted clients from previous business, clients from the
previous business are a trade secret, so former employees
violated the fiduciary duty, they should have started from
scratch and sent out random flyer that did not indicate that
they used to work for Town and Country
i. Fiduciary duty doesn’t end when agency
relationship ends
iv. Noncompete agreements – agent can leave and compete as long as not in
violation of a noncompete agreement, and noncompete agreement has to
be reasonable,
v. Competing while employed = violation of this duty as well
1. E.g full time professor for Willamette and U of O at the same time,
Willamette doesn’t know, and you made weird requests for
scheduling with Willamette because of this conflict, then in
violation because not giving best to Willamette as a result of the
conflict,
 I. Characteristics
a. It is a separate person
b. Can sue people
c. Can open bank accounts
d. Stockholder controls to a degree
e. Market capitalization – know the worth of a business by the amount that people
are willing to pay for it,
f. Shareholders, board members, directors, officers, managers, committees,
g. Securities and exchange commission mandates a board
h. New York stock exchange mandates certain board members in order to exchange
stock in their market
i. Privately held = not selling stock on open market
j. Publicly held = selling stock on open market
k. Taxes
i. Partnership + make money = goes directly on tax returns, which means
taxed once,
ii. Corporation + makes money = get taxed twice if don’t manage it closely,
for a c-corp, can do an s-corp to get taxed like a partnership,
l. Liability – if make deal before the corp is formed then can be personally liable, if
corp formed and make deal then corp will keep you not personally liable, so have
corp ratify past deals so that not personally liable for them
m. Limited liability for shareholders as well
n. As long as adhere to formalities, no fraud, and no injustice then not personally
liable
i. Business can go bankrupt and owner walks away with personal assets
o. They have incorporation by their name. So if you do business with them or loan
them money, or invest then you know you might not get paid if they go bankrupt
II. Bylaws
a. Forum selection clauses for derivative actions are ok
b. The directors can amend the bylaws without the shareholders’ permission if the
certificate of incorporation provides for this
III. Shareholder brings lawsuit against directors – this has been on the bar, need to state
whether it is direct or derivative on the bar exam, always ask whether it is direct or
derivative first
a. Direct action – shareholder brings a suit having been injured directly by the
directors.
i. Ask if a right is being infringed, rather than the corp being harmed in
some way
ii. Directors doing something that keeps a shareholder that has a right to vote
from voting
iii. loss from something to do with the dividend structure
iv. typically shareholder is trying to enjoin
v. Eisenberg: shareholder does not need security to bring this suit when it is
direct
1. Merger causes shareholder to be shareholder of holding company
rather than the operating company like before, if can get injunction
 will get lots of money because the company will want to keep the
merger,
vi. Grimes – to prove direct, s/h must show that the harm is independent of
any harm to the corporation
b. Derivative Actions – the shareholder brings a suit on behalf of the corporation
against the directors for making a decision that harms the corporation and the
shareholder is harmed indirectly
i. if money involved it is likely derivative
ii. Indemnification covers these lawsuits unless there is bad faith, the
shareholders pay for the indemnification, so it does not deter the board
members
iii. Cohen – loser pays courts costs and attorney fees, so shareholder needs
security to bring the suit, needs $50K at least in shares or needs to be
representing interests of all other shareholders, this is to keep too many
claims from coming in – this was a state law and not unconstitutional, but
this is not necessarily always the case
iv. Demand – required if not excused or s/h may bring it, if brought then s/h
concedes that it is required
1. may be excused for futility (RMBCA has done away with this in
jurisdictions that have adopted it)
a. establish a reasonable doubt that the board would make an
independent decision or be unbiased
i. (1) a majority of the board has a material interest in
the challenged transaction; OR
1. Ie they were all involved
ii. (2) a majority of the board is dominated or
controlled by the alleged wrongdoer; OR
1. Sinclair –demand excused because the
board was controlled by the majority
shareholders that had 97% of the shares and
they were the alleged wrongdoers
iii. (3) the challenged transaction was not the product
of a valid business judgment.
b. If demand is excused then an independent committee
determines if litigation is proper, special litigation
committee
i. comprised of members that are not part of the
original board
ii. their decision not to pursue is subject to the
business judgment rule
iii. Auerbach (majority rule)– independent and good
process, board members appoint the members of the
SLC, difficult to find both independent and
competent, start with at least no business or
personal relationship with the current board
members
 1. good process requires reasonable
investigation
2. then apply the business judgment rule
iv. Zapata (minority, but Delaware rule and lots of
businesses in Delaware)
1. Independent, good process, + whether the
decision was reasonable rather than applying
the business judgment rule,
v. – independence review – applies to both majority
and minority rule
1. Oracle
a. Must disclose any connections to the
current board members, and find
people outside of the area, but it is
going to be hard to find someone that
is independent entirely,
b. 2 professors from stanford were very
thorough, but were friends with
people on the board and Stanford
received donations from some of the
board members, this just needed to
be disclosed and probably would
have been ok,
2. Martha Stewart
a. Personal friendship or business
relationship are not disqualifiers
b. Need intertwined financial
relationships or blood relations to be
disqualified
vi. If the majority or minority rules are violated, then a
new SLC would have to be appointed
2. If not excused
a. Corporation may pursue the lawsuit (rare)
b. If corporation does not pursue the lawsuit then to continue
the court must determine that not pursuing the lawsuit
rebuts the business judgment presumption, which is hard to
do
i. rebutted by showing that fiduciary duty was
violated
IV. Business Judgment rule – courts will not look at whether the transaction was fair unless
bad faith, dishonest, fraud, illegality, self-dealing; otherwise not going to fail this rule
unless did something absolutely crazy that was bad for the company,
a. Board could distribute the special dividend or sell it for a $25M loss with a $8M
write off, they distributed it to cover up the loss because didn’t want shares to go
down in value, even though forfeited $8M the business judgment rules precludes
analyzing the transaction
b. AP Smith – businesses can give charitable contributions, it maximizes profits by
giving good marketing and good public relations
c. Ford: need to pay special dividends when can and have the policy to do so,
because the purpose is to make money for the shareholders, Ford should not have
said that making money was incidental to the business when he was using the
special dividend money to make another plant rather than pay out to shareholders;
courts will order payment of money, but they don’t like to stop business
d. Shlensky – derivative suit against baseball team owner for not holding night
games that could bring in money, court determined that businesses don’t have to
do what everyone else is doing, don’t have to do what is best for shareholders
now, they wanted to maintain a good relationship with the community, and that
would help the team in the future, so business judgment rule precludes this suit;
Ford can be distinguished because in Ford large amounts of money that the
company already had were being kept from the shareholders, no fraud, illegality
or self-dealing so business judgment rule presumption is not rebutted, not enough
evidence that not making money because of no night games, maybe low
attendance because the fans just aren’t interested because of poor performance,
business judgment might be rebutted by the directors not looking into the problem
in accordance with duty of care, but duty of care has not been developed at this
point
e. Duty of Loyalty – if violate it then have to prove that it was fair to the corp
i. If stealing or self-dealing is proven then the court will look at the
transaction to verify that it was fair
ii. Kamin - 4 directors were also employees, but no evidence that they
dominated the other 16 members, so no breach of duty of loyalty, so not
rebutting the business judgment presumption on that fact
iii. Bayer – wife of president chosen to sing for their advertisement, and she
receives payment, derivative suit, demand excused because CEO
influences the whole board, would need an independent committee to
decide on the wife, so duty of loyalty violated, but court found that it was
fair because the business received a fair benefit and the payment to the
wife was comparable to the market,
iv. Conflict of interest
1. Benihana – Abdo is on board of directors of Benihana and BFC,
he is negotiating deal for BFC to purchase stock from Benihana,
Abdo discloses the relationship and leaves while the board makes
the vote, the court determined that the deal was fair because it was
still probably the best option available, but to keep it out of
litigation have the meeting transcribed so that have record that
Abdo was gone while the vote was made
2. If a director owns a little bit of stock in the other corporation then
the conflict of interest is probably not substantial enough
3. If a director owns a substantial amount of stock in the other
corporation then make sure they leave while the vote is going on
and make sure the meeting for the vote is well recorded, and be
sure to disclose the conflict
 v. Corporate Opportunity
1. (1) the corporation is financially able to take the opportunity;
2. (2) the opportunity is in the corporation’s line of business;
a. Sinclair – Sinven located in Venezuela, oil was their line
of business, but the opportunities were oil located in other
locales, so it was not their line of business
3. (3) the corporation has an interest or expectancy in the opportunity;
and
a. Ebay – IPO, Goldman gave lucrative securities to directors,
and directors should have offered them to ebay, because
they received them because they work for ebay
4. (4) by embracing the opportunity, the officer or director would
create a conflict between his or her self-interest and that of the
corporation.
5. If these four elements are met, then an offer and rejection is
required to avoid a violation of this duty
6. Future opportunities do not have to be considered, Pricellular
didn’t own shares in CIS at the time that Robert had the
opportunity, so Robert did not have to offer the opportunity to
Pricellular
7. LLCs
a. McConnell – contracted around their duty of loyalty, the
operating agreement had a clause that said if anyone in the
LLC membership gets a better deal than the LLCs is getting
for the hockey team then they can go for it. Court said this
was ok. It is not clear whether this would apply to
corporations.
f. Duty of Care – if violate it then have to prove that it was fair to the corp
i. Kamin – had a meeting, knew all the options, had experts, decided what
they thought was best after deliberation, debate and considering experts,
this was a proper process so the business judgement presumption is not
rebutted
ii. Van Gorkom - directors need to gather all material information
reasonably available to them to make the decision,
1. Delaware is incumbent friendly, so they passed laws to soften this
standard, because this sort of case would scare directors, have to
show enough of sloppiness in the procedure to get passed the
business judgment presumption and to then get to the analysis
about whether the transaction was fair,
2. Shareholders won’t want this high of a standard because directors
won’t make decisions because can’t get enough information
3. Gorkom had 75K shares, nearing retirement, vetoed LBO, met in
secret with Pritzker, Gorkom talked to the board about it for 20
min., the board did not look into further and decided on it, and that
breached the duty of care, they should have hired an expert to
determine fair market value, should have deliberated more,
 iii. Cinerama - the CEO had done a thorough job of investigation, had
bargained hard, had hired experts, and this was sufficient for the board to
make a decision even though the they had not done the investigation
personally themselves
iv. Francis – Mrs. Pritchard inherited husband’s share of business, didn’t
monitor the business at all, and her sons took all the money and
bankrupted the company.
1. If something illegal is happening the director has to object, and if
can’t persuade to a different action then have to resign otherwise
will be held liable
2. Director needs to monitor by looking at the financial statements
and other business activities
3. Directors should ask to see the books, the bylaws, the articles, ask
if have D & O insurance to cover us
v. Disney – distinguish from Van Gorkom because Gorkom was about
selling a business, and Disney is about an employment contract, the
employment contract gave a huge severance package to Ovitz, which is
normal because he is coming from being an agent and won’t be able to do
that when leaves, so needs security to leave prior employment, firing him
gave him the large severance, if he walked away then wouldn’t get the
large severance, and the board decided to fire him
1. Good idea for corporations to have succession plans, because
corporations live forever
2. Proving that board did not follow best practices does not rebut the
business judgment presumption
a. They probably should have negotiated the severance
package at firing time, but not going to 2nd guess this
3. The employment contract showed some good process but that was
about it, and the court was ok with it, so the standard in Gorkom is
lessened a bit by this decision,
4. Compensation committee has to have independent directors
5. Could have avoided court if they had followed formalities, like a
special meeting or regular board meeting on this
6. Market should determine executive salaries
vi. Stone – board must set up a system that monitors the coming and goings
of the corporation
V. waste means underlying decision would serve no rational business purpose, which is a
hard standard to meet, because can say that has a rational purpose even though it was
very stupid, this is commonly on exams
a. Disney: hard to find someone like Ovitz, company started looking like a billion
dollars more once they disclosed that Ovitz would be working there, so large
severance package was not waste,
VI. Duty of good faith – by affirmatively doing something bad, if director engages in bad
faith then the insurance protecting the director probably won’t cover you,
a. Subjective intent to purposely do harm or
b. Failure to act when know that something wrong is happening
 c. Gross negligence does not constitute bad faith
VII. Piercing the corporate veil
a. Follow Formalities to avoid it
i. Hold meetings
ii. File Articles
iii. Adopt bylaws
iv. Keep corporate funds separate from personal funds by keeping the
corporate funds in the separate business account
1. Most say that need injustice or fraud in addition to unity of interest
not being separate, but some say that unity of interest not being
separate is enough to pierce the veil
v. Doesn’t matter if the plaintiff is aware of formalities to pierce the veil
b. Reverse pierce- piercing the veil to the individual then extending that pierce to
other corporations or subsidiaries owned by the individual
c. Fraud - Old-fashioned fraud is an independent basis for liability, but sometimes
requires proof of the plaintiff’s reliance on the basis of fraud
i. E.g. skylar owns autowash, full service autowash, sold soap to A1 and
they didn’t’ pay, they mostly launder money,
1. Going to be successful in piercing the veil to go after skylar as
well, because the setup is a sham and set up to abuse the corporate
structure
d. Two Prong Test – this is commonly on the bar
i. To determine whether unity of interest exists, courts look at four factors
together:
1. (w) the lack of corporate formalities,
a. Didn’t hold meetings, need bylaws to explain how to hold
meetings,
b. Walkovszky – 10 cab businesses all owned by same guy,
each had 2 cabs and had all the formalities and finances
separate, so could not pierce the veil
2. (x) the commingling of funds and assets,
a. Paying child support out of business account,
3. (y) under-capitalization, and
a. When corporation owned by same owner, takes funds from
one corporation and moves it to another corporation
4. (z) the use by one corporation of assets of another.
ii. where failing to PCV would either (i) sanction fraud or (ii) promote
injustice.
1. More than an uncollected debt is needed to meet this prong
iii. Contract – must meet both prongs
iv. Tort – only need to meet the first prong
e. Piercing the LLC veil – same as corporations
i. Two prongs that have to both be met
1. whether the entities in question operated as a single economic
entity
 a. NetJets – Zimmerman did not keep a separate bank
account, that was the biggest issue that made him not
separate from the entity
2. whether there was an overall element of injustice or unfairness
a. NetJets – Zimerman bought a Bentley rather than paying
his debts back, so that was injust
VIII. Damages
a. Successful shareholder is entitled to difference between what the shares sold for
and what the fair market value of the shares is
IX. Majority Shareholder – has a fiduciary duty to be intrinsically fair to minority
shareholders
a. Have to prove Intrinsically fair – if there is risk of self-dealing
i. was it at market price or were they using their insider knowledge to get a
better deal
ii. Sinclair – 97% shareholder may have to prove that they were intrinsically
fair to 3% shareholder, but in this case they did not have to prove this
because there was no self-dealing, because the 3% shareholders got paid
dividends the same as the 97% shareholders
iii. Pesky Minority
1. Ratification strategy
2. Make them whole (preemptively)
3. Buy them out
4. Independent Directors
iv. Zahn – Class B had voting rights and could call Class A, since B had the
voting rights, they owed the intrinsically fair fiduciary duty to Class A,
Class B had insider information about the value of tobacco going up and
called Class A without letting them know, they had a duty to let Class A
know about the value of the tobacco going up
v. Fliegler – the shareholders can vote by majority to ratify the decision and
that proves intrinsically fair, but the shareholders have to be disinterested;
the shareholders were not disinterested, so have to look at fairness because
of risk of self-dealing since the same board members were on both of the
businesses boards, it was fair because it would be good for the company in
the future.
X. Closely Held Corporations
a. IRS standard –
i. half the shares are owned by 5 or fewer shareholders in 2nd half of fiscal
year.
ii. 100 or less shareholders max
b. Ownership and governance typically overlap
c. Sometimes want to stay closed in order to maintain control and avoid public
scrutiny
d. Can bring a direct or a derivative suit in closely held corporations as well,
the same rules apply as they would for a publicly held corporation.
e. Duty of strict good faith
 i. Shareholders in a close corporation owe this to each other because they
have more control than shareholders in a publicly held corporation
ii. legitimate business objective
1. the controlling shareholder group must meet this standard for an
action taken that the minority shareholders challenge
2. Wilkes – in closely held corporations the investor is often seeking
a return through employment, when they fired Wilkes they had no
legitimate business objective, because he was not harming the
company; plan for exiting so that these problems don’t arise
3. Less harmful – if the controlling shareholder group demonstrates
a legitimate business objective, then the minority group can show
that the same result could have been accomplished through means
that were less harmful to them
iii. Smith v. Atlantic – with 4 shareholders each owning 25%, and articles
requiring 80% to come to an agreement, effectively the agreement had to
be unanimous, the one shareholder holding out had to show a legitimate
business objective
iv. Jordan v. Duff – if shareholders have information that is material to
decisions that other shareholders will make regarding their stock, then the
shareholders must disclose that information
v. Alaska Plastic – have insurance and buy-sell agreements in the case of
death, divorce, or separation, especially when have a liberal dissolution
agreement because then the minority can force a good buy out when
threatening dissolution; Patricia received her ex-spouse’s share of the
business, and the others didn’t’ tell her about the meetings they were
traveling to, and paying themselves for, so she was able to recover because
it looked like they were taking it from her, good to have proper meetings
to protect the corporate veil, court said she had to invoke the liberal statute
for dissolution then the court could order that her shares be bought,
otherwise had to show fraud or oppression to get the stock option ordered.
f. Voting Agreements: the shareholders may enter into agreements about who they
will vote to the board, but they cannot agree to what the board members will do
once they are on the board, because once they are on the board they have a
fiduciary duty to the other shareholders, so can’t agree that will appoint a certain
person as a CEO once they are put on the board
i. Ringling – Aubrey violated the voting agreement, so the court’s solution
was to not count her vote
ii. Mcquade – agreed to vote each other onto the board, but as board
members they couldn’t remove each other from employment and couldn’t
change salaries, so that was a breach of the fiduciary duty
1. All agreements binding the actions of board members are void
iii. Clark – if there are no minority shareholders to hurt then the owners can
agree who will be on the board and what they will do once on the board
1. E.g. if have 3 shareholders and all enter into the voting agreement
then can agree to what board members will do once on the board
 2. E.g. if have 3 shareholders and only 2 enter into the voting
agreement then can’t agree to what the board will do once they are
on the board
iv. If the agreement is violated then can enforce the agreement
v. Can put selves or people who are friendly to us on the board
vi. Ramos – there were shareholders that were not part of the voting
agreement, so could not bind board members to certain decisions in the
voting agreement, there was an underlying agreement that they would
keep a certain president in, and if violated the voting agreement then could
purchase that person’s shares, the voting agreement was to vote according
to the majority, Estrada voted the president out, then the next year, the
board voted by majority to remove Estrada from the board, Estrada voted
against that which violated the agreement and then they were able to
purchase her shares and remove her entirely, she should have voted with
the majority to protect her share, and the others were able to get around
the not binding board members rule, by removing board members the next
year if they did not comply with the underlying rule
g. Ingle – they planned for exit, if employment terminated then shares could be
purchased, this case is different from Wilkes as well because the shareholder that
gets bought out comes in after the business is formed
i. Duty to an employee and duty to a minority shareholder should be kept
separate, so do not owe a duty of good faith to the employees
ii. Person that came in to have ownership after formation = Employment
terminated = could purchase shares of that person; Ingle was fired and his
shares were purchased at the fair market value price, and this was ok
h. Brodie –
i. Freezeout means a squeezer refuses to share dividends, giving too large of
salaries to majority so that all assets are wiped out, depriving minority of
corporate offices or employment or selling company assets at an
inadequate price to the majority
1. The standard is the reasonable expectation of the shareholders
a. Mary could expect dividends and an opportunity to
participate in decision making because that was in the
agreement, but she could not expect a forced buy-out
becaue that was not in the agreement but the other
shareholders are now incentivized to purchase her out
because the court has concluded that she is entitled to
certain things and he others won’t want her around
XI. Judicial Dissolution
a. on grounds of deadlock if three conditions are met
i. Corp must have two 50% stockholders
ii. They must be engaged in joint venture
iii. They must be unable to agree upon whether to discontinue the business or
how to dispose of its assets
b. Haley v. Talcott – the exit clause was not specific on the buy-out, the two
interested parties had signed personal guarantees for the mortgage for purchasing
 the property for the business and that was going to continue after exiting, so court
ordered dissolution to exit
c. Pedro v. Pedro three brothers, two were stealing from the company, the one that
was concerned about it got fired, the exit clause provided for 75% of book value
mandatory purchase of stock, so court awarded dissolution to fired brother which
entitled to fair market value for stocks plus lifetime expectancy of wages, this
doesn’t add to fiduciary duty doctrine, it is equity, and could have brought
derivative suit, could have gotten demand excused because the two stealing
brothers were on the board, and they would have to pay the money back and then
fired brother can sell his stock once the value goes up from having paid the
money back,
d. Stuparich v. Harbor – brother has the controlling share, two sisters have shares
and disagree with how brother is running the business, there is the furniture
business that is losing money and the trailer home business that is keeping
everything afloat, the business judgement rule precludes dissolution on that point,
the brother physically injured one of the sisters during an altercation at home, the
court nearly dissolved for that reason, but decided that it was not an altercation
that happened as part of the business and that it was not intimidating the other
board members enough, it the altercation had happened at a board meeting then
they would have ordered dissolution
e. Fisk Venture different for LLCs – LLCs can experience judicial dissolution as
well, even though there is a lot of freedom to contract, in this case it was ordered
because the two shareholders were deadlocked, no one was going to contribute
money as it was, and without more money the business was doomed
XII. Paying a premium for control
a. When purchasing control and placing self as officer as well, that is suspect
b. Frandsen – owns 8% of JS Agency, Jensen owns 52%, Frandsen has the right of
first refusal for JS Agency stock and if doesn’t like the offer than JS will buy him
out at same price which gives him more control, it is ok that he has more control
this way
c. Zetlin – can purchase at a premium as long as no bad faith, the incentive for
control is ok because it is the same position as before, there was an incentive for
the prior controlling shareholders and that same incentive exists now, having
control but not owning the whole thing helps with risk aversion, control in the
hands of someone who has more expertise also might be worth more, so can make
an offer based on what you think it will be worth in your hands with your
expertise
d. Essex – it is ok to sell a control block, but it is not ok to sell an officer position, so
don’t explicitly say in the agreement that the sell comes with a position, it is ok
that it may be implied that once get control can put who you want in the officer
position, in this case it was ok that board members would resign one at a time and
be replaced by the controlling party as that happened,
XIII. LLC
a. In an LLC, investors/interest-holders are called members
b. More flexibility afforded than for corporations and LPs in developing rules for
management and control
 i. Could be managed by members
ii. Could be managed by managers
c. No double taxation/works like partnership
d. Does have formal filing like corporation, same limited liability
e. De Facto LLC
i. Incorporators proceeded in good faith
ii. Under a valid statute
iii. For an authorized purpose
iv. Incorporators subsequently executed and acknowledged articles of
association pursuant to that purpose
v. look at whether incorporators were acting in good faith, filing quickly and
made a mistake, operating for valid reasons, incorporators executed and
acknowledged articles of association pursuant to that purpose, so does it
look like a corporation,
vi. when formalities have not been properly followed
vii. LLC by estoppel
viii. Outlaw – contract for drilling, did not timely perform, wanted to sue
Paren personally because Outlaw did not sign and file the articles
properly. LLC by estoppel because the person that entered the agreement
with Outlaw thought they were dealing with an LLC.
ix. This applies to corporations as well.
x. Don’t’ get to this point. Avoid litigation by following the correct
formalities.
f. Operating Agreement
i. Elf – the two entities came together as an LLC and agreed to arbitrate in a
specific jurisdiction in the operating agreement, that was enforceable
ii. There are some limits to contracting for an LLC, for example, can’t agree
away liability for gross negligence or willful negligence
iii. Racing Investment – manager could order the other members to make a
contribution according to his discretion, this was not upheld, because that
does away with the limited liability about an LLC
g. Dissolution
i. New Horizon – be sure to wind up properly, third party creditors get paid
first, then partners that loaned money,
h. Fiduciary Duties
i. Offers more flexibility for drafting contracts around the fiduciary duties
than partnerships do,