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Corporations and Other Business Associations

CORPORATIONS AND OTHER BUSINESS ASSOCIATIONS
CASES AND MATERIALS (Third Edition)

by Charles R. T. O'Kelley and Robert B. Thompson
Published by Aspen Law and Business formerly Little Brown and Company

Table of Contents

1  Economic and Legal Aspects of the Firm

A. Introduction
B. The Economic Backdrop
1. Comparative Search for Best Investment
2. Risk and Return
3. Transaction Costs and Choice of Organizational Form
a. Introduction
b. Transaction Cost Factors
c. The Limits on Organizing Production as an Implicit Team
d. Discrete and Relational Contracting
e. Decision to Organize as a Firm
C. The Sole Proprietorship and the Law of Agency
1. Introduction
2. Agency Law and the Choice of Sole Proprietorship Form
3. Fiduciary Limits on Agent's Right of Action
4. Limits on the Proprietor's Right to Discharge an Employee at Will
5. Agency Law and Relations with Creditors
D. The Road Ahead
1. Selection of Joint Ownership a. Organizing Team Production as a Sole Proprietorship or Jointly
     Owned Firm
b. The Challenge of Passive Ownership
c. The Need for Rules Allocating and Limiting Ownership Rights
(1)  Full Participation by All Owners versus Separation of
       Functions
(2)  The Need for "Voting" Rules
(3)  The Need for Monitoring Agents: The Role of Boards of
       Directors
d. The Need for Rules Governing Exit
2. The Role of Entity Law
a. Governance
(1)  Provision of Standard Form Governance Rules
(2)  Default Versus Immutable Rules
(3)  Tailored, Majoritarian, and Penalty Default Rules
(4)  Fiduciary Duty and the Nexus of Contracts Approach
b. Liability as to Outsiders
c. Relations to Government (Primarily Tax)
d. Business Planning and the Role for Lawyers
3. The Role of Markets
4. State versus Federal Law
5. Use of Corporations and Other Forms of Business Associations

2  Partnership and Limited Liability Companies

A. Introduction
1. Traditional Noncorporate Business Associations
a. The General Partnership
b. Joint Ventures
c. The Limited Partnership
2. Emergence of Limited Liability Entities as the Norm
a. Impetus for New Forms
b. The Limited Liability Company
c. The Limited Liability Partnership
3. Continuing Role of General Partnership Law
B. Fiduciary Duty
1. The Traditional Framework
2. Fiduciary Duty and Private Ordering
3. The Duty of Care
C. Power to Manage and Bind the Firm
1. Responsibility for the Acts of a General Partner
2. Participation in Management and Control
3. Limited Partner's Participation in Control
D. Dissociation and Dissolution: Accommodating the Changing Needs of the
      Partnership and Its Partners
1. At-Will Partnerships and the Dissolution Framework
a. Introduction
b. Settling Accounts
c. Cash versus In-Kind Distributions
d. Winding Up and the "No Compensation" Rule
e. Continuance of the Partnership's Business After Partner's Unplanned
     Dissociation by Death or Retirement
  2. Wrongful Dissociation
  3.   Partner Expulsion
  4.   Contracting to Prevent Opportunistic Withdrawal

3  Corporate Form and the Separate, Specialized Role of Shareholders and Managers

A. Introduction
B. The Corporate Form
1. Statutory Norms
         a. Overview
         b. Directors
         c. Officers
         d. Shareholders
              (1)  Shareholder Rights and Responsibilities
              (2)  Who Are Shareholders in the Publicly Traded Corporation?
              (3)  Proxy Voting
2. Obtaining and Modifying the Statutory Norms
a. Formation
b. Creating Classes of Shares
c. Using Articles and Bylaws to Change Legal Norms
3. State Corporation Laws as Competing Sets of Standard Form Rules
C. The National Market System and the Efficient Market Hypothesis
1. Introduction
2. The National Market System
3. The Efficient Market Hypothesis
D. Shareholder's Governance Role
         1. State Law Restrictions on Shareholder's Direct Management Power
         2. The Forum for Political Persuasion - State Law Rules Affecting Shareholder Voting Rights
         3. Electing and Removing Directors
                   a. Overview of Normal Rules
                   b. Changing of the Normal Allocation of Voting Power
                         (1)  Class Voting and Dual-Class Voting Scheme
                         (2)  Cumulative Voting and Minority Representation
                    c. Staggered Terms - Adaptability Versus Stability
                    d. Removal of Directors and Other Midstream Private Ordering
E.   Regulating the Shareholder Communication Process
           1. Overview of Federal Regulation
                     a. Rules Primarily Affecting Solicitation of Proxies, Whether by Management or Shareholders
                     b. Rules Primarily Regulating Shareholder Access to Effective Means of Communication with Other Shareholders
            2.   Socially Significant Shareholder Proposals
            3.   Governance-Related Shareholder Proposals
            4.    Independent Proxy Proposals
            5.    The Chilling Effect of Overbroad Restrictions on Persuasive Communication
            6.    Shareholder Access to Corporate Records and Shareholder Lists

4  Fiduciary Duty, Shareholder Litigation, and the Business Judgment Rule

A. Introduction to Fiduciary Duty and the Business Judgment Rule
         1. Overview
         2. Directors' Discretion to Determine General Business Policies
         3. Directors' Discretion ot Consider Interests of Non-Shareholder Constituencies
B. Fiduciary Duty and Directors' Conduct of Official Duties
1. Duty to Monitor and Be Informed About Corporate Operations and to
     Prevent Misconduct by Others
2. Director's Basic Oversight Duties
3. Duty of Care in the Decisional Setting
4. Statutory Exculpation Provisions
          5. The Role of Substance in Judging Directors' Care
          6. The Board's Responsibility to Monitor and Prevent Illegal Activity
 C.   The Fiduciary Duty of Loyalty
          1.   Introduction
          2. The Corporate Opportunity Doctrine
          3. Conflicting Interest Transactions
                 a. Overview
                 b. Transactions Lacking Disinterested Shareholder or Director Approval
                 c. The Effect of Disinterested Approval
                 d. Subchapter F of the Model Business Corporation Act
                 e. Transaction with Controlling Shareholders 386
 D.   Corporation's Right to Control Derivative Litigation
          1. Introduction
          2. The Demand Requirement
                 a. Overview
                 b. Review of Directors' Ability to Impartially Consider Demand
                 c. Review of Board's Refusal of Demand
          3. Dismissal of Derivative Litigation at the Request of an Independent Litigation Committee of the Board
E.   Indemnification and Insurance
        1. Introduction
        2. Indemnification
        3. Insurance

5  Protecting Shareholders' Expectations in Closely Held Corporations

A. Introduction
B. Contracting as a Device to Limit the Majority's Discretion
1. As to Director Decisions
2. Voting Agreements as to Shareholder Decisions
C. Fiduciary Duty and Threat of Dissolution as a Check on Opportunistic
      Majority Action
1. Traditional Judicial Deference to Majority's Discretion
2. The Partnership Analogy as a Basis for Enhancing Minority
     Shareholders' Rights
3. The Modern Approach to Involuntary Dissolution
D. Share Repurchase Agreements

6  The Corporation as a Device to Allocate Risk Between Insiders (Officers,  Directors, and Shareholders) and Outsiders

A. Introduction
B. Corporate Law Rules Specifying an "Equity Cushion"
1. Historical Overview
2. Statutory Rules Governing the Equity Cushion
a. Minimum Initial Capitalization Requirements
b. Quality and Valuation of Consideration Paid for Shares
c. Limits on Distributions to Shareholders
C. Piercing the Corporate Veil
1. Introduction
2. Piercing the Corporate Veil to Reach Real Persons
a. Contract Cases
b. Tort Cases
3. Piercing the Corporate Veil to Reach Incorporated Shareholders
D. Ambiguous or Legally Defective Allocation of the Risk of Loss
1. Introduction
2. Contracts on Behalf of Nonexistent Corporations
a. Introduction
b. Ambiguous Attempts to Contract Around Personal Liability
c. Allocating Losses When Insiders Make No Attempt to Contract
     Around Personal Liability
3. Allocating the Risk of Loss from Unauthorized Actions
a. Agent's Unauthorized Actions
b. Ultra Vires

7  Friendly Transfers of Control and Fundamental Changes

A. Introduction
B. Mergers and Dissenters Rights
1. Mergers
2. Dissenter's Rights
3. Triangular Mergers and Compulsory Share Exchanges
4. Short Form Mergers
C. Contracting around Appraisal and Voting Rights
          1. Use of Alternative Transactional Forms
                  a.   Introductory Note
                  b.   Sale of Assets
                  c.   Triangular Mergers
                  d.   Compulsory Share Exchanges
          2. "De Facto" Mergers
          3. Limiting Appraisal Rights by Contract Provision
 D. The Intersection between the Appraisal Remedy and Fiduciary-Duty-Based Judicial Review
          1. Cash-Out Mergers and the Business Purpose Test
          2. The Weinberger Approach
E.   Appraisal and Entire Fairness Relief after Weinberger
          1.   Valuation under Statutory Appraisal
          2.   Appraisal as the Exclusive Remedy
          3.   Fashioning Relief for Controlling Shareholder's Failure to Prove Entire Fairness
                  a. Introduction
                  b. Weinberger on Remand
                  c. The  Shell Oil Litigation
         4.   Third-Party Mergers
F.   Transfer of Control for a Premium
        1.   Fundamental Principles
                  a. Sale of Control Block
                  b. Sale of Corporate Office
                  c. Negligent Sale of Corporate Control
       2.   Sale of Corporate Opportunity
                 a. Premium Received in Compensation for Sale of Corporate Asset
                 b. Proper and Improper Use of Majority Power

8  Changes in Control: Hostile Acquisitions

A. The Market for Corporate Control
B. Judicial Review of Tender Offer Defenses
1. Traditional Business Judgment Review
2. The Enhanced Scrutiny Framework
a. Introduction
b. The Unocal Doctrine
c. Poison Pills
d. The Revlon Rule
e. Refining Revlon and Unocal
(1)  The Time-Warner Case
(2)  The QVC Case
C. Judicial Review of Voting Contest Defenses
1. Judicial Limits on Inequitable Actions
2. Enhanced Review of Good Faith Actions
3. Unocal Review of Measures Affecting the Shareholder Franchise
4. Board Action Affecting Action by Shareholder Consent - Judicial Protection
     of Express Statutory Rights
D. Testing of the Limits of Pre-Planned Defenses
E. State Anti-Takeover Statutes
F. Differing Incentives in Proxy Fights

9  Federal Law Affecting Corporate Transactions

A. Introduction
1. The Importance of Disclosure
2. Disclosure and Markets
B. Initial Issuance of Securities
1. The Securities Act of 1933
2. Exemptions from Registration
3. Definition of a Security
C. Liability Under the Proxy Rules
1. Coverage of' Section 14(a)
2. Rule 14a-9
a. Implied Private Cause of Action
b. Misrepresentations or Omissions of a Material Fact
c. Scienter
d. Reliance, Causation and Remedy
D. Rule 10b-5 as Applied to Corporate Transactions
1. Introduction
2. Standing: In Connection with a Purchase or Sale
3. Elements of Common Law Fraud Applied to Rule 10b-5
a. Misrepresentation or Omission of a Material Fact
b. Scienter
c. Reliance and Causation
d. Measure of Recovery
e. Procedural Limits on Rule 10b-5 Suits

10  Federal Regulation of Tender Offers

A. The Williams Act
1. Disclosure
2. Substantive Regulation
3. Definition of a Tender Offer
B. Intersection Between State and Federal Regulation
1. Antifraud Provisions of the Williams Act
2. State Anti-Takeover Statutes

11  Insider Trading

A. The Common Law Foundation for Rule 10b-5
B. Rule 10b-5 as a Regulator of Insider Trading
1. "Classic" Insider Trading as Fraud
2. Extensions of the Classic Theory
        a. Tippee Liability and Constructive Insiders
        b. Misappropriation and Rule 14e-3
C. Regulation of Insider Trading Under Section 16 of the Securities Exchange Act of 1934
1. Enforcement
2. Computation of Recovery
3. Who Is an Insider?
4. Timing Questions: Transactions Before or After Insider Status
5. Unorthodox Transactions, Tender Offers, and the Definition of Purchase
     and Sale
6. Derivative Securities