CHAPTER 1 INTRODUCTION AND FORMATION, 1
1.01 INTRODUCTION, 1
1.02 SOURCES OF CORPORATE LAW, 3
1.03 HISTORICAL BACKGROUND, 4
1.04 CHOICE OF FORM, 5
[A] Sole Proprietorship, 6
[B] Partnership vs. Corporation, 6
1.05 TAXATION, 9
[A] Double Taxation, 9
[1] Subchapter S Corporation, 10
[2] Limited Liability Companies, 11
1.06 LIMITED PARTNERSHIPS, 12
1.07 INCORPORATION AND ORGANIZATION, 13
1.08 CHOICE OF LAW, 14
[A] Delaware's Dominance, 15
1.09 ULTRA VIRES, 17
1.10 CORPORATE SOCIAL RESPONSIBILITY, 18
[A] Philanthropy, 18
[B] Stakeholders, 19
CHAPTER 2 PROMOTERS' LIABILITY AND DEFECTIVE INCORPORATION, 23
2.01 INTRODUCTION, 23
2.02 PROMOTERS' LIABILITY ON PREINCORPORATION CONTRACTS, 23
[A] Overview, 23
[B] Liability of the Promoter, 24
[C] The Strict View of Promoters' Liability, 24
[D] Reliance On the Intent of the Parties, 25
[E] Liability of the Newly Formed Corporation, 28
[F] Promoters' Fiduciary Duties, 29
2.03 DEFECTIVE INCORPORATION, 30
[A] The Problem, 30
[B] The De Facto Corporation Doctrine and Corporation by Estoppel, 31
[C] Statutory Abolition of the De Facto Corporation Doctrine, 33
[D] Does Corporation by Estoppel Survive the Model Business Corporation Act?, 34
[E] Model Business Corporation Act Compromise, 35
CHAPTER 3 PIERCING THE CORPORATE VEIL, 37
3.01 THE CONCEPT OF LIMITED LIABILITY, 37
3.02 THE LIMITED LIABILITY DEBATE, 39
3.03 GROUNDS FOR PIERCING THE CORPORATE VEIL, 41
[A] Introduction, 41
[B] Intermixture of Affairs, 42
[C] Lack of Corporate Formalities 43
[D] Inadequate Capitalization, 44
[1] Overview, 44
[2] What is Capital for These Purposes?, 45
[3] When is Capital Adequate?, 46
[4] Is Inadequate Capitalization Alone a Sufficient Ground?, 46
[5] Does a Duty Ever Arise to "Top Off" the Original Capital?, 48
[E] Evasion of a Contract or Statute or Use of a Corporation Solely to Work a Fraud, 49
[F] Instrumentality Theories, 50
[G] Torts Versus Contracts, 52
3.04 EQUITABLE SUBORDINATION, 53
3.05 PIERCING THE CORPORATE VEIL: PROCEDURAL CONTEXTS, 55
3.06 STATUTORY LIABILITY UNDER ENVIRONMENTAL LAWS, 56
3.07 SUCCESSOR CORPORATION LIABILITY IN PRODUCTS LIABILITY, 58
3.08 PIERCING THE CORPORATE VEIL - STRUCTURAL SETTINGS, 58
[A] Personal Shareholder Liability, 58
[B] Parent-Subsidiary Settings, 61
[C] Brother-Sister (Sibling) Corporation Settings, 63
[D] Enterprise Liability, 66
[E] Summary, 67
CHAPTER 4 FINANCING THE CORPORATION, 69
4.01 INTRODUCTION, 69
4.02 SECURITIES, 70
[A] Debt, 70
[B] Common Shares, 71
[C] Preferred Shares, 72
4.03 LEVERAGING AND CAPITAL STRUCTURE, 73
4.04 LEGAL CAPITAL RULES, 74
[A] Preemptive Rights, 75
[B] Par Value, 76
[C] Dividends and Repurchases of Shares, 77
4.05 VALUATION, 78
[A] Liquidation Value, 79
[B] Book Value, 79
[1] Cost Based Accounting, 80
[2] Depreciation, 80
[3] Intangible Assets, 81
[C] Earnings Approach, 81
[1] Capitalization of Earnings, 82
[2] Cash Flow as Earnings, 83
[3] The Rate, 84
CHAPTER 5 THE LEGAL MODEL AND CORPORATE GOVERNANCE: THE ALLOCATION OF POWER UNDER STATE
LAW, 87
5.01 INTRODUCTION, 87
5.02 THEMES, 88
[A] Publicly Held Corporation, 89
[B] The Stock Markets, 89
[1] Benefits of Stock Markets, 90
[2] Shareholder Protection and Stock Markets, 91
[C] The Efficient Capital Market Hypothesis, 92
[D] Separation of Ownership from Control, 94
[E] Institutional Investors, 95
[F] Independent Directors, 96
[G] Gatekeepers, 98
[H] Federalism, 99
[I] Publicly Held vs. Closely Held Corporations, 100
5.03 THEORIES OF THE FIRM, 101
[A] Regulatory Approach, 101
[B] Management Approach, 101
[C] Law and Economics Approach, 102
[1] Agency Costs, 102
[2] Markets, 103
[3] Nexus of Contracts, 104
[4] Critics of Contractual Approach, 104
[5] Behavioral Economics, 105
5.04 THE LEGAL MODEL, 105
5.05 SHAREHOLDERS, 106
[A] Right to Vote, 106
[1] Cumulative Voting, 108
[B] Proxy Voting, 110
[C] The Proxy Fight, 111
[1] Change Management, 111
[2] Change Directors to Facilitate an Acquisition, 112
[3] Change Policy, 112
[4] Collective Action Problem, 113
[5] Proxy Expenses, 114
[6] Fiduciary Duty, 115
[D] Shareholder Democracy, 115
[E] Vote Buying, 119
[F] Right of Expression, 120
[G] Right to Information, 120
5.06 BOARD OF DIRECTORS, 123
[A] Board Structure, 124
[B] Meetings, 124
[1] Actions Without A Meeting, 125
5.07 OFFICERS, 126
[A] Authority, 126
5.08 THE SARBANES-OXLEY ACT OF 2002, 128
CHAPTER 6 MERGERS AND ACQUISITIONS, 133
6.01 INTRODUCTION, 133
6.02 MERGERS, 133
[A] Triangular Merger, 135
[B] Reverse Triangular Merger, 136
[C] Short Form Merger, 137
6.03 SALE OF ASSETS, 137
6.04 TENDER OFFER, 138
6.05 OTHER LEGAL ISSUES, 139
6.06 APPRAISAL REMEDY, 140
[A] Delaware Block Approach, 142
[1] The New Methodology, 144
[B] Stock Market Exception, 145
6.07 DEFACTO MERGERS, 145
CHAPTER 7 INTRODUCTION TO FEDERAL REGULATION AND THE PROXY RULES, 147
7.01 INTRODUCTION AND OVERVIEW, 147
7.02 SEC JURISDICTION AND PERIODIC REPORTING BY PUBLICLY HELD CORPORATIONS, 149
[A] SEC Jurisdiction, 149
[B] Periodic Reporting - An Overview, 151
[C] Certifications, Code of Ethics Disclosure, and Penalties for Earnings Restatements, 151
[D] Private Securities Litigation Reform Act (PSLRA) Safe Harbor for Forward Looking Statements, 153
[E] Management Discussion and Analysis (MD&A), 153
[F] Earnings Management and Revenue Recognition Issues, 154
7.03 SECURITIES ISSUANCE, 155
[A] The Federal Disclosure Philosophy, 155
[B] Registration Requirements, 156
[C] The Registration Process, 159
[D] Exemptions From Registration, 161
[1] Scope, 161
[2] The Intrastate Exemption, 161
[3] The Private Offering Exemption, 161
[4] Regulation D Exemptions, 164
7.04 PROXY REGULATION, 165
[A] Introduction, 165
[B] A Proxy Solicitation Hypothetical, 167
[C] Proxy Contests, 168
[1] The Shareholder's Role, 168
[2] Inadvertent Solicitation and Other Problems, 169
[3] Regulatory Burdens and Costs, 171
[4] Proxy Contest Procedures and Further Costs, 172
7.05 THE SEC SHAREHOLDER PROXY PROPOSAL RULE: SEC RULE 14a-8, 173
[A] Proposals, 173
[B] Eligibility and Procedure, 175
[C] Background on the Nature of the Proposals, 175
[D] Mechanics of the Shareholder Proxy Proposal Process, 177
[E] The 14a-8, Question 9(7) Ordinary Business Operations Exclusion, 180
[F] Other Rule 14a-8 Exclusions, 182
7.06 THE PROXY RULES' GENERAL ANTIFRAUD RULE: AN INTRODUCTION TO GENERAL DISCLOSURE LAW CONCEPTS, 183
[A] Introduction, 183
[B] SEC Rule 14a-9, 185
[C] Implication of Private Rights of Action, 186
[D] Standing to Sue, 189
[E] Materiality of the Omission of the Misleading Statement, 190
[F] State of Mind (Fault) Required, 192
[G] Causation, 193
[H] Remedies, 198
CHAPTER 8 INTRODUCTION TO FIDUCIARY DUTY: THE DUTY OF CARE AND THE BUSINESS JUDGMENT
RULE, 199
8.01 INTRODUCTION, 199
[A] Overview of Duty of Care and Loyalty, 200
[B] Sliding Scale, 200
[C] Duty of Disclosure, 202
8.02 POLICY ISSUES, 203
[A] Law and Economics Approach, 204
8.03 DUTY OF CARE, 205
[A] Failure to Monitor, 207
[B] Duty to Monitor and Legal Compliance, 208
[C] Business Judgment Rule and Decision Making, 209
[1] Good Faith, 211
[D] Causation, 212
8.04 THE SMITH v. VAN GORKOM CASE, 214
8.05 THE DEMISE OF THE DUTY OF CARE, 217
[A] Delaware General Corporation Law 102(b)(7), 217
8.06 DUTY TO ACT LAWFULLY, 219
CHAPTER 9 THE DUTY OF LOYALTY, 221
9.01 INTRODUCTION, 221
9.02 POLICY, 221
9.03 INTERESTED DIRECTOR TRANSACTIONS, 223
[A] Common Law, 225
[B] Statutory Responses, 226
[1] Weak Form Approach, 229
[2] Semi-Strong Approach, 230
[a] The New York Approach, 230
[b] The Current California Approach, 231
[3] Strong Form Approach, 231
[a] Delaware Approach, 231
[b] The MBCA Approach, 233
9.04 EXECUTIVE COMPENSATION, 234
[A] Stock Options, 236
[B] Waste, 239
[1] Delaware's Waste Standard, 239
9.05 CORPORATE OPPORTUNITY, 241
[A] Legal Tests, 242
[1] Interest Test, 242
[2] Line of Business Test, 243
[3] Fairness Test, 244
[4] The ALI Test, 244
[B] Financial Inability, 246
[C] Multiple Boards, 246
[D] Use of Information and Competition, 247
[E] Undisclosed Profits, 248
9.06 SHAREHOLDER RATIFICATION, 248
[A] Required Voting, 249
[B] Optional Shareholder Voting, 250
CHAPTER 10 CONTROLLING SHAREHOLDERS, 253
10.01 INTRODUCTION, 253
10.02 USE OF CONTROL, 255
[A] The Zahn Case, 255
[B] Parent-Subsidiary Dealings, 256
[C] Sale of Corporation, 258
10.03 FREEZEOUTS, 259
[A] Policy Issues, 260
[B] State Law, 263
[C] Cases, 264
[1] The Weinberger Case, 265
[2] Post Weinberger Cases, 268
[a] The Controlling Shareholder's Tender Offer, 269
[D] Federal Law, 271
[1] SEC Rule 13e-3, 271
[2] SEC Rule 10b-5, 271
10.04 INDEPENDENT DIRECTORS OR DISINTERESTED SHAREHOLDER RATIFICATION, 273
[A] Independent Directors, 274
[B] Shareholder Ratification, 276
10.05 SALE OF CONTROL, 277
[A] Looting, 279
[B] The Perlman Case, 280
[C] The California Approach, 281
[D] Sale of Office, 284
CHAPTER 11 SPECIAL PROBLEMS OF THE CLOSELY HELD CORPORATION, 287
11.01 INTRODUCTION AND OVERVIEW, 287
11.02 OBTAINING AND MAINTAINING A MEASURE OF CONTROL, 289
[A] Preview, 289
[B] Shareholder Voting Agreements, 290
[C] Irrevocable Proxies, 292
[D] Voting Trusts, 294
[E] Class Voting, 296
[F] Cumulative Voting, 297
[G] Summary, 298
11.03 PROTECTING SHAREHOLDER EXPECTATIONS IN CLOSELY HELD CORPORATIONS EX
ANTE, 298
[A] Contract, 298
[B] Long-Term Shareholder Tenure and Salary Agreements, 299
[C] Less Than Unanimous Shareholder Agreements, 301
[D] Other Agreements Affecting Directors' Discretion, 302
[E] Comprehensive Shareholder Agreements, 304
11.04 RESTRICTIONS ON SHARE TRANSFERABILITY, 306
[A] Introduction, 306
[B] Umbrella Test - Unreasonable Restraint Upon Alienation?, 307
[C] Other Legal Aspects of Share Transfer Restrictions, 309
[1] Legal Capital and Funding, 309
[2] Procedural Aspects, 309
[3] Disparity Between Buy-Out Price or Formula and Fair Price, 310
[4] Notice, 311
11.05 OTHER GOVERNANCE FEATURES OF THE CLOSELY HELD CORPORATION, 311
[A] Overview, 311
[B] Greater Than Majority Quorum and Voting Requirements, 312
[C] Informal Action By Shareholders and Directors, 314
11.06 CLOSE CORPORATION STATUTES, 314
11.07 PROTECTING SHAREHOLDER EXPECTATIONS IN THE CLOSE CORPORATION EX POST, 315
[A] Resetting the Problem, 315
[B] Heightened Fiduciary Duty in the Close Corporation Setting, 317
[C] Heightened Fiduciary Duty in Other Jurisdictions, 320
[D] Two Worlds Collide: The Donahue Principle Meets Employment at Will, 321
[E] Involuntary Dissolution Statutes, 323
[F] Cases of Deadlock, 324
[G] Oppression Grounds, 326
[H] Remedies in Involuntary Dissolution Cases, 328
[I] Valuation Issues in Court Ordered Buyouts, 331
[J] Conclusion, 332
CHAPTER 12 HOSTILE TENDER OFFERS, 333
12.01 INTRODUCTION, 333
12.02 THE RISE AND FALL OF HOSTILE TENDER OFFERS, 333
12.03 POLICY ISSUES, 336
[A] Proponents, 336
[B] Opponents, 337
12.04 TACTICS, 339
[A] Bidder Tactics, 340
[B] Target Tactics, 342
[1] Poison Pills, 343
12.05 STATE LAW, 347
[A] Delaware Approach, 348
[1] The Cheff Case, 348
[2] The Unocal Test, 348
[3] The Revlon Test, 350
[4] The Time Case, 352
[5] The QVC Case, 354
[6] The Unitrin Case, 356
[7] Shareholder Voting and Tender Offers, 358
[8] Summary, 359
12.06 FEDERAL SECURITIES LAW - THE WILLIAMS ACT, 360
[A] History, 361
[B] Disclosure Rules, 361
[C] Other Rules, 362
[D] Section 14(e), 363
12.07 STATE TAKEOVER STATUTES, 364
[A] Introduction, 364
[B] Policy Issues, 365
[C] Constitutionality, 366
[1] The Edgar Case, 367
[2] The CTS Case, 367
CHAPTER 13 SEC RULE 10b-5 DISCLOSURE AND INSIDER TRADING, 371
13.01 SEC RULE 10b-5 DISCLOSURE AND INSIDER TRADING, 371
13.02 DISCLOSURE CONCEPTS AND ELEMENTS OF A CAUSE OF ACTION UNDER RULE 10b-5, 373
[A] Implication of Private Rights of Action, 373
[B] Standing to Sue, 374
[C] Materiality, 376
[D] State of Mind, 378
[E] Pleading State of Mind, 381
[F] Reliance (Transaction Causation), 383
[G] The Fraud on the Market Theory Reliance Substitute, 386
[H] Loss Causation, 388
[I] The "In Connection With" Requirement, 389
[J] Privity, 389
[K] Secondary Liability for Disclosure Violations, 390
13.03 THE PROHIBITION OF INSIDER TRADING: IS IT GOOD OR BAD?, 392
13.04 THE LAW OF INSIDER TRADING, 394
[A] Common Law Background, 394
[B] The Nature of the Insider Trading Prohibition, 395
[C] Who is an Insider?, 397
[D] Tipper-Tippee Liability, 399
[E] The Misappropriation Theory, 402
[F] The Misappropriation Theory in the Supreme Court, 405
[G] Tippees of Misapporiators, 408
[H] Pushing the Insider Trading Envelope, 409
[I] Remedies and Enforcement, 410
13.05 THE INSIDER TRADING PROHIBITION UNDER STATE LAW, 414
[A] Common Law, 414
[B] Common Law Exceptions: The Kansas Rule, 415
[C] Common Law Exceptions: Special Facts Doctrine, 415
[D] Modern Expansion of the Special Facts Doctrine, 416
[E] Finding Harm to the Corporation from the Insider's Trading, 416
13.06 REGULATION OF INSIDER TRADING UNDER SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934, 417
[A] Statutory Provisions, 417
[B] Parties Plaintiff and Calculation of Damages, 418
[C] Who is an Officer for Section 16 Purposes?, 420
[D] Insider Status at Only One End of a Swing, 420
[E] Takeover Players and Section 16(b), 421
CHAPTER 14 CORPORATE LITIGATION, 423
14.01 INTRODUCTION, 423
14.02 THE NATURE OF THE DERIVATIVE SUIT: DIRECT VERSUS DERIVATIVE, PRO RATA, 425
[A] The Nature of the Derivative Suit, 425
[B] Direct Versus Derivative - Special or Distinct Injury Rule, 427
[C] Direct Versus Derivative - Denial of Contract Rights Associated With Shareholding, 429
[D] Direct Versus Derivative - Closely Held Corporation Exception, 431
[E] Pro Rata (Individual) Recovery in Derivative Actions, 432
14.03 QUALIFICATIONS OF A PROPER PLAINTIFF SHAREHOLDER, 435
[A] Record Ownership, 435
[B] Contemporaneous Ownership, 436
[1] Introduction, 436
[2] Basis for the Rule, 436
[3] Possible Exception: Undisclosed Wrongdoing, 438
[4] Exception: Continuing Wrong, 438
[5] Exception: Double Derivative Actions, 439
[C] Continuous Owner, 439
[D] Clean Hands Requirement, 441
[E] Adequate Representation Requirement, 441
[F] Selection of Lead Counsel, 443
14.04 REFORMS OF THE EARLIER STRIKE SUIT ERA, 444
[A] Overview, 444
[B] Verification Requirement, 444
[C] Security for Expenses Requirements, 445
14.05 THE DEMAND RULE, 447
[A] Overview, 447
[B] Demand Refused, 447
[C] Demand Accepted, 448
[D] Demand Excused, 450
[1] Introduction, 450
[2] The Futility Exception, 450
[a] Introduction, 450
[b] Disabling Conflicts of Interest, 451
[c] Lack of Independence, 452
[d] Legal Tests for Demand Futility, 454
[3] Threat of Irreparable Harm, 456
[4] Closely Held Corporations 456
[5] Delay, 456
[6] Neutrality, 457
[E] Demand On Shareholders, 457
14.06 TERMINATION OF LITIGATION: THE ADVENT OF THE SPECIAL LITIGATION COMMITTEE DEVICE, 458
[A] Background, 458
[B] Application of the Business Judgment Rule, 460
[C] Delaware and the Zapata Second Step, 461
[D] Structural Bias and Other Criticisms, 462
[E] Recent Cases, 465
14.07 PROPOSED REFORMS OF THE MODERN STRIKE SUIT ERA, 469
[A] The ALI Proposals Briefly Considered, 469
[B] The American Bar Association (Model Business Corporation Act) Proposals, 470
[C] Summary, 471
14.08 RIGHT TO TRIAL BY JURY, ATTORNEYS' FEES, AND MISCELLANEOUS ISSUES, 472
[A] Right to Trial By Jury, 472
[B] Attorneys' Fees in Derivative Actions, 473
[1] Entitlement: Common Fund Versus Common Benefit Cases, 473
[2] The Cosmetic (Collusive) Settlement Problem, 475
[3] Computation of Fee Amounts: Lodestar Versus Percentage of Recovery Methods, 475
[4] Objectors and Intervenors, 477
[C] Statute of Limitations or Laches?, 478
14.09 THE REPRISE OF THE SHAREHOLDER CLASS ACTION, 479
[A] The Death of the Derivative Action and the Rise of the "Stock Drop" Class Action, 479
[B] The Private Securities Litigation Reform Act (PSLRA) of 1995, 480
[C] The Securities Litigation Uniform Standards Act (SLUSA) of 1998, 482
14.10 LAWYERING PROBLEMS IN CORPORATE LITIGATION, 484
[A] Attorney-Client Privilege, 484
[B] Attorney-Client Privilege in Derivative Litigation, 485
[C] The Corporation as Client, 486
[D] Sarbanes-Oxley Act (SOA) 307: The Conflict Between "Reporting Up" and the Prohibition on Disclosure of Client Confidences, 488
14.11 INDEMNIFICATION AND INSURANCE, 489
[A] Overview, 489
[B] Indemnification Statutes, 489
[C] Advance of Fees and Other Expenses, 491
[D] Fees on Fees, 491
[E] Implementation By Contract, 491
[F] Non-exclusive Versus Exclusive Statutes, Public Policy Limits, and Consistency Limitations, 492
[G] Insurance, 492
[H] Summary, 493
Table of Cases, TC-1
Table of Statutes, Rules and Regulations, TS-1
Index, I-1
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