BUSINESS ASSOCIATIONS
Prof. Fletcher
2024
Table of Contents
AGENCY LAW............................................................................7
Who is an agent?.................................................................................................... 7
Hanson v. Kynast................................................................................................ 7
Gay Jenson Farms v. Cargill.................................................................................8
Respondent Superior.............................................................................................. 8
AGENT AUTHORITY..................................................................................................... 8
Actual Authority...................................................................................................... 8
In re Motors Liquidation Company.......................................................................8
Apparent Authority................................................................................................. 9
Ratification.............................................................................................................. 9
FRANCHISING............................................................................................................. 9
Agency relationship................................................................................................ 9
Francisor Liability.................................................................................................. 10
FIDUCIARY DUTIES OF AGENTS.................................................................................11
Duty of Loyalty...................................................................................................... 11
Duty of Care.......................................................................................................... 11
Self-dealing / conflict of interest...........................................................................11
Curing a Breach of Fiduciary Duty........................................................................12
PARTNERSHIP.........................................................................13
Key provisions under the Uniform Partnership Act (UPA)..........................................13
Partner’s rights – UPA § 401(f)..............................................................................13
Decision-Making and Flexibility – UPA § 401(j); UPA § 801(1)................................13
Unlimited Liability - UPA § 306(a)..........................................................................13
Duty of Loyalty 404(b).......................................................................................... 13
Duty of Care 404(c).............................................................................................. 14
Good Faith and Fair Dealing 404 (d, e, f, g)..........................................................14
What can’t be on the partnership agreement – UPA § 103(a)...............................15
When do we have a Partnership?..........................................................................15
Fiduciary Duties of Partnership.............................................................................16
Dissolution............................................................................................................ 17
CORPORATIONS......................................................................18
INTRODUCTION..............................................................................18
PARTNERSHIP VS. CORPORATION.............................................................................18
ATTRIBUTES OF A CORPORATION.............................................................................18
Characteristics of Partnerships.............................................................................18
Characteristics of Corporations.............................................................................18
Governing law (internal affairs doctrine)...............................................................19
LIMITED LIABILITY AND PIERCING THE CORPORATE VEIL..........................................19
Definition – Piercing the Corporate Veil.................................................................19
What do Courts look at?........................................................................................19
When is the Corporate Veil Pierced?.....................................................................20
FORMATION OF THE CORPORATION..........................................................................20
Actors of the incorporation...................................................................................20
Sources of Law...................................................................................................... 20
Internal affairs doctrine.........................................................................................21
Types of Corporate Rules......................................................................................21
1
, ARTICLES OF INCORPORATION AND BYLAWS............................................................21
Articles of Incorporation........................................................................................21
DGCL § 102........................................................................................................... 21
Amending the Articles...........................................................................................22
§ 242 DGCL....................................................................................................... 22
Bylaws.................................................................................................................. 23
Amending the Bylaws........................................................................................... 24
DGCL § 109....................................................................................................... 24
CORPORATE STRUCTURE.......................................................................................... 25
Roles and responsibilities in a corporation............................................................25
Directors............................................................................................................... 25
Characteristics..................................................................................................25
Dependent and independent directors..............................................................25
Inside and Outside Directors.............................................................................26
Safeguards Against Opportunism......................................................................26
Director Election...............................................................................................26
Director term.................................................................................................... 26
Staggered / Classified Board.............................................................................27
Vacancies and Newly Created Directorships.....................................................27
Officers................................................................................................................. 28
Shareholders......................................................................................................... 29
SHARE ISSUANCE...................................................................................................... 29
Characteristics...................................................................................................... 29
Types of Shares.................................................................................................... 30
VOTING.........................................................................................30
Approval standard................................................................................................ 30
Shareholders Action.............................................................................................. 32
Annual Meeting.................................................................................................32
Special Meeting................................................................................................. 33
Written Consent................................................................................................33
SHAREHOLDERS RIGHTS...........................................................................................34
Director Removal..................................................................................................34
Adlerstein v. Wertheimer..................................................................................35
Amending Bylaws.................................................................................................36
Airgas, Inc......................................................................................................... 36
Process vs. Substantive Amendments......................................................................36
Substantive Changes and Legal Violations...............................................................37
Fiduciary Out Provisions...........................................................................................37
Proxy Voting......................................................................................................... 38
Access to Books and Records................................................................................39
Espinoza v. Zuckerberg.....................................................................................40
Ringling Bros. v. Ringling..................................................................................41
Hewlett v Hewlett company..............................................................................41
MEETING MECHANICS............................................................................................... 41
Record Date.......................................................................................................... 41
Notice................................................................................................................... 42
THE DEATH OF THE CORPORATION...........................................................................42
Reasons for a Corporation to End.........................................................................42
Statuatory solutions..............................................................................................42
§ 226 DGCL - Deadlock and appointment of Custodian.........................................43
Shawe v. Elting.................................................................................................43
CORPORATE PURPOSE & JUDICIAL REVIEW................................45
Corporate Purpose................................................................................................45
PUBLIC BENEFIT CORPORATIONS....................................................45
Benefit Corporations – definition...........................................................................45
Difference with traditional corporations................................................................45
Interests................................................................................................................ 45
2
, Transition.............................................................................................................. 45
Why does a corporation need PBC status?............................................................45
FIDUCIARY DUTIES.........................................................................45
To whom director/officers owe fiduciary duty?......................................................45
JUDGMENT.....................................................................................46
Derivative Suits..................................................................................................... 46
STANDARD OF REVIEW...................................................................46
BUSINESS JUDGMENT RULE......................................................................................46
Definition.............................................................................................................. 46
Shlensky v. Wringley.........................................................................................47
Board does NOT make a decision.........................................................................47
Discretion in Considering Non-Shareholder Interests............................................47
Dodge v. Ford.................................................................................................... 47
Policy Rationale.................................................................................................... 47
How to Pierce the BJR...............................................................................................48
Two ways to pierce...............................................................................................48
Disney............................................................................................................... 49
ENTIRE FAIRNESS TEST.............................................................................................49
General................................................................................................................. 49
Weinberger v. UOP............................................................................................49
Burden of Proof..................................................................................................... 50
DUTY OF CARE – exculpable............................................................50
Presumption.......................................................................................................... 50
Rebuttals of the presumption...............................................................................50
Smith v. Van Gorkom........................................................................................51
Gross negligence standard...................................................................................51
Burden of Proof..................................................................................................... 51
Is a shareholder vote enough to cure the breach?................................................51
EXCULPATION CLAUSE.............................................................................................. 51
General................................................................................................................. 51
Liability cannot be eliminated for….......................................................................51
In re Lear Corporation.......................................................................................52
Where do we include the clause...........................................................................52
Purpose................................................................................................................. 52
DUTY OF LOYALTY – non exculpable................................................52
CORPORATE OPPORTUNITY.......................................................................................52
Determining a Corporate Opportunity...................................................................52
Broz v. Cellular Information Systems................................................................53
In re: eBay, Inc..................................................................................................53
Conditions Allowing a Fiduciary to Take the Opportunity......................................54
Safe-harbor - Opportunity Presentation................................................................54
Broz v. Cellular Information Systems................................................................54
Renounciation to opportunity................................................................................54
Court review......................................................................................................... 55
INTERESTED DIRECTOR TRANSACTIONS...................................................................56
General................................................................................................................. 56
Directors setting their own compensation............................................................56
In re Investor Bancorp Stockholder Litigation....................................................56
SAFE HARBOR FOR INTERESTED DIRECTOR TRANSACTIONS....................................56
Common Law........................................................................................................ 57
DGCL 144.............................................................................................................. 57
Interplay between DGCL § 144 and Common Law................................................57
Bayer v. Beran.................................................................................................. 57
Benihana of Tokyo, Inc. v. Benihana, Inc...........................................................58
Cumming v Edens............................................................................................. 58
Structuring conflicted transactions to secure the BJR...........................................59
3
, CONTROLLING SHAREHOLDER TRANSACTIONS........................................................60
Definition – controlling shareholder......................................................................60
Factors Determining a Controlling Shareholder....................................................60
Legal framework – EFT vs. BJR..............................................................................61
Standard of review – Self dealing..........................................................................61
Sinclair Oil......................................................................................................... 61
Procedural safeguards..........................................................................................62
In re Tesla Motors, Inc. Stockholder Litigation...................................................62
SAFE HARBORS FOR CONTROLLERS.........................................................................62
MFW test............................................................................................................... 62
Controlling group..................................................................................................64
Third-Party Transactions with Majority Shareholders............................................64
Only one of the procedural safeguards from MFW is not enough..........................64
Tornetta v. Musk............................................................................................... 65
All members of the special committee must be independent to apply the BJR.....65
In re Match Group Inc., Derivative.....................................................................65
MFW applies to non-merger transaction...............................................................65
REVIEW DUTY OF LOYALTY...................................................................................66
OVERSIGHT AND CAREMARK CLAIMS........................................67
General................................................................................................................. 67
Oversight.............................................................................................................. 67
Caremark claims................................................................................................... 67
Standard............................................................................................................... 67
Bad faith............................................................................................................... 67
High threshold for showing breaches of good faith...............................................68
In re The Walt Disney Company Derivative Litigation.......................................68
In re Citigroup Inc. Shareholder Derivative Litigation........................................68
Zucker v. Andreessen.......................................................................................68
FIDUCIARY DUTIES RECAP.....................................................................................69
DERIVATIVE LITIGATION...........................................................71
DIRECT OR DERIVATIVE ACTIONS?...................................................71
Direct vs. derivative claims...................................................................................71
Determining whether a claim is direct or derivative.............................................71
Tooley v. Donaldson, Lufkin & Jenrette, Inc.......................................................71
In re Riverstone National...................................................................................72
DEMAND.......................................................................................72
General................................................................................................................. 72
Purpose................................................................................................................. 72
Types of Actions.................................................................................................... 72
Demand – Rule 23.1.............................................................................................. 72
Consequences of making demand........................................................................72
DEMAND REFUSAL.........................................................................73
General................................................................................................................. 73
Standard............................................................................................................... 73
Andersen v. Mattel Inc......................................................................................73
DEMAND FUTILITY..........................................................................74
General................................................................................................................. 74
Previous tests....................................................................................................... 74
United Food test................................................................................................... 75
PRE-SUIT DEMAND.........................................................................75
When is a pre-suit communication a demand?.....................................................75
Burden.................................................................................................................. 76
DEMAND REQUIREMENTS RECAP..........................................................................76
CAREMARK CLAIMS........................................................................76
4
Prof. Fletcher
2024
Table of Contents
AGENCY LAW............................................................................7
Who is an agent?.................................................................................................... 7
Hanson v. Kynast................................................................................................ 7
Gay Jenson Farms v. Cargill.................................................................................8
Respondent Superior.............................................................................................. 8
AGENT AUTHORITY..................................................................................................... 8
Actual Authority...................................................................................................... 8
In re Motors Liquidation Company.......................................................................8
Apparent Authority................................................................................................. 9
Ratification.............................................................................................................. 9
FRANCHISING............................................................................................................. 9
Agency relationship................................................................................................ 9
Francisor Liability.................................................................................................. 10
FIDUCIARY DUTIES OF AGENTS.................................................................................11
Duty of Loyalty...................................................................................................... 11
Duty of Care.......................................................................................................... 11
Self-dealing / conflict of interest...........................................................................11
Curing a Breach of Fiduciary Duty........................................................................12
PARTNERSHIP.........................................................................13
Key provisions under the Uniform Partnership Act (UPA)..........................................13
Partner’s rights – UPA § 401(f)..............................................................................13
Decision-Making and Flexibility – UPA § 401(j); UPA § 801(1)................................13
Unlimited Liability - UPA § 306(a)..........................................................................13
Duty of Loyalty 404(b).......................................................................................... 13
Duty of Care 404(c).............................................................................................. 14
Good Faith and Fair Dealing 404 (d, e, f, g)..........................................................14
What can’t be on the partnership agreement – UPA § 103(a)...............................15
When do we have a Partnership?..........................................................................15
Fiduciary Duties of Partnership.............................................................................16
Dissolution............................................................................................................ 17
CORPORATIONS......................................................................18
INTRODUCTION..............................................................................18
PARTNERSHIP VS. CORPORATION.............................................................................18
ATTRIBUTES OF A CORPORATION.............................................................................18
Characteristics of Partnerships.............................................................................18
Characteristics of Corporations.............................................................................18
Governing law (internal affairs doctrine)...............................................................19
LIMITED LIABILITY AND PIERCING THE CORPORATE VEIL..........................................19
Definition – Piercing the Corporate Veil.................................................................19
What do Courts look at?........................................................................................19
When is the Corporate Veil Pierced?.....................................................................20
FORMATION OF THE CORPORATION..........................................................................20
Actors of the incorporation...................................................................................20
Sources of Law...................................................................................................... 20
Internal affairs doctrine.........................................................................................21
Types of Corporate Rules......................................................................................21
1
, ARTICLES OF INCORPORATION AND BYLAWS............................................................21
Articles of Incorporation........................................................................................21
DGCL § 102........................................................................................................... 21
Amending the Articles...........................................................................................22
§ 242 DGCL....................................................................................................... 22
Bylaws.................................................................................................................. 23
Amending the Bylaws........................................................................................... 24
DGCL § 109....................................................................................................... 24
CORPORATE STRUCTURE.......................................................................................... 25
Roles and responsibilities in a corporation............................................................25
Directors............................................................................................................... 25
Characteristics..................................................................................................25
Dependent and independent directors..............................................................25
Inside and Outside Directors.............................................................................26
Safeguards Against Opportunism......................................................................26
Director Election...............................................................................................26
Director term.................................................................................................... 26
Staggered / Classified Board.............................................................................27
Vacancies and Newly Created Directorships.....................................................27
Officers................................................................................................................. 28
Shareholders......................................................................................................... 29
SHARE ISSUANCE...................................................................................................... 29
Characteristics...................................................................................................... 29
Types of Shares.................................................................................................... 30
VOTING.........................................................................................30
Approval standard................................................................................................ 30
Shareholders Action.............................................................................................. 32
Annual Meeting.................................................................................................32
Special Meeting................................................................................................. 33
Written Consent................................................................................................33
SHAREHOLDERS RIGHTS...........................................................................................34
Director Removal..................................................................................................34
Adlerstein v. Wertheimer..................................................................................35
Amending Bylaws.................................................................................................36
Airgas, Inc......................................................................................................... 36
Process vs. Substantive Amendments......................................................................36
Substantive Changes and Legal Violations...............................................................37
Fiduciary Out Provisions...........................................................................................37
Proxy Voting......................................................................................................... 38
Access to Books and Records................................................................................39
Espinoza v. Zuckerberg.....................................................................................40
Ringling Bros. v. Ringling..................................................................................41
Hewlett v Hewlett company..............................................................................41
MEETING MECHANICS............................................................................................... 41
Record Date.......................................................................................................... 41
Notice................................................................................................................... 42
THE DEATH OF THE CORPORATION...........................................................................42
Reasons for a Corporation to End.........................................................................42
Statuatory solutions..............................................................................................42
§ 226 DGCL - Deadlock and appointment of Custodian.........................................43
Shawe v. Elting.................................................................................................43
CORPORATE PURPOSE & JUDICIAL REVIEW................................45
Corporate Purpose................................................................................................45
PUBLIC BENEFIT CORPORATIONS....................................................45
Benefit Corporations – definition...........................................................................45
Difference with traditional corporations................................................................45
Interests................................................................................................................ 45
2
, Transition.............................................................................................................. 45
Why does a corporation need PBC status?............................................................45
FIDUCIARY DUTIES.........................................................................45
To whom director/officers owe fiduciary duty?......................................................45
JUDGMENT.....................................................................................46
Derivative Suits..................................................................................................... 46
STANDARD OF REVIEW...................................................................46
BUSINESS JUDGMENT RULE......................................................................................46
Definition.............................................................................................................. 46
Shlensky v. Wringley.........................................................................................47
Board does NOT make a decision.........................................................................47
Discretion in Considering Non-Shareholder Interests............................................47
Dodge v. Ford.................................................................................................... 47
Policy Rationale.................................................................................................... 47
How to Pierce the BJR...............................................................................................48
Two ways to pierce...............................................................................................48
Disney............................................................................................................... 49
ENTIRE FAIRNESS TEST.............................................................................................49
General................................................................................................................. 49
Weinberger v. UOP............................................................................................49
Burden of Proof..................................................................................................... 50
DUTY OF CARE – exculpable............................................................50
Presumption.......................................................................................................... 50
Rebuttals of the presumption...............................................................................50
Smith v. Van Gorkom........................................................................................51
Gross negligence standard...................................................................................51
Burden of Proof..................................................................................................... 51
Is a shareholder vote enough to cure the breach?................................................51
EXCULPATION CLAUSE.............................................................................................. 51
General................................................................................................................. 51
Liability cannot be eliminated for….......................................................................51
In re Lear Corporation.......................................................................................52
Where do we include the clause...........................................................................52
Purpose................................................................................................................. 52
DUTY OF LOYALTY – non exculpable................................................52
CORPORATE OPPORTUNITY.......................................................................................52
Determining a Corporate Opportunity...................................................................52
Broz v. Cellular Information Systems................................................................53
In re: eBay, Inc..................................................................................................53
Conditions Allowing a Fiduciary to Take the Opportunity......................................54
Safe-harbor - Opportunity Presentation................................................................54
Broz v. Cellular Information Systems................................................................54
Renounciation to opportunity................................................................................54
Court review......................................................................................................... 55
INTERESTED DIRECTOR TRANSACTIONS...................................................................56
General................................................................................................................. 56
Directors setting their own compensation............................................................56
In re Investor Bancorp Stockholder Litigation....................................................56
SAFE HARBOR FOR INTERESTED DIRECTOR TRANSACTIONS....................................56
Common Law........................................................................................................ 57
DGCL 144.............................................................................................................. 57
Interplay between DGCL § 144 and Common Law................................................57
Bayer v. Beran.................................................................................................. 57
Benihana of Tokyo, Inc. v. Benihana, Inc...........................................................58
Cumming v Edens............................................................................................. 58
Structuring conflicted transactions to secure the BJR...........................................59
3
, CONTROLLING SHAREHOLDER TRANSACTIONS........................................................60
Definition – controlling shareholder......................................................................60
Factors Determining a Controlling Shareholder....................................................60
Legal framework – EFT vs. BJR..............................................................................61
Standard of review – Self dealing..........................................................................61
Sinclair Oil......................................................................................................... 61
Procedural safeguards..........................................................................................62
In re Tesla Motors, Inc. Stockholder Litigation...................................................62
SAFE HARBORS FOR CONTROLLERS.........................................................................62
MFW test............................................................................................................... 62
Controlling group..................................................................................................64
Third-Party Transactions with Majority Shareholders............................................64
Only one of the procedural safeguards from MFW is not enough..........................64
Tornetta v. Musk............................................................................................... 65
All members of the special committee must be independent to apply the BJR.....65
In re Match Group Inc., Derivative.....................................................................65
MFW applies to non-merger transaction...............................................................65
REVIEW DUTY OF LOYALTY...................................................................................66
OVERSIGHT AND CAREMARK CLAIMS........................................67
General................................................................................................................. 67
Oversight.............................................................................................................. 67
Caremark claims................................................................................................... 67
Standard............................................................................................................... 67
Bad faith............................................................................................................... 67
High threshold for showing breaches of good faith...............................................68
In re The Walt Disney Company Derivative Litigation.......................................68
In re Citigroup Inc. Shareholder Derivative Litigation........................................68
Zucker v. Andreessen.......................................................................................68
FIDUCIARY DUTIES RECAP.....................................................................................69
DERIVATIVE LITIGATION...........................................................71
DIRECT OR DERIVATIVE ACTIONS?...................................................71
Direct vs. derivative claims...................................................................................71
Determining whether a claim is direct or derivative.............................................71
Tooley v. Donaldson, Lufkin & Jenrette, Inc.......................................................71
In re Riverstone National...................................................................................72
DEMAND.......................................................................................72
General................................................................................................................. 72
Purpose................................................................................................................. 72
Types of Actions.................................................................................................... 72
Demand – Rule 23.1.............................................................................................. 72
Consequences of making demand........................................................................72
DEMAND REFUSAL.........................................................................73
General................................................................................................................. 73
Standard............................................................................................................... 73
Andersen v. Mattel Inc......................................................................................73
DEMAND FUTILITY..........................................................................74
General................................................................................................................. 74
Previous tests....................................................................................................... 74
United Food test................................................................................................... 75
PRE-SUIT DEMAND.........................................................................75
When is a pre-suit communication a demand?.....................................................75
Burden.................................................................................................................. 76
DEMAND REQUIREMENTS RECAP..........................................................................76
CAREMARK CLAIMS........................................................................76
4
