THE CORPORATE FORM AND THE SPECIALIZED ROLES OF SHAREHOLDERS,

DIRECTORS, AND OFFICERS

Roles
o Shareholders provide capital and elect directors
No direct management roles
CAN request the directors take a particular action
o Directors make major policy decisions
Owe a fiduciary duty to the corporation and its shareholders
Case law and statutes limit what a director can do
Directors elect officers
o Officers execute the policies made by the Directors
Provide day-to-day management
o Incorporators (one or more) submits the certificate of incorporation to
the Secretary of State (may be done electronically)
ANY entity OR neutral person (18 years +) can be an incorporator
(does NOT have to be an OK resident)
Documents Governing Corporations
o Certificate of Incorporation serves as a contract (this document binds
you even though you never sign it)
SUPERSEDES the bylaws
In order to limit directors, the certificate CAN be changed
DE 102(a) what MUST be in certificate; 102(b) what MAY be
in certificate
Must state the PURPOSE of the Corporation
o It is sufficient to say the purpose is to engage in any
lawful activity
OK Title 18 1006 tells you what has to be in the certificate
To change a certificate of incorporation:
(1) Director must propose an amendment
(2) Shareholders must vote on it
o NOTE: the directors draft the certificate in the first
place, so they really have the power over this
document
o Shareholders can NEVER propose an amendment
HOW to change a certificate as a shareholder:
Corporation would say dont buy the
stock if you dont like what is in the
certificate
You COULD vote for new directors
o You really do not have the power
because the directors choose
 who gets to be voted on to
become a director
DE is a popular place to incorporate
Directors determine where to file for incorporation
DE is the most friendly
o Its corporate case law is well established
o The courts are very experienced
DE Court of Chancery (lower court in DE,
appeals from here go to the DE Supreme
Court)- special court in DE that ONLY hear
corporate cases (judges are appointed by their
merits; they are usually former corporate
attorneys)quick adjudication of corporate
disputesthere is no jury trial nor punitive
damages given
Seems to be a state where all the branches of gov't try to
keep their laws up to date
OK Courts are governed by DE decisions
OK is not kept up to date like DE so our statutes are older
To Form A Corporation:
Participants complete the articles of incorporation and file
them with the appropriate state official in the chosen state
(Secretary of State in OK)
Must include (MBCA 2.01)
o Corporations name
o Registered office and agent for service of process
o Number of shares it is authorized to issue
o MAY need to include the corporations purpose
DE requires it (102(a))
o After the articles are filed, there is usually a meeting
to determine what directors are elected, shares are
issued in exchange for consideration that the
corporation received to undertake its business and
bylaws governing the corporation are adopted
o Bylaws subordinate to the certificate (they are NOT filed)
Shareholders have the sole power to amend
Teamster v. Fleming OK case; cannot restrict the power of the
board; the bylaws must be consistent with legislature
Types of Corporations
o Sole Proprietorship
You alone decide to go into business
You are PERSONALLY liable for the entities debt
o General Partnership
 Two or more people get into business with each other
All people who invest are PERSONALLY liable for the entities debt
o Limited Liability (LLC, LP, LLP, Corp.)
Shareholders are NOT liable for the corporations debt
You are required to do something to become these entities
Corporation file a certificate of incorporation
Reasons to select a Corporation over a Partnership
Limited personal liability
o OK 1006(b)(6)
o DE 102 (b)(6)
Management
o Under a partnership, you have equal rights as your
partners to make decisions (majority to approve
things)
Problem- lots of decisions to be made and a lot
of opinions, hard to do
o Under a corporation, there is a hierarchy; directors
would make the decisions (so we would be giving up
control buy may be a good thing)
Directors elect officers
Officers implement the policies and day-
to-day management that directors
decide on
Directors can also terminate officers
Voting
o Corporations have much more efficient and structured
voting
Shareholder Meetings (DE 228, 211)
o DE 228: things you CAN do WITHOUT a meeting IF you have a written
consent form SIGNED by ALL the members that could have been at the
meeting
o DE 211(b): directors will be elected at the annual meetings
o Regulated by the SEC specific steps that must be followed
Must issue a proxy statement
o Three ways to elect directors
Annual meetings
Special meetings of the shareholders (not preferred by directors)
Written Consent
o Cases
Hoschett v. TSI
DE
Written consent is NOT enough to forgo the annual meeting
 DE Legislature amended 211, NOW if there is written
consent for electing directors
Boilermakers
Forum selection clause in bylaws are VALID
Agosta v. Southwest Breeders
You CANNOT issue more stock than allowed in your
certificate in OK, you cannot back date amendments to
the certificate
STAAR Surgical v. Waggoner
You CAN amend your certificate AS LONG AS you get the
right signatures (DE only)
Valid Consideration for Stock
Eastern OK v. AMECO
o You CANNOT issue tock for services to be
performed, cash, work done or property received
o OK Legislature amended the statute to allow stock in
return for cash, intangible or tangible property, any
benefit to the corporation or any combination of those
EXCEPT services performed
o Shares/Shareholders
There must be a class of shares that carry authority to elect
directors and exercise all other shareholder voting rights
Common Shares combine residual claimant status and voting
rights you get anything left after creditors
Preferred Stock you get preference upon liquidation
VOTING
Cumulative Voting
o More of an exception (tends to held minority
shareholder)
o The ONLY way you can have cumulative voting is to
put it in you certificate of incorporation (DE 214; OK
1059)
o A shareholder can cast a total number of votes equal
to the number of shares multiplied by the number of
positions to be filled, and these votes can be spread
among as many candidates as there are seats to be
filled or concentrated in as few as one candidate
o A shareholder must have MORE than (S x X) / (D+1)
to get a director elected
S = number of shares owned
D = number of directors to be elected
Straight Voting
o More of a norm
 o Tends to held the majority shareholder
Dual Class Voting
o Happens when there are different classes of stock
o Each class has different rights from the other class
REMEMBER THAT YOU NEED ONE MORE VOTE THAN
THE FORMULA GIVES YOU TO WIN!
o Under Straight voting, the minority shareholder
NEVER gets a director elected
o Cumulative voting gives the minority shareholder
an opportunity to be present on the board
o (% of shares you own) (D+1) = x but you must
round down!
Classified Board
Staggered terms: effective anti-takeover defense in public
companied where the directors terms expire at staggered
times as opposed to all directors terms ending at the same
time (allowed by MBCA 8.06)
REMOVAL OF DIRECTORS
CL: Directors had a vested right to serve out their FULL
term, and shareholders could remove directors ONLY for
GOOD CAUSE
Substantive Requirement: What is cause?
o Cause calculated plan of harassment to hurt the
cooperation was sufficient to show good cause for
removal
Procedural Requirement
o Proxy is sent out to remove directors
o You have to give the directors notice and the
opportunity for them to be heard
Campbell Shareholders need to know BOTH
sides of the story to vote
Removal at ANY time by MAJORITY VOTE: DE 141 (k)
o Any director may be removed WITH OR WITHOUT
cause
o EXCEPT If the board is CLASSIFIED then you
CANNOT (staggered voting)
If you have a classified board you can ONLY
remove a director for CAUSE
o EXCEPTION If there is Cumulative voting may
NOT remove a director without cause UNLESS the
votes cast against removal would have been enough
to elect the director
MBCA 7.01-7.07; 7.21
 o Shareholders can have directors replaced for bad
behavior
o Three ways you can take action:
Annual meeting and election of directors
Special Shareholders meeting
Action by written consent
NOTE: Record date (determining shareholder
entitled to vote)
Shareholders are entitled to participate
in voting at a meeting are the ones who
own shareholder on the record date
specified by the directors
Adlerstein v. Wertheimer
o In order for removal to take place that director has to
receive NOTICE so that the director has the
opportunity to speak (guarantees fairness)
Shareholders authority to change bylaws
Change to bylaws means nothing if certificate says
otherwise
Airgas v. Air Products
o You CANNOT move up annual meeting dates in order
to get rid of directors for NO cause
CA v. AFSCME
o NO reimbursement of expenses by shareholders
BUSINESS JUDGEMENT RULE
When directors make decisions we are going
to assume it is appropriate and since the court
is not there they are NOT going to interfere
because they presume the board knows what
they are doing
DE Legislature you CAN have
reimbursement provisions
Sutter v. Sutter
o A supermajority provision CANNOT prevent a minority
shareholder from seeking judicial dissolution only
applies in farming and ranching corporations (other
corporations have to have two 50/50 shareholders
and you need a reason)
Securities Laws focuses on what you have to do when a corporation is selling stock
SEC requirements
o Require that investors receive financial and other significant information
concerning securities being offered for public sale
 o Prohibit deceit, misrepresentation, and other fraud in the sale of securities
o Registration process
A description of the companys properties and business
A description of the security to be offered for sale
Information about the management of the company
Financial statements certified by independent accountants
SEC v. Edwards investment contract set a fixed rate of return federal
securities laws applies because the court must protect investors who may see
this investment as solid
Exemption to the 1933 Act Registration
o Two main ones:
4(a)(2) exempt from securities laws if the transaction is one NOT
involving a public offering
3(a)(11) intrastate exemption
SEC v. Ralston Purina (interprets 4(a)(2))
o To qualify for the exemption under 4(a)(2)
Investors have knowledge and experience and they are able to
evaluate the risks and merits of the investment
They have to have access to information that would have received
if the stock had been registered
You have to prove that these people bare the risks of the
investment
We dont want people investing in stock if they have no
business investing in stock because you lose money when
you invest in stock sometimes
You cant use any form of solicitation to sell the stock
Regulation D
Came out of need for guidance for what qualifies as a 4(a)(2) exemption
Rules are safe harbors
o 504 you may not solicit sell and it cant be more than $1 million (this
rule is rarely used because $1 million is small in corporation world)
o 506 (most important rule) no $ limit but a limit to the # of investors
accredited investors
You may raise an UNLIMITED amount of money
BUT there is a limit on the number of investors
You can sell up to 35 people who are NON-ACCREDITED
investors
Accredited investors: if you are rich, you are sophisticated (net
worth of $1 million or the have made $200K in last two years (or
$300K with spouse) and you expect to make that much next year
IF you sell to a NON-ACCREDITED investor you are required to
give them a pile of information
 If you sell to accredited investors you do NOT need to give
them ANY information (BUT you still cannot commit fraud or
misrepresentation)
If there is ONE non-accredited investor you must give ALL
investors ALL the information
To find out if creditor is accredited, you make them fill out a
questionnaire AND under a 506 offering, you must take reasonable
steps to make sure of their worth
EXCEPTION: You CAN solicit if you take reasonable
diligence to look at accredited investors worth

Fiduciary Duty, Shareholder Litigation, and the Business Judgment Rule

2 ways to enforce fiduciary duties 1) an action brought by the corporation
at the behest and under the direction of its directors 2) a derivative action
brought on behalf of the corporation by one or more of its shareholders
Discretion to determine general business policies
o BUSINESS JUDGMENT RULE
Judicial presumption that directors have acted in
accordance with their duties
A shareholder has the BURDEN to rebut this
presumption
EXCEPTIONS: if the directors do something so bad that
they breach their fiduciary duties
Bad decisions are NOT enough
3 Fiduciary Duties:
Duty of Care
Duty of Good Faith
Duty of Loyalty
o Shlensky v. Wrigley IL derivative suit negligence is not
enough to overcome the business judgment rule there has to be
actual damage
Shareholders were requires to show some type of conflicting
interests among the directors in order to overcome the
presumption created by the BJR
a. Discretion to consider interests of non-shareholder constituencies
i. Directors may consider the interests of other constituencies if
there is some rationally related benefit accruing to the
stockholders or if doing so bears some reasonable relation to
general shareholder interest
ii. Dodge v. Ford Motor Cant use your majority vote to
suppress the minority shareholder by not paying dividends
b. Benefit Corporations (NOT in OK) designed to combat the cultural,
ideological, and investor pressures to use shareholder value
 maximization as the only legitimate metric for making or evaluating
business decisions
3. 362 what you HAVE to have in your certificate
4. 365 can directors be sued for pursuing these non-profits
a. Board is obligated to balance the charitable and profit

The Fiduciary Duty of Loyalty

Two settings
o 1) circumstances in which a director personally takes an opportunity that
the corporation later asserts rightfully belonged to it
o 2) transactions between the corporation and the director, commonly called
conflicting interest transactions
Business judgment rule applies
Broz v. CIS Test
o May not take a business opportunity
The corporation is financially able to exploit the opportunity
The opportunity is within the corporations line of business
The corporation has an interest or expectancy in the
opportunity
By taking the opportunity for his own, the corporate fiduciary
will thereby be placed in a position inimical to his duties to the
corporation
o You may take the opportunity
The opportunity is presented to the director or officer in his
individual and not his corporate capacity
The opportunity is not essential to the corporation
The corporation holds no interest or expectancy in the
opportunity
The director or officer has not wrongfully employed the
resources of the corporation in pursuing or exploiting the
opportunity
o One is not conclusive you have to look at all of them
o Line of business if it is not then the director shouldnt have to
offer it to the directors
o Interest or expectancy is this something we think the business
might get into

Conflicting Interest Transactions

Question of loyalty
Globe v. Utica Gas test there must be candor and equity in the transaction,
and some reasonable portion between benefits and burdens
o Self-dealing transaction test
Contract between a corporation and a controlling person
the person can be an entity
 The fact that a contract itself is a self-dealing contract does
not mean its not fair and it doesnt necessarily mean that
its void under the current law
If you have a self-dealing contract the business judgment
presumption rule does not protect directors
Intrinsic Fairness Test the directors must prove that the
contract was fair
Much harder for the directors to win
Sinclair Oil v. Levien (self-dealing case)
o Intrinsic fairness test: you have to prove the transaction had a fair
price and that there was fair dealing
Fair price they look at the financial part of the contract
Fair dealing what was the process of the
contract/resolution, did the person try to influence the
directors, did the board have enough time
DE 144 the transaction is not voidable if
o The majority of disinterested directors have to vote good faith they
know about the relationship and interest of the directors
o Same thing but you just go to the shareholders approval
o Doesnt matter if the directors are not disinterested and the shareholders
didnt approve it
Shapiro v. Greenfield
o When the director has NO direct interested in the conflicting transaction,
neither model creates a per se rule based on a familial or business
relationship because a relationship between the parties does not
necessarily destroy an individuals independent judgment. The pivotal
provision is the 2nd prong of the analysis, whether the relationship would
reasonably be expected to exert an influence on the directors judgment
o TEST: Can the director exercise independent judgment and the
expected relationship between the others (look at influence how
close the relationship is, how much time is spent together, evidence
of past transactions and whether the parties always agreed or not)
Interested Director Transaction TEST focus on a directors ability
to exercise independent judgment and the expected influence of a
particular relationship on the director
Intrinsic Fairness Test: you have to prove the transaction had two things
(1) fair price AND (2) that there was fair dealing
o Fair price is way more important than dealing
If it is a fair price then no one is hurt so you will probably meet the
test
o Fair Price
Look at the financial part of the contract
o Fair dealing
What was the process of the contract/resolution
 Did the person try to influence the directors
Did the board have enough time
Director Compensation
o DE does NOT go through the 144 analysis here, they instead use a
prong test
Benefits Prong
Have to prove an identifiable benefit to granting the stock
options to its own directors and officers
o i.e. you would attract better directors by offering
compensation
Value Prong
Has to be some relationship to the value of the company
Directors just have to prove there was not actual fraud (BJR)
(DE 157(b) and OK 1038(b))
o Burden is on the directors

The Fiduciary Duty of Care

Requires a director to carry out her duties with the care an ordinarily prudent
person in a like position would exercise under similar circumstances
Joy v. North business judgment rule applies
o 1) shareholders are voluntarily assuming the risk
o 2) missing all of the details from the decisions and it is too easy to send
guess them
o 3) if directors are fearful of making decisions then they wont make
decisions
Duty of Care in the Decisional Setting
o Smith v. Van Gorkom Directors failed to inform themselves and they
didnt inform the shareholders of all the information
o 251 (mergers must be approved by shareholders), 271, 141
(shareholders can rely on opinions), 102(b)(7) (limits the personal
liability of directors for money damages for breach of fiduciary duty)
o THE BJR IS UNAVAILABLE IF THE BOARD FAILED TO
INFORM THEMSELVES OF ALL THE MATERIAL INFORMATION
BEFORE MAKING A DECISION!
If directors make a UNinformed decision they are NOT
protected by the BJR
o Directors who make UNINFORMED decisions
therefore can be held PERSONALLY liable
o 5 processes to prevent failures for approving the merger
(KNOW these!!!!)
The consultation you have to get all of your internal
people on board 1st and you need a consensus and to
keep them well informed
 How the price is set need an evaluation study or call
by the directors to do this
Negotiations (are they diligent?)
Timing if you are going to make a quick decision you
better make sure that the directors are aware of all of
the facts and time to read the information
Information the board has to avail itself to all material
information
Statutory Exculpation Provisions
o After Van G, 102(b)(7) was adopted to avoid another Van G decision
DE 102(b)(7) (sometimes called a raincoat provision) allows
them to adopt a provision to preclude money damages for
breach of fiduciary duties (exceptions) but it doesnt cover
breach of the duty of loyalty, illegal dividends, acts not in good faith,
improper personal benefit
Only covers money damages
Not in good faith the cases today what is good faith?
Remember that 102(a) tells us what need to be in the
certificate of incorp.
o (b) tells you what MAY be in the certificate
NOTE: if this provision was adopted prior to Van G it
would have protected the directors
o Malpiede v. Townson 102(b)(7) all directors have to do is raise and
prove that there is a 102(b)(7) a board is not required to disprove the
duty of loyalty to get protection they just have to show that it applies to the
duty of care
o REMEMBER, 102(b)(7) only protects directors, it does NOT protect
officers

The Intersection of the Fiduciary Duties of Care and Loyalty

o Caremark International Caremark duties- test to show breach of
duty of care
In order to show directors breached their duty of care by
failing to adequately control their employees, plaintiffs would
have to show EITHER:
(1) that the directors knew OR
(2) should have known that violations of law were
occurring AND, in either event, that
(3) that the directors took no steps in a good faith effort
to prevent or remedy that situation, AND
(4) that such failure proximately resulted in the losses
complained of
 o Director oversight liability Stone v. Ritter
The directors utterly failed to implement any reporting or
information system or controls; OR
Having implemented such a system or controls, consciously
failed to monitor or oversee its operations thus disabling
themselves from being informed of risks of problems requiring
their attention
o Brehm v. Eisner the waste test require a transaction so one-sided
that it would be irrational to conclude that the corporation received
adequate compensation you have to point to specific facts in order to
claim breach of the duty of care, breach of the duty of loyalty, and waste
o In re Walt Disney created a middle ground called duty of good faith
three categories of fiduciary behavior that demonstrate bad faith
Fiduciary conduct motivated by an actual intent to do harm
Lack of due care
Conduct motivated by subjective bad intent and conduct
resulting from gross negligence
Hoye v. Meek duty of care is different from duty of good faith
Business judgement rule decisions made in good faith,
based on sound business judgement, would not alone subject
appellant to liability
To come within the business judgement rule, a director
MUST be diligent and careful in performing the duties he has
undertaken
Duty of oversight + duty of care

Miller v. U.S. Foodservice Caremark applies to officers oversight

liability applies to officers
NOTE: the duty of care and duty of loyalty are extended to officers

DERIVATIVE AND DIRECT LITIGATION

Derivative Litigation and the Demand Requirement
o Derivative suit the board is left with the decision on whether or not to sue
itself
When should we allow shareholders to supplant the directors
normal control to bring the lawsuit of behalf of the
corporation?
2 prong 1) suit by the shareholders to compel the corporation 2)
it is a suit by the corporation, asserted by the shareholders on its
behalf, against those liable to it
o Shareholders have 2 options:
 Make demand board can either accept or refuse (tested under
business judgment rule)
No demand have to prove that there is no reason to make
demand or the demand is futile then you have a better chance of
winning

Cause of Action
Make Demand No Demand

Accept demand Demand Refused Demand Excused/Futile

& file suit Business Judgement Rule *23.1 Directors will try to have case dismissed
This never happens FOCUS: on the decision, to
file the lawsuit
P do NOT want the focus here, Action No Action
they want to focus on the poor Aronson Rales
decision that led to the need for
litigation

**Motion to dismiss by the directors are going to say that the P should have made
demand and P will say, No the demand is futile

Rales- test is prong one of the Aronson side no decision was made so we just need to
look at prong 1

Aronson test- used when the shareholders are challenging a decision made by the
board
(1) directors were interested or not independent
(2) prove transaction was not the valid exercise under the business judgement
rule

NOTE: once you take one path, you cannot go back and take the other you either
made demand or do not make the demand, you cannot go back and change

o Aronson v. Lewis
2 prong test
Prong I particularized facts alleged has to create a
reasonable doubt that the disinterested and
independent
 o Directors are on both sides of the transaction or
the directors expect to get some personal benefit
o Independence beholding prove demand is
futile because they were beholden to the
controlling person
Prong II particularized facts alleged has to create
reasonable doubt that the challenged transaction was
otherwise the product of a valid exercise of business
judgment
o 2 subparts
Procedural due care ex: didnt make an
informed decision
Substantive due care the corporation
made a wasteful decision
Rales test just use Prong I at the motion to dismiss stage
o DE requires that you meet 23.1(a) you have to be very particular and
specific facts (particularized facts) why the demand is futile if you dont
provide the facts the case will be dismissed
o In re the Limited to meet the Aronson Prong I the plaintiff must prove
that at least half or more of the directors are interested or not independent
this only means that the plaintiff has alleged enough facts to defeat the
motion to dismiss and make it to trial
o Ryan v. Gifford altering the actual dates of the issuing of stock clearly
contravenes the whole stock option
o Stone v. Ritter directors are only going to have a risk of liability if it is a
breach of the duty of good faith failure of oversight can get the plaintiff
past 23.1
Dismissal of Derivative Litigation at the Request of an Independent
Litigation Committee of the board
o Different views
NY the board has the authority to have a special litigation
committee and that committee would be entitled to a business
judgment rule
Iowa this committee is somewhat meaningless and it served o
purpose
DE whether the committee is disinterested and then the court
would exercise its own business judgment to determine whether to
dismiss
o Zapata Corp. v. Maldonado test court should apply a two-step
test to prove the Committees decision is valid
(1) The court should inquire into the independence and good
faith of the committee and the bases supporting its conclusion
 If, however, the court is satisfied under rule 56 standards
that the committee was independent and showed reasonable
bases for good faith findings and recommendations, the
Court may proceed, in its discretion, to the next step
(2) The court should determine, applying its own independent
business judgment, whether the motion should be granted
The court of chancery of course must carefully consider and
weigh how compelling the corporate interest in dismissal is
when faced with a non-frivolous lawsuit
The court of Chancery should, when appropriate, give
special considerations to matters of law and public policy in
addition to the corporations best interest
Factors What the court will look at to determine if lawsuit
should be dismissed (#2):
o The courts should look at the merits of the claim itself
o Did the corporation suffer any injuries?
Damages/costs
o Effect on the operation of the corporation
o Likelihood of success
o Directors motivations or knowledges
NOTE: the court is NOT determining if the decision
INDEMNIFICATION AND INSURANCE
Indemnification contractual remedy shift financial burden from the director
to the company itself
Insurance shifts the risk by contract to a completely independent 3rd party an
insurance company
DE 145
o (a) & (b) permissive (Corporation MAY do itshould be put in the
bylaw or certificate) indemnification provision
Corporation has the power to indemnify directors against
expenses, judgements, fines, and amounts paid in settlement in
connection with action and lawsuits brought against them
IF the director acted in good faith and in a manner that is
good for the company
o (c) & (d) required indemnification provision
o (a) doesnt apply to derivate suits
Protected against: expenses and judgments
If the person acted in good-faith and in a manner that is reasonably
not opposed to the best interest of the corporation
o (b) permissible, applies to derivative suits
For expenses only
You are not going to be indemnified against the judgment
Some court discretion
 o (c) MANDATORY
Must be indemnified against your expenses IF you win
If you are a director and you are successful on the merits in
a suit covered by (a) or (b), you WILL be indemnified for
expenses incurred
o (d) talks about who can make that authorization of indemnification
(under (a) or (b) because under (c) it is mandatory)
Disinterested directors can make that decision
Lawyer or law firm can make that determination
Stock holders can make that decision
o (e) can pay expenses during the proceeding (in advance)
Allows the directors to be indemnified as the case is proceeding
It is discretionary board still has to make the decision
Requirements corporation has to secure some type of
commitment to repay that amount if the person loses the case (has
to have a promise to repay it doesnt require collateral)
The court said the corporation should look at two things:
Is this director going to be able to repay the money
The advancement of the expenses would promote the
corporations interest business judgment rule test
o (f) these sections are NOT the only way you can indemnify/advance
expenses
You could have a contractual agreement
You could hold a vote
o (g) you may also go out and buy insurance
Insurance AND indemnification can BOTH be used to protect
directors
If you are asked to be a director you should always ask:
o Is there a 102(b)(7) provision?
o What are the indemnification procedures?
o Is there an insurance policy?
Owens Corning v. National Union Fire Insurance you cannot avoid a good
faith requirement when the corporation makes payments to directors the court
is going to assume they acted in good faith therefore insurance would have to
pay but this is a rebuttable presumption

PROTECTING, PARTICIPANTS EXPECTATIONS IN CLOSELY HELD

CORPORATIONS
DE 141
o Closely held corporations 342(a)(1) corporation does not exceed 30
shareholders (definition of small corporation)
Illiquidity of investment if you dont like the way things are being
run with no control you cant walk with your feet because there is no
 market you would have to go out and find someone to take your
place which would be hard to do because you have no power
Contracting as a Device to Limit the Majoritys Discretion (typically called
shareholders agreements)
o DE 141(A) the business and affairs shall be managed by the directors
except as may otherwise be provided in this chapter (see DE closely held
corporations statutes) OR in the certificate of incorporation
o Contractual arrangements between the shareholders that dictate how
things are going to happen
o McQuade v. Stoneham didnt recognize these agreements
o Zion v. Kurtz Clear from those provisions is the fact that the public
policy of DE does not proscribe a provision such as that contained in the
shareholders agreement here in issue even though it takes all
management functions away from the directors
Court found that the agreement was valid even though neither one
of the exceptions in 141(a) applied (not a closely held corporation
nor was there an agreement in the certificate)
Voting Agreements as to Shareholder Decisions
o Tells shareholders what they can and cannot do
o Ramos v. Estrada DE 212(c) the Estradas breached the agreement
by their written repudiation of it. Their breach constituted an election to sell
their TV Inc. shares in accordance with the terms of the buy/sell provisions
in the agreement. This election does not constitute a forfeiture-they
violated the agreement voluntarily, aware of the consequences of their
acts and they are provided full compensation, per their agreement
Court held that an agreement that forced someone to vote a certain
way was ALLOWED

THE CORPORATION AS A DEVICE TO ALLOCATE RISK

Creditors lenders and human capital to the corporation
o Reasons for not being paid
May not be repaid because the companies funds may be liquid or
tied up in property
There could be a downturn in the economy
The officers and directors may have mismanaged the funds so the
creditors may not be repaid
Capital and Surplus analysis
o Did the person who bought the stock pay with permissible consideration
DE 152
You might contribute money or property
Typically it is cash under 152
o How much must the corporation share its stock for DE 153(a)
 Par value cant sell stock less than this 102(a)(4) the par
value of the stock must be stated in the certificate this is an
arbitrary number and zero to do with the actual value of the stock
Artificial number has NOTHING to do with the actual value
of the stock
You pick the par value for your stock at the time of
incorporation
o How does the corporation treat the amount received once the stock is
issued? (capital and surplus)
When the dollars come in the corporation has to divide that money
into two categories capital and surplus
The minimum amount of money that goes into capital is the number
of stock that was purchased x the par value
The corporation may put more in the capital but they only have to
put the minimum
Surplus DE 154 surplus is the excess of the net assets of
the company over the amount of capital (net assets the amount
by which total assets exceed total liabilities)
Excess over capital = surplus
154 permits a corporations directors to specify by resolution what
amount of the consideration paid for shares shall constitute capital.
The only limit on such authority is that capital cannot be less than
an amount equal to the aggregate par value of issued shares
having a par value.
If a corporation issues 100,000 shares having a par value of
$0.01 per share, the directors may elect to treat as little as
$1,000 as capital, even if the corporation actually receives
total consideration in the amount of $10M.
Boards are allowed under 154 to revalue their assets and their
liabilities for purposes of determining surplus
o 170 two limitations on pulling money out
Corporation can only payout surplus or net profits (Nimble dividend
provision)
o What if the dividend is declared but cant pay them
170(a)
178 you can only declare dividends out of surplus or profits
174(a) The directors under whose administration are jointly and
severally liable for the unlawful dividend they are liable for up to
6 years after the dividend is declared they are liable to the
shareholders and the creditors
Has to be a willful or negligent violation of 173
Any director who was absent when the action was done or
who dissented from the action may be exonerated from the
decision and therefore not liable
 102(b)(7) you cant be exculpated from liability from 174
Klang v. Smiths Food & Drug Centers self-tender will comply with 160 if the
board revalued the corporate assets under appropriate methods
Assets = liabilities + equity
Equity = assets liabilities
DE relax the distribution restrictions by allowing distributions not only out of
surplus, but also out of corporations profits for the year of distributions and/or the
preceding fiscal year

PIERCING THE (CORPORATE) VEIL

Equitable remedy to is used to protect creditors to help them receive their money
Applies to all entities that offers protections to the shareholders
Judicially created exception to shareholders not being liable for creditor debts
o There are no guarantees
o There is an understanding that his exception varies from state to state
o No real set of factors determine if this exception applies
Elements
o Whether the underlying claim is in a contract or tort debt?
Court should be more reluctant to pierce the veil in a contract
case than a tort case (in a K you have voluntarily entered into the
K, where in tort you had no choice)
o When we pierce the veil, are we subject personal or an entity to
liability?
o Single or multiple owner?
o Usually you also see that the shareholders have done something wrong
Contract cases
o Fletcher 3 factors (dont get caught up in these factors, they are not
exclusive)
The shareholder completely controls the company failure to
follow corporate formalities
Persons control was unjust, fraud, or wrongful under
capitalization or thin capitalization
Control and breach of duty must proximately cause the injury or
unjust loss complained of
o Consumers Co-op v. Olsen
Instrumentality or alter-ego test
Control complete domination
Such control must have been used by the defendant to
commit fraud or wrong
 The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of
Both inadequate capitalization and disregard of corporate
formalities are significant to a determination of whether the
corporation has a separate existence such that shareholders can
claim the account of incorporation: non-liability for corporate debts
o K.C. Roofing Center v. On Top Roofing Use Fletcher test if the
evidence demonstrates a pattern of activity or scheme or plan which is
corroborative of the plaintiffs position and it is admissible even though
subsequent to plaintiffs dealing with defendant evidence is relevant if it
tends to prove or disapprove a fact in issue, or to corroborate evidence
which is relevant and which bears on the principal issues
o A note on signing documents
So, you form a corporation and the corporation is going to sign a
lease how does a corporation sign the lease
How it would look to sign on behalf of an entity
Realty Co.
By ______________________
o Abe Lincoln, President
Could you sue Abe Lincoln personally?
No because it is very clear he is signing on behalf of his
company in his official duties
If they president part was taken out may be able to sue
him personally
If by president and by were taken out may be able to sue
him because there is nothing to show his capacity
Guaranteeing the contract
Realty Co.
By________________________
o Abe Lincoln, President
___________________________
o Abe Lincoln
Tort Cases
o Western Rock v. Davis proximate cause of damage + no capital to get
to = liable
o Baatz v. Arrow Bar alter-ego applies to tort cases
Factors
Fraudulent representation by the corporations
directors, officers, or shareholders
Undercapitalization
Failure to observe corporate formalities
Absence of corporate records
Payment by the corporation of individual obligations
 Use of the corporation to promote fraud, injustice, or
illegalities
o If the corporation contradicts what the legislature has established, then
they will lose their case Walkovszky v. Carlton
o Pate v. Alian the corporate shield may be disregarded where it is used
to justify wrong, defend crime or defeat an overriding public policy
looking for: using the corporation to justify a wrong or defeat the overriding
policy
o Thomas v. Vertigo overriding public police you cant have a
corporation not get workers compensation insurance and then prevent the
person from suing the shareholders this is not equitable for the
company to not get the insurance and hide behind corporate veil
o Kenkel v. Parker larger number of shareholders decreases the
likelihood of piercing the corporate veil
OK ways shareholders can be liable (according to Paliotta)
o (1) Veil piercing
o (2) Augusta Case issued unauthorized stock that exceeds the number
of authorized shares
o (3) 102(b)(6)? Provide in the certificate that the shareholders are liable
o (4) Suspension of corporation charter
o (5) Dissolution of the corporation if you distribute assets and you have
creditors those assets could be put back into the corporation prevents
corporations from jumping the gun
o (6) Trust fund taxes employment and sales tax the company holds
the sales tax in trust for the OK tax commission (then they pay it to them)
pay it over regularly
o (7) Failure to pay franchise taxes
o (8) If you violate the securities laws
o (9) Liable for your own torts
Franchise Tax
o Not a significant tax based on capital used or employed for business in
OK
o You can be reinstated if you pay all the taxes and then your certificate can
be reinstated
o 18 OS 1120(e) brings the corporation back to life like and brings all
the contracts back total cure once you come back into existence
then its like it never happened
You cannot defend a lawsuit if your charter has been suspended
Statute in the tax code title 681212(c) every officer whose rights
have been forfeited and any debts accrued during this time knowing
they have forfeited charter they are treated as partners making
them jointly and severely liable
18 OS 1002(b) if there is a conflict between the corporation act
and the tax law that conflict is regulated by the tax law (State
 insurance fund v. AAA engineering) meaning those officers are
personally liable if they had knowledge of the loan

PIERCING THE VEIL IN LLCS

Changing the entity does NOT change the need to look for liability
LLCs are a bit more specific
o OK 2022 NOT liable
o OK 2021 factors that you have to have (failure to follow corporate
formalities is NOT a factor
Kaycee Land and Livestock v. Flahive equitable factors capitalization,
fraud, corporate formalities UNLESS there is a state statute that prevents this
Asset Collection
o Once you are a creditor you can go and collect assets from A and A has to
tell you where those assets are at
o You can go and collect that money
o Corporation does not have outside in protection
A creditor of a shareholder has the right to come in and take that
stock (complete control)
o LLC
The answer is different
18 OS 2034 if you are a creditor of a member you can go to
court and you can get a charging order the charging order is the
sole and exclusive remedy to the creditor to the respect of As
interest all you get is the right to distributions (like a dividends)
They have no right to vote that interest no control of the
entity and cant sell the assets
These owners are protected when they own ownership in a
LLC
This statute really protects the other shareholders in the LLC
People who have a judgment against an individual or entity and
they are trying to collect on it
How you can protect that persons assets from the rightful claims of
creditors
Not hiding them but assembling those assets to make them
unreachable by creditors
o In re Albright a single shareholder LLC cannot file a charging order
because no one else is affected If you are in a one person LLC, then
you cannot be protected by the LLC (if there is some diversity of
ownership, this may not be the case)
o Arrington v. Kruger overrules Albright a charging order can be done
for an LLC with one or multiple shareholders
MERGERS AND OTHER FRIENDLY CONTROL TRANSACTIONS
Steps DE 251
o There has to be a plan of merger written document
o Boards of the corporations have to approve the plan
o Shareholders vote on the plan of mergers
o Assuming the shareholders approve it you file the plan of merger with the
State
o Sometimes the shareholders have the right to dissent
Mergers
o DS
Two types of disappearing stock cash or assets
o 4 questions
Do the shareholders get to vote? (both sides)
Which shareholders get to dissent? (both sides)
o Steps
Managers of the company negotiate the merger plan
Once the plan is done then the directors get to vote
Each company calls a special meeting for the shareholders to
vote on the merger
The shareholders actually vote
The companies have to assimilate with each other and be
integrated
Mergers
o Hewlett v. HP in order to satisfy the burden of proof knowingly
misrepresented the material facts and coercion
Dissenters Rights
o DE 251
DE 251 1st question RIGHT TO VOTE
(c) general rule each get to vote on the general
merger
Exceptions
o (g) when you have a holding company
o (f)
Only applies to the shareholders of the
SURVIVING corporation
No vote of the surviving corporation is
necessary IF: (need ALL 3)
(1) Certificate doesnt change
(2) Each share of stock of the
survivor will be outstanding after the
merger
 (3) No shares of stock of the survivor
are issued or the shares of stock of
the survivor doesnt go over 20%
you get to vote because you suffered
substantial delusion
Majority vote required to approve the merger
DE 262 2nd question RIGHT TO DISSENT
The court will determine if the value you got was
reasonable
Court determines whether you received a fair value
There is a possibility that the court determines you have
received too much and then you lose that amount
(b) appraisal rights are available to the shareholders
to the constituent corporation in a merger
o GR: appraisal rights are available
But not if
242 amendment to the certificate
of incorporation
271 shareholders vote to the sale
of assets
o Exceptions (two ways to lose dissenters rights in
(b)(1) and one way to gain them back in (b)(2))
(b)(1)
you DONT GET appraisal rights if
your shares are on a national
securities exchange
YOU DO NOT GET appraisal rights
are available if you dont have the
right to vote for the merger (if you
didnt get the chance to vote, you get
the opportunity to dissent)
(b)(2) you GET appraisal rights if what
you are being required to accept for your
shares in the merger:
Cash
(d) procedure you go to in order for dissent to apply
voting against the merger is not sufficient
(e) this is not going to be short or easy it is a long
process
(h) & (j) what it is that you get determination of the
fair value of your shares
Alternative Transactional Forms
o Asset sales
The corporation selling assets does not automatically go out of
existence upon consummation of the sale
The selling corporation need not transfer all of its assets
The liabilities of the selling corporation will not necessarily pass to
the purchasing corporation by operation of law
DE shareholders would get to vote but would be denied appraisal
rights
Katz v. Bregman the assets sold constituted the corporations
longtime principal business, and that the corporation planned to
undertake a radically different business post-sale
o Triangular mergers
2 basic forms
Forward triangular merger the acquired corporation
mergers into the acquiring subsidiary
Reverse triangular merger the acquiring subsidiary
merges into the acquired corporation is the surviving
corporation
o Compulsory Share Exchanges
Permits one corporation to acquire all the shares of another while
leaving the acquired corporation in existence
o De Facto Mergers
If the sale is actually a merger, the court will treat it as a merger
and give the shareholders dissenters rights
Farris v. Glen when a corporation combines with another so as
to lose its essential nature and alter the original fundamental
relationships of the shareholders among themselves and to the
corporation, a shareholder who does not wish to continue his
membership therein may treat his membership in the original
corporation as terminated and have the value of his shares paid to
him
Girl Scouts-Western OK v. Barringer-Thomson To allow an
attorney to assert attorney client post-merger would be in
derogation of the merger agreement transferring ownership to
Western whatever privilege there was is now owned by Western
Applestein v. United Board & Carton Corp shareholders are
entitled to be notified and advised of their statutory rights of dissent
and appraisal during a de facto merger
Hartiton v. Arco Electronics the reorganization here
accomplished through 271 and a mandatory plan of dissolution
and distribution is legal. This is so because the sale-of assets
statute and the merger statute are independent of each other. They
are, so to speak, of equal dignity and the framers of a
 reorganization plan may resort to either type of corporate
mechanics to achieve the desired end
Woolf v. Universal Fidelity Life Ins. you do not get a right to put a
discount on the shares fair value is different from the market
value
The statute says you get the fair value and there is no
discount applied
Every shareholder gets the same amount no matter if you
are a majority shareholder or a minority shareholder
o Cash-out Mergers
Opportunity for a majority shareholder that would treat a minority
shareholder unfairly
Use their power to gain a benefit for themselves
Give the minority shareholders dollars and you are going to give
yourself stock in this new company that you have created has all
of the same assets and does the same business
Statute allows this
You have taken away the stockholders of the minority
shareholders
Can you do this?
o If you just read the statute you can do that
Is this fair?
o All they have now are dissenters rights and appraisal
o Minority there should be a remedy other than
dissenters right
If it was just to get rid of us and no other
reason at all then another remedy should exist
Singer v. Magnavox minority shareholders were alleging that the
merger that had no valid purpose DE court there is a right
beyond the right of seeking fair value the board is required to
prove the business purpose test
Test: prove valid business purpose shareholders have a
right to have the corporation prove the fair dealing
Tanzer v. International General there was a valid business
purpose
Coggins v. New England Patriots Football Club no valid business
purpose loan was personal
Weinberger v. UOP DE DE eliminated the business purpose
you have to prove entire fairness, fair dealing, and fair price
if you have to prove this and the shareholders get the
dissenters rights remedy then that should be enough
 This merger would have worked would had been if they
appointed an independent committee of directors to
negotiate the merger
o This would have been enough to meet the entire
fairness test
Revlon v. MacAndrews added another circumstance
Revlon Duties
o Heightened duties of the board under DE law under
one particular circumstance sale or change of
control
o Duty the directors have an obligation to act, seek,
and receive the best value reasonably available to
them
KNOW:
When are Revlon duties triggered?
o If the corporation is going to sell its assets or
shift control
What are the Revlon duties?
o The boards fiduciary duties shifts from looking at
long-term benefit to corporation to maximizing
value to shareholders
o In doing this, the boards judgement is based on
enhanced scrutiny (NOT business judgement)
Directors do NOT get the business
judgement rule presumption, they must
defend their decisions