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Business Associations/Corporations
SUNY Buffalo Law School
Brown, Steven Todd

2-8 / 2-10
Corporation – a framework for bringing people together who want to join a business for profit
Meinhard v. Salmon 164 NE 545 (1928)
· Topic: Fiduciary Violations
· Facts: April 10 1902 Gerry leased to D premises known as Bristol hotel in NY. 20 year lease (may 1902 – April 1922). D while in the court of treaty with lessor as to the execution of the lease was in the course of treaty with P for necessary funds. P was to pay D for half of the money to reconstruct and D was to pay P 40 percent of the net profits of first five years of lease and 50 percent of profits for years thereafter. Each party was to bear losses equally.
· K terms: gave D the right to manage the building
· First few years of lease the building operated at a loss. Then the profits increased greatly.
· Court: Joint adventurers like co partners owe to one another while the enterprise continues the duty of the finest loyalty.
· What was bad about D’s conduct?
o Court: the trouble about his conduct is that he excluded his co adventurer from any chance to compete from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency.
· Hold: for P
· Dissent: Salmon fulfilled his duties under the lease
· Meaning of the case:
o What protections are capitalists entitled to when they delegate operational discretion to a manager
o Majority – that parties relationships exist beyond the morals of the marketplace and are compelled by the manager to make any related opportunities available to the capitalist
Terms to be aware of in relationships
· Rights/responsibilities
· Discretion/responsibility
· Supervision/control
· Amendments
· terminate
Risks in a business partnership
· Controllable risks – i.e. decisions on tenants – quality and safety of the building
· Non controllable risks – risks the parties in a business firm cannot control (i.e. the economy or stock market)
· Risk averse
· Risk seekers
· Risk neutrality
Ways to manage risk
· Insurance
· Diversification – can diversify risks by participating in numerous ventures
· Internal risk allocation
· Risk externalization – move the risk to people outside the firm
Fiduciary Duties – what are the implicit duties of firm participants to others?
· Theories of fiduciary duties
o One theory that duties exist only to the extent that they are specified
o Law often steps in and says that
§ Fiduciary must exercise care, diligence, honestly, and loyalty with respect to the firm and its participants (pg. 23)

Chapter 2 – Corporate Basics
· Corporation as a Private Constitution (with fundamental rights)
· Shareholders fundamental rights (pg. 26)
o To voice views on various issues, primarily by voting
o To litigate claims against the corporation and its directors, officers and controlling shareholders
o To exit the corporation by selling shares
Corporate Vocabulary
· The corporation
o A legal entity
o Can enter into k
o Commit torts
o Sue and be sued
o Creatures of state law which permits the formation of corporations as separate legal entities
· Types of corporations
o For profit
o Non profit
o Public
o Close
· Tax status
o C Corporations
o S corporations
To form a corporation
· Must file articles of incorporation with the relevant state officials and pay the required fee
· Articles of incorporation are like the constitution of the corporation
· Corporations founders will also draft and adopt bylaws – essentially the corporation’s constitution
o Set out the governing details of the corporation
§ Include items such as
· Powers of the directors and officers
· Procedures for elections
· Required notice periods for holding shareholder meetings
· Etc.
o These are organic documents
Corporate Actors
· Shareholders – sometimes called stockholders – often described as owners of the corporation
o Shareholders generally play a passive role in the corporation and their voting rights are limited
o Part of a business’s financing
o Voice is best expressed by exit
o Can sue a director when they violate duties
· Directors – individuals elected by the shareholders to be responsible for managing or supervising the corporations business; responsible for basic oversight
o Think of directors as elected officials
o Have some duties which serve as a check on their self interest; however we cannot allow a shareholder to sue whenever they disagree with a decision
o Business judgment rule: as long as you action as a board follow certain basic steps we will not let litigation get anywhere
§ Page 38 – Business Judgment Rule requires that the director decisions are:
· Informed
· Serve a rational purpose
· Are disinterested
· Are made independently
o Outside and inside directors
· Officers – corporate employees
o Some are appointed
o Have duty of loyalty
o Run things day to day
o They might be in best position to take advantage of their position
o They report to the directors
o i.e. – the CEO COO CFO
o di

production of a list of its stockholders to P or there confederates
o Court: the management “has attempted to utilize the corporate machinery and the Delaware law for the purpose of perpetuating itself in office and to that end for the purpose of obstructing the legitimate efforts of dissident stockholders (pg.47)
o Hold: for P
o Issue: is there a screw-up in the alignment – are the directors interest misaligned with that of the corporate interest now
o Reasoning: if you are screwing up a vote simply to stay in power than you are kind of screwing up that alignment
· Stahl v. Apple Bancorp Inc, 579 A2d 1115 (Del. Chi, 1990)
o Facts: P who holds 30% of common stock announced a public tender for all of the remaining shares of D. P was proposing a tender offer. P proposed to add shares so he could get more control. Similar to Roosevelt and switch in time. On March 19th the board set the record date as April 17th. Anyone who has a share that day can vote and there is a law there must be specified time frame between the record date and the voting date
§ DBCL – §213 – sets the window for when the annual meeting can occur
o Stahl then decides to sue.
o May 9th – sets out the proxy solicitation materials
o Issue: Whether the D’s have authorized corporate power inequitably
§ How do we know
· Whether they take action to impair to impede the operate of corporate machine
· And if the answer is yes is there a compelling justification to do so
o P argument: this is an impressible machination of the Delaware machinery
o Test: whether the directors purpose is inequitable
§ An equitable purpose in not necessarily synonymous with dishonest motive
o Hold: for D
o Court: board had legit reasons for doing what they did
o Reasoning: the board was not doing this for improper means, we were doing this because we did not think this was the best offer and we want to investigate
· How do we reconcile Schnell and Stahl
o Both hostile takeovers but Stahl was manipulating and went against bylaws