Business Associations II Outline

· SH’s fiduciary duty
o Under certain circumstances the corporation’s AoI can state that SHs have certain powers that normally belong to the BoD
o When SH control the company, SH owe fiduciary duty to the company
§ Sinclair Oil Corp. v. Levien [Del. 1971] § Breach of k, Sinclair did not comply with the minimum purchase to SinVen.
§ SH cannot be self-interested. SH has to put the company’s better off in the first place.
· Abusing control
o One way to profit from abusing control without being directly responsible: Let someone else do the dirty work.
§ Transfer of control
· Zetlin v. Hanson Holdings [NY 1979] o control premia, not breach of FD
· Perlman v. Feldman [CA2, 1955] o After Feldman sold the company, the minority can no longer enjoy the “Feldman plan”, while majority had enjoyed b/c of the premia.
o Value of control was inflated by unusual conditions that transferred value away from the company and into the hands of the controlling group
o sale of control transfer an asset that belonged to the company into the hands of the buyer è Breach of FD
§ Sale of corporate office
· Essex Universal Corp. v. Yates [CA2, 1962] · Control SH had each of his directors resign (one at a time) while the other board members replaced them with Essex’s (buyer) nominees
· Breach of FD b/c People exercising control over the corporation do so for the benefit of all SHs, and therefore cannot regard it as their own personal property which they may dispose of as they wish
· It is illegal to sell a corporate office or control by itself (i.e., not accompanied by the stock that would provide voting control)
o When sales of a corporate office is made in connection with the sale of shares, the judges differ:
§ Lumbard: Sale is acceptable if it is tied to selling a controlling interest in the corporation
§ Clark: No doctrinal guidance (decision should be tied to the facts)
§ Friendly: Directors always owe a fiduciary duty to all SH, so they can’t allow a use of their vote to sell an office

· Special rules under Del. Court of Chancery Rule 23.1:
o Plaintiff must have been a SH at the time of the alleged wrong, and maintained that status throughout the litigation (“contemporaneous holding rule”)also see Tooley v. DLJ (Del. 2004)

Reason: Preventing purchase of shares with litigious motives

SH needs to ask the corporation to sue before he can sue derivatively (“the demand requirement”)

Reason: Preventing unrepresentative plaintiffs

· Determine whether a suit is derivative or direct:
o Cause of action is the corporation’sè derivative
o Tooley v. DLJ (Del. 2004)
§ The tender offer was extended for 22 days, a former minority SH challenge this in court.
§ Since Tooley had already tended the shares, he was no longer a SH, thus no derivative suit.
o The correct test (derivative or direct)
§ Who suffered the alleged harm – the corporation or the suing shareh