INTRODUCTION
· The Agency Problem
o Efficient operation of the business v. Minimizing agency costs
o 3 Solutions to mitigate agency problems of insiders (directors/officers/controlling SHs):
§ 1) Litigatory – Fiduciary Duties
· Bright-line behavioral constraints
· Framework for Legal Analysis:
o Hypo: All 3 directors of Acme are alumni of U of Chi. They make the corporation donate 100K to UC.
§ Alice: SH of Acme and Yale alum, sues Acme in order to have ½ the donation go to Yale.
§ Bob: Another SH, sues Acme in order to enjoin the donation and make Acme distribute the 100K as dividends
§ Acme’s directors move for summary judgment, pointing to DGCL § 122(9), in combination with DGCL § 141(a)
· Acme has the power to give to charity DGCL § 122(9), and directors wield that power DGCL 141(a).
o 1. Authority
§ Who was the actor? (Officer, BoD committee, BoD, SHs)
§ What was the challenged action?
§ Substantive authority? Procedural authority?
· Ex. 141(a) + 122(13); proper procedure
§ If actor does not owe FDs, skip BJR & breach
o 2. BJR – Court defers to actor’s action unless:
§ Actor did not make a business judgment
· Was there a decision? (Van Gorkom)
· Necessary expertise and information – depends on:
o Nature of challenged action
o Importance of the challenged action to corporation/SHs
· Did the actor acquire necessary expertise and information?
o Reliance on actor’s own knowledge/expertise
o Reliance on advisors; DGCL § 141(2)
§ Expertise
§ Independence
§ No abdication of decision
§ Actor did not act in good faith pursuit of a legitimate corporate interests. (if not these 3, then good faith)
· Conflict of interest
o Cinerama v. Technicolor (Partially-conflicted BoD) –
Rule: When one or more directors, but less than a majority of those voting have a CoI, BJR rebutted only if plaintiff proved:
§ The interested director controls or dominates the board as a whole, OR
§ The interested director failed to disclose his interests in the transaction to the board + A reasonable director would have regarded the undisclosed interests as significant to the transaction
· Illegality – Violates applicable lafrw
· Waste – A decision so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration
o Note: VERY rare
§ Exception to BJR: from Blasius
· If the plaintiff proves that the BoD acted for the primary purpose of interfering with the free exercise of the SHs’ franchise, the BoD must demonstrate that there was a compelling justification for its actions.
o 3. Breach – Standard depends on allegation
§ (DoC) Negligence – Reasonableness standard
· Exculpation for DoC only: DGCL § 102(b)(7) Allows an AoI provision that eliminates or limits directors personal liability for breach of fiduciary duties, EXCEPT:
o Breach of Duty of Loyalty
§ Acts/Omissions not in good faith, involving intentional misconduct or knowing violation of the law
§ Where director derived improper personal benefit
o Unlawful dividend payment/stock repurchase
§ (DoL) Conscious disregard of duties
· Stone v. Ritter (Del. 2006) – Two alternative prongs for liability:
o Directors utterly failed to implement any reporting or information systems or controls, OR
o Having implemented such a system or controls, consciously failed to monitor or oversee its operations, thus disabling themselves from being informed of risks or problems requiring their attention
§ (DoL) CoI – Substantive review (fairness)
· A fair transaction will be upheld even though it was never disclosed by the interested party to the BoD, Directors, or SHs
· Fairness determined at the time of the transaction
§ (DoL) Illegality/Waste – Automatic breach
o 4. Ratification
§ Ratifiable?
· Void actions: Against public policy, illegal, waste, or beyond the authority of corporation under its AoI
o Void actions cannot be ratified
o Cannot cure:
§ Lack of corporation authority
§ Corporate waste
§ Illegality
§ Conscious disregard of duties (void as against public policy)
o UNANIMOUS SH ratification insulates BoD from future SH challenge, except actions void as against public policy
· Voidable actions: Actions that exceed actor’s authority or that breach actor’s duties to corporation, but do not exceed corporation’s authority + Are not illegal or against public policy
o Voidable actions can be ratified by an actor who can legally take the action, or by SHs
§ SH’s can ratify actions of BoD, BoD committees and officers
§ BoD can ratify actions of BoD committees and officers
§ Committee can ratify actions of officers and committees, as authorized by BoD
§ Officers can ratify actions of other officers who are their agents (agency law), or as authorized by BoD
o Ratification cures:
§ Lack of actor authority
§ Negligence
§ CoI (unless controlling SH has COI, in which case BoP shifts to plaintiff to prove unfairness)
§ Proper procedure (Delaware)
· Vote is designated as ratification
o SHs must be asked to approve the particular action
o SHs can only ratify actions that do not require SH approval in order to become legally effective
· Informed
o All material information disclosed
· Quorum; DGCL § 141(b), 144(b), 216(1)
o Default – Majority of directors (including interested)/ Majority of outstanding shares
· Required vote; DGCL § 144, Fliegler
o Default – Majority of disinterested directors/shares
· Example: Acme’s BoD consists of 5 directors: A, B, C, D, E. They vote to ratify a K between Acme & D’s wife.
o Only B, D, E show up: Do they have quorum? Look 141(b), 144(b)
o B, E vote in favor of K; D abstains: Was the contract ratified? Look 141(b), 144(a)(1)
· REVIEW – Simulation 1: The house of Bouygues (CoI)
o Facts – Board composition:
§ Francis – Company founder, CEO & BoD
ancis is controlling SH and has CoI
§ In which case BoP shifts to plaintiff to prove unfairness
SHAREHOLDER ACTIVISM
Basic Concepts in Corporate Finance
· Corporate Finance – Focus on acquiring and managing capital
o Capital – Non-human resources used in the firm’s operations
o Goal – Maximize firm’s value subject to firm’s financial risks
o Firm received money in return for debt or equity services
§ Debt – Predetermined stream of money, unrelated to firm’s performance
§ Equity – Claim to the remainder of the firm’s assets after paying all other obligations
· Capital Markets – Markets in which money is offered in return for securities
o Primary source of capital
o Types:
§ Primary market – Transactions in which issuing corporation is a party
· Purpose – Allow finds to raise capital for their operations
§ Secondary market – Transaction in which corporation is not a party (Ex. stock exchanges)
· Purpose:
o Public benefit
§ Assesses the value of the company
· However, assessment is only as good as the information it incorporates
o Private benefit
§ Benefit to persons who have money to invest
§ Benefit to SHs who want to sell their securities
§ Benefit to the company
· Investing in Capital Markets (Private benefit)
o Two types of securities analysis:
§ Fundamental analysis – Figuring out the “correct” value of a security by studying available information about the company and economic factors that affect a given company’s business
· Strategies for fundamental investing in stock:
o Value – Identify companies that are much cheaper than the correct value
§ Hunting for bargain prices
o Growth – Identify companies that are likely to have explosive growth in their business
§ Hunting for the next big thing
§ Technical analysis – Studying the past pricing pattern of a security to predict its future price
· All information is already factored into the price, but the actual information is hard to acquire
o Understanding risk
§ Outcome of most investments is uncertain
· Stock – Not clear how company will perform
· Bonds – Debtor might default
§ Evaluate investments by estimating the possibility of outcomes
· If estimate is correct, don’t have uncertainty; still have risk
§ Investments evaluated on two dimensions:
· Return – The average expected profit from the investment
