Select Page

Business Associations II
University of Kansas School of Law
Lovitch, Fred B.

Business Associations II
Table of Contents

I. COMPLETION OF BA I

CLOSE CORPORATIONS: AGREEMENTS RESTRICTING SHARHEOLDER ACTION———————————- 2
CLOSE CORPORATIONS: AGREEMENTS RESTRICTING DIRECTOR ACTION—————————————– 8
CLOSE CORPORATIONS: RESOLUTION OF INTRACORPORATE DISPUTES—————————————— 9
CLOSE CORPORATIONS: TRANSFER RESTRICTIONS———————————————————————— 10

II. FIDUCIARY DUTIES OF DIRECTORS AND CONTROLLING SHAREHOLDERS

a. NATURE OF A DERIVATIVE CAUSE OF ACTION————————————————————————————- 11

b. DUTY OF CARE
i. LIABILITY DERIVING FROM INATTENTION—————————————————————————– 12
ii. LIABILITY DERIVING FROM UNPROFITABLE BUSINESS DECISIONS—————————————– 13
iii. INATTENTION REVISITED—————————————————————————————————- 16

c. DUTY OF LOYALTY
i. INTERESTED PARTY TRANSACTIONS———————————————————————————– 16
1. CASE LAW———————————————————————————————————- 16
2. STATUTORY TREATMENT———————————————————————————— 17
3. CASE LAW: “FAIRNESS” ————————————————————————————– 19
4. SHAREHOLDER RATIFICATION OF TRANSACTIONS OTHERWISE VOIDABLE————- 26
ii. CORPORATE OPPORTUNITIES——————————————————————————————— 24
iii. COMPETITION BY FIDUCIARIES——————————————————————————————- 25
iv. OBLIGATIONS OF CONTROLLING SHAREHOLDERS TO MINORITY SHAREHOLDERS [?]———— 26

d. TRANSACTIONS IN SHARES
i. INTRODUCTION——————————————————————————————————————- 36
ii. COMMON LAW——————————————————————————————————————— 38
iii. FEDERAL LAW: INTRODUCTION TO SECURITIES ACTS———————————————————– 40
iv. FEDERAL LAW: DEFINTION OF THE TERM “SECURITY”———————————————————— 42
v. FEDERAL LAW: SECTION 10(b) AND RULE 10b-5, ENOFORCEMENT AND CRIMINAL ACTIONS—— 44
vi. FEDERAL LAW: SECTION 10(b) AND RULE 10b-5, PRIVATE CAUSES OF ACTION: “TRADING”——– 53
1. ELEMENTS OF THE CAUSE OF ACTION; INTRODUCTION—————————————— 54
2. ELEMENTS OF THE CAUSE OF ACTION: THE CULPABILITY REQUIRMENT—————— 54
3. ELEMENTS OF THE CAUSE OF ACITON: PLAINTIFFS DUTY OF CARE/DILLIGENCE—— 56
4. ELEMENTS OF THE CAUSE OF ACTION: RELIANCE/TRANSACTION CAUSATION——— 57
5. ELEMENTS OF THE CAUSE OF ACTION: BASIC INC. V. LEVINSON (1988)——————– 61
6. ELEMENTS OF THE CAUSE OF ACTION: LOSS CAUSATION————————————– 62
7. ELEMENTS OF THE CAUSE OF ACTION: STATUTE OF LIMITATIONS————————– 63
8. SECONDARY LIABILITY: AIDING AND ABETTING—————————————————— 64
9. INSIDER TRADING SANCTIONS ACT OF 1988 (ITSA)——————————————— 64
vii. FEDERAL LAW: SECTION 10(b) AND RULE 10b-5, PRIVATE CAUSE OF ACTION: “NON-TRADING”– 67
viii. FEDERAL LAW: ANTI-FRAUD PROVISIONS OF THE SECURITIES ACT OF 1933—————————- 73
ix. SALE OF “CONTROL SHARES”———————————————————————————————– 74

CLOSE CORPORATIONS: AGREEMENTS RESTRICTING SHAREHOLDER ACTION
I. Types of Agreements
a. Complicated and composed of:
i. Voting agreements
1. Ringling (see handout)
a. seven directors and were elected by cumulative voting
i. any two branches could come together and be

of RELIEF is the court going to grant to the Ringlings’?
1. trial ct:
a. a new meeting should be held that the Haley shares should be voted by Ms. Ringling
b. implied: Ms. Ringling has the right to vote the non-abiding parties votes.
2. Sup ct
a. REVERSED
i. No power for Ringling to vote shares
ii. No words in agreement that said non-abiding could vote abiding shares
b. Loose court did a “Prater like job” = terrible
i. Should have thought about what happens if arbitration is not abided for.
vi. Valid Contract but NO RELIEF
1. the Haleys’ shares are simply not counted
a. Who gets elected directors?
b. Court created corporate deadlock
i. Who actually won this case a practical matter?
j. Loose (arbitrator under valid contract)
i. could give the same direction he gave in the 1946; OR
ii. direct that all the Ringling and Haley shares be voted for five Ringlings
1. What are the Haley’s choices?
a. NOT vote
b. Vote the way they please
c. If they do this, we now know there votes would not be counted
2. What happens if the Haley’s votes are not counted?
a. 685 shares are going to be voted.
b. Only two can vote
c. 1947 meeting, the North’s control
k. When can this occur (the winning party loses)
i. In a three party context, the non-abiding party has more shares then the abiding party.
ii. In any context, it is WHEN THE NON-PARTIES HAVE MORE SHARES THAN THE ABIDING PARTIES
1. the abiding parties can get outvoted by the abiding parties
l. Note on Voting Agreements and Irrevocable Proxies (page 361)
i. Ringling the majority rule in the validity of shareholder agreements
What kind of relief is going to be granted?