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Business Associations/Corporations
University of San Diego School of Law
Partnoy, Frank

CORPORATIONS – Fall 2010 – Partnoy
§ Corporate law is about deal making – defining relationship and structure
§ Meinhard (investor, principal) v. Salmon (expertise, agent) – JV real estate deal with risk allocated – relationship unclear
ú  Court (Cardozo) – relationship extends to new business opportunities – copartner duty of finest loyalty, duty to disclose
ú  Dissent (Andrews) argues this was a JV, not a GP, with end fixed at end of lease – no duty to renew – contract view
§ Risk Allocation in the Firm – quantifiable uncertainty – allocate to party best situated to bear the risk
ú  Non-controllable risk – weather, economy – want to allocate to the person most able to bear it
ú  Controllable risk – allocate to employee because ability to impact – marketing, sales, quality – incentive based
ú  Risk tolerance – seeker, risk averse, risk neutral(decisions based on expected returns)
ú  Manage risk – insurance, diversify, allocate through firm organization – balance tension by defining business relationship
ù Financial rights and obligations, supervisory power, access to information, term, termination, risk allocation, org structure
ú  Moral hazard – person who does not bear risk will not take steps to control it – shirking
§ Fiduciary Duties
ú  When management authority is delegated, those who run the firm have fiduciary duties to those who entrusted them
ú  Law:  duty of care, diligence, honesty and loyalty – this is where Cardozo comes out in M v. S (Andrews follows contract)
§ Corporation – gift of LL, separation of ownership and control – for profit, not for profit (university, hospital)
ú  Attributes:  separate entity, perpetual existence, limited liability, central management, transferable ownership interests
ú  Divided ownership – each share is a % interest in the company – shareholder rights to vote, sue, sell
ú  ‘Tone at the top’ – statements of morale, trying to get shareholder loyalty – example (Amgen saves lives…)
ú  File ‘articles of incorporation’ with state, pay fees, create ‘bylaws’ that set out governing details – procedures for electing and filling director vacancies, notice periods and details for calling shareholder meetings, other governance issues
§ Corporate Actors – shareholders – money – passive role – elect directors – charged with managing the business – choose the CEO and officers – line employees run day-to-day business – contract with stakeholders – employees, creditors – to serve WHO
§ Securities – common stock (authorized, issued, outstanding, treasury), preferred stock, debt
§ Corporate Fiduciary Duties – owed by directors and officers to the corporation
ú  Care – make prudent decisions – conduct transactions as if you were managing your own affairs – presume officers will do this
ú  Loyalty – corporate interests ahead of self – no personal transactions, conflict, self interest – presume officers not do this
ú  BJR – business judgment rule – directors love this – judicial presumption that D&O act in best interest of corporation
ú  Shareholder suit – to enforce duties (direct shareholder harm or derivative corporate harm)
§ Sources of Corporate Law – Constitution, federal law, state law, judge-made law – articles of incorporation – bylaws
ú  Delaware – section 102b7 – may limit liability of directors – leading corporate law state
ú  Internal affairs doctrine – choice of law rule – laws of state of incorporation govern internal affairs
§ Annual Stockholders Meeting – opportunity for shareholders to act – bylaws provide structure for annual meeting
ú  Schnell v. Chris-Craft – court will enforce EQUITABLE PRINCIPLES over legal possibilities – if board acts to obstruct legitimate efforts of dissident stockholders – manipulating the law against established principles of corporate democracy – not OK
ú  Stahl v. Apple Bancorp – court will enforce BJR in same situation if not clear intent to impede
§ Corporation governed by law of state in which incorporated even if no business there
§ Reincorporate – to move to another state – accomplish by merging with a shell formed in the destination state
§ Horizontal Federalism – view from the states
ú  Internal Affairs Doctrine – matters peculiar to the relationship among SH, D & O – governed by laws of state of incorporation
ù McDermott v. Lewis – DE court says even if it is Panama – for internal corporate affairs, state of incorporation governs
ù Shareholders (vote, dividends, sue), duty of managers to shareholders
ù Board actions such as indemnification of officers, issuing stock, or mergers
ú  External affairs – governed by forum, federal or state regulatory statutes – employment, tax, torts, contracts, property
ú  State regulation of pseudo-foreign corporations – CA imposes its corporate rules to internal affairs of companies incorporated outside of state but doing most of their business and having most shareholders within the state (DE disagrees)
§ Vertical Federalism – Federal oversight of State corporate law
ú  Federal law (e.g. securities law) preempts state law but absent a clear federal statutory intervention, corporate law is a matter of state law – the states can regulate their own corporations (federal abstention)
ú  Anti-takeover Regulation – interfering in commercial transactions occurring outside of state (sale of stock in the market) can violate dormant limitations of Commerce Clause (states were seeking to regulate corporate takeovers)
ù First IL – Edgar v. MITE – attempt to regulate tender offers by forcing Sec State review/approval – USSC says unconstitutional
ù Second IN – control block statute – CTS v. Dynamics – cannot vote a control block in favor of a merger unless disinterested shareholders voted by majority to approve – USSC law consistent with shareholder protection goals and federal statute
–    Does not violate Commerce Clause because effects equally interstate and local business
ù Third WI, DE – upheld if regulate internal affairs of ‘domestic’ corporations (formed within state) but not those that regulate ‘foreign’ corporations – can a state then render its corporations ‘takeover-proof’ – see Amanda
–    Easterbrook – states face competitive pressures not to over-regulate their corporations – protectionist laws protect managers and make raising new capital more difficult – statute is constitutional but may be ‘folly’
§ Market in State Charters
ú  Race to the bottom – states seek to attract self-serving managers
ú  Race to the top – states seek to balance interests of managers and shareholders
ú  Corporate law comes from the Delaware bar, changes in law come from lawyers – lobby for change
§ Event Study – looks at a period around an event – interesting to see how the markets react to things
ú  Study in DE showed that reincorporation in DE leads to increased share price
§ Who Does the Corporation Serve – shareholder value vs. firm value, duty to entity, duty to maximize shareholder wealth
ú  Some statutes (not DE) specifically recognize board discretion in making CSR decisions – not just shareholder interests
ú  Corporation as Private Property – primary responsibility is to generate shareholder wealth (focus on contributor of capital)
ú  Corporation as Social Institution – both a social service and profit making function – other stakeholders, employees
ù Shareholders are too short sighted with no real stake in long term health of the corporation
ù Maximize firm value – includes all corporate securities and not just common shares
§ CSR in Legal Context – balancing shareholder primacy and ideals of CSR
ú  Dodge v. Ford – court held that corporation is organized for profit of stockholders – shareholder primacy argument – you had been doing something (dividends) and cannot stop for some idiosyncratic purpose – BUT vertical integration and planning for the future is not challenged – this is well considered and judges are not business experts – BJR
ú  Theodora v. Henderson – charitable contributions allowed if reasonable (and not self dealing) – IRC 170 – 10% taxable income
ú  Shareholders tolerate corporate gifts to charities because they advance business interests and directors have discretion – BJR
ú  AP Smith v. Barlow – set precedent for corporate gifts ($1,500 to Princeton)
§ Role of Corporate Lawyers in CSR – Takeover Choices – lawyer makes the legal argument
ú  Legal Rules – ‘Revlon’ idea – if company up for sale – the directors have a fiduciary duty to get the highest price
ú  ALI Principles – corporate objective is conduct of business focused on enhancing corporate profit and shareholder gain
ú  Tension here is a valuation tension – short term/long term – if we are worried only about share price today, then cannot take less money for better corporate value – but if we can make long term argument then we look at enhancing corporate value
§ Legal Arbitrage – taking advantage of price differential in two markets (move production to low minimum wage country but sell products in a high minimum wage country) – legal rules and legal costs, ethical issues – economic impact, do the right thing
§ Tillman Act (1907) 441b – bans campaign contributions (electioneering communication) or speech expressly advocating for/against a candidate by banks, corporations, labor unions – meant to protect shareholders from subsidizing political views
§ PAC – corporate response – funded by voluntary contributions – can support or oppose political candidates
§ Federal Election Campaign Act (1974) – caps on individuals, parties, PACs but permits corporate giving
§ Bipartisan Campaign Reform Act ‘BCRA’ (2002) – limited soft money to individuals capped at $

king for authority – look for ratification – principal can ratify the agent’s action ex post – after it happens – or reasonable belief of authority – more a policy matter – type of action that people typically (inherently) have authority to do – CEO usually has inherent authority – advise clients to get express authority – not rely on inherent
ú  Getting actual authority – Board expressly approves – usually at a meeting with notice, adequately planned, majority vote
§ Lee v. Jenkins
ú  Look for actual authority of CEO – bylaws convey the authority to CEO to offer pension, board gives CEO authority, most courts assume CEO authority to bind corporation in transactions in the ‘ordinary course of business’
ú  Then apparent authority – words and conduct between Board/company and Lee – board resolution or minutes for pension
ù Even if there is not authority but Lee reasonably believes through words or actions then there is a pension
ù Is this an ordinary or extraordinary transaction (see Menard case – extraordinary)
§ Menard v. Dage – no actual authority because Board has expressly disapproved of the sale of property
ú  Does CEO have apparent authority – NO because buyer knows that Board did not approve the first deal – words or actions do not indicate that third party would reasonably believe Board had approved the transaction and land deal not ordinary business
ú  If have to look for inherent authority to make sure the deal gets done – trouble!
ù Back to relationship between principal and agent and what third party believes about this relationship
ù Focus on CEO and nature of his position – the custom with respect to this type of position
ú  Inherent authority factors to consider (Restatement) – and then it is a mess – you are arguing about reasonable expectations and the nature of the position – lots of facts become relevant that would not otherwise be relevant in a corporate transaction
ù Acts usually accompany or are incidental to transactions which the agent is authorized to conduct even though forbidden
ù 3P reasonably believes the agent is authorized to do them and
ù 3P has no notice that agent is not so authorized
§ Corporate Authority and Board Action – always investigate if transaction involves conflict of interest (officer personal benefit)
ú  Evidence of authority – statute, articles of incorporation or company bylaws, copy of board resolution or evidence that corporation has allowed officer to act in similar matters and approved or ratified them
ù Copy of resolution or minutes certified by secretary is binding on the corporation
ú  Formalities of Board action at a meeting – majority present, vote in favor of transaction, there are minutes
ù Notice and quorum requirements – notice can be waived by showing up at the meeting or signing a waiver – quorum requires a minimum to show up in order to have a meeting
ù Majority of Board members vote – board directors cannot vote by proxy but can patch in by phone
ú  Guaranty signed by VP/Treasurer – want to see that this person has actual authority and corporation exists and verify position
ù Check bylaws to see if authorized, meeting minutes, quorum, majority present or bylaws – as a general matter it is allowed
ú  What are the 2 ways a board can take action – UWC (unanimous written consent) or formal Board meeting
ú  Actual authority – board approval – or apparent authority – did the board intend to give ‘Treasurer’ authority
§ Legal Opinions – a hedge against business risks
ú  Unqualified – apply law to facts and reach a clear legal conclusion free from doubt (“shares duly authorized and validly issued”)
ú  Qualified – do not like to stick neck out so qualify everything – “based on my review…” – if worried about negligence
ú  Reasoned – reasoning with stated legal conclusions – important where arguments might lead to a different legal interpretation
ú  Should opinion vs. would opinion