Business Organizations

14 July

• Shareholder agreements can be all kinds of things, but we see them mostly about voting rights. But just remember the shareholders can agree about all kinds of stuff. Delaware doesn't have all the provisions of the model code, just § 218(c) permitting agreements. Doesn't have to be all the shareholders, just has to be in writing and signed. Courts are applying a "reasonableness" requirement.
• Ronnen v. Ajax Electric
  Why would individuals like this want a shareholders' agreement? Maybe just to keep their lives simpler (I want to own stuff, but not have to manage it). The casebook says the agreement is poorly written: does "and corporate management" include electing directors? Shareholders don't have much to do with corporate management or day-to-day operations when there is a board of directors.

  But shareholders do elect directors, so because there's nothing else for this phrase to mean, that must be what it means.

  Does he have the authority to adjourn the meeting?

  People do get into shareholder agreements that affect all kinds of collateral parties. That's why courts have previously been reluctant to enforce them. Policy nowadays is moving towards freedom of contract, but it hasn't always been that way.

  The model act has restrictions on what you can do in a shareholder agreement: disclosure, duration, etc.

• § 202: this/ is the Caital Group case. What restrictions can you put on transfers? These ones. But note that theres no "reasonableness" requirement, other than (5) saying it can't be manifestly unreasonable.

  These are also known as "buy-sell" provisions or agreements. Generally they're designed to keep ownership among a group of approved investors. Also, they often depend on complex appraisal considerations.

• Capital Group
  The reasonableness requirement isn't so much in the statute. And, in fact, this is just like 202(c): it's one of the types of restrictions that's explicitly permitted. The court makes it clear that 202(c) isn't a safe harbor: even things there are subject to reasonableness.

  And reasonableness is in the abstract, not in the particular circumstances of an individual: you can't foresee all the nonsense that will happen, after all. So as long as it is reasonable to achieve a legitimate corporate purpose-- this is because we want people to make decisions based on the law, not having to go to court and get rulings on every set of facts.

• Voting trust: a formal arrangement wherein shareholders delegat the authority to vote their shares to a trustee. They actually do retitle their shares to the trustee.

  § 218. You can make a voting trust, but you have to file a copy with the corporation, so that other shareholders know who is voting the stock (this prevents secret accumulations of huge voting blocks).

  The nice thing here is that duties come with it. The law of fiduciary duties of majority shareholders is spotty and unclear, but the law of trustee fiduciary duties is solid. So it's a nice way of giving control of a company to one person without just making them the majority shareholder. In fact, they could be a minority.

• Warehime v. Warehime
  What standard applies to the action of the voting trustee? Good faith, it appears.

  Even if you wanted to eliminate the duty of good faith, you might not be able to; here, it certainly didn't happen by implication.

• So we've got different ways of controlling ownership of stock, and they come with different standards. Reasonableness, with the shareholder's agreement and the transfer agreement. Fiduciary duties, with the voting trust. So we can think about when we'd want each of these different ways in our deal.

16 July

• We need to know the attributes of the various types of delegations of authority (voting trusts, proxies, etc.), so we can advise clients about what's the best plan. Exam question: some pattern where the client wants a specific outcome-- how would we advise them, and why?
• Today: classified shares, cumulative voting, and supermajority requirements. These, too, are ways of controlling how voting is done.
• What is voting all about? Who the directors are, and major transactions (sale of the company, merger, etc.). Mostly it's about appointing directors. So consider what the consequences are of appointing directors: directors are bound by a fiduciary duty, after all.
• Classified shares. § 151. There's a lot of flexibility here. In S corporations, recall that there can only be one class of stock (there can be voting and non-voting, and there can be cumulative voting, but in terms of economic rights, there can be only one).
• By "Class" of stock, we mean economic class. Know this about S-Corps for the exam.
• Benchmarke Capital Partners c. Cague
  So Juniper is a credit card issuer. Benchmark gets in on the A and B series. Then CIBC comes along: they loan some money, but then when it comes time to spend serious money, they wanted some control. They get that right, but they leave Benchmark with the right to vote on issues that would change their share, and before any other equity senior to them is offered, and before a merger.

  As a financial services firm, Juniper has to maintain a certain level of liquidity. So it's sort of a standoff: Benchmark can block CIBC from doing the new round of funding, in which case they get nothing (because the firm dies out), or they can let CIBC get the Series D stock, which cuts their ownership percentage by about 75%, and reduce their liquidation preferences.

  So Juniper creates a new sub corporation (a C corp), which issues some shares. Then they'll merge that sub, cancel all the shares in both the sub and Jumiper, and re-issue. The "surviving company" in a merger is treated as a new company: new charter, new shares. So then they sell the new series D.

  Benchmark says they have the right to challenge the merger, because it's an amendment to the charter that adversely affects their economic rights.

  The court here is really protecting the employees of Juniper more than anyone else. Benchmark's strategy is kind of a suicide move: they're not going to get anything out of Juniper if it liquidates now. And that would be hard on Juniper's employees.

  So they fall back on technical reasoning (merger with a subsidiary isn't an amendment of the charter). Basically, the damage to Benchmark was done when the shares were authorized (that's when they lost control), and there's nothing that says that Benchmark could block that, and no reason to allow them to go back and undo it.

  Oh, good grief. I am lost on this one.

• So, is it good policy to read protections of minority shareholders this narrowly? They invested in good faith, and then someone bigger came along-- we don't want them to be totally displaced, so they make agreements for a disproportionate degree of control. If we're going to mess with the voting rules, it maybe does make sense to interpret it narrowly.
• Cumulative voting: § 214.
• Problem 6-2. This is a shareholder proposal at a meeting.

  Majority and minority interests can diverge: this is why we have tag-along rights, e.g.

  So what does it mean to elect one board member? The fiduciary duties will be the same.