Business Organizations

7 July

• Incorporation, and how it's accomplished. Except when a corporation is insolvent, directors do not owe a fiduciary duty to creditors.
• Distinctions between closely-held and public
• In a public corporation most of the directors won't be employees or officers. In a private company, the directors, shareholders, and officers overlap. Public companies get a lot more securities regulation and disclosure requirements. Private companies aren't required to do much disclosure unless the shareholders ask for it (and they rarely do).
• Also, because public corporations have freely-traded stock, they are subject to takeover; and even a 10% shareholder can have a lot of influence.
• Majority of shares represented at a meeting where there is a quorum: that's a common standard for taking action. It's possible to take over a company without the directors or many of the shareholders on your side, if you can control who attends a meeting to vote.
• Usually in a private company there's just one (or a small cadre) of shareholders who have a majority vote.
• It's extremely important, if you're advising a corporation, to know what's in the charter and what's in the bylaws.
• Alderstein v. Wertheimer
  Alderstein is CEO, and a majority voting share, but he's a miserable failure as a business leader. And note that again, for a second time, McDermott Will and Emery colludes with some shareholders to squeeze out another.

  So what's interesting here is the order of operations.

  It's an odd decision: most of the reasoning is in the footnotes.

  Also, it's kind of counter-intuitive that a guy who is tanking the company and sexually harrassing the employees should be protected by the courts.

• Problem 4-2
  So the meeting was called invalidly (i.e., not by the secretary, as the bylaws require), but she was a bad actor and had obtained her position by deceit.

  So what could be done that would not violate the rules?

• Corporate law is interesting in terms of the way people use the procedures (i.e., offering stock, calling board meetings, etc.) to achieve their objectives.
• Generally directors can just remove an officer (Alderstein was both an officer and a director), but ousting a director can be hard.
• See DGCL § 141: it's a board of directors: directors act as a board, not as individuals. Pay attention to what has to be in the charter (i.e., public, hard to change) as opposed to in the bylaws (private, slightly more malleable).

  (b): how the number of directors can be changed. Directors don't need to be stockholders.

  Typically, directors are elected at the annual meeting, for a 1-year term. But it's possible to have a staggered board, as an anti-takeover measure. It would force a takeover squad to hold onto stock for more than a year in order to install their own board. That;s (d).

  (c) a committee can do anything the board can do except things required to be sumbitted to stockholders for approval and amending the bylaws.

  (f) directors can submit actions by writing (if it's unanimous)-- note that they're not able to vote by proxy, they have to be there. So this is a way of getting out of that requirement, but it's restricted.

  (k): any director can be removed with or without cause. If the board is staggered, cause is required; and only the shareholders who have the right to elect that class of director have the right to remove that director.

• § 142: directors can appoint officers and delegate powers to them (officers' duties often set forth in the bylars.
• § 211: (b) shareholders have an annual meeting, but can vote by proxy. The annual meeting is not optional. (c): court can order a meeting to be held if there's a 13-month failure to have one. Shareholders get notice of what the meeting is about.
• § 212: by default, 1 share = 1 vote. Can vote by proxy, but proxies have an expiration unless they're secured by some interest. For example, I give you my stock as collateral for a loan: I give you proxy authority until the loan is paid back.
• § 213: the record date determines who is a shareholder for the purposes of notice and voting. If you buy stock after the record date, and you want to vote, you need to negotiate for a proxy right.
• § 214: cumulative voting (pooling your shares' votes) to give minority shareholders a chance to have a say in one seat.
• § 216: by default, a majority of the shares counts as a quorum. Note: directors can't override the shareholders' amendments to bylaws regarding votes needed to elect directors.
• § 222: notice required about the meetings.
• § 223: filling vacancies
• § 225: quick ruling on who is a director
• § 228: action can be taken without a meeting or notice, if the requisite number of shareholders consent in writing.
• §§ 229-30: you can invalidate actions taken without notice at a meeing, but you can waive the notice requirement. Attending is waiving, unless you object at the start of the meeting.
• So back on Alderstein
  Alderstein is one of three directors, and a majority shareholder. They don't tell him the nature of the business to be transacted at the meeting of directors, but that's not such a thing with directors. You could argue that this was a de facto shareholders' meeting. But the court is annoyed that the director who doesn't know what's going on is the majority shareholder, and he could have stopped the directors from acting just by removing them.

  OK, so then they issue voting stock to the new shareholder. The board can do this, if the shares are authorized; unless Alderstein has a pre-emptive right.

  The court is upset here that the directors are divesting a stockholder of control. Directors owe loyalty to the shareholders, not the corporation. Violating a shareholder's rights, even if in order to save the company, is out of bounds.

  Courts hate it when directors act mostly to protect their positions.

9 July

• Again, with the exam, statute sections that were involved in cases are of interest.
• So we talked about the board, the fact that the charter or bylaws control the number of directors, and that determines who is able to change the directors. Outside, inside, and independent directors. A lot of emphasis now on independent directors. Terms of office (generally 1 year, unless they are staggered). Directors can also be classified, and their elections can be handled by different classes of shareholders. By default, staggered directors can only be removed for cause. The Delaware code does not require notice of the purpose of the meeting to shareholders; the model code does require this.
• Bylaws are adopted either by the incorporator or by the directors.
• Quorum requirements (shareholders and directors), acting without having a meeting. Shareholders can vote by proxy, but directors can not. Annual shareholder meeting is mandatory, and that's enforceable in court. The record date.
• Back on Problem 4-2, there's going to have to be an appeal to the court. You need to be careful who you give these positions to.
• So there are rules that place limits on the shareholders' ability to take money out of the company. Basically, it's like preventing fraudulent transfers. In some respects, the shareholders are favored over the creditors (from the perspective of fiduciary duties). But creditors are protected from looting of the company by statutes, and also by the doctrine of veil-piercing when the corporation is unable to cover its obligations.
• Shares exist for the life of the company (though they may change hands), and loans are for a fixed term, generally.
• Creditors can negotiate a stricter standard for dividends, if they are worried about getting fleeced.
• Klang v. Smith's Food & Drug Centers, Inc.
  This is sort of like the mark-to-market issue. Assets on the balance sheet may change value. As long as the board is making those adjustments in good faith, it's OK.

  Also, the directors can rely on qualified experts in doing their valuation.

• Limited liability makes investors with large amounts of capital free to invest in corporations with many shareholders. If shareholders were liable, that would discourage them, because they'd know that the others wouldn't be able to pay their way.
• Voluntary vs. involuntary creditors: voluntary creditors can negotiate whatever terms they want.
• Still, why don't they pierce more in tort cases, like Easterbrook says? Possibly because tort cases are often about insurance companies duking it out: the victim may already have recovered.
• So what are some elements? Lack of formalities-- comingling of corporate and personal funds, etc. Sometimes, a link between the use of the corporation as a sham and the harm that was incurred.
• Soerries v. Dancause
  Why did they sue for just the value of the car? Not everyone has the right to sue for wrongful death: parents of an adult child aren't losing economic support or companionship. Not so with pain and suffering: that claim belongs to the victim's estate.

  So they find the shareholder liable because of comingling of finances.

  And if there is comingling, after all, why should a court treat the corporation's finances as separate from the shareholder's? And also, there's no real redeeming value (i.e., a benefit to society) from this corporation. In general the price that society pays for the benefit of corporations is limited liability; here, if the sole purpose for the corporation is limited liability so the owner can be reckless, it's proper to pierce the veil.

• Minno v. Pro-Fab
  This has the standard for piercing nicely articulated (p. 284, from Belvedere). Some courts don't require that final prong.

  The court is really stretching here: the dissent is maybe a little more persuasive.

• In Re Phillips
  Nice articulation of the standards on p. 294.

  So they find the grounds for piercing, but the owner doesn't have sufficient assets to satisfy the claim, but they exist in a corporation where the owner holds shares. Often you seen those shares then sold at auction, and the proceeds used to satisfy the judgment. But it would be nicer still to reach into the corporation and take an asset.

  That's reverse piercing. It's problematic: as far as creditors of the corporation are concerned, a surprise creditor has just jumped in front of them in line. So it could be an inequitable result: analogous to allowing dividents when the surplus is impaired.