; Scope of Pr’s tort liability Principal-Agent LIABILITY a) for penalties (?217D)
b) for punitive damages under certain conditions (see ?217C)
AGENCY RELATIONSHIPS: relationship between two people (Principal and Agent) where the Pr. bestows a legal power on A, accepted by A. (Neither written agreement nor intent Agent’s (CONTRACT) LIABILITY/ FIDUCIARY DUTY identity unk. to 3dP. is necessary). Pr. can be disclosed, undisclosed, or semi-disclosed—; Violation of fiduciary duty (obligation to exercise a reasonable, good faith attempt to advance the purposes of the relationship). Principal’s CONTRACT LIABILITY: Pr liable for A’s actions. a) Duty of obedience to documents creating the relationship Q: Was __ really P’s A? b) Duty of Loyalty (to Pr’s interest, not self interest) ; Pr. expressed or implied to A ； actual authority. c) Duty of Care- duty to act in good faith, as one believes a reasonable a) Pr manifested to A (from perspective of reasonable A) b) that A should act on Pr’s behalf, subject to P’s control, and person would act, in becoming informed and exercising any agency or c) A manifested assent or consent? RST(2)-A ?26, 144. fiduciary authority. i) (if stated explicitly - express authority) d) (good faith = fair dealing + upon full disclosure of material information) ii) (if not stated explicitly, but A reasonably believed his authority went beyond expressed ; unless Pr. consents, per RST(3)-A ? 8.06, activities- implied/incidental authority, ?35, 161?) a) upon full information and good faith from A, E.g.: Creditor (Cargill) was held to be a principal to debtor (Warren) due to b) A acts fairly, and Cargill’s significant control over Warren. Jenson Farms v. Cargill (18). c) consent is to specific act/transmission or specified type of act/transmission reasonably ; 3dP reasonably believed A had such authority (based upon Pr.’s acts) ； expected to occur in course of relationship. apparent authority. ?27, 159. ; Scope of Liability: a) E.g. Bidder at auction did not have apparent authority b/c 3dP did not believe P had for any profits (―fruits of labor‖), RST ?388, even if ill-gotten. Tarnowski. authorized the sale. White v. Thomas (22). (She probably had apparent authority for the See also RST(2)-Trusts ?? 203, 205, 206; In re Gleeson (even though fair dealing or no larger purchase.) breach). b) E.g. VP did not have apparent authority to sell and leaseback corporation’s assets even though he was a general agent. Jennings (110). c) Justification for not requiring statement of P, as with common law: (i) intuition of fairness TERMINATION OF AGENCY and (ii) ex-ante efficiency ; at any time (even despite a contracted term length). ? 118. ; No actual or apparent authority ； possibly inherent power. ; but party can get damages if termination at odds with contract length. ? 188 cmt[a]. a) A appears to be Pr: undisclosed Pr. + A’s acts on behalf of Pr for usual transactions in such ; no equitable relief of specific performance (b/c specific performance of unwilling service is businesses + on the Pr’s account, although contrary to directions of Pr. ?195. unlikely to be efficacious). b) General A unauthorized acts: disclosed or partially-disclosed Pr. i) + general A’s unauthorized acts if ordinarily would have the power to act as such NOTES ii) or acts are incidental to authorized transactions + 3dP reasonably believes A is ; TYPES of agents: authorized to do so and does not know that matters stand differently in this case. ?161. a) General: ongoing, range of activities iii) E.g. Ins. A had inherent power to defer payment on renewed auto policy b/c Pr. had not provided notice to 3dP that A did not have such power. Gallant Ins. Co. v. Isaac. b) Special: limited purpose or activity But see Jennings (finding VP acted outside the usual course of business and 3dP did ; A trust differs from an agency relationship b/c ordinarily the trustee owes a fiduciary duty to the not reasonably rely on VP’s acts). grantor/creator, not the beneficiary. (For agency relationships, the grantor = beneficiary.) ; Ratification: Pr. affirms A’s acts not originally authorized. ?82. ; Pr. doesn’t correct 3dP’s mistaken belief: possibly liable by estoppel, ?8B. 3dP reasonably relied upon (made a ―detrimental change in position‖ because of) an act that 3dP believed to be on Pr’s account + Pr. either caused such belief or failed to rectify belief + knew others might change their position b/c of it + did not take reasonable steps to correct.
Principal’s TORT LIABILITY
; When Pr. has control over A. (i.e., A is an employee, not an independent
contractor). ? 219 (refer to ?220 for definition of employee/i.c.) a) A committed tort while acting in scope of employment (see ??228, 230) or b) A committed tort while acting outside scope of employment if i) + Pr. intended the conduct or consequences, ii) + Pr. was negligent or reckless,
iii) + conduct violated a non-delegable duty of Pr., or iv) + A purported to act or speak on behalf of Pr. + apparent authority or A was aided in accomplishing tort by existence of Pr-A relationship.
AO - 1
Partnership LIABILITY CREDITOR PROTECTIONS ; Disclosure obligations for debtors PARTNERSHIPS: Association of 2 or more persons to be co-owners of a business for profit ; Contract – e.g., high interest rate or security interest (collateral) ; Tenancy in partnership (UPA ? 25) ADVANTAGES o Cannot be possessed or assigned by individual partner, inherited by his heirs, or ; Aggregation of capital attached and executed upon by personal creditors (? 25(2)). ; Lower cost of equity capital (b/c increased control ； decreased risk premium) ; Insurance ; Specialization of roles ; Counteracts agency problems by aligning investor and controller interests (b/c controllers are investors) POLICY ISSUES But creates additional agency costs – binding of partners for each other’s decisions ; Place responsibility upon lowest cost avoider to minimize waste a) E.g. Don’t allow continuing partners to bind departed partners and, thereby, externalize risk LIABILITY b/c the continuing partners are in the best position to control for risk.
; Vicariously for other partners’ acts (all partners are principals). UPA ?? 9; 13; ; Protect third parties who rely upon representations a) E.g. Don’t allow partners to withdraw from liability to easily; otherwise, they would just RUPA ? 305. depart when trouble is on the horizon. (1) Was D a partner (i.e., control and profits)? If not ； not liable. ; Incentivize managers to take reasonable risks (not too much risk, as when they (2) If so ； Is D still a partner (not effectively w/drawn)? have no stake in the success or failure of the organization; but not too little risk, (a) if agreement btwn creditor and remaining partners can be inferred, ?36(2), (b) or the debt obligation is renegotiated by a creditor who knows of the w/drawal, as when potentially liable for a good faith but poor decision.) ? 36(3). If not ； not L. (3) If so ； Was act authorized (including usual activities not specifically
restricted by a majority)? If not ； go to (4). If authorized ； liable.
(4) Did 3dP reasonably rely upon apparent authority? If not ； no L.
If reliance ； liable. Nabisco.
(4) If liable and partnership property insufficient to satisfy debt ； How to
balance D’s personal creditors with partnership creditors re: personal
assets? (a) P deceased ； personal debts paid first. ? 36(4). (b) Partnership creditors have priority re: partnership assets. (c) For personal assets, - if UPA applies (person not in bankruptcy or UPA jxn + dual bankruptcy) ； jingle rule—personal creditors have priority re: personal assets. - if RUPA applies or federal bankruptcy ； partnership and personal creditors in parity re: personal assets
- or by estoppel when 3dP reasonably relied upon a representation of
partnership and the partner(s) consented. ? 16.
; Violation of fiduciary duty (all partners are agents) E.g., Meinhard v. Salmon.
; Violation of RUPA ? 103 non-waivable requirements
; Scope of Liability - Joint and Several (for authorized or usual-course acts,
UPA ? 13, or for breach of trust, ? 14). UPA ? 15.
* RUPA ? 303 allows partnerships to provide statements of authority to
3dP such that 3dP cannot argue reasonable reliance beyond such statement. ; Tort liability – for partners’ acts within the scope of employment.
; To creditors
a) Partnership property ； to partnership creditors
b) Personal property ； priority to personal creditors
AO - 2
SHAREHOLDER SUITS CORPORATIONS
TYPE – Direct or Derivative Advantageous Features vs. Partnerships
; (1) Direct action by group of individuals who share a common aspect of their legal personality w/ indefinite life terminable at will of partner claim? ； class action (proceeds once class is certified, then usually settles) limited liability for investors potential personal liability for partners Recovery goes to the individual/class + attorney’s fees free transferability of shares non-transferability/illiquidity of equity E.g., action re: right to vote, failure to disclose a self-dealing transaction centralized management/specialization cumbersome shared management For self-dealing transaction, can pursue an appraisal or entire management appointed by investors fairness action. Rabkin. (see DAMAGES) ; (2) Assertion of corporate injury for which directors or officers failed to take ; Directors and Managers are agents ； have fiduciary duties to all shareholders. adequate protective action? ； derivative claim. See Tooley (366). a) But charter may limit board’s responsibility to shareholders re: duty of Recovery goes to the corporation + P’s attorney’s fees obedience to specific proposals. See Automatic Self-Cleaning. E.g., breach of fiduciary duty b) Actual authority of individual board members is established by Board resolution. See Jennings. STANDING – Initiating a Derivative Suit ; Fundamental problem of large, publicly-financed corporations: ―collective ; (1) direct claim – sh’s personal interests have been wrongfully injured action problem‖ associated with dispersed share ownership whereby each ; (2) derivative claim – corporation has been injured owner has little incentive to invest time and money monitoring mgt. a) All shareholders have been injured equally b) Directors have failed to take effective action to address the injury. FINANCING A CORPORATION c) Test, FRCP 23.1: Debt Equity i) P a contemporaneous owner? ； Advantage to Corp. Tax subsidy, no control No payments required, ii) P a continuous owner? ； rights $$ only returned upon iii) P ―fairly and adequately‖ represents the interests of shareholders (i.e, termination of corp. has no conflicts, and, in Del., there has been no merger)? ； Advantage to Investor Less risk: periodic unlimited upside/share of iv) Demand requirement: payment + priority + profits + control (right to (1) Did P make a demand of the Board to sue? covenants sell, vote, & sue) (a) Yes ； Did the Board sue? ； If so, no derivative suit (not Advantage to Lender ― ― Provides incentive not to necessary). take too great of risks (b) Yes ； If Board did not sue, in Del. ； BJR – no derivative ; Cost of debt = interest rate for new debt (bond yield rate) * tax rate suit allowed unless (2)(ii) is met (rebuttal of BJR). ; Cost of equity = expected return, discounted by CAPM’s Beta (the more B >1 (c) Yes ； If Board did not sue, under FRCP ； P must state the ； riskier) reasons (for wrongful refusal of demand) a) Equity is usually more expensive than debt due to less risk of return (?), (2) If No demand ； Does P has a reasonable excuse for not making but only up to a particular debt/equity ratio. a demand (i.e., ―demand futility‖)? e.g., (i) b/c Board was responsible for the wrong or VALUING A FIRM (for APPRAISAL REMEDY) otherwise could not make a disinterested decision ; DCF—Estimated future cashflows * WACC discount rate (conflicted)—if allegation of lack of independence, must
show domination by officer/director who proposed CREDITOR PROTECTION/LIABILITY TO CREDITORS transaction.
; See Section VI. on Outline or (ii) b/c Board did not exercise due care (as pleaded
by particularized facts rebutting the presumption of ; Derivative Claim (N. Am. Catholic Educational Fdtn.)
reasonable business judgment), see Levine?
(a) Yes ； Demand excused ； Suit proceeds (usually settled)
(b) No ； Suit dismissed.
v) If suit proceeds ； Who will be lead lawyer (first-come priority).
AO - 3
; Violation of duty of loyalty
a) Self-Dealing Transactions
SPECIAL LITIGATION COMMITTEES (SLCs) (p388): i) If P proves self-dealing transaction:
If SLC dismisses suit or decides to settle ； If disinterested & informed ； D must prove good faith + full disclosure + entire fairness (i.e., fair
dismissed in NY. Auerbach. process and fair price)? If so ； O.k. If not ； transaction is voidable.
+ Court assesses business judgment in Del. If reasonable ； SLC decision Cookies; Weinberger.
stands. Zapata, Carlton Investments. ii) If controlling shareholder involved (including two-step tender offer)
； burden shifts to D to prove entire fairness. Cede v. Technicolor; MOTION to DISMISS (FRCP 12(b)(6)) Emerald Partners.
; Well-pleaded facts + particularized facts for duty of loyalty claim ； suit (1) But if merger is ratified by majority of minority shs or truly
proceeds. McMillan v. InterCargo Corp. (p260). independent Committee ； burden shifts to P to show unfairness.
Wheelabrator; Kahn v. Lynch.
DERIVATIVE SUITS – SUBSTANCE iii) But If a sh vote is statutorily required ； ―ratification‖ + vote is
necessary. Gantler. ; violation of duty of obedience—e.g., violation of corporate statute or creating
iv) If controller tender offer (not two-step merger b/c already a controller) documents
+ non-coerciveness + independent committee approval ； only ; violation of duty of care (e.g., fraud or extreme inattention)
remedy is dissent and appraisal, not entire fairness approach. If a) Acts:
coercive ； Kahn entire fairness review. Pure Resources: i) Disinterested directors + fully informed + good faith ； BJR
(1) Non-coercive= subject to non-waivable majority of the minority (presumption that standard of care was met if there is any rational
tender condition, promise to consummate prompt ?253 short-business purpose for the act, even if negligent). Gagliardi.
form merger at the same price if obtains more than 90%, no If not ； burden upon Ds to prove entire fairness. Disney.
retributive threats, and excludes interested shs. (p506). or
b) Corporate Opportunities – ALI:CG ?? 5.04 et seq. ii) Disinterested directors + liability waiver + good faith ； No liability,
i) Factors: connection to company and how the opportunity came to the even if negligent (not fully informed)/dismiss case, Malpiede,
person (e.g., director receives opp. b/c director ； corp. opp.) although equitable order (e.g., injunction) may be issued.
ii) Defenses: waiver, Board ratification, company unable to take. (1) Except if controlling shareholder involved (including two-step
c) Executive Compensation (inherent/necessary conflict) tender offer) ； burden shifts to D to prove entire fairness. Cede
i) Should have a disinterested, independent Compensation Committee v. Technicolor. If fair ； dismissed. Emerald Partners.
d) Entrenchment or e) Miscellaneous iii) Illegal act ； no BJR, liable if knowledge of illegality. Miller v.
i) P proves not acting toward corporate objectives (e.g., acting for AT&T; Metro Communications.
personal vendetta reasons) ； voidable. b) Omissions (oversight liability for criminal/fraudulent acts of employees):
i) No oversight system in place or sustained and systemic failure to
DEFENSES recognize a red flag ； not good faith ； Liable. Smith v. Gorkom;
; Reasonable reliance upon experts. DGCL ? 141(e). Stone v. Ritter; Caremark.
ii) Oversight system but + notified of problem but decided not to act
DAMAGES anyway ； not liable by BJR. Caremark; Kamin v. Am. Express.
unless bad faith (breach of loyalty). Disney; Stone v. Ritter ; Breach of duty of care: actual damages
(pp345-46). ; Breach of loyalty:
iii) If problem involved a judgment of business risk (not a) rescission, rescissory damages, or appraisal for controller merger (e.g.,
criminal/fraudulent act) + good faith ； BJR applies. Citigroup. parent-sub or two-step merger). Technicolor.
c) Summary (p347): b) appraisal (cash) for arms-length, single-step merger
i) Ordinary negligence ； not liable (BJR). Gagliardi.
ii) Gross negligence ； liable, absent liability waiver. Van Gorkom. SETTLEMENT
iii) Even if liability waiver, bad faith or disloyalty (―abandonment of ; Requires notice, opportunity to be heard, and judicial determination of fairness
office‖) ； liable. Disney. ; Usually occurs following class certification or following the allowance of a derivative suit beyond the demand pleading stage
AO - 4
b/c Ps’ attorneys don’t want to expend too much of their own money in ; If controlling shareholder involved (including two-step tender offer) ； burden
discovery, and Ds will be indemnified and can avoid personal liability and shifts to D to prove entire fairness. Cede v. Technicolor; Emerald Partners.
heightened scrutiny from litigation. o But if merger is ratified by majority of minority shs or truly ; For SLC recommendation of settlement, see SLC above. independent Committee ； burden shifts to P to show unfairness.
Kahn v. Lynch.
PROTECTIONS FOR DIRECTORS/OFFICERS ; Defensive measure: if no entrenchment motive； enhanced BJR (was defense ; Question of reasonableness re: business decisions? ； Business Judgment proportional to threat? burden on D). Unocal.
Rule (BJR) presumes no liability. o Except for public companies, where SEA ? 13e-4 prohibits
a) Mere error of judgment (No conflict of interest or evidence of bad faith)? discriminatory self-tenders.
； BJR (business decision stands if reasonable). o Also, if change in control is inevitable ； Board must attempt to get
best price. Revlon. ; Indemnity clauses –authorized, e.g., by DGCL ? 145
; Stock-for-stock merger does not involve an inevitable a) Pending:
change in control ； does not trigger Revlon duties. i) Criminal matter? ； D had no reasonable basis for knowing the act
Paramount (TimeWarner case). was criminal? ； Indemnified; otherwise, not. ? 145(a).
; However, going from a dispersed control to a controlling ii) Non-criminal act undertaken on behalf of the corporation in good
shareholder does implicate Revlon. QVC. faith + subjective belief in best interest of corp.? ； Indemnification
o If no competing bidders ； no affirmative duty to seek a better price. allowed. ? 145(a).
Lyondell. iii) Advance payment right under ? 145(e). (But Sarbanes-Oxley ?402
may disallow this by disallowing loans for public companies, p335) ; If board does not redeem poison pill upon condition of buyer ； upheld if
b) D ―successful on the merits‖ (not adjudicated against)? ； OK. ? 145(c); ―substantive coercion‖ (seemed like a good deal to shs but really not).
c) Adjudicated against? ； See ? 145(b) (equitable indemnity allowed). ; Remedies:
Note: Judgment, conviction, or no contest plea ； not presumption of o Appraisal – for single-step (e.g., ? 253 parent-sub) or complaints re:
bad faith or reasonable cause to know of criminality. ? 145(a). price. Unocal v. Glassman; Rabkin
; D&O Insurance o Appraisal or Entire Fairness – for controlling (e.g., cash-out, two-
a) Note: The Corporation is theoretically the beneficiary of a derivative suit, step). Technicolor; Rabkin.
but Ps’ attys are the real beneficiaries. The Corporation bears all the costs
of defending a suit, indemnifying D&Os’ costs, Ps’ costs for successful MISC (1) controlling shareholder announces its intention to begin a tender offer directly to the minority suit. shareholders. ; Liability Waiver (2) The target forms an SC of independent directors to assess the transaction, negotiate with the a) But not in cases of ―bad faith‖ (see pp346-47 re: Disney). controller, and issue a Schedule 14D-9 recommendation to the minority (e.g., approve, reject, neutral, or unable to take a position). (3) If the controller gained sufficient shares in its tender offer to get to 90% voting control of the FEDERAL OVERSIGHT LIABILITY target, it would then execute a short-form merger, which does not require a shareholder vote, in order to ; SEA and SEC regulations impose oversight obligations on directors. eliminate the remaining (nontendering) minority shareholders. ; Various environmental and other statutes impose civil and criminal liability (4) Because 90% is the critical threshold in a tender offer freezeout, the controller would typically condition its offer on getting to 90% control (a "90% condition") upon directors and officers.
; Current law re: transactional forms for a freezeout by controller ; Defense: Oversight mechanisms can reduce the penalty. (p278). (1) the statutory merger – involves SC but entire fairness review (2) tender offer route - BJR ; What to do if director presented with an opportunity? ; Duties of a controlling sh? Terms
; Corporate opportunities/duty of loyalty can be contracted around, ; freezeout = transaction in which a controlling shareholder buys out the
minority shareholders in a publicly traded corporation, for cash or the but not the duty of good faith and fair dealing (i.e., duty of care). controller's stock. Aka ―cash-out merger,‖ ―going private mergers,‖ ―squeeze-
outs,‖ ―parent-subsidiary merger,‖ ―minority buyout,‖ or a ―take out.‖ MERGERS
; Arms-length (disinterested party, no self-dealing) ； BJR.
; Freezout/cash-out merger + dissent ； Appraisal remedy
AO - 5