Liability of Principal to Third Parties in Contract, the agent’s authority – Mill Street Church of Christ v. Hogan
Year: 1990
Court:
2. Disposition: Affirm the decision of the New Board.
3. Holding: Sam Hogan was within the employment of the Mill at the time he was injured.
4. Issue:
5. Procedural History: Mill petitions for review of a decision of the New Board that reversed an earlier decision by the Old Board and ruled that Hogan was an employee. The Old Board ruled that Hogan was not an employee of the Mill and was not entitled to any workers’ compensation benefits.
6. Facts: In 1986, the Elders of the Mill decided to hire Bill Hogan to paint the church building. Bill Hogan discussed the matter of a helper with Dr. Waggoner but Petty, helper, was difficult to reach. Bill Hogan approached his brother, Sam, about helping him complete the job. Sam climbed the ladder to paint a ceiling corner, and a leg of the ladder broke. Sam fell to the floor and broke his left arm. The Elders did not know that Bill Hogan approached Sam to work as a helper until after the accident occurred. Sam Hogan filed a claim under the Workers’ Compensation Act.
7. Rule: Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated.
Apparent authority is not actual authority but the authority the agent is held out by the principal as possessing.
8. Reasoning: Petitioners argue that the New Board erred in finding that Bill had implied authority as an agent to hire. -> it must be determined whether the agent reasonably believes because of present or past conduct of the principal that the principal wishes him to act in a certain way or to have certain authority.
Bill Hogan had implied authority to hire Sam Hogan. (1) in the past the church had allowed Bill to hire his brother or other persons. (2) Bill Hogan needed to hire an assistant to complete the job for which he had been hired. (3) Sam Hogan believed that Bill Hogan had the authority to hire him as had been the practice in the past.
Liability of Principal to Third Parties in Contract, the agent’s authority – Three-seventy Leasing Corp v. Ampex Corp
Year:
Court:
2. Disposition:
3. Holding: the district court was not clearly erroneous when it found that Kays had apparent authority to accept Joyce's offer on behalf of Ampex, and we further conclude that the November 17 letter, in these circumstances, can reasonably be interpreted to be an acceptance.
4. Issue:
5. Procedural History:
6. Facts: 370 seeks damages for breach of contract to sell six computer core memories. These negotiations resulted in a written document submitted by Kays to Joyce at the direction of Mueller. The document provided for the purchase by Joyce of six core memory units at a price of $100,000 each. The document had signature blocks for a representative of each party to sign. Joyce signed on behalf of 370, but no one from Ampex signed the document.
7. Rule:
8. Reasoning: There is no evidence, either written or oral, other than the document itself, which shows that Ampex had the requisite intent necessary to the formation of a contract prior to November 6, 1972. On November 9, 1972, Mueller issued an intra-office memo that Ampex was awarded an Agreement.
Liability of Principal to Third Parties in Contract, the agent’s authority – Ackerman v. Sobol Family Partnership, LLP
Year: 2010
Court:
2. Disposition:
3. Holding: the trial court’s finding that Coe had apparent authority to settle the litigation is supported by the evidence and is legally correct, and the Plaintiffs’ claim that the settlement agreement is unenforceable has no merit.
4. Issue: whether the plaintiffs’ attorney had apparent authority to make settlement proposals, engage in settlement discussions and bind the plaintiffs to a global settlement agreement with the defendants.
5. Procedural History: Sobol and Bank of American filed a motion to enforce a settlement agreement purportedly reached with Plaintiff. The court granted the motion to enforce the settlement agreement. Plaintiffs filed a motion to reargue and appealed.
6. Facts:
7. Rule: Apparent authority exists (1) where the principal held the agent out as possessing sufficient authority to embrace the act in question and knowingly permitted him to act as having such authority; and (2) in consequence thereof, the person dealing with the agent acting in good faith reasonably believed under all the circumstances that the agent had the necessary authority.
Actual authority exists when an agent’s action is expressly authorized or although not authorized, is subsequently ratified by the principal. Apparent authority is that semblance of authority which a principal, through his own acts or inadvertences, causes or allows third persons to believe his agent possesses. It is to be determined by the acts of the agent’s principal.
Apparent authority terminates when the third person has notice that (1) the agent’s authority has terminated; (2) the principal no longer consents that the agent shall deal with the third person; or (3) the agent is acting under a basic error as to the facts.
8. Reasoning: Plaintiffs contend that the trial court’s findings that Rena was present at the deposition and never manifested that the settlement authority was limited or had been terminated were insufficient to support that Coe had full authority. Plaintiffs further contend that findings by the trial court that Rena was involved in every aspect of the litigation and that she is very bright are inconsistent with the conclusion that Coe had apparent authority to settle the litigation. -> Defendants contend that Plaintiffs consistently held Coe out as their sole spokesman. The Court agrees with the defendants that Plaintiffs clothed Coe with apparent authority to settle the litigation.
The Plaintiffs held Coe out as possessing the necessary authority to settle the litigation by (2) authorizing him to represent them at the court-ordered mediation, (2) communicating with Coe in the presence of the defendants, and (3) failing to revoke Coe’s authority or to inform so. -> Plaintiffs held Coe out as having authority to settle the litigation.
Liability of Principal to Third Parties in Contract, the agent’s authority – Watteau v. Fenwick
Year: 1892
Court:
2. Disposition: Appeal dismissed.
3. Holding: The defendants are liable in the present action. Defendants have so conducted themselves as to enable their agent to hold himself out to the world as the proprietor of their business and they are undisclosed principals. All the Plaintiff has to do is to do that they were within the reasonable scope of the agent’s authority.
4. Issue:
5. Procedural History: The judge allowed the claim for the cigars and Bovril only and gave judgment for Plaintiff. Defendants appealed.
6. Facts: A beerhouse called the Victoria Hotel was transferred to the defendant brewers. Under the agreement Humble had no authority to buy any goods for the business except bottled ales and mineral waters. The action was brought to recover the price of goods delivered at the Hotel for which Plaintiff gave credit to Humble only. They consisted of cigars, Bovril, and other articles. Plaintiff sues for the price of cigars supplied to the Hotel.
7. Rule:
8. Reasoning: the liability of a principal for the acts of his agent depends upon his holding him out as his agent- that is, upon the agent being clothed with an apparent authority to act for his principal. Where, in the present case, there is no holding out by the principal, but the business is carried on in the agent’s name and the goods are supplied on his credit, a person wishing to go behind the agent and make the principal liable must show an agency in fact.
Undisclosed principals and agents are liable. There is no apparent authority in undisclosed principal context.
Liability of Principal to Third Parties in Contract, ratification – Botticello v. Stefanovicz
Year: 1979
Court:
2. Disposition: remand.
3. Holding: Mary never authorized her husband to act as her agent and recovery against her is precluded. Walter was not restricted in his capacity to contract.
4. Issue:
5. Procedural History: The trial court ordered specific performance. Defendants claim in appeal that Mary was never a party to the agreement. Plaintiff alleges that Walter acted as Mary’s authorized agent.
6. Facts: Stefanovicz acquired as tenants in common a farm. Walter advised Botticello that the asking price of the farm was $100000 and Botticello made a counteroffer of $75000. Mary stated that there is no way she could sell. Walter and Botticello agreed upon a price of $85000 for a lease with an option to purchase. The agreement was signed by Walter and by Botticello. Botticello did not request a title search and Walter did not represent that he was acting for his wife as her agent. Botticello made substantial improvements on the property and exercised his option to purchase. Stefanovicz refused to honor the option agreement and Botticello commenced this action.
7. Rule: Agency is defined as the fiduciary relationship which results from manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. The three elements required to show the existence of an agency relationship include: (1) a manifestation by the principal that the agent will act for him; (2) acceptance by the agent of the undertaking; and (3) an understanding between the parties that the principal will be in control of the undertaking. Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. Ratification requires acceptance of the results of the act with an intent to ratify and with full knowledge of all the material circumstances.
8. Reasoning: The facts are wholly insufficient to support the court’s conclusion that Walter acted as Mary’s authorized agent. A statement that one will not sell for less than a certain amount is by no means the equivalent of an agreement to sell for that amount. The fact that one spouse tends more to business matters does not constitute the delegation of power as to an agent. Walter never signed any documents as agent for Mary prior to 1966.
Plaintiff argues Mary ratified the contractual terms by her subsequent conduct -> no intent by Mary to ratify nor establishes her knowledge of all the material circumstances.
She does not know the material facts so it is insufficient to ratify. Mary should not have reasonably known the terms of the deal.
Exception: if the principal chooses to not know the facts, the principal can ratify.
Liability of Principal to Third Parties in Contract, estoppel – Hoddeson v. Koos Bros
Year: 1957
Court:
2. Disposition: Reverse.
3. Holding: Where a proprietor of a place of business by his dereliction of duty enables one who is not his agent conspicuously to act as such… the law will not permit the proprietor defensively to avail himself of the impostor’s lack of authority and thus escape liability for the consequential loss thereby sustained by the customer.
4. Issue: whether the evidence circumstantiates the presence of apparent authority.
5. Procedural History:
6. Facts: Hoddeson traveled to Koos to purchase certain articles of bedroom furniture and was greeted by a tall man with dark hair frosted at the temples and clad in a light gray suit. The man guided Hoddeson to the furniture, took cash, and informed her the articles would be delivered to her in September. Hoddeson awaited the delivery but the date of delivery elapsed and her inquiry was answered that Koos records failed to disclose any such sale and credit. Defendant insists that the salesperson was an impersonator without Defendant’s knowledge.
7. Rule: The liability of a principal to third parties for the acts of an agent may be shown by proof disclosing (1) express or real authority which has been definitely granted; (2) implied authority to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and (3) apparent authority, such as where the principal by words, conduct, or other indicative manifestations has held out the person to be his agent.
8. Reasoning: the duty of the proprietor also encircles the exercise of reasonable care and vigilance to protect the customer from loss occasioned by the deceptions of an apparent salesman.
Liability of Principal to Third Parties in Contract, agent’s liability on the contract – Atlantic Salmon A/S v. Curran
Year: 1992
Court:
2. Disposition: Reversed.
3. Holding: Defendant’s use of trade names or fictitious names by which he claimed Marketing Designs, Inc. conducted its business is not in the circumstances a sufficient identification of the alleged principal so as to protect Defendant from personal liability.
4. Issue: personal liability of an agent who at the relevant times was acting on behalf of a partially disclosed or unidentified principal.
5. Procedural History: Curran argues that he was acting as an agent of Marketing Designs, Inc. in 1988.
6. Facts: Curran did business with Salmonor and Atlantic in 1985 and 1987, respectively. Curran dealt with Plaintiffs as a representative of Boston Seafood Exchange, Inc. Curran paid, represented, and advertised under that name. A Mass corporation named Marketing Designs, Inc. was organized in 1977. In 1983, the company was dissolved for failure to make requisite corporate filings. In 1987, a certificate was filed declaring that Marketing Designs, Inc. was conducting business under the name of Boston Seafood Exchange. Salmonor is owed $101000 and Atlantic $153000 for salmon sold to the business Boston Seafood Exchange during 1988. Marketing Designs, Inc. was revived for all purposes in 1988.
7. Rule:
8. Reasoning: it is the duty of the agent, if he would avoid personal liability on a contract entered into by him on behalf of his principal, to disclose not only that he is acting in a representative capacity, but also the identity of his principal.
It was not Plaintiff’s duty to seek out the identity of Defendant’s principal; it was Defendant’s obligation fully to reveal it.
Liability of Principal to Third Parties in tort, Servant/IC – Humble Oil & Refining Co. v. Martin
Year: 1949
Court:
2. Disposition:
3. Holding: the Court of Civil Appeals properly held Humble responsible for the operation of the station.
4. Issue:
5. Procedural History: The trial court rendered judgment against Humble and Love jointly and severally and gave Love judgment over against Humble for whatever Love might pay. The Appeals affirmed after reforming the judgment to eliminate the judgment over in favor of Love without prejudice to the right of contribution by either defendant.
6. Facts: An unoccupied automobile belonging to Love had been left by Love at a filing station owned by Humble for servicing and rolled by gravity off the premises into and across the abutting street, striking Martin and his children from behind as they were walking into the yard of their home. Humble argues that it is not liable because the station was operated by an independent contractor, Schneider.
7. Rule:
8. Reasoning: The main object of the enterprise was the retail marketing of Humble’s products with title remaining in Humble until delivery to the consumer. The business was Humble’s business, just as the store clerk’s business would be that of the store owner.
Humble sets prices, work hours, locations, advertises, and others and has control over the business. Perform other duties as required from time to time for the company. Humble covers the store’s losses; Schneider does not lose. Schneider did not sell products other than Humble products.
Liability of Principal to Third Parties in tort, Servant/IC – Hoover v. Sun Oil Company
Year: 1965
Court:
2. Disposition:
3. Holding: Sun had no control over the details of Barone’s day-to-day operation. No liability can be imputed to Sun from the allegedly negligent acts of Smilyk.
4. Issue:
5. Procedural History:
6. Facts: the fire started at the rear of Hoover’s car where it was being filled with gasoline at a station operated by Barone and by employee Smilyk. Plaintiffs sued Smilyk, Barone, and Sun. Sun moved for summary judgment claiming that Barone was an independent contractor. Hoover claims Barone was Sun’s agent. Barone operated the business as a lease and Sun owned the station and equipment except some.
7. Rule:
8. Reasoning: The lease contract and dealer’s agreement fail to establish any relationship other than landlord-tenant, and independent contractor.
Barone can sell non-Sun Oil products. It can set its own hours. Barone internalized more of the profits and losses and is more of an equity holder. Schneider does not internalize as much profits and losses.
Liability of Principal to Third Parties in tort, Servant/IC – Murphy v. Holiday Inns, Inc.
Year: 1975
Court:
2. Disposition: Affirmed.
3. Holding: regulatory provisions of the franchise contract did not constitute control within the definition of agency.
4. Issue:
5. Procedural History: The trial court found no principal-agent or master-servant relationship and granted summary judgment for Defendant.
6. Facts: Murphy sustained injuries as a guest at a motel in Danville. Murphy alleges that Defendant owned and operated the motel and Murphy slipped and fell on an area of a walk where water draining from an air conditioner had been allowed to accumulate. Defendant filed a motion for summary judgment on the grounds that it has no relationship to the operator of the premises other than a license agreement.
7. Rule:
8. Reasoning: in determining whether a contract establishes an agency relationship, the critical test is the nature and extent of the control agreed upon.
Regulatory provisions gave defendant no control or right to control the methods or details of doing work and no principal-agent or master-servant relationship existed.
All such powers and other management controls and responsibilities customarily exercised by an owner and operator of an ongoing business were retained by Betsy-Len.
No employer-employee relationship existed. Terms of license are not enough to create day-to-day control. Holiday Inns is creditor not equity holder.
Liability of Principal to Third Parties in tort, Tort Liability and Apparent agency – Miller v. McDonald’s Corp.
Year: 1997
Court:
2. Disposition: Reverse.
3. Holding: A jury could find that it was Defendant’s very insistence on uniformity of appearance and standards designed to cause the public to think of every McDonald’s as part of the same system that makes it difficult or impossible for the Plaintiff to tell whether her pervious experiences were at restaurants that Defendant owned or franchised.
4. Issue:
5. Procedural History: The trial court granted summary judgment to Defendant on the ground that it did not own or operate the restaurant.
6. Facts: Miller seeks damages from Defendant for injuries when she bit into a heart-shaped sapphire stone while eating a Big Mac sandwich. 3K owned and operated the restaurant under the Agreement that required it to operate in a manner consistent with the McDonald’s System.
7. Rule:
8. Reasoning: Despite the detailed instructions on day to day operations of the restaurant, the Agreement provided that 3K was not an agent of Defendant for any purpose but was an independent contractor.
Defendant does not dispute that a jury could find that it held 3K out as its agent. It argues that there is insufficient evidence that Plaintiff justifiably relied on that holding out. Defendant’s argument that she must show that it operated those restaurants is disingenuous.
Do the franchise terms give McDonald’s control over the means that led to the injury? McDonald’s precisely controls the food preparation.
Liability of Principal to Third Parties in tort, Scope of Employment – Ira S. Bushey & Sons, Inc. v. US
Year: 1968
Court:
2. Disposition: Affirmed.
3. Holding: the risk that seamen going and coming from the Tamaroa might cause damage to the drydock is enough to make it fair that the enterprise bear the loss.
4. Issue:
5. Procedural History: The drydock owner was granted compensation by the DC for the EDNY.
6. Facts: USCG vessel Tamaroa was being overhauled in a floating drydock and a seaman turned some wheels on the drydock wall. He opened valves that controlled the flooding of the tanks and the ship listed, slid off the blocks and fell against the wall. Parts of the drydock sank and the ship partially did. Seaman Lane drank heavily and turned each of three large wheels some twenty times that controlled the water intake valves. The vessel and dock were listing and the ship slid off the blocks and fell against the drydock wall.
7. Rule: 228(1) Restatement of Agency 2d states that conduct of a servant is within the scope of employment if, but only if, it is actuated, at least in part, by a purpose to serve the master.
8. Reasoning: the government argues that Lane’s acts were not within the scope of his employment.
It was foreseeable that crew members crossing the drydock might do damage negligently or even intentionally. The proclivity of seaman to find solace for solitude by copious resort to the bottle has been noted.
Lane had come within the closed-off area where his ship lay… to occupy a berth to which the Government insisted he have access… and his act was not shown to be due entirely to facets of his personal life.
Respondent superior liability -> whether Lane was acting within the scope of employment. When returning to the ship? When turning the wheels? (clover) To determine, the act must have the motive to serve the employer. Whether it was employee and is this conduct within the scope of employment. Unintentional tort because drunk.
Liability of Principal to Third Parties in tort, Scope of Employment – Manning v. Grimsley
Year: 1981
Court:
2. Disposition: vacated and remanded on the battery count.
3. Holding: Grimsley’s assault was not a mere retaliation for past annoyance, but a response to continuing conduct which was presently interfering with his ability to pitch in the game if called upon to play.
4. Issue:
5. Procedural History: The district judge directed a verdict for Defendants on the battery count and the jury returned a verdict for defendants on the negligence count. Plaintiff appeals on the battery count.
6. Facts: Manning was a spectator at a baseball game and was injured by a ball thrown by a pitcher and sought to recover damages from the pitcher and his employer. Grimsley had been warming up by throwing a ball from a pitcher’s mound to a plate in the bullpen located near the right field bleachers. The spectators heckled Gimsley. Grimsley faced the bleachers and wound up or stretched as though to pitch and the ball hit Manning.
7. Rule: where a plaintiff seeks to recover damages from an employer for injuries resulting from an employee’s assault… what must be shown is that the employee’s assault was in response to the plaintiff’s conduct which was presently interfering with the employee’s ability to perform his duties successfully. This may be in the form of an affirmative attempt to prevent an employee from carrying out his assignments.
8. Reasoning: Constant heckling by fans at a baseball park would be conduct. Such conduct had either the affirmative purpose to rattle or the effect of rattling the employee so that he could not perform his duties successfully.
Whether Grimsley intended to respond to carrying out the duties for employer, warming up.
Liability of Principal to Third Parties in tort, Liability for Torts of Independent Contractors – Majestic Realty Associates, Inc. v. Toti Contracting Co.
Year: 1959
Court:
2. Disposition:
3. Holding: the current New York rule is that the razing of buildings in a busy, built up section of a city is inherently dangerous within the contemplation of section 416 of the Restatement.
4. Issue:
5. Procedural History: The trial court acknowledged that the demolition work was hazardous by nature, but did not constitute a “nuisance per se.” Hence, the trial court ruled that since the Authority did not have control over the demolition performed by Toti, an independent contractor, the Authority could not be held liable for Toti’s negligence. The Appellate Division reversed and found that the Authority was liable for the damage caused by Toti.
6. Facts: Majestic and Bohen’s sued Toti and Authority for damages caused to a building owned by Majestic. The Authority contracted with Toti to demolish a number of structures on the street where Majestic’s building was located. A Toti employee acted negligently in the demolition of the structure adjacent to Majestic’s building, which resulted in severe damage to Majestic’s property.
7. Rule: where a person engages a contractor, who conducts an independent business by means of his own employees, to do work not in itself a nuisance, he is not liable for the negligent acts of the contractor in the performance of the contract. Exceptions are (1) where the landowner retains control of the manner and means of the doing of the work which is the subject of the contract; (2) where he engages an incompetent contractor, or (3) where the activity contracted for constitutes a nuisance per se.
Inherently dangerous: imposes liability upon the landowner who engages an independent contractor to do work which he should recognize as necessarily requiring the creation during its progress of a condition involving a peculiar risk of harm to others unless special precautions are taken.
8. Reasoning:
P could have made sure that the agent is bonded or insured. Insolvent agent and the liability on the principal.
Fiduciary Obligation of Agents, Duties during agency – Reading v. Regem
Year: 1948
Court:
2. Disposition: Petition dismissed.
3. Holding: the wearing of the King’s uniform and his position as a soldier is the sole cause of his getting the money and he gets it dishonestly, that is an advantage which he is not allowed to keep.
4. Issue:
5. Procedural History:
6. Facts: Reading (plaintiff) was a sergeant in the Royal Army Medical Corps. (defendant), stationed in Cairo, Egypt. Reading decided to make money by escorting a truck loaded with cargo through the streets of Cairo and delivering them to a third party, Manole. Manole paid Reading handsomely for his efforts. Reading was in full uniform while he was transporting the cargo. When the army discovered that Reading had a great deal of money in his Egyptian bank accounts and in his apartment, it launched an investigation. When it was discovered how Reading had made the money, the army impounded the funds. The army kept the money on the ground that Reading violated his duty by using his status as a soldier to escort the trucks through Cairo for pay. Reading sued to get the money back, contending that it rightfully belonged to him.
7. Rule:
8. Reasoning: if a servant takes advantage of his services and violates his duty of honesty and good faith to make a faith for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies play the predominant part in his obtaining the money, then he is accountable for it to his master.
The use of the facilities provided by the Crown in the share of the uniform and the use of his position in the army were the only reason why the plaintiff was able to get this money.
Fiduciary Obligation of Agents, Duties during agency – Rash v. J.V. Intermediate, Ltd.
Year: 2007
Court: 10th circuit
2. Disposition:
3. Holding: Rash violated his fiduciary duty in failing to disclose his interest in TIPS to JVIC.
4. Issue:
5. Procedural History:
6. Facts: JVIC hired Rash to start and manage a Tulsa division of its industrial plant maintenance business. The employment agreement stipulated the use of Texas law and required Rash to devote his full work time and efforts to JVIC. The agreement was to last from 1999 to 2001 and Rash served as manager until 2004. Starting in 2001, JVIC claims Rash actively participated in and owned at least four other businesses. One was TIPS, a scaffolding business, that bid on projects for FVIC-Tulsa and JVIC-Tulsa often selected TIPS as a subcontractor. JVIC started its own scaffolding business and JVIC-Tulsa never used JVIC’s scaffolding services.
7. Rule:
8. Reasoning: Rash was an agent of JVIC, because (1) Rash ran the shop; (2) Rash contractually agreed to perform the duties of an agent; and (3) Rash does not deny that he was an agent of JVIC.
Rash states he owed no specific duty to JVIC’s minor scaffolding business and Vardell, JVIC’s president, told him that he had no problem with Rash forming a business which might contract with JVIC. -> Rash had a general duty of full disclosure respecting matters affecting the principal’s interests and a general prohibition against the fiduciary’s using the relationship to benefit his personal interest, except with the full knowledge and consent of the principal.
Violated adverse party transactions
Fiduciary Obligation of Agents, Duties during and after termination of agency – Town & Country House & Home Service, Inc. v. Newbery
Year: 1958
Court:
2. Disposition: Affirm.
3. Holding: Plaintiff is entitled to enjoin defendants from further solicitation of its customers.
4. Issue:
5. Procedural History: The complaint was dismissed at Special Term on the ground that the appellants were not subjected to negative covenants under any contract with plaintiff and that the methods and techniques are not confidential or secret. Appellate Division reversed because while in plaintiff’s employ appellants conspired to terminate their employment, form a business of their own in competition with plaintiff and solicit plaintiff’s customers.
6. Fact: Newbery worked for T&C for nearly three years. After terminating their employment with T&C, Newbery et al. formed their own house cleaning company which directly competed with their former employer. Newbery et al. built their customer base by soliciting T&C’s customers. After discovering that Newbery et al. solicited its customers, T&C sued Newbery et al., alleging that Newbery et al. had engaged in unfair competition. In its complaint, T&C contended that its business was “unique, personal and confidential” and that Newbery et al. breached their confidential relationship with T&C by appropriating its trade secrets, i.e., T&C’s customer information, for competitive purposes.
7. Rule:
8. Reasoning: the only trade secret which could be involved in this business is plaintiff’s list of customers. Plaintiff’s customers were the only ones they did solicit. It would be different if these customers had been equally available to appellants and respondent, but these customers had been screened by respondent at considerable effort and expense.
Violation of fiduciary duty based on misuse of the principal’s confidential information.
Partnership, Partners Compared with Employees – Fenwick v. Unemployment Compensation Commission
Year: 1945
Court:
2. Disposition: Reversed.
3. Holding: The element of co-ownership is lacking in this case.
4. Issue: whether Cheshire was from 1939 to 1942, a partner or an employee of Fenwick.
5. Procedural History: The Commission held that the agreement was nothing more than an agreement fixing the compensation of an employee. The Supreme Court held that the parties were partners.
6. Facts: Fenwick employed Chesire as a cashier and reception clerk. Chesire initially worked for $15 per week, but after several months she demanded a raise. Not wanting to lose Chesire, Fenwick agreed to increase her compensation if his beauty parlor made more money. Fenwick and Chesire executed an agreement which described their association going forward as a “partnership,” and each of them as a “partner.” Chesire continued to work as cashier and receptionist for three years after the agreement was executed. She subsequently terminated the agreement and quit her job to stay home with her child.
7. Rule:
8. Reasoning: it would seem that, as far as the intention of the parties is concerned, the effect of the statements in the agreement has been met and overcome by the sworn testimony of Fenwick and by the conduct of the parties.
The right to share in profits -> not every agreement that gives the right is a partnership agreement.
Obligation to share in losses -> absent.
Ownership and control of the partnership property and business -> Fenwick contributed all.
Community of power in administration -> reservation in the agreement of the exclusive control of the management excludes this element for Chesire.
Language in the agreement -> the language excludes Chesire from most of the ordinary rights of a partner.
The conduct of the parties toward third persons -> They filed partnership income tax returns and held thelselves out as partners to the Commission, but no one else did they hold themselves out as partners.
The rights of the parties on dissolution -> the rights of Chesire in the dissolution was exactly the same as if she had quit an employment.
Was a form of increase in compensation not an agreement in the outset.
Partnership, Partners Compared with Lenders – Martin v. Peyton
Year: 1927
Court:
2. Disposition: Affirmed.
3. Holding: no partnership was created. When taken together a point may come where stipulations immaterial separately cover so wide a field that we should hold a partnership exists.
4. Issue:
5. Procedural History:
6. Facts: Martin claims Peyton, who had made investments in the firm, were partners and liable for its debts. Peyton claims they were creditors. Hall obtained a loan of $500000 from Peyton. Hall entered into negotiation with Peyton, Perkins, and Freeman that some of them should become partners but it was rejected. Under the agreement, the respondents were to loan KN&K $2500000 which were to be returned to them. Respondents were to receive 40% of the profits of the firm and could join the firm.
7. Rule:
8. Reasoning: creditors or equity holders or partners? -> relationship of Hall to other partners. The level of control the lenders have.
Partnership, Partners Compared with Lenders – Southex Exhibitions, Inc. v. Rhode Island Builders Association, Inc.
Year: 2002
Court:
2. Disposition: Affirm.
3. Holding:
4. Issue:
5. Procedural History: The district court entered judgment for RIBA, holding that the agreement created no partnership between RIBA and SEM.
6. Facts: SEM executed an agreement with RIBA to produce RIBA home shows at a local civic center. During the contract negotiations, SEM’s president, Sherman, told RIBA representative Dagata that if he was not happy after the first year, he would give back the shows to RIBA. Sherman consistently referred to himself as the producer of the shows. Twenty years after the agreement was executed, Southex acquired SEM’s interest under the agreement. Southex continued to enter into third-party contracts under its own name, and never filed partnership tax returns. Four years later, Southex decided that it would likely renegotiate the agreement. RIBA told Southex that it was dissatisfied with Southex’s performance and then signed a contract with a rival producer. Southex sued RIBA alleging that RIBA breached its duty to Southex by wrongfully terminating the agreement and contracting with the competing producer.
7. Rule:
8. Reasoning: Southex insists that the 1974 agreement contains indicia that a partnership was formed, including: (1) a 55-45% sharing of profits; (2) mutual control over designated business operations; and (3) the respective contributions of valuable property to the partnership.
The court finds that the Agreement is entitled ‘Agreement,’ it prescribes a fixed term, and SEM does not share operating costs with RIBA. SEM was responsible for the lion’s share of management decisions. Southex went into contract and conduct business in its own name. The evidence as to whether either SEM or RIBS contributed any corporate property so that it becomes a partnership property is highly speculative.
Southex asserts that RIBA agreed to share business profits with SEM and formed partnership. -> totality of the circumstances test should apply.
Southex asserts that the Agreement unambiguously describes the parties as partners. -> the labels are not necessarily dispositive as a matter of law.
SEM said it did not want to be co-owners with RIBA.
The Fiduciary Obligations of Partners – Meinhard v. Salmon
Year: 1928
Court:
2. Disposition: affirmed with modification.
3. Holding: There may be substituted for a trust attaching to the lease a trust attaching to the shares of stock, with the result that one-half of such shares together with one additional share will in that event be allotted to Salmon and the other shares to Meinhard.
4. Issue:
5. Procedural History: A referee gave judgment for the plaintiff but limiting the interest to 25 percent. Appellate court enlarged the equitable interest to one-half of the whole lease.
6. Facts: Gerry leased to Salmon the Hotel Bristol for twenty years. Salmon was in negotiations with Meinhard for the necessary funds, and a joint venture resulted. Gerry became the owner of the reversion. In 1922, Gerry made a new lease to Salmon covering the whole tract and involving a huge outlay. The existing buildings are to be torn down and a new building to be placed upon the site. Salmon personally guaranteed the performance but did not tell Meinhard anything about it. When Meinhard knew it he demanded that the lease be held in trust as an asset of the venture, making offer upon the trial to share the personal obligations incidental to the guaranty. A refusal led to this suit.
7. Rule:
8. Reasoning: joint adventurers owe to one another the duty of the finest loyalty.
To the eye of an observer, Salmon held the lease as owner in his own right, for himself and no one else. Salmon excluded his coadventurer from any change to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency.
The very fact that Salmon was in control with exclusive powers of direction charged him the more obviously with the duty of disclosure, since only through disclosure could opportunity be equalized.
The Plaintiff’s equitable interest is to be measured by the value of half of the entire lease, and not merely by half of some undivided part.
The lease is to the corporation. Salmon has majority of shares and control rests with Salmon. Gerry’s expectations are protected.
The Fiduciary Obligations of Partners – Sandvick v. LaCrosse
Year: 2008
Court:
2. Disposition:
3. Holding: Defendants breached their fiduciary duties of loyalty by taking advantage of a joint venture opportunity when they purchased the top leases without informing Plaintiffs.
4. Issue:
5. Procedural History: The district court ruled that neither a partnership nor a joint venture existed with respect to the Horn leases and that, therefore, no fiduciary duty was owed.
6. Facts: In May 1996, plaintiffs and defendants jointly purchased three oil and gas leases (the Horn leases) for the purpose of selling them for profit during their five-year terms. Empire Oil, which was owned by LaCrosse, held title to the Horn leases. The purchase was made using credits that each of the parties had in Empire Oil’s checking account. The Horn leases had no provisions for extensions or renewals. In November 2000, six months before the expiration of the Horn leases, Haughton and LaCrosse purchased three five-year oil and gas leases (the Horn top leases) that were, in effect, extensions of the Horn leases. The terms of the Horn leases and the Horn top leases were identical, except that Sandvick and Bragg were not parties to the Horn top leases. Sandvick and Bragg were not informed of Haughton and LaCrosse’s acquisition. Sandvick and Bragg brought suit against LaCrosse and Haughton, alleging that they breached their fiduciary duties by failing to offer Sandvick and Bragg the chance to participate in the purchase of the Horn top leases.
7. Rule: Partnership involves (1) an intention to be partners, (2) co-ownership of the business, and (3) a profit motive.
Joint venture involves (1) contribution by the parties in some common undertaking (2) a proprietary interest and right of mutual control over the engaged property; (3) an express or implied agreement for the sharing of profits and of losses; and (4) an express or implied contract showing a joint venture was formed.
8. Reasoning: the purchase of the Horn leases was a separate act undertaken by the parties -> partnership did not exist.
Joint venture did exist in regard to the parties’ purchase of the Horn leases, because the leases were purchased out of the parties’ checking account funds in equal shares, they were titled in Empire Oil’s name, and profits were going to be shared if the leases were sold.
Business: a series of acts directed towards an end. In purchasing and selling Horn leases, there was no series of acts. Two insiders became adverse to the goal of the joint venture.
The Fiduciary Obligations of Partners, Grabbing and leaving – Meehan v. Shaughnessy
Year: 1989
Court:
2. Disposition:
3. Holding: Meehan and Boyle breached their fiduciary duties.
4. Issue:
5. Procedural History: The trial court found that the MBC attorneys did not manipulate cases or handle them differently as a result of their decision to leave PC.
6. Facts: Meehan and Boyle, disgruntled partners in the law firm of PC, decided to quit that firm and form their own legal partnership. After leaving Parker Coulter, Meehan and Boyle sued their former firm for compensation they claimed was unfairly withheld from them. Parker Coulter filed a counterclaim alleging that Meehan and Boyle had breached their fiduciary duty by unfairly acquiring consent from clients to remove cases from Parker Coulter.
7. Rule:
8. Reasoning: Meehan and Boyle owed their copartners at Parker Coulter a duty of the utmost good faith and loyalty, and were obliged to consider their copartners’ welfare, and not merely their own.
PC argues that Meehan and Boyle violated their fiduciary duty by handling cases for their own benefit and challenges that no manipulation occurred -> judge’s finding that the reassignment of cases did not establish manipulation is consistent with a determination that the reassignment was based on merit and workload.
PC argues that the judge’s findings compel the conclusion that Meehan and Boyle breached their fiduciary duty not to compete with their partners by secretly setting up a new firm during their tenure at Parker Coulter. -> disagree.
PC argues that the judge’s findings compel the conclusion that Meehan and Boyle breached their fiduciary duty by unfairly acquiring consent from clients to remove cases from PC. -> Meehan and Boyle obtained an unfair advantage over their former partners in breach of their fiduciary duties.
They were ready to move the instant they gave notice to their partners. But Boyle delayed providing his partners with a list of clients he intended to solicit. The content of the letter sent to the clients was unfairly prejudicial to PC. By sending a one-sided announcement, on PC letterhead, so soon after notice of their departure, Meehan and Boyle excluded their partners from effectively presenting their services as an alternative to those of M and B.
Fair competition and violation of duty
The Fiduciary Obligations of Partners, Expulsion – Lawlis v. Kightlinger & Gray
Year: 1990
Court:
2. Disposition:
3. Holding: Lawlis’s constructive fraud argument is without merit.
4. Issue:
5. Procedural History:
6. Facts: Lawlis (plaintiff) had been a senior partner in the law firm Kightlinger & Gray (K&G) (defendant) for a number of years when he developed an alcohol problem in 1982. Lawlis also signed a Program Outline, which set conditions for Lawlis’s continuing partnership with K&G. The Program Outline stated that there was “no second chance” if Lawlis drank again. Lawlis started drinking again in March 1984, but K&G gave him another chance, allowing him to remain as senior partner as long as he stopped drinking permanently and met other conditions. All the senior partners except Lawlis voted in favor of the recommendation, which resulted in an addendum to the partnership agreement, providing that Lawlis would be given one unit of work and retain his senior partner status until he was terminated in June 1987. Lawlis refused to sign the addendum, and the remaining senior partners voted to expel Lawlis in February 1987.
7. Rule:
8. Reasoning: Lawlis claims his notification by Wampler on his severance constituted a dissolution of the partnership. Lawlis asserts he has a claim for damages for expulsion not authorized by a 2/3 votes. -> Wampler merely told what Finance Committee proposed to do in the future.
Lawlis claims his expulsion contravened the implied duty of good faith and fair dealing because he was expelled for the predatory purpose of increasing the firm’s lawyer to partner ratio. -> the facts present no predatory purpose.
Lawlis claims the expelling was constructively fraudulent because it breached fiduciary duty owed between partners. -> executive committee had the right to expel and did not breach fiduciary duty.
The Fiduciary Obligations of Partners, Partnership Property – In re Fulton
Year: 1984
Court:
2. Disposition:
3. Holding: equity in the trailer shall be distributed in accordance with UPA 40(b).
4. Issue:
5. Procedural History:
6. Facts: Padgett Carroll (plaintiff) and Walter Fulton (debtor) were partners in a trucking company called C & F Trucking. In July 1982, Carroll bought a trailer for C & F. The invoice listed C & F as the purchaser, and the trailer’s certificate of title listed C & F as the owner. In December 1982, Fulton petitioned for Chapter 7 bankruptcy and listed the trailer as an asset.
7. Rule: a partner cannot claim title in partnership property. When a partner files for bankruptcy, the partner’s estate obtains whatever partnership interest was held by the filing partner.
8. Reasoning: when the debtor filed bankruptcy, the partnership was dissolved. Upon dissolution, partnership property must be used to pay the liabilities of the partnership in the priority established. Money loaned to Carroll was a loan not to the partnership. The purchase of the trailer by Carroll constitutes a capital contribution to the partnership.
The Fiduciary Obligations of Partners, the Rights of Partners in Management – National Biscuit Company v. Stroud
Year: 1959
Court:
2. Disposition: Affirmed.
3. Holding: Freeman’s acts bound the partnership and Stroud.
4. Issue:
5. Procedural History:
6. Facts: Stroud (defendant) and Freeman formed a general partnership to sell groceries. The partnership agreement did not limit either partner’s authority to conduct ordinary business on behalf of the partnership. Several months before the partnership was dissolved, Stroud told a National Biscuit Company (NBC) (plaintiff) official that he would not be personally liable for any bread sold to the partnership. Freeman subsequently ordered more bread on behalf of the partnership, and NBC delivered that bread to the partnership. Shortly thereafter, the partnership was dissolved, and Stroud refused to pay for the bread delivered at Freeman’s behest.
7. Rule:
8. Reasoning: Stroud could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an ordinary matter connected with the partnership business, for the purpose of its business and within its scope, because Stroud was not and could not be a majority of the partners.
Gridlock, not majority and status quo prevails.
The Fiduciary Obligations of Partners, the Rights of Partners in Management – Summers v. Dooley
Year: 1971
Court:
2. Disposition:
3. Holding: one partner continually voiced objection to the hiring. It is manifestly unjust to permit recovery of an expense which was incurred individually and not for the benefit of the partnership.
4. Issue:
5. Procedural History:
6. Facts: Summers (plaintiff) and Dooley (defendant) were co-partners in a trash collection business. Both partners operated the business. The partners agreed that when one partner was unable to work, he could hire a replacement at his own expense. Several years after the formation of the partnership, Summers asked Dooley if he would agree to hire an additional employee. Dooley refused, but Summers hired the worker anyway and paid him out of his own pocket. In spite of the fact that the new worker was a good employee, Dooley would not agree to pay him out of the partnership funds.
7. Rule:
8. Reasoning: the non-consenting partner refused to consent but retained profits earned by the labors
Business differences must be decide by a majority of the partners provided no other agreement speaks to the issues.
We need a majority to change an ordinary course of business decision.
The Corporate entity and limited liability – Frigidaire Sales Corporation v. Union Properties, Inc.
Year: 1977
Court:
2. Disposition: affirm.
3. Holding: Because petitioner entered into the contract knowing that Union was the only party with general liability, and because in the eyes of the law it was Union which controlled the limited partnership, respondents did not incur general liability for their acts done as officers.
4. Issue:
5. Procedural History: Court of Appeals held that limited partners do not incur general liability for the limited partnership’s obligations simply because they are officers, directors, or shareholders.
6. Facts: Mannon and Baxter were the co-owners of Union. Mannon and Baxter were also the limited partners of Commercial Investors, a limited partnership in which Union was the general partner. Commercial had a business relationship with Frigidaire. Frigidaire sought to hold Mannon and Baxter directly liable for the obligations of Union, because neither Union nor Commercial were adequately capitalized, and because Mannon and Baxter directly controlled Commercial’s operations through Union.
7. Rule:
8. Reasoning: Frigidaire contends that respondents should incur general liability for the limited partnership’s obligations because they exercised the day-to-day control and management of Commercial. Respondents contend that Commercial was controlled by Union.
For us to find that respondents incurred general liability for the limited partnership’s obligations would require us to totally ignore the corporate entity of Union.
Respondents signed the contract as officers of Union, the general partner of Commercial. In the eyes of the law it was Union which entered into the contract with petitioner and controlled the limited partnership.
Petitioner knew Union was the sole general partner and did not rely on respondents’ control.
Partnership Dissolution, Dissociation and dissolution – Giles v. Giles Land Company
Year: 2012
Court:
2. Disposition: Affirmed.
3. Holding: The trial court properly held that Kelly could also be dissociated under K.S.A. 56a-601(e)(1).
4. Issue:
5. Procedural History: The trial court ruled in favor of the defendants on all counts, finding that it was not practicable to continue the partnership with Kelly as a partner.
6. Facts: The partnership held a meeting to consider converting the partnership to a limited liability company (LLC). Kelly was unable to attend the meeting, but later received notice of the partnership’s determination to convert to an LLC. Kelly formally requested the partnership’s books and records for his review. he brought suit against the partnership and the other partners (defendants), claiming that he was improperly denied access to the books and records. The defendants filed a counterclaim, arguing that Kelly should be dissociated from the partnership.
7. Rule:
8. Reasoning: Kelly argues that the evidence that the trial court relied on was not related to the partnership business. -> it is clear that Kelly can no longer do business with his partners and vice-versa.
Norman clearly testified that the partnership was at a standstill because of the disputes between Kelly and the rest of the partners. This is evidence that Kelly was materially or adversely affecting the partnership.
Standards for dissociation: not reasonably practical to carry out the business, wrongful conduct that materially or adversely affected. Material and adverse is met because the partnership is at a standstill.
Owen v. Cohen
Year: 1941
Court:
2. Disposition: affirmed.
3. Holding: the order to show cause issued in connection therewith is therefore discharged.
4. Issue: whether or not the evidence warrants a decree of dissolution of the partnership
5. Procedural History:
6. Facts: Owen (plaintiff) and Cohen (defendant) entered into an oral agreement to become partners in a bowling alley. Owen loaned the partnership $6,986.63 to buy the necessary equipment, which the parties agreed would be paid back to Owen from the profits of the business. Cohen insisted on being the dominant partner, and was openly hostile toward Owen in front of customers and employees. Cohen refused to do any manual work, and appropriated partnership funds for personal use. Cohen further demanded that a gambling room be added to the bowling alley. Owen subsequently filed an action in equity to dissolve the partnership.
7. Rule:
8. Reasoning: courts of equity may order the dissolution of a partnership where there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business.
This is a partnership for particular undertaking. Owen cannot leave without paying damages for the wrongful dissociation. Owen needs to prove that grounds exist for dissolving the partnership. Three criteria for dissolving partnership.
Collins v. Lewis
Year: 1955
Court:
2. Disposition: Affirmed.
3. Holding: We have already pointed out the ever present inherent power, as opposed to the legal right, of any partner to terminate the relationship. The alternative course available to appellants seems clearly legible in the verdict of the jury, whose services in that connection were invoked by appellants.
4. Issue:
5. Procedural History:
6. Facts: Collins (plaintiff) and Lewis (defendant) each owned 50% interest in a partnership formed to own and operate a cafeteria. Their partnership agreement provided that Collins would provide funds to build and open the cafeteria, while Lewis would oversee the construction of the cafeteria and manage it once it opened for business. Collins initially advanced $300,000, based on Lewis’s initial estimate of the cost to build and open the cafeteria. After a substantial delay in completing the cafeteria and increases in expenses, the initial cost had increased to $600,000. Collins expressed his displeasure about the cost increase, but he advanced the entire amount. Soon after the cafeteria opened, Collins discovered that the expenses far exceeded the receipts. Lewis accused Collins of unauthorized interference in the management of the business, while Collins charged that Lewis had mismanaged the building and opening of the cafeteria.
7. Rule:
8. Reasoning: whenever it is made to appear that the partners are in hopeless disagreement concerning a partnership which has no reasonable expectation of profit, the legal right to dissolution exists. Legal right to dissolution rests in equity, as does the right to relief from the provisions of any legal contract.
The jury has found that he was competent, and could reasonably have performed his obligation but for the conduct of Collins.
The business wasn’t profitable because plaintiffs was the reason. Wrongful dissociation leads to damages.
Partnership Dissolution, The Consequences of Dissolution – Kovacik v. Reed
Year: 1957
Court:
2. Disposition: Reversed.
3. Holding: upon the loss of both money and labor, the parties have shared equally in the losses.
4. Issue:
5. Procedural History:
6. Facts: Kovacik (plaintiff) and Reed (defendant) entered into a partnership to remodel kitchens. Kovacik would contribute funds to the enterprise in the amount of $10,000. Reed would contribute labor and skill, acting as an estimator and superintendent of the projects without compensation. The partners did not discuss the apportionment of losses. While the two received some jobs, they lost money. Kovacik asked Reed to contribute money to cover half of the total losses. Reed refused, and Kovacik filed this lawsuit.
7. Rule:
8. Reasoning: upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only services.
Where one party contributes money and the other contributes services, then in the event of a loss each would lose his own capital – the one his money and the other his labor.
Partnership Dissolution, Buyout Agreements – G & S Investments v. Belman
Year: 1984
Court:
2. Disposition:
3. Holding: partnership buy-out agreements are valid and binding although the purchase price agreed upon is less or more than the actual value of the interest at the time of death.
4. Issue:
5. Procedural History:
6. Facts: G & S Investments (plaintiff) and Thomas Nordale (defendant) were two of four partners in an enterprise to own and operate an apartment building. Nordale, who lived in one of the apartments in the building, became erratic and unreliable starting in 1979. In 1981, G & S filed suit to dissolve the partnership and buy out Nordale’s interest. The complaint filed by G & S alleged that Nordale had become incapable of performing under the partnership agreement and that his conduct made it impracticable for the other partners to carry on the partnership with him. In February 1982, Nordale passed away. In June 1982, G & S filed a supplemental complaint that invoked their right under the partnership agreement to carry on the partnership and buy out Nordale's interest. Nordale's estate argued that the original filing of the complaint acted as a dissolution of the partnership that required liquidating the partnership and distributing the assets to the partners.
7. Rule: Article 19 of the Articles of Partnership provides that the surviving or remaining general partners may continue the partnership business. Should they desire to continue the business, they must purchase the interest of the retiring or resigning general partner.
8. Reasoning: appellees content wrongful conduct of Nordale gave the court the power to dissolve the partnership and allow them to carry on the business by themselves. -> agree.
The words capital account are not ambiguous and clearly mean the partner’s capital account as it appears on the books of the partnership. Language of article 19 requires, for a buy out, the payment of the amount of the partner’s capital account plus other sums.
The Corporate entity and its formation and structure – Boilermakers Local 154 Retirement Fund v. Chevron Corp.
Year: 2013
Court:
2. Disposition:
3. Holding: Bylaws are statutorily valid under 8 De. C. 109(b) and contractually valid and enforceable as forum selection clauses.
4. Issue:
5. Procedural History:
6. Facts: the board of Chevron has adopted a bylaw providing that litigation relating to Chevron’s internal affairs should be conducted in Delaware. The board of FedEx adopted a similar bylaw. Stockholders in Chevron and FedEx sued the boards for adopting these “forum selection bylaws.” Plaintiffs claim that the bylaws are statutorily invalid because they are beyond the board’s authority under the Delaware General Corporation Law; the bylaws are contractually invalid because they were unilaterally adopted; and claimed breach of fiduciary duty.
7. Rule:
8. Reasoning: Boards say they adopted bylaws in response to corporations being subject to litigation over a single transaction or a board decision in more than one forum simultaneously, multiforum litigation; that multiforum litigation imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately born by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings.
8 Del. C. 109(b) has long been understood to allow the corporation to set “self-imposed rules and regulations that are deemed expedient for its convenient functioning.” The forum selection bylaws here fit this description. They are process-oriented, because they regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation.
Plaintiff argues bylaws do not speak to a traditional subject matter -> not convincing.
Bylaws constitute a binding part of the contact between a Delaware corporation and its stockholders. Stockholders are on notice that, as to those subjects that are subject of regulation by bylaw under 8 Del. C. 109(b), the board itself may act unilaterally to adopt bylaws addressing those subjects.
Plaintiffs’ argument that stockholders must approve a forum selection bylaw to be contractually binding -> contradicts the plain terms of the contractual framework.
The Corporate entity and Limited Liability – Walkovszky v. Carlton
Year: 1966
Court:
2. Disposition:
3. Holding: Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.
4. Issue:
5. Procedural History: The trial court granted the motion. Walkovszky appealed, and the appellate court reversed.
6. Facts: William Carlton (defendant) owned a large taxicab business. Carlton was a controlling shareholder of 10 different corporations, each of which held title to two cabs and no other assets. John Walkovszky (plaintiff) alleged that he was struck and injured by a cab owned by Seon Cab Corporation (defendant), one of Carlton’s entities. Walkovszky sued Carlton, Seon Cab, and each of Carlton’s other cab corporations, arguing that they all functioned as a single enterprise and should be treated accordingly. Carlton moved to dismiss the complaint as to him personally for failure to state a cause of action.
7. Rule:
8. Reasoning: the courts will disregard the corporate form, or pierce the corporate veil, whenever necessary to prevent fraud or to achieve equity.
Whenever anyone uses control of the corporation to further his own rather than the corporation’s business, he will be liable for the corporation’s acts upon the principle of respondeat superior applicable where the agent is a natural person.
Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation’s stockholders.
If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff’s injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations.
The Corporate entity and Limited Liability – Sea-Land Services, Inc. v. Pepper Source
Year: 1991
Court:
2. Disposition: Reverse and remand.
3. Holding: Sea-Land has yet to come forward with evidence akin to the wrongs found in these cases.
4. Issue:
5. Procedural History: The district court found that the entities were all alter egos of Marchese and granted summary judgment for Sea-Land. Defendants were held jointly liable for $87000.
6. Facts: Marchese (defendant) owned six business entities (defendants). One of these entities, Pepper Source, owed Sea-Land Services, Inc. (Sea-Land) (plaintiff) approximately $87,000 for delivery services. Pepper Source had no assets. When Pepper Source did not pay, Sea-Land sued it in federal district court to recover the money. However, Pepper Source was dissolved by the state for failing to pay taxes. The court entered a default judgment against Pepper Source for the debt. Sea-Land then sued Marchese individually and Marchese’s other business entities such as Tie-Net, seeking to pierce the corporate veil to get paid.
7. Rule: whether a corporation is so controlled by another to justify disregarding their separate identities: (1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own.
8. Reasoning: the courts that properly have pierced corporate veils to avoid promoting injustice have found that unless it did so, some wrong beyond a creditor’s inability to collect would result: the common sense rules of adverse possession would be undermined; former partners would be permitted to skirt the legal rules concerning monetary obligations; a party would be unjustly enriched; a parent corporation that caused a sub’s liabilities and its inability to pay for them would escape those liabilities; or an intentional scheme to squirrel assets into a liability-free corporations while heaping liabilities upon an asset-free corporation would be successful.
The Role and Purposes of Corporations – A.P. Smith Manufacturing Co. v. Barlow
Year:
Court:
2. Disposition:
3. Holding: we have no hesitancy in sustaining the validity of the donation by the plaintiff.
4. Issue:
5. Procedural History:
6. Facts: A.P. Smith Manufacturing Company (A.P. Smith) (defendant) was a New Jersey corporation, founded in the late nineteenth century, that made a donation to Princeton University. A.P. Smith claimed that, as a corporation, it had a duty to support the public good, and that it was to the company’s benefit to make sure that there was an educated public from which to draw future employees. Barlow (plaintiff), a shareholder in A.P. Smith, filed suit seeking declaratory judgment that the company should not have made the donation and alleging that the application of New Jersey’s statute would be unconstitutional.
7. Rule:
8. Reasoning: stockholders argue that (1) the plaintiff’s certificate of incorporation does not expressly authorize the contribution and under common-law principles the company does not possess any implied or incidental power to make it, and (2) the NJ statutes which expressly authorize the contribution may not constitutionally be applied to the plaintiff, a corporation created long before their enactment.
Appellants contend that the foregoing NJ statutes may not be applied to corporations created before their passage. -> NJ provided that every corporate charter granted shall be subject to alteration, suspension and repeal.
In expressly authorizing reasonable charitable contributions by corporations, our State has not only joined with other states in advancing the national interest but has also specially furthered the interests of its own people…
The Role and Purposes of Corporations – Dodge v. Ford Motor Co.
Year: 1919
Court:
2. Disposition: reverse the portion enjoining the building of the smelting plant and upheld the portion ordering the payment of a dividend of $19.3 million.
3. Holding:
4. Issue:
5. Procedural History:
6. Facts: Ford was incorporated in 1903 and began selling motor vehicles. Ford paid $10 million or more in special dividends annually in 1913, 1914, and 1915. Then, in 1916, Ford’s president and majority shareholder, Henry Ford, announced that there would be no more special dividends and that all future profits would be invested in lowering the price of the product and growing the company. The board quickly ratified his decision. The Dodge brothers (plaintiffs), who owned their own motor company, were minority shareholders in Ford and sued to reinstate the special dividends and stop the building of Ford’s proposed smelting plant.
7. Rule:
8. Reasoning: it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of shareholders, it would not be the duty of the courts to interfere.
We are not persuaded that we should interfere with the proposed expansion of the business of the Ford Company.
The Role and Purposes of Corporations – Shlensky v. Wrigley
Year: 1968
Court:
2. Disposition: Affirmed.
3. Holding: Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their judgment because of the decisions of directors of other companies.
4. Issue: whether plaintiff’s amended complaint states a cause of action.
5. Procedural History:
6. Facts: The Cubs did not play night games. As a result, the Cubs sold fewer tickets and were less profitable than any other major-league team. Philip Wrigley (defendant), the president of the Chicago National League Ball Club (defendant), which owned the Cubs, was opposed to playing night games, claiming that night games would be damaging to the neighborhood in which the Cubs played. Shlensky alleged that the only reason the Cubs did not play night games was because Wrigley felt it was somehow against the spirit of baseball.
7. Rule:
8. Reasoning: plaintiff argues that fraud, illegality and conflict of interest are not the only bases for a stockholder’s derivative action against the directors. Defendants argue that the courts will not step in and interfere with honest business judgment of the directors unless there is a showing of fraud, illegality or conflict of interest.
We are not satisfied that the motives assigned to Wrigley are contrary to the best interests of the corporation and the stockholders. Decision is one properly before directors and the motives showed no fraud, illegality, or conflict of interest in their making of that decision.
Plaintiff made no allegation that these teams’ night schedules were profitable or that the purpose for which night baseball had been undertaken was fulfilled.
The Obligations of Control: Duty of Care – Kamin v. American Express Company
Year:
Court:
2. Disposition: motion by the defendants for summary judgment and dismissal of the complaint is granted.
3. Holding: plaintiffs have failed as a matter of law to make out an actionable claim.
4. Issue:
5. Procedural History:
6. Facts: American Express (defendant) authorized dividends to be paid out to stockholders in the form of shares of Donaldson, Lufkin and Jenrette, Inc. (DLJ). Kamin and other minority stockholders (plaintiffs) in American Express brought suit against the directors of American Express, alleging that the dividends were a waste of corporate assets in that the stocks of DLJ could have been sold on the market, saving American Express about $8 million in taxes. The American Express directors filed a motion to dismiss the case.
7. Rule:
8. Reasoning: the question of whether a dividend is to be declared or a distribution of some kind should be made is exclusively a matter of business judgment for the Board of Directors.
It must be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose.
It is not enough to allege that the directors made an imprudent decision. More than imprudence or mistaken judgment must be shown.
Substantive duty of care case.
The Obligations of Control: Duty of Care – Smith v. Van Gorkom
Year: 1985
Court:
2. Disposition: Reverse and remand.
3. Holding: the directors of Trans Union breached their fiduciary duty to their stockholders by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer.
4. Issue: whether the directors reached an informed business judgment on September 20, 1980; and if they did not, whether the directors’ actions taken subsequent were adequate to cure any infirmity in their action taken on Sept.
5. Procedural History: The Delaware Court of Chancery ruled in favor of the directors.
6. Facts: Prior to negotiations, Van Gorkom determined the value of Trans Union to be $55 per share and during negotiations agreed in principle on a merger. Van Gorkom called a meeting of Trans Union’s senior management, followed by a meeting of the board of directors. Senior management reacted very negatively to the idea of the buyout. However, the board of directors approved the buyout at the next meeting, based mostly on an oral presentation by Van Gorkom. Smith and other shareholders (plaintiffs) brought a class-action suit against the Trans Union board of directors, alleging that the directors’ decision to approve the merger was uninformed.
7. Rule:
8. Reasoning: The Directors did not reach an informed business judgment on September 20, 1980 in voting to sell the Company for $55 per share. The directors did not adequately inform themselves as to Van Gorkom’s role in forcing the sale of the Company; were uninformed as to the intrinsic value of the Company; and were grossly negligent in approving the sale of the Company upon two hours’ consideration.
Defendants rely on the following: the magnitude of the premium or spread between the $55 Pritzker offering price and TransUnion’s current market price of $38 per share; the amendment of the Agreement as submitted on September 20 to permit the Board to accept any better offer during the market test period; the collective experience and expertise of the Board’s inside and outside directors; and their reliance on Brennan’s legal advice that the directors might be sued if they rejected the Pritzker proposal.
McNeilly dissenting: the directors knew Trans Union like the back of their hands and were well qualified.
Procedural duty of care violation, board could not meet
The Obligations of Control: Duty of Care – Francis v. United Jersey Bank
Year: 1981
Court:
2. Disposition: affirmed.
3. Holding: Mrs. Pritchard’s conduct was a substantial factor contributing to the loss.
4. Issue:
5. Procedural History:
6. Facts: Charles, Jr., and William Pritchard (sons) were directors of Pritchard & Baird Intermediaries Corp. (Pritchard & Baird), a reinsurance broker that controlled millions of dollars of client funds in an implied trust. Eventually, the corporation went insolvent because of the siphoned funds. During the time the funds were misappropriated, Mrs. Pritchard did nothing in her role as director. Her husband, the deceased founder of Pritchard & Baird, had actually warned her to watch out for the sons before he died. Mrs. Pritchard died, and the trustee in bankruptcy (representing the interests of many creditors) brought suit against the estate of Mrs. Pritchard.
7. Rule:
8. Reasoning: Determination of the liability of Ms. Pritchard requires finding that she had a duty to the clients of Pritchard & Baird, that she breached that duty ad that her breach was a proximate cause of their losses.
A director should acquire at least a rudimentary understanding of the business of the corporation…
While directors may owe a fiduciary duty to creditors also, that obligation generally has not been recognized in the absence of insolvency. With certain corporations, directors are deemed to owe a duty to creditors and other third parties even when the corporation is solvent.
Mrs. Pritchard had a duty to protect the clients against policies and practices that would result in the misappropriation of money they had entrusted to the corporation. She breached that duty.
Tort structure: duty, breach, causation, damages. Brokers held money to reinsurers and the firm was insolvent -> creditors owed fiduciary duty. Ms. Pritchard’s noncompliance with the duty enabled the thieving.
Duty of Loyalty, directors and managers – Bayer v. Beran
Year: 1944
Court:
2. Disposition: complaint dismissed.
3. Holding: the directors acted in the free exercise of their honest business judgment and their conduct in the transactions challenged did not constitute negligence, waste, or improvidence.
4. Issue:
5. Procedural History:
6. Facts: The directors (defendants) of the Celanese Corporation of America (CCA) started a radio advertising campaign for the corporation. One of the singers on the program on which CCA decided to advertise was the wife of Camille Dreyfus, one of CCA’s directors. Suit was brought claiming that the advertising campaign was started due to the benefit to Mrs. Dreyfus as it “subsidized” her career and was “a vehicle for her talents.”
7. Rule:
8. Reasoning: where a close relative of the CEO of a corporation takes a position closely associated with a new and expensive field of activity, the motives of the directors are likely to be questioned. The board would be placed in a position where selfish, personal interests might be in conflict with the duty it owed to the corporation. The entire transactions ust be subjected to the most rigorous scrutiny.
The evidence fails to show that the program was designed to foster or subsidize the career of Miss Tennyson as an artist or to furnish a vehicle for her talents. The directors have not been guilty of any breach of fiduciary duty.
Plaintiff: expenditures were illegal because the radio advertising program was not taken up at any formal meeting of the board and no resolution approving it was adopted by the board or by the executive committee. -> directors acting separately and not collectively as a board cannot bind the corporation.
The expenditures for radio advertising were approved and authorized by the members individually.
Duty of Loyalty, directors and managers – Benihana of Tokyo, Inc. v. Benihana, Inc.
Year: 2006
Court:
2. Disposition:
3. Holding: the directors did not breach their duty.
4. Issue:
5. Procedural History:
6. Facts: Benihana of Tokyo, Inc. (BOT) (plaintiff) and its subsidiary Benihana operated restaurants across the world. Many of Benihana’s restaurants needed renovation, but the company did not have the necessary funds. Joseph recommended that Benihana issue convertible preferred stock, which would give the company the funds necessary for renovation. Subsequently, John Abdo, a Benihana board member, informed Joseph that BFC Financial Corporation (BFC) was interested in buying the convertible stock. The Benihana board voted in favor of the sale to BFC. Two weeks later, BOT’s attorney sent a letter to the Benihana board asking it to abandon the sale on account of concerns of conflicts of interests, the dilutive effect on voting of the stock issuance, and the sale’s “questionable legality.” The board nonetheless again approved the sale. BOT then brought suit against the Benihana board of directors, alleging breach of its fiduciary duties.
7. Rule:
8. Reasoning: BOT argues that 144(a)(1) is inapplicable because the disinterested directors, when they approved the Transaction, did not know that Abdo had negotiated the terms for BFC. -> the board possessed that material information when it approved the Transaction.
BOT argues the Court of Chancery should have reviewed under an entire fairness standard because Abdo breached his duty of loyalty when he used Benihana’s confidential information to negotiate on behalf of BFC. -> Abdo did not use confidential information against Benihana.
BOT argues that the board’s primary purpose in approving the Transaction was to dilute BOT’s voting control. -> the primary purpose of the Transaction was to provide what the directors subjectively believed to be the best financing vehicle available for securing the necessary funds to pursue the agreed upon Plan.
Knowing acceptance of Abdo’s role by disinterested directors; ratification.
Duty of Loyalty, corporate opportunities – Broz v. Cellular information systems, Inc.
Year:
Court:
2. Disposition:
3. Holding: Broz did not breach his fiduciary duties to CIS. Broz was under no duty to consider the contingent and uncertain plans of PriCellular in reaching his determination of how to proceed.
4. Issue:
5. Procedural History:
6. Facts: Robert Broz (defendant) was a director of Cellular Information Systems, Inc. (CIS) (plaintiff). He was also the president and sole stockholder of RFB Cellular (RFBC), a competitor of CIS in the cellular-telephone-service market. (Mackinac), a third-party cellular-service provider, was seeking to sell Michigan-2. Mackinac thought that RFBC would be a potential buyer and contacted Broz about the possibility. The license was not offered to CIS. Broz spoke informally with other CIS directors, all of whom told him that CIS was not interested in the license. a fourth service provider, PriCellular, had undergone discussions with CIS about PriCellular purchasing CIS. PriCellular agreed on an option contract with Mackinac about purchasing Michigan-2. Broz, on behalf of RFBC, offered Mackinac a higher price for the license, and Mackinac agreed to sell to RFBC. Nine days later, PriCellular completed its purchase of CIS. CIS then brought suit against Broz, alleging that Broz breached his fiduciary duties to CIS by purchasing the license for RFBC when the newly formed PriCellular/CIS corporation had the option open to make the same purchase.
7. Rule:
8. Reasoning: a corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances.
(1) CIS was not financially capable of exploiting the Michigan-2 opportunity. (3) It is not clear that CIS had a cognizable interest or expectancy in the license. (4) The corporate opportunity doctrine is implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity.
(0) How did the director learn of opportunity. (2) in line of business and of practical advantage. Disjunctive analysis -> look at all five factors and on balance where do they come out. Even if all of them are not met one may violate duty of loyalty.
Duty of Loyalty, corporate opportunities – In re eBay, Inc. Shareholders Litigation
Year:
Court:
2. Disposition: deny defendants’ motions to dismiss.
3. Holding: defendant directors were not free to accept this consideration from a company.
4. Issue:
5. Procedural History:
6. Facts: eBay hired Goldman Sachs to underwrite the initial public offering (IPO) of eBay stock. In doing so, Goldman Sachs allocated shares of the eBay IPO stock to eBay “insiders,” including members of eBay’s board of directors. Three of the directors on eBay's seven-member board received the IPO allocations and sold the shares on the open market for a significant profit. Shareholders of eBay (plaintiffs) brought derivative actions against the directors (defendants).
7. Rule:
8. Reasoning: Plaintiff argues defendants usurped a corporate opportunity. Defendants insist that the IPO allocations were collateral investment opportunities. -> No one disputes that eBay financially was able to exploit the opportunities. eBay was in the business of investing in securities. The facts suggest that investing was integral to eBay’s cash management strategies. It is no answer to say that IPOs are risky investments.
Defendant argues viewing IPO allocations as corporate opportunities will render every advantageous investment opportunities one. -> the conduct involved a large bank steering highly lucrative IPO allocations to select insider directors and officers.
An agent is under a duty to account for profits obtained personally in connection with transactions related to his or her company. Even if this conduct does not run afoul of the corporate opportunity, it may still constitute a breach of the fiduciary duty of loyalty.
Duty of Loyalty, dominant shareholders – Sinclair Oil Corp. v. Levien
Year:
Court:
2. Disposition: reverse the portion of damages sustained as a result of dividends paid and affirm the remaining portion.
3. Holding: the Chancellor erred in applying the intrinsic fairness test as to these dividend payments. The business judgment standard should have been applied. The dividends complied with the business judgment standard. Sinclair failed to meet the burden in breach of contracts case.
4. Issue:
5. Procedural History:
6. Facts: Sinclair owned about 97 percent of the stock of its subsidiary, Sinven. From 1960 to 1966, Sinclair caused Sinven to pay out $108 million in dividends, which was more than Sinven earned during the time period. The dividends were made in compliance with law on their face, but Sinven contended that Sinclair caused the dividends to be paid out simply because Sinclair was in need of cash at the time. In addition, in 1961 Sinclair caused Sinven to contract with International, another Sinclair subsidiary created to coordinate Sinclair’s foreign business. Under the contract, Sinven agreed to sell its crude oil to International. International, however, consistently made late payments and did not comply with minimum purchase requirements under the contract. Sinven brought suit against its parent, Sinclair, for the damages it sustained as a result of the dividends, as well as breach of the contract with International.
7. Rule:
8. Reasoning: the Chancellor held hat because of Sinclair’s fiduciary duty and its control over Sinven, its relationship with Sinven must meet the test of intrinsic fairness. Sinclair argues business judgment rule should apply. When a parent controls the transaction and fixes the terms, intrinsic fairness test applies; this standard applies only when the fiduciary duty is accompanied by self-dealing.
A proportionate share of dividend was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its minority stockholders. The motives for causing the declaration of dividends are immaterial unless the plaintiff can show that the payments resulted from improper motives and amounted to waste.
Sinclair’s act of contracting with its dominated subsidiary was self-dealing. Sinclair received the products produced by Sinven and the minority shareholders of Sinven were not able to share in the receipt of these products. -> the contract was breached by Sinclair, both as to the time of payments and the amounts purchased.
Under the intrinsic fairness standard, Sinclair must prove that its causing Sinven not to enforce the contract was intrinsically fair to the minority shareholders of Sinven.
What are fiduciary duties of controlling shareholder?
Duty of Loyalty, dominant shareholders – Zahn v. Transamerica Corporation
Year: 1947
Court:
2. Disposition: Reversed.
3. Holding: If the allegations of the complaint be proved, Zahn may maintain his cause of action to recover from Transamerica the value of the stock retained by him as that shall be represented by its aliquot share of the proceeds of Axton-Fisher on dissolution.
4. Issue:
5. Procedural History:
6. Facts: Zahn was a holder of Class A stock in Axton-Fisher. Axton-Fisher had stock in three categories: preferred stock, Class A stock, and Class B stock. In 1941, Transamerica Corporation (defendant) began purchasing Class A and Class B stock in Axton-Fisher. The purchases gave Transamerica control of the business affairs of Axton-Fisher, including 80 percent of the outstanding Class B stock. Transamerica also elected the board of directors of Axton-Fisher, which was composed in large part of officers or agents of Transamerica. Axton-Fisher’s principal asset was leaf tobacco, the value of which suddenly rose sharply in 1943, at which point Transamerica, knowing of the increased value, allegedly “conceived a plan to appropriate the value of the tobacco to itself by redeeming the Class A stock at the price of $60 a share plus accrued dividends...and thereafter, the redemption of the Class A stock being completed, to liquidate Axton-Fisher.” This resulted in Transamerica gaining most of the value of the tobacco for itself by virtue of its status as a Class B stockholder because the redemption precluded Class A stockholders from participating in the liquidation.
7. Rule:
8. Reasoning: the right to call the Class A stock for redemption was confided by the charter to the directors and not to the stockholders of that corporation. When voting as a stockholder he may have the legal right to vote with a view of his own benefits and to represent himself only; but that when he votes as a director he represents all the stockholders in the capacity of a trustee for them and cannot use his office for his personal benefit.
Transamerica states that the directors might call the Class A stock for redemption. Zahn states that the directors were not entitled to favor Transamerica by employing the redemption provisions of the charter for its benefit.
It was the intention of the framers of Axton-Fisher’s charter to require the directors to act disinterestedly if that body called the Class A stock, and to make the call with a due regard for its fiduciary obligations. Liability which flows from the dereliction must be imposed upon Transamerica which constituted the board of Axton-Fisher and controlled it.
Preferred: dividends 6/share, liquidated at 105/share + unpaid dividends. Class A: receives 2xClass B in liquidation, option to convert into Class B, entitled to dividend 320, Axton Fisher may convert for $60/share + unpaid dividends. Class B: dividends 1.6/share, VR. Dominating shareholder gets at the expense of other shareholders.
Duty of Loyalty, Ratification – Fliegler v. Lawrence
Year: 1976
Court:
2. Disposition: affirmed.
3. Holding: Defendants have proven the intrinsic fairness of the transaction. Agau received properties which by themselves were clearly of substantial value.
4. Issue:
5. Procedural History:
6. Facts: John Lawrence acquired certain properties under a lease option. Lawrence was the president of Agau and offered to transfer the lease option to Agau, but Agau’s board of directors determined that the acquisition would not be prudent for the corporation at the time. Lawrence transferred the lease option to USAC. USAC then granted Agau a long-term option to purchase USAC if it ever became financially viable for Agau. Subsequently, the Agau board of directors resolved to exercise the option, and the resolution was approved by a majority of the Agau shareholders. THe majority of the shares were held by directors of Agau who were also directors of USAC.
7. Rule:
8. Reasoning: we cannot say that the entire atmosphere has been freshened and that departure from the objective fairness test is permissible. Nor do we believe the Legislature intended a contrary policy and rule to prevail by enacting section 144.
Defendants argue the transaction is protected by 144(a)(2). -> the statute does not provide a broad immunity. It merely removes an interested director cloud when its terms are met and provides against invalidation of an agreement solely because such a director or officer is involved.
144 -> In three different cases transaction won’t be voidable. (1) if informed disinterested directors approve the transaction. (2) if informed and disinterested shareholders approve the transaction. (3) if the transaction is entirely fair.
Duty of Loyalty, Ratification – In re Investors Bancorp Inc. Stockholder Litig.
Year: 2017
Court:
2. Disposition: reverse and remand.
3. Holding: the directors, when exercising their discretion under the EIP, acted inequitably in granting themselves unfair and excessive awards. Because the stockholders did not ratify the specific awards under the EIP, the affirmative defense of ratification cannot be used to dismiss the complaint.
4. Issue:
5. Procedural History: the Court of Chancery dismissed the complaint against the non-employee directors.
6. Facts: The board of directors of Bancorp, Inc. (defendant) proposed an equity incentive plan (EIP) under which certain stock awards and options would be given to Bancorp officers, employees, and directors. The shareholders approved the EIP. Ultimately, pursuant to the EIP, the non-employee directors received stock options valued at $780,000 and restricted stock valued at over $1.2 million. Bancorp’s president and CEO received stock options and restricted stock valued at a total of over $16 million. Bancorp’s COO received stock options and restricted stock valued at a total of over $13 million. Stockholders sued alleging breaches of fiduciary duty.
7. Rule:
8. Reasoning: Section 141(h) of DGCL authorizes the board to fix the compensation of directors. The decision lies outside the business judgment rule’s presumptive protection and the receipt is subject to showing that the arrangements are fair to the corporation. The entire fairness standard of review applies.
As ratification has evolved, the courts have recognized it when stockholders approved the specific director awards, when the plan was self-executing, or when directors exercised discretion and determined the amounts and terms of the awards after stockholder approval.
Plaintiffs argue that the compensations were unfair and excessive; that the Board used the EIP to reward past efforts for the mutual-to-stock conversion rather than future performance; and that the rewards were inordinately higher than peer companies’.
Substantial discretion was left to the directors.
The Obligation of Good Faith, Compensation – In re the Walt Disney Co. Derivative Litigation
Year: 2006
Court:
2. Disposition: Affirm.
3. Holding: The Court found the facts contrary to appellants’ position.
4. Issue:
5. Procedural History: The Delaware Court of Chancery entered judgment in favor of the directors.
6. Facts: The Walt Disney Company (Disney) hired Michael Ovitz as its president. The board of director’s compensation committee approved an employment agreement with Ovitz, which contained a nonfault-termination provision providing that if Ovitz left his employment with Disney through no fault of his own, he would receive a severance package. Fourteen months after he was hired, Ovitz was terminated on a nonfault basis and received approximately $130 million under his severance package. After their original complaint was dismissed, shareholders (plaintiffs) filed a second amended complaint against Disney’s directors (defendants), claiming that the board breached its fiduciary duty and committed waste by approving the employment agreement without properly informing itself of the cost of the nonfault-termination provision.
7. Rule: three categories of fiduciary behavior are candidates for bad faith label. First, subjective bad faith. Fiduciary conduct motivated by an actual intent to do harm. Second, lack of due care. Fiduciary action taken solely by reason of gross negligence and without any malevolent intent. Third, intentional dereliction of duty, a conscious disregard for one’s responsibilities.
8. Reasoning: in the business judgment rule the law presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the company. The presumptions can be rebutted if the plaintiff shows that the directors breached their fiduciary duty of care or of loyalty or acted in bad faith. If that is shown, the burden shifts to the director defendants to demonstrate that the challenged act or transaction was entirely fair to the corporation and its shareholders.
Plaintiffs failed to prove either breach of duty of care or had not acted in good faith.
Nothing in the DGCL mandates that the entire board make the decisions on approving the OEA.
OEA was specifically structured to compensate Ovitz for walking away from the anticipated commissions from CAA.
The directors were informed of all information reasonably available and were not grossly negligent.
Appellants argue that because Ovitz could have been terminated for cause, Litvack and Eisner acted without due care and in bad faith in reaching the contrary conclusion -> disagree.
Bad faith alone is not enough to violate fiduciary duties. It is not actionable. Does gross negligence amount to bad faith? -> no. Duty of care violations do not constitute violation of bad faith.
The Obligation of Good Faith, oversight – Stone v. Ritter
Year: 2006
Court:
2. Disposition: Affirm.
3. Holding: the Court of Chancery properly dismissed the plaintiffs’ derivative complaint for failure to excuse demand.
4. Issue:
5. Procedural History:
6. Facts: AmSouth was forced to pay $50 million in fines and penalties on account of government investigations about AmSouth employees’ failure to file suspicious-activity reports that were required by the Bank Secrecy Act (BSA) and anti-money-laundering (AML) regulations. The Federal Reserve and the Alabama Banking Department issued orders requiring AmSouth to improve its BSA/AML practices. The orders also required AmSouth to hire an independent consultant to review AmSouth’s BSA/AML procedures. AmSouth hired KPMG. A group of shareholders (plaintiffs) brought a derivative suit against AmSouth directors (defendants) for failure to engage in proper oversight of AmSouth’s BSA/AML policies and procedures.
7. Rule: Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.
8. Reasoning: plaintiffs concede that the standards for determining demand futility in the absence of a business decision are set forth in Rales. Rales states…
the Caremark standard for oversight liability draws heavily upon the concept of director failure to act in good faith.
Describing the lack of good faith as a necessary condition to liability is deliberate. A failure to act in good faith is not conduct that results in the direct imposition of fiduciary liability. Because a showing of bad faith conduct is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.
Only the duties of care and loyalty, where violated, may result directly in liability, whereas a failure to act in good faith may do so, but indirectly. Fiduciary duty of loyalty also encompasses cases where the fiduciary fails to act in good faith.
Plaintiffs argue that demand is excused under Rule 23.1 because directors breached their oversight duty…-> KPMG report shows that the Board enacted written policies and procedures…
There was no conscious disregard. AmSouth’s interests are being seen as a good corporate body.
Disclosure and Fairness, Definition of a Security – Robinson v. Glynn
Year: 2003
Court:
2. Disposition: Affirm.
3. Holding: Robinson was an active and knowledgeable executive at GeoPhone.
4. Issue:
5. Procedural History:
6. Facts: Glynn was the chairman of GeoPhone. Robinson agreed to loan Glynn $1 million so that Glynn could test a technology he had developed called CAMA. Robinson agreed to a letter of intent to invest an additional $24 million if the CAMA technology worked in the field test. Glynn then performed the field test without the CAMA technology, and told Robinson that the test had been a success. Robinson then invested the rest of the money according to the letter of intent. Robinson found out that the CAMA technology had not been used in the initial test and he filed suit.
7. Rule: Investment contract is a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
(1) an investment of value (2) in a common enterprise (3) with an expectation of profit, and (4) derived from the efforts of others
Common stock has characteristics of (i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability (transferability); (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; or (v) the capacity to appreciate in value.
8. Reasoning: Under Rule 10b-5, Robinson must prove fraud in connection with the purchase of securities. Robinson claims that his membership interest in GeoPhone is either an investment contract or stock.
We have not required that an investor expect profits solely from the efforts of others. What matters is the economic reality that an investment scheme represents.
Robinson carefully negotiated for a level of control antithetical to the notion of member passivity required to find an investment contract.
Agreements cannot invoke securities laws simply by labeling commercial ventures as securities. It is the economic reality of a particular instrument that determines. -> Robinson was a knowledgeable executive.
Robinson’s claim that he held stocks fail for (i), (ii), and (iii). Robinson and Glynn viewed the investment as a membership interest.
Only the economic right not the control right can be transferred (like in partnership).
Shareholder derivative actions – In re Medtronic, Inc. Shareholder Litigation
Year: 2017
Court:
2. Disposition:
3. Holding: Steiner alleged an injury based on the loss of certain rightful incidents of his ownership interest, which is an injury that falls only on shareholders and not on the corporation.
4. Issue:
5. Procedural History: The district court granted the motion to dismiss.
6. Facts: Medtronic, Inc., a Minnesota corporation, agreed to merge with Covidien plc, an Irish company. The merged entity became an Irish corporation. Under the merger agreement, Medtronic shareholders retained a reduced, 70 percent interest in the merged entity. Further, the Internal Revenue Service taxed the merger, subjecting Medtronic shareholders to a capital-gains tax. Medtronic did not compensate the shareholders for this tax liability. In contrast, the Medtronic directors were required to pay an excise tax on their stock compensation as part of the merger, but Medtronic reimbursed the directors for that tax liability.
7. Rule: a direct claim is available when (1) all shareholders share the same injury; (2) the shareholders would receive the benefit of the recovery or remedy; and (3) the injury is not suffered by the corporation.
8. Reasoning: when a derivative claim is brought, the plaintiff must allege with particularity the efforts made to obtain the desired action from the directors of the corporation and the failure of the corporation to take such action.
A direct claim alleges an injury to the shareholder rather than an injury to the corporation. It is not subject to 23.09.
When shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.
The claims asserting injuries due to the excise-tax reimbursement are derivative, but the claims asserting injuries due to the capital-gains tax liability and dilution of shareholders’ interests are direct.
(1) shareholders had to pay capital gains tax (direct) (2) shareholders lost some of their vote (direct) (3) unlike insiders, shareholders were not reimbursed for tax (derivative). Whether injury is direct or derivative -> look at injury, relief, theory of complaint. Direct because shareholders are directly losing something and not the corporation.
Shareholder derivative actions, the requirement of demand on the directors – Grimes v. Donald
Year: 1996
Court:
2. Disposition: Affirm.
3. Holding: an abdication claim can be stated by a stockholder as a direct claim. when a stockholder demands that the board take action on a claim and demand is refused, the stockholder may not thereafter assert that demand is excused with respect to other legal theories in support of the same claim, although the stockholder may have a remedy for wrongful refusal or may submit further demands which are not repetitious.
4. Issue: (1) the distinction between a direct claim of a stockholder and a derivative claim; (2) a direct claim of alleged abdication by a board of directors of its statutory duty; (3) when a pre-suit demand in a derivative suit is required or excused; and (4) the consequences of demand by a stockholder and the refusal by the board to act on such a demand.
5. Procedural History:
6. Facts: The board of directors of DSC Communications (DSC) (defendant) approved contracts with DSC’s CEO, James Donald (defendant), that promised him employment until his seventy-fifth birthday. The contracts provided that if Donald lost his job without cause, he would be entitled to the same salary he would have earned until the contracts would otherwise have expired. Grimes (plaintiff) demanded that the board abrogate the contracts with Donald. The board refused.
7. Rule: distinction between direct and derivative claims depends upon the nature of the wrong alleged and the relief which could result if plaintiff were to prevail.
8. Reasoning: business decisions are not an abdication of directorial authority merely because they limit a board’s freedom of future action. If an independent and informed boards acting in good faith, determines that the services of a particular individual warrant large amounts of money, the board has made a business judgment.
A stockholder filing a derivative suit must allege either that the board rejected his pre-suit demand that the board assert the corporation’s claim or allege with particularity why the stockholder was justified in not having made the effort to obtain board action.
Demand having been made as to the propriety of the Agreements, it cannot be excused as to the claim that the Agreements constituted waste, excessive compensation or was the product of a lack of due care.
The Board is entitled to have its decision analyzed under the business judgment rule unless the presumption of that rule can be rebutted. Grimes cannot avoid this result by holding back or bifurcating legal theories based on precisely the same set of facts alleged in the demand.
Since Grimes made a pre-suit demand with respect to all claims arising out of the Agreements, he was required to plead with particularity why the Board’s refusal to act on the derivative claims was wrongful. The complaint fails to include particularized allegations which would raise a reasonable doubt that the Board’s decision to reject the demand was the product of a valid business judgment.
Plaintiff cannot bring this claim on the basis of futility. He has to bring the claim on the theory that demand was improperly rejected. If approved, board controls claim. If rejected, business judgment rule applies and Section 220 + public info.
Shareholder derivative actions, the requirement of demand on the directors – Marx v. Akers
Year: 1996
Court:
2. Disposition:
3. Holding: these conclusory allegations do not state a cause of action. There are no factually based allegations of wrongdoing or waste which would, if true, sustain a verdict in plaintiff’s favor.
4. Issue:
5. Procedural History:
6. Facts: The board of directors of International Business Machines (IBM) (defendant) voted for compensation for three members of the board who were also IBM executives, including Akers (defendant), a former CEO. The board also voted for compensation for directors who were not executives. Marx (plaintiff) was displeased with this course of action and filed a derivative action, without first making a demand of the board of directors.
7. Rule: NY BCL 626(c) provides that in any shareholders’ derivative action the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reason for not making such effort.
8. Reasoning: the purposes of the demand requirement are to (1) relieve courts from deciding matters of internal corporate governance by providing corporate directors with opportunities to correct alleged abuses, (2) provide corporate boards with reasonable protection from harassment by litigation on matters clearly within the discretion of directors, and (3) discourage strike suits commenced by shareholders for personal gain rather than for the benefit of the corporation.
Delaware approach applies a two-pronged test to each case of demand futility to determine whether a failure to serve a demand is justified. Universal demand abandons particularized determinations in favor of requiring a demand in every case before a shareholder derivative suit may be filed.
In New York, a demand would be futile if a complaint alleges with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.
The complaint does not allege particular facts in contending that the board failed to deliberate or exercise its business judgment in setting those levels. Directors are self-interested in a challenged transaction where they will receive a direct financial benefit from the transaction. A director who votes for a raise in directors’ compensation is always interested. A demand was excused as to plaintiff’s allegations that the compensation set for outside directors was excessive.
Claims: Insiders gets paid too much. Outside directors get paid too much. Outside directors are majority and the claim is futile.
Agency costs: the costs agents impose on the principals.
Shareholder derivative actions, the role of Special Committees – Auerbach v. Bennett
Year: 1979
Court:
2. Disposition:
3. Holding: requisite showing has not been made on this record. We find nothing in this record that requires a trial of any material issue of fact concerning the sufficiency or appropriateness of the procedures chosen by this special litigation committee. Nor is there anything in this record to raise a triable issue of fact as to the good-faith pursuit of its examination by that committee.
4. Issue:
5. Procedural History:
6. Facts: The General Telephone & Electronics Corporation (General Telephone) board of directors (defendants) conducted an investigation and found that General Telephone and its officers had made bribe payments and that some of the directors had been directly involved in those payments. Auerbach, a shareholder, in connection with other shareholders including Wallenstein (plaintiffs) brought a derivative action against the board, General Telephone, and Arthur Anderson & Co., General Telephone’s outside auditor. Auerbach’s complaint alleged that the board members involved in the transactions and Arthur Anderson & Co. were both liable to General Telephone for the money lost through those improper transactions.
7. Rule:
8. Reasoning: the disposition of this case on the merits turns on the proper application of the business judgment doctrine. The determination of the special litigation committee forecloses further judicial inquiry in this case.
Only while the board is unable to management the claim the shareholder has the right to pursue claim derivatively. Conditions on SLC reasserting the power of the board: (1) the SLC be disinterested (2) the investigation is done in good faith and considers what it should have considered (procedural question).
Shareholder derivative actions, the role of Special Committees – Zapata Corp. v. Maldonado
Year: 1981
Court:
2. Disposition: Reversed.
3. Holding: if the Court’s independent business judgment is satisfied, the Court may proceed to grant the motion, subject to any equitable terms or conditions the Court finds necessary or desirable.
4. Issue:
5. Procedural History:
6. Facts: William Maldonado (plaintiff), a shareholder in Zapata Corporation (defendant), brought a derivative action on behalf of Zapata against 10 of Zapata’s officers and directors, alleging breach of fiduciary duty. Maldonado had not made a prior demand that the board bring the action and instead argued that demand was futile, because all of the board members were named defendants who allegedly took part in the challenged transactions. After two new outside directors were added to the board, the board as a whole appointed only those two new directors to an investigation committee charged with investigating Maldonado’s claims. The committee found that it was in Zapata’s best interest that Maldonado’s derivative suit be dismissed.
7. Rule: McKee rule – a stockholder cannot be permitted to invade the discretionary field committed to the judgment of the directors and sue in the corporation’s behalf when the managing body refuses.
8. Reasoning: the determination that a stockholder, once demand is made and refused, possesses an independent, individual right to continue a derivative suit for breaches of fiduciary duty over objection by the corporation as an absolute rule is erroneous.
We see no reason why the two phases of a derivative suit, the stockholder’s suit to compel the corporation to sue and the corporation’s suit, should automatically result in the placement in the hands of the litigating stockholder sole control of the corporate right throughout the litigation.
When a derivative plaintiff is allowed to bring suit after a wrongful refusal, the board’s authority to choose whether to pursue the litigation is not challenged although its conclusion, reached through the exercise of that authority, is not respected since it is wrongful.
First, the Court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. Second, the Court should determine, applying its own independent business judgment, whether the motion should be granted.
Shareholder derivative actions, Director Independence – Delaware County Employees Retirement Fund v. Sanchez
Year: 2015
Court:
2. Disposition:
3. Holding: where the question is whether the plaintiffs have met their pleading burden to plead facts suggesting that Jackson cannot act independently of Chairman Sanchez, these obvious inferences that arise from the pled facts require that the defendants’ motion to dismiss be denied. The plaintiffs pled particularized facts, that when considered in the plaintiff-friendly manner required, create a reasonable doubt about Jackson’s independence.
4. Issue:
5. Procedural History: the Court of Chancery concluded that the plaintiffs had not pled facts overcoming the presumption that Jackson was independent.
6. Facts: Sanchez Resources, LLC, a private company, entered into a transaction with a public company in which the Sanchez family owned the most stock (Sanchez Public Company). There was no dispute that two of the five directors of the Sanchez Public Company were interested directors for purposes of the transaction. The Delaware County Employees Retirement Fund and other shareholders (plaintiffs) of the Sanchez Public Company brought a shareholder derivative suit against that company’s directors (defendants), challenging the transaction. The plaintiffs claimed that demand on the Sanchez Public Company board of directors was excused because at least three of the five directors were interested directors.
7. Rule:
8. Reasoning: Plaintiffs contend that these pled facts support an inference that Jackson cannot act independently of Chairman Sanchez.
The plaintiffs did not plead the kind of thin social-circle friendship. The close relationship may be coincidental.
Concerns two channels of influence: Personal connection and financial interests. Impact, judgment. A. Jackson has long deep friendship with Sanchez. Financial – AJ is executive at IBC (Sanchez partly controls IBC), AJ’s brother works at IBC, Sanchez companies are clients, director compensation (30-40% of overall compensation).
Indemnification and Insurance – Waltuch v. Conticommodity Services, Inc.
Year: 1996
Court:
2. Disposition: Affirm the indemnification part.
3. Holding: Conti’s Article Ninth, which would require indemnification of Waltuch even if he acted in bad faith, is inconsistent with 145(a) and thus exceeds the scope of a Delaware corporation’s power to indemnify.
Conti’s contention is inconsistent with the rule in Merritt. Once Waltuch achieved his settlement gratis, he achieved success on the merits or otherwise. Waltuch’s settlement vindicated him.
4. Issue:
5. Procedural History:
6. Facts: Waltuch (plaintiff) was a silver trader for Conticommodity Services, Inc. (Conti) (defendant). When the silver market crashed, silver speculators brought multiple lawsuits against Waltuch and Conti. All of the suits settled with Conti paying the settlements. As a result of Conti’s payments, Waltuch was dismissed from the suits with no settlement contribution. However, in defending himself in the suits, Waltuch spent approximately $1.2 million out of his own pocket. In addition to the civil suits, the Commodity Futures Trading Commission (CFTC) brought an enforcement proceeding against Waltuch. Waltuch brought suit against Conti, seeking indemnification of his various legal expenses.
7. Rule: under 145(f), a corporation may provide indemnification rights that go beyond the rights provided by 145(a) and the other substantive subsetions of 145. At the same time, any indemnification rights provided by a corporation must be consistent with the substantive provisions of 145, including 145(a).
145(a) and (b) expressly grant a corporation the power to indemnify directors, officers, and others, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation.
8. Reasoning: Waltuch argues that he was successful on the merits or otherwise in the private lawsuits because they were dismissed with prejudice without any payment or assumption of liability by him. Conti argues that the claims were dismissed only because of Conti’s 35 million settlement payments and that this payment was contributed on behalf of Waltuch. The district court agreed with Conti. -> this understanding and application of the vindication concept is overly broad and is inconsistent with a proper interpretation of 145(c).
Bad faith in private plaintiffs suit and CFTC suit. 145(a) requires good faith for indemnification. 145(f) does not offer indemnification either.
Formation – Duray Development, LLC. V. Perrin
Year: 2010
Court:
2. Disposition:
3. Holding: de facto corporation doctrine applies to Outlaw, a LLC. Outlaw, not Perrin, is liable for the breach of the contract.
The record clearly supports a finding of LLC by estoppel through the extension of the corporation by estoppel doctrine.
4. Issue:
5. Procedural History:
6. Facts: On September 30, 2004, Duray Development, LLC (Duray) (plaintiff) entered into a contract with Perrin (defendant), under which Perrin would excavate certain property that Duray owned. Subsequently, on October 27, 2004, Duray entered into a second contract with Outlaw. Perrin, who had recently formed Outlaw and was Outlaw’s owner, signed the second contract on Outlaw’s behalf. Outlaw did not perform under the contract satisfactorily or timely, so Duray brought suit. During discovery, Duray learned for the first time that Outlaw did not officially become a “filed” limited liability company (LLC) until November 29, 2004, after the parties signed the second contract.
7. Rule: the de facto corporation doctrine provides that a defectively formed corporation, one that fails to meet the technical requirements for forming a de jure corporation, may attain the legal status if certain requirements are met. The important aspect is that courts perceive and treat it in all respects as if it were a properly formed de jure corporation.
Corporation by estoppel is an equitable remedy and does not concern legal status. Where a body assumes to be a corporation and acts under a particular name, a third party dealing with it under such assumed name is estopped to deny its corporate existence. It prevents one from arguing against it and does not establish its actual existence.
8. Reasoning: Perrin argues that all parties treated the contract as though Outlaw was a properly formed LLC and de facto corporation doctrine shielded Perrin from personal liability. He argues doctrine of corporation by estoppel precluded Duray from arguing that he is personally liable.
Pursuant to the LLC Act, Outlaw was not in existence on October 27, 2004. Outlaw did not adopt or ratify the second contract. Perrin became personally liable unless a de facto LLC existed or LLC by estoppel applied.
There is no evidence whatsoever to suggest that Perrin formed Outlaw in anything other than good faith. All elements of a de facto corporation were present.
De facto incorporation (1) proceed in good faith; (2) under a valid statute; (3) for an authorized purpose; and (4) have executed and acknowledged articles. Corporation by estoppel: party assumes and acts as incorporated entity in good faith, and other party interacts with first party as an incorporated entity.
The Operating Agreement – Elf Atochem North America, Inc. v. Jaffari
Year: 1999
Court:
2. Disposition: Affirm.
3. Holding: (1) the Agreement is binding on the LLC as well as the members; and (2) since the Act does not prohibit the members of an LLC from vesting exclusive subject matter jurisdiction in arbitration proceedings in CA to resolve disputes, the contractual forum selection provisions must govern.
4. Issue: (1) whether the LLC, which did not itself execute the LLC agreement, is nevertheless bound by the Agreement; and (2) whether contractual provisions directing that all disputes be resolved exclusively by arbitration or court proceedings in CA are valid under the Act.
5. Procedural History: the Court of Chancery granted defendants’ motion to dismiss based on lack of subject matter jurisdiction.
6. Facts: (Elf) (plaintiff) and Cyrus Jaffari (defendant) agreed to form a limited-liability company (LLC), Malek LLC, to develop and distribute solvent-based maskants. Elf and Jaffari entered into an operating agreement, which established and set forth governance provisions for Malek LLC. The agreement contained an arbitration clause providing that all disputes arising from the agreement would be resolved by arbitration. Malek LLC itself never signed the agreement. Subsequently, Elf sued Jaffari and Malek LLC individually and on behalf of Malek LLC for breach of fiduciary duty to Malek LLC, breach of contract, and tortious interference with prospective business relations, among other claims.
7. Rule:
8. Reasoning: Elf argues that because Malek LLC is not a party to the Agreement, the derivative claims it brought are not governed by the arbitration and forum selection clauses of the Agreement. -> Malek Inc. and Elf executed the Agreement to carry out the affairs and business of Malek LLC and to provide for arbitration and forum selection. Elf’s claims are subject to the arbitration and forum selection clauses of the Agreement.
Elf argues that the Court erred in failing to classify its claims against Malek LLC as derivative and, had the court properly characterized its claims, the arbitration and forum selection clauses would not have applied to bar adjudication.
Elf contracted away its right to bring an action in Delaware and agreed instead to dispute resolution in CA.
Elf argues that the Act 6 Del.C. 18-110(a), 18-111, and 18-1001 affords the Court of Chancery special jurisdiction to adjudicate its claims. -> because the policy of the Act is to give the maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements, the parties may contract to avoid the applicability of the Sections.
Agreements: operating agreement (arbitration clause, no court jurisdiction, forum selection), distributorship agreement, employment agreement. Elf’s first argument -> Court takes substance over form argument.
The Operating Agreement – Fisk Ventures, LLC. V. Segal
Year: 2009
Court:
2. Disposition:
3. Holding: because Segal has not stated facts that either show he is entitled or from which it can be inferred he is entitled to relief, dismiss the claims.
4. Issue:
5. Procedural History:
6. Facts: Andrew Segal (plaintiff) founded Genitrix, LLC, a Delaware limited-liability company (LLC). Segal owned the majority of Genitrix’s Class A membership interests. Genitrix’s Class B membership interests were owned by H. Fisk Johnson individually, Johnson’s company Fisk Ventures, LLC (Fisk), and two of Johnson’s employees, Stephen Rose and William Freund (defendants). Genitrix’s managing board had five seats: two appointed by Segal, two by Johnson, and one by the Class B members generally. Genitrix’s LLC agreement also established a power-sharing arrangement between the Class A and Class B members that required a supermajority vote of 75 percent of the Genitrix board for all important business decisions. The supermajority requirement essentially gave each class a veto power. Finally, the LLC agreement gave the Class B members a put-option right, which permitted the Class B members to sell all their interests back to Genitrix. If exercised, this so-called put right would give Class B members a higher-priority claim to Genitrix’s assets than any new investor. Fisk filed a lawsuit to dissolve Genitrix. Segal filed counterclaims alleging that the four Class B members had blocked Genitrix’s chances at getting funding.
7. Rule:
8. Reasoning: Segal argues that Genetrix suffered because the Class B members refused to accede -> the LLC agreement endows both the Class A and Class B members with certain rights and protections. In no way does it obligate one class to acquiesce to the wishes of the other simply because the other believes its approach is superior or in the best interests of the Company.
Segal argues that members breached the implied covenant of good faith and fair dealing by frustrating or blocking the financing opportunities. -> neither the LLC Agreement nor any other contract endowed him with the right to unilaterally decide.
The court may order dissolution of an LLC by an application of member. Dissolve LLC when: The members’ votes are deadlocked, operating agreement does not provide a way to resolve deadlock, and due to financial status, business had no realistic prospects.
Segal tried to argue that violation of Covenant of good faith and fair dealing for Fisk to self-deal
Piercing the LLC veil – NetJets Aviation, Inc. v. LHC Communications, LLC.
Year: 2008
Court:
2. Disposition: Vacate and remand.
3. Holding: NetJets is entitled to trial on its contract and account-stated claims against Zimmerman as LHC’s alter ego.
4. Issue:
5. Procedural History: The district court granted the motion with respect to LHC but denied the motion with respect to Zimmerman’s personal liability. The district court sua sponte granted Zimmerman, personally, summary judgment and dismissed the claims against him.
6. Facts: NetJets (plaintiff) leased to LHC (defendant) an interest in an airplane for a term of five years. LHC was a limited-liability company (LLC) whose only member-owner was Zimmerman (defendant). Zimmerman had sole authority to make all financial decisions with respect to LHC. He often withdrew money from LHC’s account for personal use and transferred money into LHC’s account from his own personal account. LHC terminated the lease agreement with NetJets about one year into the agreement. The next year, LHC ceased operations, owing NetJets a balance of $340,840.39. NetJets brought suit against LHC and Zimmerman.
7. Rule:
8. Reasoning: with respect to the limited liability of owners of a corporation, DE law permits a court to pierce the corporate veil where there is fraud or where the corporation is in fact a mere instrumentality or alter ego of its owner. To prevail under the alter-ego theory or piercing the veil, a plaintiff need not prove that there was actual fraud but must show a mingling of the operations of the entity and its owner plus an overall element of injustice or unfairness.
There is evidence that Zimmerman created LHC to be one of his personal investment vehicles; that he was the sole decisionmaker with respect to LHC’s financial actions; that Zimmerman frequently put money into LHC as LHC needed it to meet operating expenses;… This evidence is ample to permit a reasonable factfinder to find that Zimmerman completely dominated LHC and that he essentially treated LHC’s bank account as one of his pockets. -> reject Zimmerman’s contention that the district court should have granted summary judgment on the ground that he and LHC did not operate as a single economic entity.
The record includes other evidence from which a reasonable factfinder could find that Zimmerman operated LHC in his own self-interest in a manner that unfairly disregarded the rights of LHC’s creditors. There was an overall element of injustice in Zimmerman’s operation of LHC.
Veil Piercing: (1) unity of interest & ownership; and (2) respecting limited liability would promote injustice
Fiduciary Obligation – McConnell v. Hunt Sports Enterprises
Year: 1999
Court:
2. Disposition:
3. Holding: it was not a breach of fiduciary duty for appellees to form COLHOC and obtain and NHL franchise to the exclusion of CHL.
4. Issue:
5. Procedural History:
6. Facts: McConnell (plaintiff) and Lamar Hunt (defendant) were part of a group that formed Columbus Hockey Limited, LLC (CHL), a limited-liability company, in order to try to obtain a National Hockey League franchise in Columbus. CHL began negotiations with Nationwide Insurance Enterprise (Nationwide) about building an arena, which CHL would then lease. Hunt, purporting to act for CHL but without consulting other CHL members, repeatedly rejected Nationwide’s lease offers. Nationwide then approached McConnell individually, and McConnell said that if Hunt would not agree to the lease on behalf of CHL, McConnell would individually. Subsequently, McConnell and his individual group signed a lease independently of CHL and Hunt. There was a clause in CHL’s operating agreement stating that members of CHL had a right to engage in business ventures that might compete with CHL. McConnell then filed suit, seeking a declaratory judgment to establish his right to operate the NHL franchise without CHL or Hunt. Hunt filed a counterclaim, alleging that McConnell violated a fiduciary duty to CHL.
7. Rule: Section 3.3 – members shall not in any way be prohibited from or restricted in engaging or owning an interest in any other business venture of any nature, including any venture which might be competitive with the business of the Company.
8. Reasoning: the words “any nature” could not be broader, and the inclusion of the words “any venture…” makes it clear that members were not prohibited from engaging in a venture that was competitive with CHL’s investing in and operating an NHL franchise. -> section 3.3 is plain and unambiguous and allowed members of CHL to compete against CHL for an NHL franchise.
A LLC is involved which involves a fiduciary relationship. It would preclude direct competition between members of the company. Here we have an operating agreement that by its very terms allows members to compete with the business of the company. Whether an operating agreement may limit or define the scope of the fiduciary duties -> yes.
It was appellant’s actions that caused the termination of any relationship or potential relationship it had with Nationwide and the NHL. There was not sufficient material evidence presented at trial so as to create a factual question for the jury on the issues of breach of fiduciary duty and tortious interference with business relationships.
There was no duty on appellant’s part to unilaterally file the actions at issue. Appellant did not act properly under the operating agreement in filing such actions. The provision in section 4.4 indicating members were only liable to other members for their own willful misconduct in the performance of their obligations under the operating agreement does not even apply to the actions taken by appellant.
Fiduciary duties can be waived in part or whole.
Additional Capital – Racing Investment Fund 2000, LLC. V. Clay Ward Agency, Inc.
Year: 2010
Court:
2. Disposition: reverse.
3. Holding: Assumption of personal liability by a member of an LLC is so antithetical to the purpose of a LLC. Section 4.3(a) simply does not qualify.
4. Issue:
5. Procedural History: the trial court ordered that Racing Investment act accordingly to satisfy the Judgment. The Court of Appeals affirmed.
6. Facts: Racing Investment Fund 2000, LLC (Racing Investment) (defendant) purchased insurance from Clay Ward Agency, Inc. (Clay Ward) (plaintiff). In May 2004, after falling behind on payments, Racing Investment agreed to a judgment. Racing Investment, which by then had become defunct, failed to pay the entire judgment when due.
7. Rule:
8. Reasoning: Clay Ward argues that Racing incurred a legitimate business expense and the members of the LLC are subject to a last call to satisfy the outstanding balance on the judgment. Under this theory, any outstanding debt that remains unpaid by the LLC can be satisfied through application for a court-ordered capital call. -> reject as contrary to the plain terms of the Operating Agreement and Kentucky LLC Act.
An operating agreement providing for future capital contributions by the LLC’s members is neither unique as suggested by Clay Ward nor atypical as described by the Court of Appeals.
Section 4.3(a) of Operating Agreement does not meet this standard. A provision designed to provide on-going capital injusion as necessary is simply not an agreement to be obligated personally for any of the debts, obligations, and liabilities of the LLC.
Dissolution – Reese v. Newman
Year: 2016
Court:
2. Disposition: Affirm.
3. Holding: (5) can only be interpreted to mean when a judge finds that any of the events in (5) have taken place, she may expel by judicial order a member of an LLC, and when a judge has done so the member shall be dissociated. When both grounds for dissociation of a member and dissolution of the LLC exist, the trial judge has discretion to choose either alternative.
4. Issue:
5. Procedural History: The trial court ordered dissolution.
6. Facts: Reese (defendant) and Nicole Newman (plaintiff) co-owned ANR Construction Management, LLC. Due to managerial differences, Newman informed Reese that she wished to dissolve the limited-liability company (LLC). Reese did not want to dissolve the LLC but wanted to keep running it herself. Instead, Reese wanted Newman to be dissociated from the LLC. Newman filed suit, seeking judicial dissolution of the LLC. Reese counterclaimed, seeking a court order dissociating Newman from the LLC.
7. Rule:
8. Reasoning: Reese argues that the trial court erred when it purported to use discretion in choosing between dissolution of the LLC and forcing dissociation of Newman from the LLC. Reese’s interpretation of the statute is that a judge shall dissociate a member of an LLC when that member commits any one of the actions in 29-806.02(5). -> it places a command on the trial judge that does not exist. The Code means when a judge has used her discretion to expel a member of an LLC by judicial order, under any of the enumerated circumstances in (5), that member shall be dissociated.
Reese argues that (5) is compulsory by pointing to this express provision in the dissolution section and absence of similar express provision in the dissociation section to order another remedy -> there is no ‘shall.’ A judge has discretion to choose means (5) is not compulsory.
Condition for dissociation was not met.
Strategic Use of Proxies – Levin v. Metro-Golewyn-Mayer, Inc.
Year: 1967
Court:
2. Disposition:
3. Holding: matters in issue are not being employed and the injunctive relief should be denied.
4. Issue: whether illegal or unfair means of communication, such as demand judicial intervention, are being employed by the present management. We do not find the amounts recited excessive or the method of operation disclosed by MGM management to be unfair or illegal.
5. Procedural History:
6. Facts: The stockholder annual meeting for Metro-Goldwyn-Mayer, Inc. (MGM) was coming up and two different groups of stockholders wanted to nominate two different slates of directors for MGM’s board. Both groups solicited proxies for the meeting. MGM’s proxy statement stated that MGM would “bear all cost in connection with the management solicitation of proxies.” One group, the O’Brien group (defendants), used MGM funds in its solicitation of proxies, including use of MGM funds to retain attorneys, hire a public relations firm, and hire proxy soliciting organizations. The other group, consisting of Philip Levin and other stockholders (plaintiffs), brought suit against MGM and the O’Brien group, seeking injunctive relief against the O’Brien group’s continued solicitation of proxies in that manner.
7. Rule:
8. Reasoning: Plaintiffs maintain the injunctive relief is required to prevent (1) the unlawful use of the corporate organization, (2) the retention of the four to proxy-soliciting concerns and the passing of their bill for their services to the corporation rather than to the individuals, and (3) the employment at corporate expense of special counsel with their own private funds.
The decision as to the continuance of the present management rests entirely with the stockholders. A court may not override or dictate on a matter of this nature to stockholders.
Reimbursement of Costs – Rosenfeld v. Fairchild Engine & Airplane Corp.
Year: 1955
Court:
2. Disposition: affirmed.
3. Holding: in a contest over policy, corporate directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe are in the best interests of the corporation. The stockholders have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny.
4. Issue:
5. Procedural History:
6. Facts: In a policy-related proxy contest for a board-of-directors election in Fairchild (defendant), Fairchild’s treasury paid $106,000 in defense of the old board of directors’ position, $28,000 to the old board by the new board after the change to compensate the old board for its failed campaign, and $127,000 reimbursing expenses that the new board members incurred in their campaign. That reimbursement was ratified by a majority vote of the stockholders. The policy question behind the proxy contest was the long-term and very expensive pension contract of a former director, Carlton Ward. Rosenfeld (plaintiff) brought suit to compel the return of the above payments to the Fairchild treasury.
7. Rule:
8. Reasoning: plaintiff does not argue that the sums were fraudulently extracted from the corporation, but denied they were legal charges which may be reimbursed for. Is the disagreement over policy or personnel? If policy, legitimate. 4 steps inquiry.
Shareholder Inspection Rights – AmerisourceBergen Corporation v. Lebanon County Employees’ Retirement Fund
Year: 2020
Court:
2. Disposition: Affirm.
3. Holding: reaffirm a stockholder must show, by a preponderance of evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement or wrongdoing warranting further investigation. The stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable.
4. Issue:
5. Procedural History: The court of chancery ruled in favor of the retirement fund, holding that the demand stated a proper purpose for the inspection of certain board materials.
6. Facts: AmerisourceBergen Corporation (defendant) was a major opioid distributor in the United States. Lebanon County Employees’ Retirement Fund (the retirement fund) (plaintiff) served an inspection demand on AmerisourceBergen under Delaware General Corporation Law (DGCL) § 220. The demand sought inspection of 13 categories of books and records and listed four investigatory purposes. AmerisourceBergen rejected the demand, asserting that the demand did not state a proper purpose or, in the alternative, that the request was overbroad. The retirement fund filed an action against AmerisourceBergen in the Delaware Court of Chancery and requested that the court compel AmerisourceBergen to provide the requested documents.
7. Rule:
8. Reasoning: a stockholder seeking to investigate wrongdoing must show, by a preponderance of the evidence, a credible basis from which the court can infer there is possible mismanagement as would warrant further investigation. Once a stockholder has established a proper purpose, the stockholder will be entitled only to the books and records that are necessary and essential to accomplish the stated, proper purpose.
When a stockholder investigates meritorious allegations of possible mismanagement, waste, or wrongdoing, it serves the interests of all stockholders and should increase stockholder return -> the stockholder’s purpose is proper.
When the purpose of an inspection of books and records under Section 220 is to investigate corporate wrongdoing, the stockholder seeking inspection is not required to specify the ends to which it might use the books and records.
AB contends that Plaintiffs must establish that the wrongdoing is actionable and that Plaintiffs’ claims are not actionable because they are legally barred by a section 102(b)(7) exculpatory provision in its certificate of incorporation and by laches.
The Plaintiffs contemplated purposes other than litigation. We need go no further than that to dispose of AB’s actionability argument.
Shareholder Inspection Rights – Crane Co. v. Anaconda Co.
Year: 1976
Court:
2. Disposition:
3. Holding: since it appears that Anaconda has failed to sustain its burden of proving an improper purpose and it cannot be said that the court below abused its discretion, inspection should be compelled.
4. Issue: whether a qualified stockholder may inspect the corporation’s stock register to ascertain the identity of fellow stockholders for the avowed purpose of informing them directly of its exchange offer and soliciting tenders of stock.
5. Procedural History: Special Term found that neither Crane’s overriding purpose to further its tender offer nor its ancillary purposes were proper in this context and dismissed the petition. The Appellate Division reversed, concluding that the matter was proper being one of general interest to Anaconda’s shareholders by virtue of their common interest in the corporation as shareholders.
6. Facts: Crane Co. (plaintiff) announced that it was offering up to $100 million in debentures for up to 5 million shares of Anaconda Co. (defendant)—over one fifth of Anaconda’s outstanding stock. After Crane obtained some Anaconda stock, it formally asked for a copy of Anaconda’s list of shareholders. Crane wanted to see the list so it could communicate its tender offer to the remaining shareholders. Crane’s demand stated that its proposed inspection of the list was solely for the purposes of the business of Anaconda, in accordance with the Business Corporations Law. Anaconda denied Crane access to the list of shareholders, arguing that trying to convince stockholders to sell their stock does not involve the business of the corporation. Crane sued.
7. Rule:
8. Reasoning: a shareholder desiring to discuss relevant aspects of a tender offer should be granted access to the shareholder list unless it is sought for a purpose inimical to the corporation or its stockholders-and the manner of communication selected should be within the judgment of the shareholder.
Whenever the corporation faces a situation having potential substantial effect on its wellbeing or value, the shareholders qua shareholders are necessarily affected and the business of the corporation is involved within the purview of section 1315 of the Business Corporation Law. To say that a pending tender offer involving over 1/5 of the corporation’s common stock is a purpose other than the business of the corporation is myopic.
Shareholder Inspection Rights – State ex rel. Pillsbury v. Honeywell, Inc.
Year: 1971
Court:
2. Disposition:
3. Holding: his sole purpose was to persuade the company to adopt his social and political concerns. This purpose on the part of one buying into the corporation does not entitle he petitioner to inspect books and records.
4. Issue:
5. Procedural History: the trial court dismissed the petition, holding that the relief requested was for an improper and indefinite purpose.
6. Facts: Pillsbury (plaintiff) found out that Honeywell, Inc. (defendant) was engaged in the production of munitions used in the Vietnam War. Pillsbury was against the war and bought 100 shares of Honeywell with the sole purpose of gaining access to Honeywell’s business affairs so he could convince the board of directors and fellow shareholders to stop producing the munitions. To that end, Pillsbury formally demanded from Honeywell access to its original shareholder ledger, current shareholder ledger, and all corporate records dealing with the manufacture of munitions. Honeywell refused to grant Pillsbury access. Pillsbury brought suit, seeking a writ of mandamus compelling Honeywell to produce the documents.
7. Rule:
8. Reasoning: his avowed purpose in buying Honeywell stock was to place himself in a position to try to impress his opinions favoring a reordering of priorities upon Honeywell management and its other shareholders. Such a motivation can hardly be deemed a proper purpose germane to his economic interest as a shareholder.
Shareholder Voting Control – Stroh v. Blackhawk Holding Corp.
Year: 1971
Court:
2. Disposition: affirmed and remanded.
3. Holding: the stock which could be bought cheaper, and yet carry the same voting power per share, was not permitted to share at all in the dividends of assets of the corporation. This additional step did not invalidate the stock.
4. Issue: whether 500000 shares of class B stock is valid.
5. Procedural History:
6. Facts: Blackhawk Holding Corp. (Blackhawk) (defendant) designated two classes of stock, Class A and Class B. Each share of the Class B stock was entitled to a vote in corporate matters, but the articles of incorporation provided that Class B stock was not entitled to dividends of any kind. Stroh, et al. (plaintiffs) brought suit as owners of Class B stock, claiming that the provision effectively invalidated their stock.
7. Rule:
8. Reasoning: Plaintiffs contend that because of the limit that deprives the Class B shares of the economic incidents of shares of stock, or of the proportionate interest in the corporate assets, the Class B shares do not constitute shares of stock.
We agree with Defendants’ construction. The proprietary rights conferred by the ownership of stock may consist of one or more of the rights to participate “in the control of the corporation, in its surplus of profits, or in the distribution of its assets.”
Our present constitution requires only that a shareholder not be deprived of his voice in management. It does not require that a shareholder, in addition to the management aspect of ownership, must also have an economic interest.
The constitution requires only that the right to vote be proportionate to the number of shares owned, not to the investment made in a corporation.
Shareholder Voting Control – Espinoza v. Zuckerberg
Year: 2015
Court:
2. Disposition: deny Defendants’ motion for summary judgment. Dismiss Plaintiff’s claim of waste.
3. Holding: stockholders of a Delaware corporation, even a single controlling stockholder, cannot ratify an interested board’s decisions without adhering to the corporate formalities specified in the DGCL for taking stockholder action.
4. Issue:
5. Procedural History:
6. Facts: Espinoza (plaintiff) brought a shareholder derivative suit challenging the decision of the Facebook, Inc., board of directors (defendants) to approve certain compensation to outside directors. Mark Zuckerberg (defendant) was the controlling stockholder of Facebook, controlling over 61 percent. After Espinoza filed suit, Zuckerberg, in a deposition and affidavit, approved the contested compensation. Zuckerberg had not received the compensation. The directors moved for summary judgment on the ground that Zuckerberg’s approval constituted stockholder ratification of the board’s compensation decision.
7. Rule: DGCL provides two methods for stockholders to express assent: (1) by voting in person or by proxy at a meeting of stockholders, or (2) by written consent.
Under Section 228 of the DGCL, any action that may be taken at any annual or special meeting of stockholders may be taken by majority stockholder consent without a meeting, without prior notice and without a vote.
8. Reasoning: the parties agree that the board’s decision to approve would be governed by the entire fairness standard of review.
Defendants contend that BJR apply because Zuckerberg ratified the Compensation. Plaintiff argues that these acts do not constitute a valid form of stockholder ratification because Zuckerberg did not express assent as a stockholder in a manner permitted by the DGCL.
The ratification will not be effective unless it complies with the technical requirements of Section 228.
Failure to adhere to corporate formalities to effect stockholder ratification impinges on the rights of minority stockholders.
Control in Closely Held Corporations – Ringling Bros – Barnum & Bailey Combined Shows v. Ringling
Year: 1947
Court:
2. Disposition: remand.
3. Holding: the election should not be declared invalid, but that effect should be given to a rejection of the votes representing Haley’s shares.
4. Issue:
5. Procedural History:
6. Facts: defendant was a closely held corporation with 1,000 shares of outstanding stock. The corporation’s three stockholders were Edith Ringling (plaintiff), Aubrey Haley (defendant), and John North (defendant). Ringling owned 315 shares, Haley owned 315 shares, and North owned 370 shares. Ringling and Haley entered into an agreement to always vote their shares jointly and in the same way. The agreement provided that if Ringling and Haley could not agree on how to vote their shares, an arbitrator would settle the dispute. the women disagreed about who should be the fifth director. The dispute went to arbitration, and the arbitrator ruled that Ringling and Haley were to vote for William Dunn, a prior board member, for the fifth position. The outgoing chairman of the corporation’s board relied on Ringling and Haley’s pooling agreement and the arbitrator’s ruling to declare that Dunn would receive a position instead of Griffin. At the next board meeting, both Dunn and Griffin claimed to be the seventh board member. Ringling filed a lawsuit in the Delaware Court of Chancery, seeking a declaration that the pooling agreement was enforceable and therefore Dunn was the seventh board member.
7. Rule:
8. Reasoning: under the agreement, something more is required after the arbitrator has given his decision in order that it should become compulsory; at least one of the parties must determine that such decision shall be carried into effect.
We do not find enough in the agreement or in the circumstances to justify a construction that either party was empowered to exercise voting rights of the other.
Defendants argue that the voting provisions are illegal and revocable. -> neither the cases nor the statute sustain the rule for which the defendants contend. We think the particular agreement before us does not violate Section 18 or constitute an attempted evasion of its requirements, and is not illegal for any other reason.
The undertaking to vote in accordance with the arbitrator’s decision is a valid contract. The good faith of the arbitrator’s action has not been challenged… the failure of Haley to exercise her voting rights in accordance with his decision was a breach of her contract.
Control in Closely Held Corporations – McQuade v. Stoneham
Year: 1934
Court:
2. Disposition:
3. Holding: until the date when the defendant repudiated the agreement, its performance constituted a violation of the statute.
4. Issue:
5. Procedural History: the courts below refused to order the reinstatement of McQuade but gave him damages.
6. Facts: Stoneham (defendant) was the majority owner of National Exhibition Company. McGraw (defendant) and McQuade (plaintiff) each bought 70 shares of Stoneham’s stock. As part of the purchase, the three entered into a contract that provided that the parties would “use their best endeavors” to make sure that they would all remain directors of National Exhibition Company. Stoneham became president of the board, McGraw vice-president, and McQuade treasurer. Stoneham selected and controlled the other four directors. McQuade and Stoneham began quarreling about the corporate treasury. At a board meeting at which the position of treasurer was up for election, Stoneham and McGraw did not vote, McQuade voted for himself, and the four other directors voted for Leo Bondy to succeed McQuade. At the next board meeting, the board dropped McQuade as a director. McQuade’s removal was due to personal conflict with Stoneham, not for any misconduct by McQuade. McQuade brought suit for breach of contract, alleging that Stoneham and McGraw did not use their best efforts to keep him on as a director.
7. Rule:
8. Reasoning: Defendants say the contract was void because the directors held their office charged with the duty to act for the corporation according to their best judgment and that any contract which compels a director to vote to keep any particular person in office and at a stated salary is illegal.
Plaintiff contends that an agreement among directors to continue a man as an officer of a corporation is not to be broken so long as such officer is loyal to the interests of the corporation and that the agreement of defendants is enforceable.
The stockholders may not control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries.
The minority shareholders whose interests McQuade says he has been punished for protecting are not complaining about his discharge. He is not acting for the corporation or for them in this action.
Lehman concurring: the contract is valid. It is unenforceable only because it resulted in an employment which was itself illegal.
Board cannot delegate its authority in selecting and compensating officers.
Control in Closely Held Corporations – Clark v. Dodge
Year: 1936
Court:
2. Disposition:
3. Holding: if there was any invasion of the powers of the directorate under that agreement, it is so slight as to be negligible; and certainly there is no damage suffered by or threatened by anybody.
4. Issue: whether the contract is illegal as against public policy within the decision in McQuade.
5. Procedural History: the Appellate Division dismissed the complaint.
6. Facts: Clark (plaintiff) owned 25 percent of each of two corporations. Dodge (defendant) owned the other 75 percent of each. Clark was a director and the general manager of Bell & Co., Inc. (Bell), one of the corporations. The corporations manufactured medicinal preparations by secret methods and formulas known only to Clark. Dodge and Clark entered into an agreement that provided that Clark would disclose the secret formula to a son of Dodge and, in return, Dodge would vote his stock. Clark brought suit, claiming that Dodge did not use his stock to maintain Clark as director and general manager and that Dodge hired “incompetent persons at excessive salaries” so as to reduce the portion of net income paid to Clark.
7. Rule:
8. Reasoning: the agreement here in question was legal and the complaint states a cause of action.
Shareholders can agree on core business strategy and who they will vote for directors.
Control in Closely Held Corporations – Galler v. Galler
Year: 1964
Court:
2. Disposition:
3. Holding: Defendants must account for all monies received by them from the corporation since Sept 25, 1956, in excess of that theretofore authorized.
4. Issue:
5. Procedural History: the Appellate Court found the 1955 agreement void and held that the public policy o this state demands voiding the agreement.
6. Facts: Benjamin and Isadore Galler were brothers and equal partners in the Galler Drug Company (GDC). In 1955, they executed an agreement to ensure that after the death of the one of the brothers, the immediate family of the deceased would maintain equal control of GDC. In 1956, Benjamin created a trust with his shares of GDC and named his wife, Emma (plaintiff), as trustee. Benjamin died in December 1957. Prior to Benjamin’s death, Isadore, Isadore’s wife, Rose, and Isadore’s son, Aaron (defendants) had decided that they were not going to honor the agreement. When Emma presented Benjamin’s stock certificates to the defendants to transfer the certificates into her name, the defendants tried to convince Emma to abandon the agreement. Subsequently, Emma demanded enforcement of the terms of the agreement guaranteeing her equal control, dividends each year, and a continuation of Benjamin’s salary. The defendants refused, and Emma brought suit.
7. Rule:
8. Reasoning: with substantial shareholding interests abiding in each member of the board, it is difficult to secure independent board judgment free from personal motivations concerning corporate policy. Often the only sound basis for protection is afforded by a lengthy detailed shareholder agreement securing the rights and obligations of all.
We are aware of no statutory or public policy provision against stockholder’s agreements which would invalidate this agreement on that ground.
(1) board shall consist of four directors with a quorum of 3. (2) four directors will be brothers and spouses, except if brother dies, spouse nominates replacement. (3) salary continuation. (4) dividend requirement.
Control in Closely Held Corporations – Ramos v. Estrada
Year: 1992
Court:
2. Disposition: affirmed.
3. Holding: the Estradas breached the agreement by their written repudiation of it. Their breach constituted an election to sell their Television w=shares in accordance with the terms of the buy/sell provisions in the agreement.
4. Issue:
5. Procedural History:
6. Facts: Broadcast Group partnered with another group, Ventura 41, to obtain a permit from the FCC to run a television station. Each group owned 50 percent of the combined entity, Television, Inc. The members of Broadcast Group entered into an agreement to vote all of their shares in Television, Inc. the same way, as determined by a majority of the members. The agreement provided that if anyone did not vote with the majority, their shares would be sold to the other members of the Broadcast Group. Estrada voted with the Ventura 41 members of Television, Inc. to remove Ramos as president and replace him with a member from Ventura 41. The Ramoses sued Estrada for breach of contract, seeking specific performance of the agreement, causing her shares to be sold.
7. Rule:
8. Reasoning: the Estradas contend that the June Broadcast Agreement is void because it constitutes an expired proxy which the Estradas validly revoked.
The Estradas contend that the forced sale provision is unconscionable and oppressive. -> Estrada is an astute businesswoman.
The June Broadcast Agreement was unanimously executed after the Estradas had a full and fair opportunity to consider it in its entirety.
Abuse of Control – Wilkes v. Springside Nursing Home, Inc.
Year: 1976
Court:
2. Disposition: reversed.
3. Holding: the directors breached fiduciary duty and Wilke shall be allowed to recover the salary he would have received.
4. Issue:
5. Procedural History:
6. Facts: Wilkes (plaintiff), Riche, Quinn, and Connor (defendants) were the four directors of the Springside Nursing Home, Inc. (Springside) (defendant), each owning equal shares and having equal power within the corporation. Eventually the relationship between Wilkes and the other three directors soured. When Springside became profitable, the defendants voted to pay out salaries to themselves but did not include Wilkes in the group to which salary would be paid. Then, at an annual meeting, Wilkes was not reelected as director and was informed that he was no longer wanted in the management group of Springside.
7. Rule: Donahue: stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.
8. Reasoning: Wilkes claims for damages based on a breach of the fiduciary duty owed to him by the other participants in this venture.
By terminating a minority stockholder’s employment or by severing him from a position as an officer or director, the majority effectively frustrate the minority stockholder’s purposes in entering on the corporate venture and also deny him an equal return on his investment.
It must be asked whether the controlling group can demonstrate a legitimate business purpose for its action.
Our courts must weigh the legitimate business purpose against the practicability of a less harmful alternative. Wilkes had always accomplished his assigned share of the duties competently.
The schedule of salaries and payments and duties changed since Wilkes was severed.
The test to use in judging an activity by a majority co-owner is whether it violates minority owner’s rights.
Abuse of Control – Ingle v. Glamore Motor Sales, Inc.
Year: 1989
Court:
2. Disposition: Affirmed.
3. Holding: if there was no protection against discharge of an at-will employee in Murphy, there surely can be none here where the related contract expressly confirms the unavailability of that protection.
4. Issue:
5. Procedural History:
6. Facts: Ingle (plaintiff) was one of four directors and shareholders of Glamore Motor Sales, Inc. (GMS) (defendant); Ingle was also GMS’s sales manager. Ingle did not have an employment contract that specified any kind of employment duration. The other three directors/shareholders were James Glamore and his two sons (defendants). The four directors entered into an agreement that provided that if “any Stockholder cease[d] to be an employee of the Corporation for any reason,” James Glamore would have the option to purchase all the shares owned by that stockholder. Subsequently, Ingle was voted out of his director position and fired from his job at GMS.
7. Rule:
8. Reasoning: Plaintiff argues that as a minority shareholder of a closely held corporation, he is nevertheless entitled by reason of his minority shareholder status to a fiduciary-rooted protection against being fired. He next urges that an implicit covenant of good faith and fair dealing under the shareholders’ agreement precluded his termination without cause. He concludes that even if he is an at-will employee, an action properly lies for the respondents’ breach of fiduciary duties and for wrongful interference with his employment. -> Ingle did not sufficiently present facts raising a triable issue regarding the existence of either an oral or written employment contract fixing employment of a definite duration. Ingle never asserted that what was paid to him was not fairly representative of his equity interest.
Hancock dissenting: New York recognizes that the status of a minority shareholder in a close corporation requires special protection from the courts.
Abuse of Control – Brodie v. Jordan
Year: 2006
Court:
2. Disposition:
3. Holding: prospective injunctive relief may be granted to ensure that the plaintiff is allowed to participate in company governance, and to enjoy financial or other benefits from the business, to the extent that her ownership interest justifies.
4. Issue: whether the plaintiff was entitled to the remedy of a forced buyout of her shares by the majority
5. Procedural History: the appellate court found freezeout.
6. Facts: Walter Brodie (Walter), Barbuto, and Jordan were the three directors of Malden, a Massachusetts corporation. Each held one-third of the shares of the corporation. As Walter got older and wanted to be less involved, he requested multiple times that Barbuto and Jordan (defendants) buy out his shares. They refused. Eventually Walter was voted out as president and director of Malden, and he died five years later. Walter’s executrix (Brodie) (plaintiff) inherited Walter’s shares in Malden. Upon her requests, Barbuto and Jordan repeatedly failed to provide her with various company information. In addition, Brodie nominated herself as director but was voted down by Barbuto and Jordan. Brodie also requested that Barbuto and Jordan buy out her shares, but they again declined. Brodie brought suit for breach of fiduciary duty.
7. Rule:
8. Reasoning: majority shareholders in a close corporation violate the fiduciary duty when they act to freeze out the minority. The majority frustrates the minority’s reasonable expectations of benefit from their ownership of shares.
Because the wrongdoing in a freeze-out is the denial by the majority of the minority’s reasonable expectations of benefits, the remedy should restore to the minority shareholder those benefits which she reasonably expected.
There is nothing in the background law, the governing rules, or any other circumstance that could have given the plaintiff a reasonable expectation of having her shares bought out.
Abuse of Control – Smith v. Atlantic Properties, Inc.
Year: 1981
Court:
2. Disposition:
3. Holding: the trial judge was justified in charging Wolfson with the out-of-pocket expenditures incurred by Atlantic for the penalty taxes and related counsel fees of the tax cases.
4. Issue:
5. Procedural History: The trial judge ruled in favor of Smith.
6. Facts: Wolfson, Smith, Zimble, and Burke each owned 25 percent of the outstanding shares of Atlantic. Atlantic’s bylaws stated that no corporate action could be taken without an affirmative vote of 80 percent of the outstanding stock. This provision effectively meant that any decision could be vetoed by one of the four partners. When Atlantic began to turn a profit, Smith, Zimble, and Burke wanted to declare dividends. Wolfson, however, repeatedly voted against declaring dividends, instead wanting to devote the funds to repairs on the property. The IRS accordingly assessed penalties against Atlantic for seven straight years, with Wolfson still refusing to give in. After about four years of the IRS penalties, Smith, Zimble, and Burke brought suit, seeking reimbursement to Atlantic from Wolfson for the IRS penalties.
7. Rule:
8. Reasoning: cases may arise in which, in a close corporation, majority stockholders may ask protection from a minority stockholder. The 80% provision may have substantially the effect of reversing the usual roles of the majority and the minority shareholders. The minority, under that provision, becomes an ad hoc controlling interest.
Whatever may have been the reason for Wolfson’s refusal, he recklessly ran serious and unjustified risks of precisely the penalty taxes eventually assessed, risks which were inconsistent with any reasonable interpretation of a duty of utmost good faith and loyalty.
Control, duration, and statutory dissolution – Alaska Plastics, Inc. v. Coppock
Year: 1980
Court:
2. Disposition: remanded.
3. Holding: we express no opinion whether they were dividends, whether Muir was deprived, or whether the majority shareholders violated AS 10.05.540.
4. Issue:
5. Procedural History:
6. Facts: Ralph Stefano, Harold Gillam, and Robert Crow (defendants) were the sole owners and directors of Alaska Plastics, Inc. (API). Each owned one third of API’s shares. However, Crow got divorced and lost half of his shares in the settlement, giving a one-sixth interest in API to his former wife, Patricia Muir. The directors failed to notify her of various shareholder meetings; they took annual directors’ fees without giving Muir any; they authorized a salary to Gillam; and they used corporate funds to pay for bringing their wives to corporate meetings. Muir never received any money from API. Stefano, Gillam, Crow, and Muir began discussing a corporate buyout of her shares, but the other three would only offer Muir a price much lower than the stock was worth, and throughout the negotiations she repeatedly declined the offers.
7. Rule:
8. Reasoning: For a dissatisfied shareholder, a remedy is the corporation buy shares at their fair value. First, articles of incorporation or by-laws may provide for the purchase of shares by the corporation. Second, the shareholder may petition for involuntary dissolution. Third, a shareholder may demand a statutory right of appraisal. Finally, a purchase may be equitable remedy upon a finding of a breach of a fiduciary duty.
Forced dissolution allows minority shareholders to exercise retaliatory oppression against the majority. Muir must establish that the acts of directors were illegal, oppressive or fraudulent.
We are not aware of any authority which would allow a court to order specific performance on the basis of an unaccepted offer, particularly on terms totally different from those offered.
The essence of Muir’s action is that other directors enjoyed benefits from the corporation which should have been shared equally with her. None of the other shareholders have sold their stock to the corporation so it would not be appropriate to order the corporation to purchase Muir’s stock.
The evidence was insufficient to establish a breach of duty towards the corporation. It is that she was harmed as an individual by not receiving the same benefits as the others, not that the corporation itself was harmed. A derivative action would not be appropriate.
Control, duration, and statutory dissolution – Pedro v. Pedro
Year: 1992
Court:
2. Disposition: Affirmed.
3. Holding: appellants breached their fiduciary duties to respondent and wrongfully terminated his contract for lifetime employment.
4. Issue: (1) was the evidence sufficient to support the trial court’s finding of breach of fiduciary duty? (2) did the trial court properly determine Alfred had a reasonable expectation of lifetime employment, thereby awarding him damages for lost wages following the buyout until he reached age 72? (3) did the trial court make proper determinations regarding joint and several liability, prejudgment interest, recusal of the trial judge, and attorney fee?
5. Procedural History: the trial court found that the brothers had breached their fiduciary duty to Alfred and awarded Alfred a buyout of his one-third ownership in the company. The court also found that Alfred had an expectation of lifetime employment and awarded him lost wages for wrongful termination, as well as attorney fees.
6. Facts: Alfred, Carl, and Eugene Pedro were brothers and each owned one-third of The Pedro Companies (TPC). The relationship between Alfred (plaintiff) and the other two brothers (brothers) (defendants) deteriorated around 1987. Alfred found a monetary discrepancy between TPC’s accounting records and its checking account. Alfred convinced the brothers to hire an independent accountant, who found a $140,000 discrepancy, but was unable to fully complete his investigation as the brothers refused to give him access to documents that he requested. In December 1987, the brothers did fire him. Alfred alleged to have had an expectation of lifetime employment for TPC.
7. Rule:
8. Reasoning: appellants claim no breach of fiduciary duty can exist because there has been no diminution in the value of the corporation or the stock value of respondent’s shares. -> action depleting a corporation’s value is not the exclusive method of breaching one’s fiduciary duties.
It was reasonable for the trial court to determine that the parties did in fact have a contract that was not terminable at will.
Appellants claim a grant of damages for both lost wages and breach of fiduciary duty allows respondent a double recovery. -> respondent has two separate interests as owner and employee. The recovery for each interest is appropriate and will not be considered a double recovery.
Appellant both breached fiduciary duties and acted arbitrarily, vexatiously or otherwise not in good faith.
Control, duration, and statutory dissolution – Stuparich v. Harbor Furniture Mfg., Inc.
Year: 2000
Court:
2. Disposition: affirmed.
3. Holding: As holders of a minority of the voting shares, plaintiffs are not entitled to substitute their business judgment for their brother’s with respect to viability of the furniture operations.
4. Issue: whether dissolution is reasonably necessary to protect their rights or interests.
5. Procedural History:
6. Facts: Ann Stuparich and Candi Tuttleton (plaintiffs) were sisters who each owned 19.05 percent of the voting and one-third of the non-voting shares in Harbor Furniture Manufacturing, Inc. (Harbor Furniture). Their brother, Malcolm, owned 51.56 percent of the voting shares. The plaintiffs became generally frustrated with the management of the corporation, including the failure to observe corporate formalities. The corporation had two operations, a mobile home park and its original furniture manufacturing operation. The furniture manufacturing operation had become unsuccessful, incurring losses, while the mobile home park was very profitable. The plaintiffs proposed formally separating the operations to insulate the profits of the mobile home park. Malcolm refused to discuss the proposal and later refused the plaintiffs’ request to buy them out. At that point, the plaintiffs became so frustrated that they stopped attending annual meetings. Throughout this time period, the plaintiffs continued to receive monthly dividends from the corporation. Nonetheless, they brought suit, seeking involuntary dissolution of the corporation.
7. Rule:
8. Reasoning: the corporation argues that as minority shareholders, plaintiffs’ only right and interest is in continuing to receive dividends. It invokes the BJR of deference to corporate directors in making decisions regarding the operation of the company.
Dissolution - Haley v. Talcott
Year: 2004
Court:
2. Disposition:
3. Holding: it is not reasonably practicable for the LLC to continue to carry on business in conformity with the LLC Agreement. The LLC should dissolve. Either party may bid on the Property.
4. Issue:
5. Procedural History:
6. Facts: Matthew Haley (plaintiff) and Greg Talcott (defendant) were effectively partners in a joint venture called the Redfin Grill (Redfin), a restaurant. The two had an option to purchase the land on which the Redfin was situated, and they chose to exercise the option. They formed a limited-liability company (LLC) to do so, called Matt & Greg Real Estate, LLC (the LLC). Subsequently, the two had a bitter falling out, and their relationship deteriorated quickly. Talcott tried to get Haley to resign from his employment at Redfin, but Haley took the attempt as a breach of their Redfin contract. Haley also voted to reject a new lease that Talcott proposed for Redfin and voted to put the property they had purchased up for sale. Talcott was against each of these votes, and because each owned 50 percent of the LLC, they were stuck in a stalemate with the status quo prevailing. The exit mechanism did not say which party would keep the LLC in the event of a falling out. In addition, the exit mechanism would not relieve Haley of his personal liabilities on the mortgage even if Talcott retained full control of the LLC. As a result, Haley brought suit seeking a court-ordered dissolution of the LLC.
7. Rule: Section 18-802 provides that: on application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.
Section 273 sets forth as pre-requisites for a judicial order of dissolution: (1) the corporation must have two 50% stockholders, (2) those stockholders must be engaged in a joint venture, and (3) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.
8. Reasoning: DE LLC Act is grounded on principles of freedom of contract. The presence of a reasonable exit mechanism bears on the propriety of ordering dissolution under 18-802.
While the exit provision allows either party to leave voluntarily, it provides no insight on who should retain the LLC if both parties would prefer to buy the other out, and neither party desires to leave. The exit mechanism fails as an adequate remedy for Haley because it does not equitably effect the separation of the parties.