Corporations A Contemporary Approach Chapter 1 Introduction to

Corporations: A Contemporary Approach Chapter 1 Introduction to the Firm Slide 1 of 22 Random International, “Rain Room” (Expo 1: New York, 2013)

Module I – Fundamentals Chapter 2 Corporation Basics Bar exam Corporate practice Law profession Citizen of world Corporations: A Contemporary Approach • Corporation as “private constitution” • Basic corporate vocabulary – – – – corporate categories corporate characteristics organic documents corporate actors corporate securities fiduciary duties (derivative suit) corporate law vs. other law • Corporate powers – change annual meeting – equitable limitations Chapter 2 Corporation Basics Slide 2 of 23

Why Bus. Orgs? Corporations: A Contemporary Approach Bar exam Corporate practice Law profession Citizen of world Chapter 1 Introduction to the Firm Slide 3 of 25

Corporate hierarchies Constitution Shareholders pr Co iv rp at o e ra co ti ns on tit as ut io n Board of Directors Corporation (officers) Corporations: A Contemporary Approach Chapter 2 Corporation Basics Corporate statute (judge-made law) Articles of Incorporation By-laws Slide 4 of 23

Pop quiz 1. “Exit, voice and loyalty” in political organizations are similar to “liquidity, voting and fiduciary duties” in the corporation. True or false? 2. Public corporations are -- a. a type of non-profit corporation b. a type of private corporation c. a type of close corporation d. a corporation regulated only by federal law 3. Corporations MUST have: a. Separate identity b. Perpetual life c. Limited liability d. Centralized management (board of directors) e. Transferable shares 4. Shareholders have a right to liquidate their investment and sell their shares to the corporation. True or false? 1–T / 2–B / 3–A / 4–F Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 5 of 23

5. Chancellor Bill Allen is just about the cutest jurist in the land. True or false? 6. The Model Business Corporate Act is – a. uniform statute adopted in most states b. ABA draft statute for states to adopt/revise as they choose c. modeled on the Delaware General Corporation Law 7. Corporate law is: a. Primarily judge-made law (see ALI Principles) b. A product of each state under choice of law principles c. Primarily concerned with defining rights of securities -- stock, debentures, bonds, preferred shares 8. The articles of incorporation (choose two): a. Trump corporate statutes b. Trump corporate bylaws c. Name the board of directors d. Must be filed with the secretary of state Corporations: A Contemporary Approach Chapter 2 Corporation Basics 1–T / 2–B / 3–B / 4–B, D Slide 6 of 23

Corporate fiduciary duties … A corporation during WWII – with more business than it know what to do with -- spends $1 million to sponsor a “variety hour” radio program. One of the singers on the program is wife of the company’s board chair/ president. A shareholder claims the directors, in approving this expenditure, violated their fiduciary duties. Please analyze. Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 7 of 23

Corporate Fiduciary Duties Duty of care Business judgment rule (BJR) Bayer v. Beran, (NY Sup. Ct 1944) Duty of loyalty “[A director] is called “[P]ersonal transactions “Questions of policy of upon to use care, to of directors with the management … are left exercise judgment, the solely to their honest and corporations … may tend degree of care, the kind unselfish decision … and to produce a conflict of judgment, that one between self-interest and the exercise of them for would give in similar the common and general fiduciary obligation, are situations to the conduct interests of the when challenged of his own affairs. ” examined with the most corporation may not be scrupulous care. ” questioned. ” Presumption for Corporations: A Contemporary Approach Presumption against Chapter 2 Corporation Basics Slide 8 of 23

Enforcement of fiduciary duties … (1) Derivative suit (2) Class action Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 9 of 23

Derivative suit (enforce duties to corporation) Shareholder (lawyer) “on behalf of corporation” Corporation violation of corporate duties (recovery to corporation) Fiduciaries Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 10 of 23

Class action Sh rep (enforce duties to shareholders) (lawyer) “on behalf of class” Shareholder class violation of direct duties Insiders (recovery to shareholders) Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 11 of 23

With great power comes great responsibility … Setting the shareholders’ meeting date … Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 12 of 23

Schnell v. Chris-Craft Industries, Inc. (Del. 1971) Insurgent Shareholders elect new board What is a proxy insurgency? Corporations: A Contemporary Approach Board of directors Corporation Chapter 2 Corporation Basics Slide 13 of 23

Insurgency timeline (1971) te a d s m r fo ge r u l o eh de rd a o B - - 7 8 1 t c S Sep O Oct Corporations: A Contemporary Approach t ee a d an s h S - 7 2 t c O Nov Chapter 2 Corporation Basics of ns r ea m w ne ro up ee d w e r m fo te a l g er ld o eh r a m 1 ep d en m r a Sh la y b s g nt s n r i e ws up o r g in t e n l d a in ng se g o i r eti op Y) O r - me 1 - Pd, N 1 for ) 8 n n 0 s c rtla Ja ate law e d by D Co ( ( Dec Jan Slide 14 of 23

Power vs. Duty “… Management has attempted to use the corporate machinery and the Delaware Law for the purpose of perpetuating itself in office … for the purpose of obstructing the legitimate efforts of dissident stockholders … These are inequitable purposes, contrary to established principles of corporate democracy. ” Delaware Supreme Court (2009) Schnell v. Chris-Craft Industries, Inc. (Del. 1971) Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 15 of 23

Delaware’s “product” te a d t s i g l c H in t S jun e e s to in g m t s m r w w on ess lim m e a e fo l i e t n c e y p n me f ac ac pr b u o o s s p for ro s t d g t rn file an nie t os te en a n p r e e l up t g t d am ge / da r p s d ew su ou gro our nd n r n n i a a r d s al r g er y C m t e e n e e e i d d e ld ol er er r pos ol t rig date o m h c c h ) h C o O e - ng rd re are han p Pr NY ar a a u 1 h o h Sh C C ti s) - d, S 1 S e 8 B S - - 10 18 an me ylaw 9 c 0 tlan 7 8 J 7 2 1 1 v De Cor (b t 2 ov ov ov p o ct c e ( N N N S O N O Sep Oct Corporations: A Contemporary Approach Nov Chapter 2 Corporation Basics Dec Jan Slide 16 of 23

Stahl v. Apple Bancorporation, Inc. (Del. Ch. 1990) Shareholders (1) buy shares Hostile bidder (2) elect new board What is a tender offer? Corporations: A Contemporary Approach Board of directors Corporation Chapter 2 Corporation Basics Slide 17 of 23

Takeover timeline (1986 -90) g kin c a n a pl a d g y te rit o aj m r; i m a s p f o ets n re dn u r a es t g a h s u i s o tiv b ed b p O , r d 7 vid T rna o n 1 c y n a a alte ip ril pro a e s h ls p g B , s s r a A i n r r r a e o k fo sh er ng o s h n t i a i f c a d w e 8 c dv loo t m w an % o a a t n to xy d $3 ts yla 3 a o d. u b m e r r i n t 0 o l @ i f co O es 3 t p pre tg : f da s s e u o g t rd r s T o s H m % che po s m o s k t 0 o d rec 2 rea ixe star nd see g S pr b f s l e l l irin h s rd hl uy ahl ia ws l h a a t c b h a t t qu o Sta e dra S ta hl p S S B a S t - c re S ith - 0 9 S 6 0 0 8 /8 /9 jun - /9 8/9 2/ 90 d w 9/90 7 4 6 9 2 / / / 1 n 8 1 2 9 B 5/ 11 5/ i 9/ 3/ 11 3/ 4/ 1986 1989 Corporations: A Contemporary Approach 1990 Chapter 2 Corporation Basics t bd 1991 Slide 18 of 23

Power vs. Duty “Fiduciary duties constitute a network of responsibilities that overlay the exercise of even undoubted legal power. ” “I cannot conclude that defendants have taken action for the purpose of impairing or impeding the effective exercise of the corporate franchise. ” “Deferring this company’s annual meeting where no meeting date has yet been set and no proxies even solicited does not impair or impede the effective exercise of the franchise. ” Chancellor William Allen “Plaintiff has no legal right to compel the holding of the company’s annual meeting or right in equity to require the board to call a meeting now. ” Stahl v. Apple Bancorporation, Inc. (Del. Ch. 1990) Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 19 of 23

Reconcile the cases … (1) Schnell: board has power -- but it’s inequitable for board to change meeting date and impede voting insurgency (2) Stahl: board has power -- and it’s equitable for board to not set meeting date in face of insurgency/tender offer Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 20 of 23

The end Corporations: A Contemporary Approach Chapter 2 Corporation Basics Slide 21 of 23