Corporations • miller • fall 1999/spring 2000



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§ 16(b) of 1934 Act officers, directors and 10% shareholders must pay to the corporation any profits they make, within a six-month period, from buying and selling firm's stock; for the purpose of preventing unfair use of information

  • officers and directions subject to § 16(b) if occupy position either at time or purchase or time of sale

  • equity securities, including convertible debt

  • damages calculated using lowest priced purchases and highest priced sales, to maximize amount company can recover

Reliance Electric v. Emerson Electric (S.Ct. 1972)

  • beneficial owner must be such both at the time of purchase and sale, or the sale and purchased involved

  • bright-line rule underinclusive when read literally to allow parties to plan activities to avoid liability: statutory insider might sell enough shares to bring holdings below 10% and within six months of purchase sell additional shares free from liability

  • at some point separate transactions may be deemed the same--within same day? hour?

Kern Co. v. Occidental Petroleum (S.Ct. 1973) S.Ct. refuses to apply §16(b) to behavior that falls within but does not meet Congress's purpose; execution of option to purchase not exercisable within 6-month period, and exchange of shares in tender offer, not deemed sale under 16(b)

courts look to whether transaction involves speculative abuse



involuntary exchange of shares by tender offeror threatening hostile takeover and displacement of management, vigorously and immediately opposed by current management, not in position of insider

  1. Disclosure and Fairness

Doran v. Petroleum (5th Cir. 1977) in absence of finding that offerees had been provided with information about issuer or given effective access to such information as would have been disclosed in registration statement, sale of limited partnership interest not private offering exempted by § 4(2) from registration requirements of 1933 Act

  • exempt transactions are those as to which there is no practical need for protection of the Act

factors in determining whether private offering:

  1. number of offerees and relationship to each other and the issuer

  • sophistication of investor is not substitute for access to information that registration would disclose; must be sufficient basis of accurate information upon which sophisticated investor may exercise skills

  1. number of units offered

  2. size of the offering

  3. manner of the offering

  1. Indemnification and Fairness

form of compensation to officers and directors against litigation risk (attorneys' fees, expenses) and liability risk (damages, penalty if found liable); individual retains separate counsel when potential liability exceeds corporate insurance policy limits

  • insurance company controls risk through:

  1. deductibles (insured covers first traunch of risk)

  2. exclusions

  3. premiums to reflect risk probability of insured

  4. policy ceilings/limits (insured covers last traunch of risk)

  5. copayments

  6. monitoring operations (provide advice and counsel to reduce risk)

  • if indemnification instead of insurance, company controls risk by exclusions and monitoring operations

  • problems of indemnification: self-dealing involved; company may not be able to perceive or rate risk; only attorney benefits because corporation reimburses officer/director for damages paid to corporation


DE General Corporation Law § 145

  1. in civil action, not derivative, or criminal action, corporation may indemnify officer/director, employee or agent against expenses, judgments and amounts paid in settlement if:

  1. in good faith

  2. in manner reasonably believed to be in or not opposed to best interests of corporation

  3. had no reasonable cause to believe conduct was unlawful

  1. in civil derivative action, corporation may indemnify officer/director, employee or agent only against expenses if

  1. in good faith

  2. in manner reasonably believed to be in or not opposed to best interests of corporation

except no indemnification if person adjudged liable unless and to the extent that the Chancery Court determines that person is fairly and reasonably entitled to expenses

  • to the extent person successful on the merits, corporation shall indemnify against expenses

  • determination that person entitled to indemnification made by majority of non-interested directors, written opinion of independent legal counsel, or stockholders

  • corporation permitted to pay expenses in advance of final disposition upon receipt of undertaking to repay amount if ultimately determined that not entitled to indemnification

  • corporation has power to purchase and maintain insurance on behalf of nay person irrespective of whether corporation would have power to indemnify under statute

Citadel Holding v. Roven (Del. 1992)

indemnification agreement provided additional protection beyond that available under DE corporate law by requiring corporation to advance costs and expenses before final disposition



any action not limited to claims against which director may be indemnified but extends to federal claims based on actions taken as director reasonably related to business of corporation (even if company later determines that director not entitled to indemnification)


  1. Problems of Control

solicitation includes any communication with shareholders relating to potential subject of shareholder meeting

  • letter to shareholders influencing proxy outcome

  • Studebaker v. Gittlin (2d Cir. 1966) preliminary requests that other shareholders join in demanding shareholder list constitutes solicitation under § 14, even though purpose of such solicitation was to get list with which to make actual proxy solicitation

  1. Proxy Fights

insurgent tries to oust incumbent management by soliciting proxy cards and electing its own representatives on the board; how to gain control over company:

  1. tender offer to buy shares from current shareholders (often hostile takeover attempt)

  • if lose tender offer, still make money upon resale of shares to winning bidder

  • capture value added through ownership of shares

  1. proxy solicitation to elect new directors

  • cheaper than tender offer, but must share value added as director with current shareholders

  • if lost bore entire cost of proxy solicitation

  1. Strategic Use of Proxies

Levin v. MGM (S.D.N.Y. 1967) not wrongful or unfair for incumbent management to commit corporation to pay for services of specially retained attorneys, public relations firm and proxy soliciting organizations and to have used offices and employees of corporation in proxy solicitation and the good-will and business contacts of corporation to secure support for present management

  • right of independent shareholder to be fully informed is of supreme importance, though also important that court not act to unduly influence shareholder's decision as to which faction should receive proxy

  • amounts paid not excessive

  1. Reimbursement of Costs

Rosenfeld v. Fairchild Engine & Airplane (N.Y. 1955) when directors act in good faith in a contest over policy, as opposed to purely personal power contest, they have the right to incur reasonable and proper expenses for solicitation of proxies and in defense of their corporate policies which directors believe, in good faith, to be in best interests of corporation, subject to court scrutiny

  • successful insurgents may also be reimbursed for the reasonable expenses incurred in good faith, subject to court scrutiny

  • where moneys spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in best interests of stockholders and corporation, or where fairness and reasonableness of amounts are successfully challenged, courts will disallow

  1. Private Actions for Proxy-Rule Violations

§ 14(a) of 1934 Act prohibits solicitation of proxies in violation of SEC rules. Rule 14a-9 prohibits solicitation of proxies by means of materially false and misleading statements.

Virginia Bankshares v. Sandberg (S.Ct. 1991) no causation when minority shareholder votes not determinative of outcome

  • misstatement of psychological fact of speaker's belief alone, without objective evidence that statement also expressly or impliedly asserted something false or misleading about subject matter, not subject to § 14(a)

  • mixed statement of opinion and fact may be materially misleading even when stated in conclusory terms when misleading about subject matter; reasons for directors' recommendations or statements of belief are matters of corporate record subject to documentation, to be supported or attacked by evidence of historical fact, so no undue risk of open-ended liability or uncontrollable litigation

Stahl v. Gibraltar Financial (9th Cir. 1992)

  • reliance not necessary element under § 14(a)--plaintiff who did not rely on misrepresentations may bring suit before or after vote is taken; should not penalize shareholders who discovered true facts

  1. Shareholder Proposals

Rule 14a-8 requires corporation, upon notification by shareholder of intention to present proposal for action at forthcoming shareholder meeting, to include proposal on proxy statement, with certain exceptions:

  • corporation has burden to show that proposal falls within exception

14a-8(c)(1) not proper subject for action by share holders under state law

14a-8(c)(2) would require violation of law if implemented

14a-8(c)(4) relates to redress of personal grievance or to further personal interest not shared with other shareholders at large

14a-8(c)(5) insignificant relationship to business of firm (<5% of total assets)

14a-8(c)(6) deals with matter beyond corporation's power to effectuate

14a-8(c)(7) deals with ordinary business operations (proposal violates fundamental rule Shareholders Sharehold; Managers Manage); mundane matters of day-to-day business involving no substantial economic and policy considerations

Amalgamated Clothing and Textile Workers Union v. Wal-Mart (S.D.N.Y. 1933) SEC No-Action Letter to individual company is not expression of interpretation to which court must defer, not ruling or decision; employment-related proposals based on social policy considerations generally deemed to involve conduct of day-to-day business; even if substantial policy, request for information regarding individual actions involves day-to-day business

Austin v. ConEd of NY (S.D.N.Y. 1992) shareholder proposal relating to employee pension rights and retirement after period of service not required to be included on proxy statement because related to ordinary business operations; availability of alternative forum, collective bargaining, indicates that issue not so extraordinary that shareholder meeting is only forum

NYC Employee's Retirement System v. Dole Food (2d Cir. 1992) corporation must include in its proxy statement shareholder proposal to establish committee for purpose of evaluating impact of national health care reform proposals on the company, though relates to employee benefits, because not beyond firm's power to effectuate, not related to ordinary business operations, and not insignificant piece of firm's business

  1. Shareholder Inspection Rights

books and records of firm; shareholder list (necessary to communicate directly with shareholders)

Crane v. Anaconda (N.Y. 1976) NY BCL § 1315 requires foreign corporation doing business in state to furnish shareholder list upon request of NY resident who for six months has been shareholder of record or holds or acts for those who hold 5% of any class of shares, if for purpose in interest of business of corporation (similar provision for NY corporations § 624)

  • solicitation of tender offer of general interest to shareholders of corporation, so shareholder entitled to have access to shareholder list unless inimical to purposes of corporation or its shareholders

  • whenever corporation faces situation having potential substantial effect on its wellbeing or value, shareholders are necessarily affected and business of corporation is involved

State Ex Rel. Pillsbury v. Honeywell (Minn. 1971) shareholder who purchased stock of corporation for sole purpose of asserting ownership privileges in effort to halt corporation's production of bombs not entitled to inspect corporate records because did not have proper purpose related to economic interest as shareholder

  • proper purpose is investment interest in long term well-being of corporation or enhancement of value of shares

Sadler v. NCR (2d Cir. 1991) NY law requiring out-of-state corporation doing business in NY to provide resident shareholders with list of shareholders and to compile and produce list of beneficial owners of shares who do not object to disclosure of names, when law of state of incorporation would not allow shareholders to obtain such lists, valid and not violative of Commerce Clause

statute is to be liberally construed to facilitate communication among shareholders on issues respecting corporate affairs, so firm required to compile NOBO list though one not currently in existence; DE construes its statute narrowly because compilation of NOBO list can take up to 10 days to compile and plays no role in proxy contest



  1. Shareholder Voting Control

Stroh v. Blackhawk Holding (Ill. 1971) difficulties of transition from small corporation controlled by promoters to public corporation: inherent conflict of interest when managers control corporation, inconsistent with concept that capital investment determines control when separate economic rights from voting rights

  • under Illinois corporate law, parties to a corporate entity may create whatever restrictions and limitations they may want with regard to corporate stock in the articles of incorporation limited only by proviso that articles may not limit or deny voting power of any share

  • economic rights to earnings and rights to assets may be removed and eliminated from other attributes of share of stock so long as voting rights are not limited or denied

  • proprietary rights conferred by ownership may consist of one or more of rights to participate (i) in the control of the corporation, (ii) in its surplus or profits, or (iii) in distribution of its assets

  • great deal of flexibility in structuring share attributes as long as full disclosure, may be bad deal but no fraud




  1. Control in Closely Held Corporations deadlock and oppression

Ringling Bros. v. Ringling (Del. 1947) vote pooling agreement valid, distinguished from voting trust, not against public policy, because parties only consult about how to vote stock and to vote together, not what to vote, therefore does not separate voting power from share ownership; provision for submission to arbitrator intended only as deadlock-breaking measure, not transfer of ownership of shares

  • under state law, voting trust, by which legal ownership of shares is transferred to trustee who can vote under terms of trust instrument, can exist only for ten years, while voting agreement, by which parties retain legal ownership of stock but are contractually bound to vote together, has no duration limit

  • proper remedy not to declare election invalid but not count votes cast in violation of agreement, with result of deadlock in same number of directors elected by remaining two shareholders, closing out third shareholder who is in worse position than if had complied with voting agreement

McQuade v. Stoneham (NY 1934) agreement between majority shareholder and two minority shareholders that one minority shareholder would be retained as treasurer of corporation at specified salary held invalid because precludes board of directors from changing officers, salaries or policies at risk of incurring liability except by consent of contracting parties

directors may not by agreements entered into as shareholders abrogate their independent judgment

power of shareholders to unite is limited to election of directors and is not extended to contracts whereby limitations are placed on power of directors to manage business of corporation by selection of agents at defined salaries; violates fundamental principle of Shareholders Sharehold, Directors Direct


  • punctilio of Meinhard v. Salmon exists only in relation to corporation and its shareholders, not to individual director; mere morals of marketplace govern contracts

  • not all shareholders were party to agreement, therefore would be injured if directors failed to exercise honest and unfettered judgment

  • § 620 of NY BCL overruled McQuade principle in limited circumstances if arrangement is disclosed in articles of incorporation and is approved by all of shareholders

Clark v. Dodge (NY 1936)

  • agreement between two sole shareholders of corporation to retain one as general manager at specified salary upheld because no risk of harm to minority shareholders or public

  • damage suffered or threatened is a logical and practical test for validity of shareholder agreements; if enforcement of contract damages nobody, not even the public, then no reason to hold it illegal even though impinges slightly upon broad statutory provision that business of a corporation shall be managed by directors

  • distinguished from McQuade: no attempt to sterilize board of directors or render powerless, only agreement as to manager's position and salary; agreed to by all shareholders


Galler v. Galler (Ill. 1964)

distinction between publicly held and closely held corporations, from which shareholders cannot escape merely by selling shares; modern view of nearly complete acceptance of shareholder agreements concerning management of corporation so long as:



  1. no complaining minority interest appears

  2. no fraud or apparent injury to the public or creditors is present, and

  3. no clearly prohibitory statutory language is violated


Ramos v. Estrada (Cal. 1992) general corporate law also open to shareholder pooling agreements so long as not totally sterilize board and serve valid purpose (avoid oppression) and agreed to by all shareholders (but even if not, only tells shareholder to vote together without what to vote or how to manage)

agreement to vote shares in manner voted by majority of shareholders did not constitute proxy but is substantially similar to pooling agreement authorized under California Corporations Code § 706 for close corporations (agreement between two or more shareholders of close corporation may provide that shares held by them shall be voted as provided by agreement or a parties may agree or as determined in accordance with a procedure agreed upon by them), applies also to non-close corporations so long as not otherwise illegal



Zion v. Kurtz (NY 1980) court upheld under both Del. and NY law complex financing arrangement in which creditor obtained minority interest in closely held corporation and commitment from dominant shareholder that corporation would not enter into transactions without consent of creditor, despite "technical" defects in failure to expressly elect close corporation status and to refer to agreement limiting discretion of directors in articles of incorporation

  1. Abuse of Control

Wilkes v. Springside Nursing Home (Mass. 1976) breach of fiduciary duty when three majority shareholders of close corporation did not show legitimate business purpose for severing fourth shareholder/director from payroll and refusing to reelect him as officer or director because no showing of misconduct or neglect of duties but design to pressure shareholder into selling shares to corporation at price below value, in disregard of longstanding policy that each shareholder would be director of corporation and employment with corporation would go hand in hand with stock ownership; damages in amount that would have been received if he had remained officer and director

  • shareholders of close corporation owe each other same fiduciary duty of utmost good faith and loyalty in operation of enterprise that partners owe to one another

  • close corporations afford opportunity to majority shareholders to oppress, disadvantage or freeze out minority stockholders

  • when asserted business purpose for action is advanced by majority, it is open to minority shareholders to demonstrate that same legitimate objective could have been achieved through alternative course of action less harmful to minority's interest


Ingle v. Glamore Motor Sales (NY 1989) provision in shareholders agreement for option to repurchase all shares of stock from stockholder in event that stockholder ceases to be an employee of corporation for any reason, where there was no employment contract, held not to violate fiduciary duty of close corporation to shareholders when fair share price paid

  • duty owed by corporation to minority shareholder as a shareholder distinct from any duty it might owe her as employee

  • divestiture of status as shareholder by operation of repurchase provision was contractually agreed to consequence flowing directly from firing

  • no duty of loyalty and god faith akin to that between partners precluding termination except for cause, arises among those operating business in the corporate form who have only the rights duties and obligations of stockholder and not those of partners


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