Corporations • miller • fall 1999/spring 2000



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Sugarman v. Sugarman (1st Cir. 1986) majority shareholder's offer to buy stock from minority shareholders at inadequate price constituted breach of fiduciary duty to minority shareholders of close corporation as part of plan to freeze minority shareholders out of financial benefits to which they were entitled

  • elements of cause of action by minority shareholder denied of fair share of benefits of close corporations:

  1. not sufficient to show majority shareholders have taken excessive compensation (because must be brought as derivative action) unless attempted freeze-out of minority shareholders by draining off corporations earnings in form of exorbitant salaries and bonuses

  2. not sufficient to allege that majority shareholder has offered to buy stock of minority shareholder at inadequate price unless majority shareholders breach duty to exercise complete candor with minority shareholders when negotiating stock transactions and fail to disclose all material facts surrounding proposed transaction

Smith v. Atlantic Properties (Mass. 1981) breach of fiduciary duty of utmost good faith and loyalty to shareholders of close corporation in director's unreasonable refusal to vote for declaration of dividends, attributed to tax avoidance purpose and dislike for other shareholders rather than any legitimate repair and improvement program, incurred substantial penalty taxes and legal expense

  • reversal of roles of majority and minority shareholders due to provision in articles of incorporation requiring vote of 80% of outstanding shares for election, appointment or resolution, effectively granting veto to any one of four original shareholders

Jordan v. Duff and Phelps (7th Cir. 1988) stock repurchase agreement that corporation would purchase at book value all shares held by employee upon termination of employment for any reason valid and enforceable on its face, because close corporations do not want outsiders holding stock, provide incentives to prospective employees and disincentives for employees to leave

  • special facts doctrine (background rule of state law) that close corporations buying their own stock, like knowledgeable insiders of closely held firms buying from outsiders, have fiduciary duty under Rule 10b-5 to disclose material facts including new events such as merger that substantially affect value of stock

  • parties may contract around special facts doctrine but in the case of employment at will, company did not obtain express or implied agreement releasing it from duty to disclose, and course of dealing suggests regard for value of shares in employees' decision to leave

  • employment at will still a contractual relation requiring company not to behave opportunistically to discharge employee



  1. Mergers, Acquisitions and Takeovers

  1. Statutory Merger

two companies form third separate company or one company takes on identity of the other

  • board approval by both boards

  • shareholder approval

  • may be by supermajority (depending on corporate charter)

  • interested shareholders may be excluded from voting

  1. De Facto Merger

sale of substantially all assets to other company in exchange for cash which is then liquidated in form of dividends to shareholders

  • issue of what happens to liabilities of selling firm

  • requires approval of shareholders of acquiring firm

Farris v. Glen Alden Corporation (Pa. 1958) court treats asset acquisition transaction as de facto merger with appraisal rights for shareholders based on realities and consequences of transaction not only provisions of agreement under which selling corporation sold assets for shares of acquiring corporation and then dissolved and distributed shares to dissenting shareholders

  • shareholder approval of asset acquisition agreement invalid due to failure of corporate officers to inform shareholders that true intent and purpose of agreement was merger and their right to dissent and claim fair value for shares

  • PA legislature later revised corporate law to abolish doctrine of de facto merger

Hariton v. Arco Electronics (Del. 1963) merger may be accomplished as sale of assets with mandatory dissolution and distribution without appraisal rights of statutory merger under DE corporate law

Rauch v. RCA (2d Cir. 1998) de facto non-merger theory rejected by court; agreement took form of merger but in substance was sale of assets followed by redemption (upon which sh's entitled to much higher price in Cert. of Inc.); corporation had every right under DE merger statute to convert stock to cash to accomplish merger - to treat such as redemption would be to nullify conversion provisions of statute


  1. Freeze-Out Mergers

parent takes over subsidiary through forced sale by minority shareholders

  • no vote by minority

  • forced sale

  • minority has appraisal rights

  • may be general fiduciary duty of fair treatment to minority shareholders during course of freeze-out

how to get majority share ownership:

  1. buy in market

  2. stock tender offer - acquiring company offers own stock in exchange for acquired company's stock; no financing required because just issuing own stock

  3. cash tender offer - acquiring company offers shareholders of acquired company cash in return for stock

Weinberger v. UOP (Del. 1983)

short-form cash-out merger transaction between parent and partially owned subsidiary failed to meet standard of entire fairness:

  1. fair dealing - when transaction was timed, how it was initiated, structured, negotiated, disclosed to minority shareholders/directors and how approvals of director and stockholders of subsidiary corporation were obtained

  • lack of disclosure of feasibility report that higher price than offered was still good investment for acquiring company; lack of price negotiation; cursory preparation of investment bankers' fairness opinion and communication in social context; huge time pressure in 4 day timeframe

  1. fair price - economic and financial considerations including all relevant factors such as assets, market value, earning, future prospects and any other elements that affect intrinsic or inherent value of company's stock

  • result could have been different if independent negotiating committee of outside directors had conducted transaction and parties had exerted bargaining power against other at arms length

Coggins v. New England Patriots Football Club (Mass. 1986) majority shareholder in freeze-out merger has burden of proving

  1. merger was for legitimate business purpose

  • because duty of a corporate director is to further legitimate goals of corporation, and freeze-out merger results in the elimination of public ownership in corporation, the corporate directors who benefit from transfer of ownership must demonstrate how legitimate goals of corporation are furthered

  • director violates fiduciary duty when uses the corporation for his or his family's personal benefit in a manner detrimental to the corporation

  1. then considering totality of circumstances, merger was fair to the minority

  • normally appropriate remedy for impermissible freeze-out merger is rescission, but when passage of time makes pre-merger position of parties impossible to restore, damages based on present value are appropriate

Rabkin v. Philip A. Hunt Chemical Corporation (Del. 1985)

appraisal remedy may not be adequate in cases beyond mere inadequacy of price, particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved



  • inequitable conduct in failing to effect cash-out merger during one-year period of commitment to $25/share price will not be protected merely because no legal obligation to carry it out

  • lack of genuine bargaining, when price at low end of fairness range, looks like overreaching

Cheff v. Mathes (DE 1964) greenmail - strategy of inside directors to use corporation's assets to buy out dissident directors directly at a premium price to eliminate threat to corporate policy

burden of proof on directors to justify transaction on basis of reasonable belief in danger to corporate policy, good faith and reasonable investigation

  • corporation's power to purchase and sell shares of its own stock analogous to power to use proxy funds to inform stockholders of management's views on policy questions in election to board of directors, but not selfish desire to perpetuate themselves in office

  • if board has acted solely or primarily out of desire to preserve own positions, the use of corporate funds is improper

  • control premium - substantial block of stock will sell at higher price than individual shares trading in open market

  • existence of non-corporate alternative (personal funds) to buy out control block to maintain control irrelevant to issue of improper purpose

  • 50% tax on gains from greenmail - sale of stock held for less than 2 years and sold to corporation pursuant to offer not made on same terms to all shareholders

Unocal v. Mesa Petroleum (DE 1985) board's decision to selectively offer fair value to shareholders excluding raider shareholder making two-tiered front loaded tender offer with junk bonds, reasonable and consistent with directors' duty to ensure that minority shs receive equal value for their shares

  • to be protected by business judgment rule, a defensive tactic must be reasonable in relation to threat posed to corporation(inadequacy of price offered; nature and timing of offer; illegality, impact on non-shareholders such as creditors, customers, employees, and community generally), risk of non-consummation, and quality of securities offered in exchange; enhanced judicial scrutiny over and above the traditional business judgment rule standard


Revlon v. MacAndrews & Forbes Holdings (DE 1985) when board of directors concludes that sale of business is inevitable, its role shifts from participant in contest to a more neutral stance ensuring that shareholders get best possible price for shares, directors no longer may exercise business judgment to prefer one bidder over another but must allow market forces to operate freely; decision to use a lock up to defeat a higher bidder and favor a lower bidder not protected by business judgment rule

  • concern for various corporate constituencies is proper when addressing takeover threat limited by requirement that there be some rationally related benefit accruing to stockholders; concern for non-stockholder interest is inappropriate when action among active bidders is in progress and the object no longer is to protect or maintain corporate enterprise but to sell to highest bidder

Paramount v. Time (DE 1989)

  • two circumstances when Revlon duties to maximize immediate shareholder value: (1) when corporation initiates active bidding process seeing to sell itself or to effect a business reorganization involving a clear break-up of the company, and (2) in response to a bidder's offer, a target abandons its long-term strategy and seeks alternative transaction involving breakup of the company

  • if board's reaction to hostile tender offer is only defensive response and not abandonment of corporation's continued existence, Unocal duties attach

Paramount v. QVC (DE 1989)

enhanced scrutiny to determine whether defensive measures were coercive or preclusive

where self-interest is present and affects a majority of directors approving transaction, court will apply even more exacting scrutiny to determine whether transaction is entirely fair to stockholders



  • when corporation undertakes a transaction which will cause a change in corporate control or a break-up of corporate entity, duty to seek best value

  • in seeking best value, having informed themselves of all information reasonably available, directors not limited in methods by which to fulfill obligation, such as conducting auction, canvassing market, etc.; not limited to considering only amount of case involved, not required to ignore its view of future value of a strategic alliance

  • enhanced scrutiny mandated by:

  • threatened diminution of current stockholders' voting power

  • fact that asset belonging to public stockholders (a control premium) is being sold and may never to available again

  • traditional concern of DE courts for actions which impair or impeded stockholder voting rights

  • key features of enhanced scrutiny:

  1. judicial determination regarding adequacy of decision making process employed by directors, including information on which director based their decision

  • directors have burden of proving that (a) diligent and vigilant in examining critically the competing offers; (b) act in good faith; (c) obtain, and act with due care on, all material information reasonably available, including information necessary to compare competing offers and alternative courses of action to determine which would provide best value; and (d) to negotiate actively and in good faith with both competing bidders

  1. judicial examination of the reasonableness of directors' action in light of circumstances then existing

  • judicial scrutiny limited to whether decision was within range of reasonableness, not perfect

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