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ba archive 2008 – corporations/securities

WEEK 6: 22-26 September
This week we will finish the LLC material and start on corporations. I’d like you to read chapters 4 and 5 in the Casebook.

Update: Mon. 22 Sept.: I mentioned today that there is some discussion about whether senior executives of rescued financial firms should be allowed to walk away with generous severance packages. Today AIG’s outgoing Chief Executive, Robert Willumstad, who was appointed to his position only this summer, gave up his rights to a large severance package.

Update: Tues. 23 Sept.: Problem 4-1 raises the question whether directors should owe fiduciary duties to bondholders. In NACEPF v Gheewalla in May 2007 the Delaware Supreme Court held:

the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation’s directors.

The Court said:

Recognizing that directors of an insolvent corporation owe direct fiduciary duties to creditors, would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interest of the insolvent corporation. To recognize a new right for creditors to bring direct fiduciary claims against those directors would create a conflict between those directors’ duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors. Directors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation. Accordingly, we hold that individual creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors. Creditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation or any other direct nonfiduciary claim… that may be available for individual creditors.

Update 25 Sept: The OECD (which has developed a set of OECD Principles of Corporate Governance)announced that:

Over the coming weeks, OECD will meet with government representatives, regulators, the private sector and other stakeholders to discuss the corporate governance lessons of the financial crisis.

Update 26 Sept: It is reported that Heller Ehrman partners will vote to dissolve the firm today.

WEEK 7: 29 September – 3 October
We will finish the veil piercing cases on Monday, moving on to close corporations. I think that Chapter 6 should keep us busy for this week.

Added 29 September: close corporation statutes

WEEK 8: 6-10 October
We will not meet next Thursday, 9 October so will have 2 classes next week. We will finish Chapter 6 and read Chapter 7.

This week I was encouraging you to think about the role of formalities and the form versus substance distinction in corporate law. In the Benchmark Capital Partners case I suggested that the court was upholding a transaction which was structured in a particular way to reach a particular result which arguably undermined the preferred stockholders’ rights, although these were not drafted specifically to cover the structured transaction. In other contexts we have seen that fiduciary duties are sometimes used to fill in the gaps in contracts – we could see Meinhard v Salmon as an example of this – the joint venturers did not specifically address the issue raised by the case in their agreement, but the court intervened to protect Meinhard. The Benchmark Capital Partners case does not involve the same sort of reasoning. However, the contract in this case was very detailed, and detailed contracts have a risk of containing loopholes.

In addition, the Benchmark Capital Partners case illustrates how we should sometimes think about the substance of a transaction in a complex. layered way. On one level the substance of the transaction wasn’t really a merger, but an attempt to get around the contractual rights of the preferred shareholders. On another level, those same shareholders didn’t really seem to be losing anything by not being allowed to vote, as preventing the issuance of the Series D stock to CIBC wouldn’t have done them any good. The formal approach taken by the court in this case allows the court not to get involved in these issues of how to define the substance of the transaction.

Here is an example of a certificate of incorporation for BATS Exchange (a corporation registered in Delaware), and its by-laws.

WEEK 9: 13-17 October
On Monday we will finish the oppression material, focusing on the question on page 410 about whether minority shareholders should be subject to fiduciary duties. We will then move on to Chapter 9. I would like you to read all of Chapter 9, although it will take us more than 2 classes to deal with this material as it is quite dense. We won’t be meeting on Thursday next week.

Following on from Smith v Van Gorkom, and the question of how a Board should make valuation decisions, note Stephen Bainbridge’s comment (from October 2007) on fairness opinions:

Fairness opinions are just an insurance policy board members buy using the shareholders’ money. To the extent the Delaware case law effectively mandates fairness opinions, or even provides incentives for their use, that case law has the effect of wasting shareholder money.

In Roberts v. Financial Technology Ventures, L.P, (decided October 2007) the Middle District of Tennessee dealt with an attempt by Roberts, a CEO of a corporation (Verus) to enforce a contract with a prospective acquiror of his corporation (FTV) which would give him a financial payment for supporting the acquisition. The court refused to enforce the contract as an illegal contract because it breached the CEO’s fiduciary duties. The court said:

Under his own admissions, the plaintiff extracted a payment from another shareholder in exchange for supporting, as CEO, an action that he otherwise did not think was in the best interest of the shareholders. If the court were to find that the action was, in fact, in the best interest of the shareholders, that would mean that the plaintiff extracted a payment from another shareholder by threatening not to support an advantageous corporate action. In either event, the plaintiff breached his duty of loyalty by entering into this agreement.

Week 10: 20-24 October
We will be finishing the duty of care material next week and moving on to the duty of loyalty- and we have three classes next week. For Monday please focus on Disney and Stone v Ritter; on Tuesday I’d like to think we will get on to the duty of loyalty, so please read the Hollinger case, and for Thursday please read to page 638.

On the issue of what Board meeting minutes should contain, there’s an article by Cullen M. “Mike” Godfrey in the July/August 2008 issue of Business Law Today which states:

The twenty-first century opened with a series of corporate scandals that have brought enhanced scrutiny to the role and responsibilities of corporate directors. Congress reacted with the Sarbanes-Oxley Act of 2002, which has focused much greater attention on the oversight responsibilities of directors, particularly those identified as “independent directors.” The business judgment rule is still intact, but the standards required to demonstrate that directors have met their duty of care and are not engaged in self-dealing have been enhanced. The mere recitals of resolutions adopted by a board will no longer suffice. They must be substantiated with background and materials, reflected in the minutes, adequate to underpin the board’s informed decision, along with a summary of the directors’ discussions in arriving at a consensus. Anything less invites litigation and puts the board in jeopardy that there will be a finding that it did not fulfill its fiduciary duty.





This is the page for Caroline Bradley’s Fall 2008 Business Associations Class at the University of Miami. The case book for this course is D. Gordon Smith & Cynthia A. Williams, Business Organizations: Cases, Problems, and Case Studies (2nd. ed. 2008). This is a change from last year, and very many of the cases in the book are different from last year’s cases. The authors have emphasised recently decided cases in this book. I am not assigning a statutes book – we will use online resources for statutory material instead.

Here is an initial syllabus (with no semester plan).

Roadmap: After Chapter 6 we will read Chapter 7, but I would like to move straight from Chapter 7 to Chapter 9 (omitting Chapter 8). We will read Chapters 9, 10 and 11. After Chapter 11 I would like to read Chapter 14.

WEEK 15: 24-25 November

Here is the statutes document.

WEEK 14: 17-21 November

Here are some notes on insider trading.

Here is Rule 10b5-2.

Here is a link to Fedex’s Reg FD Disclosure Policy, and one to Continental Airlines’ Policy.

Mon. Nov. 17th. The SEC today announced proceedings against Mark Cuban. The complaint:

alleges that in June 2004, Mamma.com Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.
Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company. When the offering was publicly announced, Mamma.com’s stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day’s closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

Here is Mark Cuban’s response denying the charges. Cuban is the majority shareholder in Sharesleuth.com which describes itself as “an independent Web-based reporting aimed at exposing securities fraud and corporate chicanery”. The web site discloses that Mark Cuban may make personal investments based on information sharesleuth.com discovers.

Update November 19: Here is a link to Mark Cuban’s brother’s reaction (my brother is not Martha Stewart). And Mark Cuban’s lawyer posted to Cuban’s blog an excerpt from an interview with the issuer’s CEO, suggesting that although the CEO said that the information about the proposed PIPE offering was confidential Cuban may not have agreed to keep it confidential.

WEEK 13: 10-14 November
Next week we will begin to look at the securities regulation material in Chapter 14. I think that we should be able to cover pages 911-956 next week and the remainder of the chapter the following week. The cases in this chapter are a bit different from the cases we have been reading – you’ll notice a number of US Supreme Court decisions, including some significant recent decisions (e.g. Dura v Broudo).

WEEK 12: 3-7 November
This week we will continue with the derivative litigation material (and the rest of chapter 11). We will not be meeting on Thursday 6 November.

WEEK 11: 27-31 October
We have had a number of opportunities to focus on duty of loyalty issues so far this semester. In the corporate context claims of breach of the duty of loyalty are more serious than claims of breaches of the duty of care. The rationale for applying the business judgment rule presumption does not apply where it is claimed that directors made secret profits, took corporate opportunities, or acted in other ways against the corporation’s interests (e.g., Stone v Ritter). I’d like to cover the Benihana and Wheelabrator cases relatively quickly if possible with a view to beginning Chapter 11 on Tuesday this week. Please read to page 712, although I think we won’t get beyond p 695 this week.

Note: here’s a link to a news story about the sentencing of David Bershad, one of the former partners in Milberg Weiss (now known as Milberg) to 6 months imprisonment for the firm’s scheme for paying plaintiffs we discussed the other day.

Statutes: conflicting interest transactions