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2012 archive

For 2009 and earlier years please see this page.

2012 Supplementary materials are here.

This is the page for Caroline Bradley’s Spring 2012 Business Associations class at the University of Miami. We will meet on Tuesdays, Wednesdays and Thursdays from 2.00 pm to 3.20 pm in F209.
For this class you will need: Klein, Ramseyer and Bainbridge’s Business Associations, Cases and Materials on Agency, Partnerships, and Corporations, 7th Ed. 2009, AND Klein, Ramseyer and Bainbridge’s Business Associations-Agency, Partnerships, LLCs and Corporations, 2011 Statutes and Rules. I will also provide some supplementary material via this blog.

Class Policies (revised Jan. 20 to reflect the fact that we will not be using the 2010 casebook supplement).

April 25: Here is the Exam diagram I said I would put up.

APRIL 24: Review session today at 2pm in F209.

April 20: Here is the Statutes List (amended 4/24/12 to correct an error).

April 19: Yesterday I mentioned a recent Delaware Chancery Court decision in Hermelin v KV Pharmaceutical Company. You are not required to read the decision for the exam. In the decision Vice Chancellor Glasscock writes:

Delaware law furthers important public policy goals of encouraging corporate officials to resist unmeritorious claims and allowing corporations to attract qualified officers and directors by agreeing to indemnify them against losses and expenses they incur personally as a result of their service. Prohibiting the indemnification of unsuccessful “bad actors” also relieves stockholders of the costs of faithless behavior and provides corporate officials with an appropriate incentive to avoid such acts to begin with.


there is limited Delaware case law addressing what evidence is relevant to the standard of conduct requirement in DGCL § 145(a). I suspect that this lack of case law is owed less to the fact that companies never face claims for permissive indemnification and more to the fact that, where, as here, it is clear that the employee’s right to indemnification turns on “good faith,” economics militate in favor of resolving the matter outside of court, given the costs associated with a plenary trial on the indemnitee’s conduct. The economic incentive to settle would seem particularly compelling where the parties have entered into an indemnification agreement, as they have here, that requires the company, at least initially, to foot both parties’ costs on its own.

April 17: I think we will have enough material for tomorrow’s class if you have looked at the indemnification material and the Answers Corp. decision below. But I did suggest it would be a good idea to look at the latest exam. Past exams are available here. I used versions of the Casebook we are using in all of the years except 2008. That exam is based on a different set of materials.

WEEK 14- April 16-20: This week we will finish the material on insider trading and short swing profits and then move on to indemnification and insurance. Please read to page 520 of the Casebook.

With respect to short swing profits please also read Huppe v WPCS International (2d Cir. 2012).

Finally, please also read In Re Answers Corp. Shareholders Litigation (Del. Ch. April 2012) in which Vice Chancellor Noble denies a motion to dismiss a shareholders class action in which the plaintiff shareholders alleged breaches of duty by management and knowing participation in breaches of fiduciary duty by the acquirers (an issue we most recently saw in the context of insider trading).

On insider trading:

O’Hagan suggests that disclosing an intent to trade to the information source will protect a person from being liable as a misappropriator, but this is not necessarily the case. In SEC v Rocklage (1st Cir. 2006) the Court said that an announcement of an intention to pass information on after it was received did not prevent the acquisition of the information from being deceptive:

On December 31, 2001, Mr. Rocklage learned that one of the company’s key drugs had failed its clinical trial. That afternoon, he phoned Mrs. Rocklage to discuss the trial results and he reached her while she was in a limousine. Before discussing the results with her, Mr. Rocklage made clear his intention that the results be kept confidential. He told her that she was not to react to what he was about to say, and he instructed her not to discuss the results in front of the limousine driver. She agreed. From the time that Mr. Rocklage joined Cubist in 1994, he had routinely communicated material, nonpublic information to his wife, and she had always kept the information confidential. Based on Mrs. Rocklage’s agreement, and based on their prior history of sharing nonpublic information about the company and her keeping that information confidential, Mr. Rocklage had a reasonable expectation that she would not disclose the trial results to anyone. Based on his understanding that she would keep the information confidential, Mr. Rocklage informed his wife that the clinical trial had failed. Before the results were
disclosed to her, Mrs. Rocklage understood her husband’s expectation of confidentiality….Unbeknownst to her husband, Mrs. Rocklage had a preexisting understanding with her brother, defendant Beaver, that she would inform him with “a wink and a nod” if she learned significant negative news about Cubist. At the time that Mrs. Rocklage learned the negative trial results, she knew or had reason to believe that Beaver owned Cubist stock. She also knew or had reason to know her brother would trade in Cubist securities if she disclosed the nonpublic information to him… After that conversation, and on or about the evening of December 31, 2001, Mrs. Rocklage informed her husband that she planned to signal her brother to sell his stock. Mr. Rocklage urged her not to do so, and he expressed his displeasure at the idea. Nevertheless, sometime before the morning of January 2, 2002, Mrs. Rocklage called Beaver and gave him “a wink and a nod” regarding Cubist…. In light of her disclosure to her husband, Mrs. Rocklage’s mechanism for “distributing” the information to her brother may or may not have been rendered non-deceptive by her stated intention to tip. But because of the way in which Mrs. Rocklage first acquired this information, her overall scheme was still deceptive: it had as part of it at least one deceptive device. Thus as a matter of the facts alleged in the complaint, and taking all facts and inferences in favor of the plaintiff, a § 10(b) claim is stated. The defendants (the wife, her brother, and the brother’s friend) agreed to settle the charges.

Last week the President signed the Stop Trading on Congressional Knowledge (STOCK) Act, S 2038:

barring members of Congress and their staffs, as well as executive branch and judicial branch officials and their staffs, from trading on inside information they obtain as part of the job and that is not readily available to the public.

Peter Henning asks why the rich risk insider trading.

April 9: Notes on cases involving issues with respect to corporate law and disclosure

Gantler v Stephens (Delaware Supreme Court 2009):

“It is well-settled law that “directors of Delaware corporations [have] a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.” That duty “attaches to proxy statements and any other disclosures in contemplation of stockholder action.” The essential inquiry here is whether the alleged omission or misrepresentation is material. The burden of establishing materiality rests with the plaintiff, who must demonstrate “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”..”

NB. Case holds officers of Delaware corporations owe same duties as directors. And note that DGCL Section 102(b)(7) does not exculpate officers from liability with respect to breaches of the duty of care.

Berger v Pubco (Delaware Supreme Court 2009):

Under Glassman v Unocal Exploration Corporation, the exclusive remedy for minority shareholders who challenge a short form merger is a statutory appraisal, provided that there is no fraud or illegality, and that all facts are disclosed that would enable the shareholders to decide whether to accept the merger price or seek appraisal..But where .. the material facts are not disclosed, the controlling stockholder forfeits the benefit of that limited review and exclusive remedy, and the minority shareholders become entitled to participate in a “quasi-appraisal” class action to recover the difference between “fair value” and the merger price without having to “opt in” to that proceeding or to escrow any merger proceeds that they received.

In re El Paso Shareholder Litigation (Delaware Chancery Court 2012). Shareholders challenged a proposed merger between El Paso and Kinder Morgan. Chancellor Strine wrote:

The concealed motives of Foshee, the concealed financial interest of Goldman’s lead banker in Kinder Morgan, Goldman’s continued influence over the Board’s assessment of the spin-off, and the distortion of Morgan Stanley’s incentives that arose as a result of El Paso management’s acquiescence to its Goldman friends’ demands leave me persuaded that the plaintiffs have a reasonable probability of success on a claim that the Merger is tainted by breaches of fiduciary duty.


Because, however, there is no other bid on the table and the stockholders of El Paso, as the seller, have a choice whether to turn down the Merger themselves, the balance of harms counsels against a preliminary injunction. Although the pursuit of a monetary damages award may not be likely to promise full relief, the record does not instill in me the confidence to deny, by grant of an injunction, El Paso’s stockholders from accepting a transaction that they may find desirable in current market conditions, despite the disturbing behavior that led to its final terms.

WEEK 13- April 9-13: For this week please read to page 507 of the Casebook.

WEEK 12 – Apr. 2-6: We will finish with the directors’ duties material on Tuesday and then move on to some material on securities regulation. Please read to page 413 of the Casebook for Tuesday, to page 451 for Wednesday and to page 466 for Thursday. I recognize that this may be over-ambitious.

There’s a very interesting story in today’s New York Times about Emmiss Communications Corp’s proposal to change the rights of preferred stockholders (here is the draft proxy statement), including to remove the rights of holders of preferred stock to accumulated dividends which have not been paid, and to remove the conversion rights attached to the preferred stock. The proxy statement states:

The affirmative vote of holders of at least 2/3 of the outstanding shares of Preferred Stock will be required in order to adopt the Proposed Amendments. Holders of Preferred Stock must submit proxies in the Proxy Solicitation in order to vote in favor of the Proposed Amendments. As of the record date, there were …shares of Preferred Stock outstanding. Emmis has the right to direct approximately…% of the votes eligible to be cast by holders of the Preferred Stock with respect to the Proposed Amendments and intends to direct such votes in favor of the proposals to adopt the Proposed Amendments. Therefore, the proposals to adopt the Proposed Amendments are expected to be approved by the requisite holders of the Preferred Stock.

According to the New York Times article the rights to vote the preferred stock which Emmiss controls relate to preferred stock issued to an employee benefit plan on terms that the votes fro the stock could be exercised by the CEO and preferred stock with respect to which Emmiss entered into a “total retrun swap”, a transaction under which it paid money to the holders on the basis that they would vote the stock as Emmiss wishes. The corporation is incorporated in Indiana and it seems unclear how Indiana law applies to these circumstances.

However it does seem to me that this behavior conflicts with some of Emmiss’ 11 Commandments, in particular:

Never jeopardize your integrity – we win the right way or we don’t win at all.

Mar. 30: On the knowing violation of law issue, consider this story about The Scotts Miracle-Gro Company, which for over 2 years manufactured and sold wild bird seed which included pesticides unlicensed by the EPA for use in bird feed (in violation of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)) to prevent insects from eating the seed during storage. The pesticides in question seem to be harmful to birds. The company continued to sell the product after employees warned about the dangers of the pesticides. The company’s statement about its commitment to corporate responsibility contains the following passage:

For us, a major part of being a good corporate citizen is also about protecting the environment.
The very nature of our business at ScottsMiracle-Gro is about enhancing the environment – a responsibility that originated when the company was founded in 1868 and has become even stronger throughout our history. Today, our organization remains focused on ensuring that our commitment to the environment is evident in our products and services, consumer communications as well as the way we operate our facilities.
We are proud that our consumers trust our products and services to enrich the earth, beautify their surroundings, create diverse habitats and help them connect with the outdoors. We are honored that our consumers look to us for products and services that help them succeed and return benefits to the environment.

The company has arranged that participants in Farmville can use Miracle Gro to grow their crops.

Week 11- Mar. 26-30: Please read RMBCA ss 8.60-8.70 and to page 367 of the Casebook for Tuesday, to Casebook p 392 for Wednesday and 403 for Thursday.

The Supreme Court decided Jones v Harris in 2010 endorsing the Gartenberg standard:

In Gartenberg, the Second Circuit noted that Congress had not defined what it meant by a “fiduciary duty” with respect to compensation but concluded that “the test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in the light of all of the surrounding circumstances.”.. The Second Circuit elaborated that, “[t]o be guilty of a violation of §36(b), . . . the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Ibid. “To make this determination,” the Court stated, “all pertinent facts must be weighed,” .. and the Court specifically mentioned “the adviser-manager’s cost in providing the service, . . .the extent to which the adviser-manager realizes economies of scale as the fund grows larger, and the volume of orders which must be processed by the manager.”… The meaning of §36(b)’s reference to “a fiduciary duty with respect to the receipt of compensation for services” is hardly pellucid, but based on the terms of that provision and the role that a shareholder action for breach of that duty plays in the overall structure of the Act, we conclude that Gartenberg was correct in its basic formulation of what §36(b) requires: to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining….Since the Act requires consideration of all relevant factors .. we do not think that there can be any categorical rule regarding the comparisons of the fees charged different types of clients… courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require, but courts must be wary of inapt comparisons… courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers. These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm’s length… a court’s evaluation of an investment adviser’s fiduciary duty must take into account both procedure and substance… Where a board’s process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process…where the board’s process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome….By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred…The Gartenberg standard, which the panel rejected, may lack sharp analytical clarity, but we believe that it accurately reflects the compromise that is embodied in §36(b), and it has provided a workable standard for nearly three decades. The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts.

Mar. 27: For background on the IPO spinning issue see here (NB this is not required reading).

Week 10 – Mar. 19-23: I hope you had a good break. On Tuesday we will finish LLCs (including Auriga Capital Corp. v Gatz Properties LLC) but please also read to CB p. 314. For Wednesday please read to page 335. For Thursday please read to page 352. Read DGCL § 102(b)(7) and RMBCA §§ 8.30, 8.31.

Week 8 – Mar. 5-9: On Tuesday we will finish discussing Oracle, then move on to Goldman Sachs Group, Inc. Shareholder Litigation and we will also look at RMBCA §§ 7.40-7.46. Please also read casebook pages 264-280 for Tuesday.
For the rest of the week we will be looking at LLCs. Please read to page 309 in the casebook, the ULLCA in the statutes book at pp 67-98, Auriga Capital Corp. v Gatz Properties LLC, and this comment on the case at The Conglomerate.

March 6: Here is the New York Times story on Wynn Resorts, Stephen Wynn and Kazuo Okada.

Florida statutes § 607.0830 provides:

(3) In discharging his or her duties, a director may consider such factors as the director deems relevant, including the long-term prospects and interests of the corporation and its shareholders, and the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the corporation or its subsidiaries, the communities and society in which the corporation or its subsidiaries operate, and the economy of the state and the nation.

March 7th: In our discussion today of corporate social responsibility we mentioned Apple. Here is a link to Apple’s web pages on supplier responsibility. And here is a story about Apple’s connections with Foxconn which describes how conditions on Foxconn’s assembly line are causing public relations problems for Apple. Foxconn appears on this list of Apple’s main production suppliers for 2011 as Hon Hai Precision Industry Co., Ltd. (Foxconn).

March 8:
See information about ULLCA adoptions here.

Florida Statutes § 608.406:

(1) A limited liability company name: (a) Must contain the words “limited liability company,” the abbreviation “L.L.C.,” or the designation “LLC” as the last words of the name of every limited liability company formed under the provisions of this chapter. The word “limited” may be abbreviated as “Ltd.,” and the word “company” may be abbreviated as “Co.” Omission of the words “limited liability company,” the abbreviation “L.L.C.,” or the designation “LLC” in the use of the name of the limited liability company shall render any person who knowingly participates in the omission, or knowingly acquiesces in the omission, liable for any indebtedness, damage, or liability caused by the omission.

Florida Statutes § 608.701:

Application of corporation case law to set aside limited liability.–In any case in which a party seeks to hold the members of a limited liability company personally responsible for the liabilities or alleged improper actions of the limited liability company, the court shall apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under the law of this state.

Week 7- February 27- Mar.2 Please read to page 263 of the casebook (to p. 218 for Tuesday, 238 for Wednesday) and then read Goldman Sachs Group, Inc. Shareholder Litigation, a recent Delaware Chancery Court decision. Please also read DGCL §141(a) (statutes p 108); RMBCA §§ 8.01; 7.40-7.46 (statutes p. 207-210).

WEEK 6 – February 20-24: This week we will have class on Tuesday and Wednesday. I will schedule a make-up class in lieu of Thursday’s class. On Tuesday we will begin by thinking about limited liability in LLPs and LPs. Please read RUPA sections 101(5), 306, 1001, 1002, 1003. In thinking about the limited liability of partners in an LLP you should be aware that if an LLP becomes bankrupt, bankruptcy law may allow for the clawback of payments made to the partners. So please read this document relating to a settlement in the Brobeck Phleger & Harrison LLP bankruptcy (it’s long but I think it is worth the read) and please also read this decision in Clifford Chance v Indian Harbor. For Tuesday please also read CB pp 178-188. For Wednesday please read CB pp 189-213.

NB Florida Statutes s 620.1303

No liability as limited partner for limited partnership obligations.–An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.

The status of a Florida LLP as an LLP may be revoked for failure to file an annual report under Florida Statutes s 620.9003.

WEEK 5 – Feb. 13-17: On Tuesday we will cover Lawlis, Putnam v Shoaf (quickly) and the raising additional capital material. Please also read to page 144 for Tuesday. For Wednesday please read to page 161 and for Thursday to page 178.

Feb. 14: Here are some Notes on the problem on CB pp 136-9

WEEK 4 – Feb. 6-10: Please read both UPA and RUPA and notice the differences. RUPA was drafted by NCCUSL to make changes to partnership law that were thought to be useful. For example RUPA specifies as we saw that partnerships are entities (rather than being considered to be conglomerations of the partners). We will begin with Fenwick v Unemployment Compensation Commission. Focus on RUPA s. 401 (replaces UPA s. 18). But s 401 sets out default rules, rather than rules with which partnerships must comply. So how to explain the result?
For Tuesday please read to page 104 of the Casebook, for Wednesday to page 117 and for Thursday to page 131.

WEEK 3 – Jan. 30- Feb. 3 We will begin on Tuesday by continuing our comparison of Humble and Hoover. Please read to page 71 for Tuesday, 86 for Wednesday and 97 for Thursday.

Jan. 31: Wearing Your Uniform: Do’s and Don’ts
* Always proper: After separation, it is appropriate to wear your uniform during Reserve duty.
* Sometimes proper: Under certain conditions, you may wear your uniform as a civilian. Generally, if you served honorably, you may wear your uniform:
o For military weddings, funerals, memorial services, or inaugural ceremonies.
o For patriotic parades on national holidays and for any military parades.
o For ceremonies in which a U.S. active or Reserve unit is taking part.
* Never proper: Never wear the uniform under circumstances that would detract from its prestige or tend to discredit the Armed Forces (such as attending a totalitarian or subversive function or while engaging in a business activity). Also, it is against the law for unauthorized persons to wear a uniform of the U.S. Armed Forces.

Jan. 25: Authority based on a position. In Cedar Rapids Lodge & Suites, LLC v. JFS (ND Iowa Jan. 6, 2012) noting Restatement (Third) of Agency § 3.03 (“A principal may also make a manifestation by placing an agent in a defined position in an organization . . . . Third parties who interact with the principal through the agent will naturally and reasonably assume that the agent has authority to do acts consistent with the agent’s position . . . unless they have notice of facts suggesting that this may not be so.”). The Court stated:

Pursuant to the CRLS operating agreement, Seibert, as the president of CRLS, had actual authority to execute contracts for the company by signature. See CRLS Operating Agreement… (“All . . . contracts and other instruments pertaining to the business and affairs of the Company shall be signed on behalf of the Company by the Chief Manager, or the President, or any Vice President, or by such other person or persons as may be designated from time to time by the Board of Governors.”). Furthermore, through organizational resolutions, CRLS gave original governors Seibert and Gabrielson the power to “execute, acknowledge and deliver” bank loan documents…
Even if Seibert did not have actual authority to enter into a contract, he did have apparent authority. Seibert was the president of CRLS at the time Lightowler sent him the Agreement, and Plaintiffs have not produced any evidence indicating that Lightowler had notice that, under the operating agreement, CRLS required a signature on its contracts. Furthermore, CRLS is estopped from denying the existence of the contract because it caused Lightowler to believe that Seibert had authority to act and did not take any steps to inform Lightowler otherwise. Finally, CRLS accepted the benefits of the contract by receiving the plans from Lightowler, thereby ratifying the contract. Therefore, the court finds that Seibert had authority to enter into the contract.

Week 2 – Jan. 23-27: On Tuesday we will begin by continuing to distinguish between actual and apparent authority. I suggested that the analysis of “actual authority” in Dweck v Nasser at the top of CB p. 21, relying on Shiboleth’s 20 years of experience of dealing with Nasser was really implied actual authority. Is it always going to be necessary for an agent to engage in interpretation to understand the scope of her authority? For this week please read to page 38 for Tuesday (we may not get this far) to page 52 for Wednesday and to page 66 for Thursday. Read the excerpts from the Agency Restatements in the Statutes book.

Have a good weekend.

Agency law featured in the Supreme Court’s decision in Maples v Thomas. See this post at Above the Law, and Deborah DeMott’s Amicus Brief on Agency Law. See also this post by Jason Mazzone which discusses some interesting questions about how Sullivan and Cromwell organizes pro bono representation.

Jan. 18. Re: youtube and videos of employees asleep at their desks. Fedex:


Agency law featured in the Supreme Court’s decision in Maples v Thomas. See this post at Above the Law, and Deborah DeMott’s Amicus Brief on Agency Law. See also this post by Jason Mazzone which discusses some interesting questions about how Sullivan and Cromwell organizes pro bono representation.

For the rest of the first week of class please read to page 38 of the Casebook. Please compare Littleton v McNeely (8th Cir. 2009) with Gorton v Doty. Do you think that the argument for recognizing an agency relationship is stronger in one of these cases than in the other?

Agency principles are important in many different contexts. You will already be familiar with the concept of respondeat superior, and we will see that agents can also bind their principals to liability under contracts. From the perspective of an unpaid creditor, agency principles can be used to reach into deep pockets (if the principal is wealthy or has insurance).

When thinking about the materials on authority bear in mind that officers of corporations (CEOs, CFOs etc) are agents of their corporations. The principles that apply to determine whether they have authority to bind their corporations are general agency principles.

For the first class please read:
1. Deloitte Review, Government and the Publicly Accountable Enterprise
2. Darren Dahl, A Franchisee Tries to Survive a Failing Chain, NY Times, Jan. 11, 2012