ba archive - corporations
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.
Comments»
no comments yet - be the first?